Can Turtles Fly?

What seemed inevitable five months ago is finally about to occur. General Motors, once the largest corporation in America, the largest employer, and the first one to make $1 billion (1955), is about to enter bankruptcy. I always felt that bankruptcy was inevitable due to the conflicting interests of various parties (such as current employees, retired workers, shareholders, bondholders, auto dealers, and governments.) Like most liberal governments, the Obama administration tried its best to avoid bankruptcy but was unable to do so. My Canadian government also pumped money into these failing enterprises with questionable results. I think what the US government attempted was fine, but I would have liked to see less heavy-handedness directed towards the bondholders (the GM bondholder situation doesn't seem so bad since all of them are supposedly unsecured creditors, but the Chrysler situation where the US government was playing hardball with secured bondholders hurts everyone in the lo...

United States government bond — risk-free you say? (Illustration by S. Kambayashi for The Economist. Not so risk-free . May 28th of 2009.)

Dave, in a post on his blog, wondered how the Japanese government manages to finance their debt at a lower yield than America , even though it has a lower credit rating and has a far higher debt as percent of GDP: I've wondered for some time about why Japan has so much lower borrowing costs than the U.S., despite having a lower sovereign debt rating and a much higher ratio of debt to GDP, but I haven't heard a convincing explanation yet. I'm not an economist and don't work in the industry but here is the guess I responded with (I added more here): I suspect it is because something like 90% of the government debt is owned by individuals. As for why individuals choose to invest at such low returns, that's hard to say. I imagine it's because bonds have outperformed all other major assets (such as stocks and real estate). It should also be noted that Japan was experiencing a major bull market in bonds so retail investors had a huge incentive to own bonds. Another th...

There has been a huge rally in bond yields in the last few weeks. This will make the stimulus plans being initiated by the US Treasury and Federal Reserve more difficult (it will be even worse for other countries with weaker credit, such as Britain.) Perhaps the biggest impact of rising yields will be on the housing market (since mortgage rates will rise.) The corporate sector will also be impacted but so far things look good, with big appetite for junk bonds during the recent rally. It'll be interesting to see what comes of all this. I personally have no idea if the bond sell-off is simply due to the improving economy (bonds are less attractive if economy is strong) or if it is due to bond investors signalling their displeasure with government policies (and potential for higher inflation.) Bloomberg has an article on the return of the bond vigilantes: For the first time since another Democrat occupied the White House, investors from Beijing to Zurich are challenging a president’...

Marc Faber is famous for saying controversial things. But since he is an obscure investor, no one really makes a big deal out of it, or even hears about it. Thanks for Naked Capitalism for originally mentioning a Bloomberg interview, which you can access here (approx 20 min interview.) This time around he is quoted as saying there is a 100% probability of USA facing hyperinflation, just a tad bit below modern Zimbabwe. I don't always agree with what he saying and this is one comment that I disagree on. Marc Faber also said earlier this year (or maybe last year) that the 'Warren Buffett way of investing' is dead (due to the bear market.) So value investors may want to skip him; but for others, check out my quick notes with my opinion thrown in... Japan... "country of perfection"... some Japanese companies will do very well and be shareholder friendly ... as a country, long term doesn't look so good... but Faber says he would go long for next 5 years and think...

(source: China Daily . November 15, 2007)

Some articles that you may find interesting, in no particular order: Which economic indicators are important? (The Globe & Mail): A nice article that speculates on economic indicators that are useful, and those that may not be so. Even though I'm macro-oriented, I don't really pay regular attention to economic indicators. I think they are only useful in developing a rough idea of whether the world, or a country, or an industry is "good", "bad", or whatever. As for timing, or trying to pick sectors or stocks, they confuse me more than anything. David Rosenberg Q & A (The Globe & Mail): David Rosenberg was the senior economist at Merril Lynch who recently moved to a firm in Canada. I used to have access to his reports through my discount broker (HSBC) but not anymore. He was pretty good IMO. He was mildly bearish—but not superbearish like Stephen Roach at Morgan Stanley—throughout the last few years and I'm sure he saved his clients some mone...

