Articles for week ending March 21, 2009

Perhaps the most significant event of the week was when the FedRes indicated that it will start using quantitative easing and buy up long-dated US Treasuries. The market reaction was largely neutral in my opinion. Inflation-sensitive assets like gold rallied but it didn't provide much signalling to me, given how gold is still below the March 2008 peak. The real question for macro-type investors is whether we have seen the bottom in the markets (i.e. a bull market has started) or whether this is a bear market rally. I believe it's the latter but I'm often wrong.

Anyway, in the list below you'll find some articles you may find interesting. A lot of the articles I have linked in these lists in the last few months have been macroeconomic, political, or social stories. I want to move towards more stockpicking ideas (it's time to deploy capital) but I still haven't found many stock ideas that I find really attractive. If someone has long-term stock ideas, feel free to leave a comment.

• US Treasury ready to roll out its asset-buying plan (Bloomberg): Many market participants are skeptical of anything coming out of the US Treasury or the Federal Reserve, or even the US Presidency, but one has to keep in mind that many are very short-term-oriented--many of these were the same guys & gals who was in love with the government in the last 10 years when all the imbalances were building. I am pretty sure that the latest plan from Tim Geithner--the one to get private sector to invest--is influenced by Warren Buffett. Buffett will never attach his name to it since he is so protective of his name but I'm sure he is trying his best to help out, before his time is up. I remember Buffett being one of the first persons I have seen say that private investors will invest alongside the government if they were able to leverage themselves (he said this several times but I remember him saying this explicitly in the Charlie Rose interview last year.) The low-cost funding provided by the government will attract private investors but the question is whether it amounts to simply transferring taxpayer wealth to banks and private investors. The cleanest solution is to nationalize insolvent banks but (i) so-called capitalist Americans, most of them "conservative", would not support it, and (ii) the credit markets will lock up again.
  
• Scathing criticism of Warren Buffett (The Toronto Star; thanks to pturino at GuruFocus for original mention): In the article, David Olive of The Toronto Star criticizes Warren Buffett on various matters. The Toronto Star is left-leaning and it attacks corporations and investors quite often, so it's not surprising to see a severe attack on Buffett. I think it's a good article in that it summarizes criticisms of Buffett over the years. I do think the author is correct in calling out Buffett for his criticism of derivatives while being attached to Moody's, which generated a big chunk of its earnings from structured products and is at the center of the whole financial mess. However, I think the author is too short-term-oriented and mistaken in almost equating Warren Buffett to a self-serving, inconsiderate, capitalist. Dissmissing conglomerates and equating Berkshire Hathaway to Brascan and Olympia & York is a joke. My personal view is that Warren Buffett is one of the best capitalists I have ever encountered but he is not perfect.
  
• This won't be like 1929 (FWallStreet): Pretty good analysis of the current economic environment. The article dismisses the view that this won't be like 1929. I agree. I don't think we'll see unemployment rate of 20% or GDP contraction of 25%. However, I am more bearish on the stock market than the economy. Although losses won't be anywhere near the 1929-1932 bear market, easy returns are going to be a thing of the past. People expecting 10% to 15% per year, as was the expectation in the 90's, are going to be in for a shock.
  
• Did naked short-sellers bring down Lehman Brothers? (Bloomberg): Lehman Brothers certainly had bad assets but did the naked short-sellers cause a panic in Lehman (and possibly other financial stocks)? The answer is not obvious to me. The problem is that financial institutions are based on trust, especially when funding comes from short-term investors and you need to roll them over literally every day. But on the other hand, a lot of financial institutions are sitting on bad assets that cannot be properly valued, even by the firms themselves.
  
• London Falling (The Globe & Mail): A detailed story on how the fast rising financial city, London, has fallen hard. I think London will decline somewhat and Britain in general will face some tough times. On top of the collapse of various financial companies in London, Britain had a bigger housing bubble than America, and the financial institutions may be too big to be bailed out by Britain (in the worst case.)
  
• Interview with David Dodge, former Canadian central bank governor (The Globe & Mail): David Dodge is considered to be one of the top Canadian central bankers ever, and is respected outside Canada as well. In this interview, which caused some controvery earlier in the week since it contradicted the central bank and our government, Dodge gives his thoughts on various matters including the financial crisis, what to expect in the future, and what Canada should do. Economists, like all of us, cannot predict the future but it's always good to read multiple opinions. I might excerpt this in a stand-alone post later.(Recommended)
  
• Mike Mandel's view of the current crisis (BusinessWeek): Mike Mandel, the chief economist at BusinessWeek, writes a nice blog that often provides unique perspectives. In this blog entry, he covers how he views the situation and what he views as the only solution to this. He suggests that the situation is complicated by the fact that this is a global problem--hence FedRes or US Treasury cannot solve the problem as easily as they have in the past. His solution is for the whole world to come together and negotiate a world-wide resolution to clean up the bad assets on bank balance sheets. Unfortunately, I don't think such a multi-lateral agreement is plausible until the economic situation gets much worse. I'm not hoping for that by any means but individual parties, especially the well-off, have very little reason to negotiate anything right now. For instance, consider a creditor like China that likely owns a whole hoard of US government debt, including Fannie-backed and Freddie-backed mortgage bonds. China has recently been pressuring USA (indirectly) to make them whole on all of their US holdings. If Fannie and Freddie post massive losses on the mortgages--I'm taking about real losses, instead of mark-to-market losses--that cannot be absorbed by the US govt, then the bondholders may have to take losses. Or consider another example where a country like Germany, which has a good balance sheet and has avoided most of the financial losses, or even France, which seems to be ok, have little incentive to re-negotiate or fund the failing states, say Ireland or Spain, or even Britain. But if these states see serious economic deterioration, it will hurt these stronger countries as well. So a deal may need to be cut. Such agreements cannot be reached until the world situation deteriorates much further. (Recommended)