Seth Klarman doesn't conduct too many public interviews but I ran across a detailed interview conducted by TIFF Education Foundation (thanks to ValuePlays for referring to it.) A large chunk of the interview dealt with institutional issues, such as picking the right analyst or manager and retaining them, but the latter portion is likely to be useful for small investors. I don't follow Seth Klarman closely—he is not my style and virtually impossible to tell why his fund is purchasing or selling a security—but many value investors consider him to be one of the top investors around. Seth Klarman's record in the 90's is nothing spectacular but many claim he is very risk-averse and has done exceptionally well in the 2000's (I haven't seen anything to confirm this but it is probable that his record, if you include the last 9 years, is quite good.) I will quote some of his thoughts, while injecting my views, in the rest of this post. Note that the text is not quoted i...

MarketWatch reports that non-voting FedRes member, Charles Plosser, dissents with fellow FedRes members and thinks that inflation will be a threat . He suggests that the FedRes should start raising rates sooner rather than later. Plosser's dissent from the mainstream view is based on a fundamental disagreement about the sources of inflation. In the mainstream view, inflationary pressures cannot build up when the economy has so many slack resources. With unemployment so high and so many factories, machines, stores and offices sitting idle, no one company could gain pricing power because its competitors could easily ramp up output to meet any surprise increase in demand that could lead to higher prices. The nonpartisan Congressional Budget Office has estimated that the output gap -- the difference between what the economy is producing and what it could produce -- will be a massive 7% of gross domestic product in 2009 and in 2010, and that the output gap will not close until 2013. .....

Bank of Canada is contemplating changing its policy . It's still in the early stages so nothing may come of it. IANAE (I am not an economist) and, quite frankly, I don't understand what is discussed in the article very well, but I like to cover potential events lurking far off in the distance so I thought others may find it interesting. It's certianly cutting-edge stuff so even if nothing happens now, it may be something that may be implemented 10 or 15 years from now. The Bank of Canada pulled back the curtain on its internal debate over the future of policy making, revealing an institution that appears to be edging cautiously towards a new approach to setting interest rates. Policy makers devoted their latest quarterly research publication to inflation targeting, publishing three articles that mostly back a shift to a new policy of “price-level targeting” and a fourth that seeks to damp the enthusiasm by arguing that there are still lots of questions about the largely unt...

From MarketWatch : Standard & Poor's on Thursday lowered its credit outlook on the U.K. to negative from stable for the first time ever in view of the country's swelling debt, which may expand even as the economy recovers. The move by Standard & Poor's raises the prospect not only of a credit-rating downgrade in Britain but a lowering of the outlook in the U.S., which has taken a similar path of big spending and quantitative easing to escape the credit-led recession. "I think there will be a downgrade on the U.K. and I think there will be a downgrade on the U.S. outlook from one of the Big Three" credit-rating firms, said Stephen Gallo, head of market analysis at Schneider Foreign Exchange. ... S&P kept the country's AAA rating intact, but the outlook signals that the country's credit rating could be lowered within the next two years. Rival agency Moody's Investors Service on Thursday said it is not reviewing the U.K.'s rating. S&...

Commercial real estate in America is nowhere as bubblicious ;) as residential real estate—or Japan circa 1989. Nevertheless, it is an area that will likely face stresses and probably end up with the biggest bust since 1990. The Globe & Mail picks up Reuters story that illustrates some of the fire-sales that have occured on prestigious buildings : The 40-storey skyscraper sits on a prime corner in the country's wealthiest commercial market, steps from the Museum of Modern Art and a few blocks from Rockefeller Center and Central Park. It recently sold for $100,000 (U.S.). The 1330 Avenue of the Americas building - which sold for close to $500-million three years ago - was auctioned last month for the minimum to a unit of the Caisse de depot et placement du Quebec after owner Harry Macklowe defaulted on a $130-million loan. A month before that, the John Hancock Tower - Boston's tallest skyscraper - sold at auction for just over $20-million. The 33-storey Equitable Building in ...

(Illustration by Alex Gross for The New Republic) Thanks to Commodity at GuruFocus for bringing the Michael Lewis article in The New Republic , The Master of Money , to my attention. In it, Lewis reviews Snowball , the Warren Buffett biography by Alice Shroeder, and injects his interpretation of Buffett. To put it bluntly, Lewis skewers Buffett like few others ever have, and probably ever will. However, in doing so, we actually end up seeing how Warren Buffett is a flawed human just like any of us. Michael Lewis is not a fan of Warren Buffett but his respect of Buffett acutally increases in the end. I highly recommend this article, which provides an insight into the flaws of Warren Buffett. Which brings us, oddly, to our present financial crisis. There has never really been a bad time in the last fifty years to be Warren Buffett, but just now would seem to be less favorable than most. If Buffett still measures his life by the book value per share of Berkshire Hathaway, then for the fi...

I felt like I was playing a game of musical chairs where someone’s taken out half the chairs. — David Roberts on searching for a Wall Street job The above quote pretty much sums up the employment situation for financial workers in America—and probably Britain. A lot of financial jobs have dissapeared, likely forever, and the unemployed are fighting over the few remaining ones. The situation is similar to what technology workers faced after the dot-com bust. Bloomberg Markets magazine has a profile of two couples who have lost their high-paying jobs and are struggling to find another job. The striking thing is how many of the Wall Street workers are highly paid—far more than I or 50% of Americans or Canadians would ever make in our life—and yet seem to be headed for financial difficulties. Ironically, I feel that someone who is closer to working class or middle class, and hence has a lower income, would probably handle their situation better than many of these Wa...

Traders and others who follow the markets daily may know the answer but I can't think of another time a circuit-breaker tripped on a bullish rally. It looks like the Indian stock markets were halted for the day after they rallied more than 17% in one day: A deluge of buy orders greeted Indian shares Monday, propelling the country's benchmark stock indexes higher by more than 17% and triggering market circuit-breakers to force an early suspension of the day's trading. Mumbai stocks leapt right off the blocks on optimism that the Congress Party-led alliance's victory in the just-concluded general election will result in a more market-friendly economic policy. Within moments of the markets opening for trade, the Bombay Stock Exchange's 30-stock Sensex and the National Stock Exchange's 50-stock S&P CNX Nifty surged by nearly 15%, triggering a trading halt for two hours. Immediately at the resumption of trade, they surged further, prompting a trading suspension ...

I'm not a Peak Oil Theory supporter but it's always useful to pay attention to what others are saying. Total, the French supermajor, recently said it thinks conventional oil production will peak within a decade so the Peak Oil Theorists shouldn't be dissmissed easily (but do note that people have been saying that for many years now—in fact, according to some of what was said a few years ago, the peak should have been in 2007 or 2008, yet that didn't happen.) The Toronto Star has an article interviewing former CIBC economist Jeff Rubin about his upcoming book, Why Your World Is About to Get a Whole Lot Smaller . The book is slated to be released on May 23rd and, given how Rubin is very outspoken and often has off-the-wall views, it will probably be a good read. If anyone wants to get an opinion of someone from the mainstream who thinks oil production will peak, check out the article: Its basic premise is simple: Nearly everything we do, purchase and eat is "inextr...

In the Market: The Illustrated History of the Financial Markets by Christopher Finch Published in 2001 Abbeville Press Quick Description: Colourful coffee-table book covering the history of various markets (not just the stock market); Visually appealing reference book Recommended For: Anyone interested in business/investing/economics/economic history My Rating: 91% (anything over 25% is worth considering; over 50% is recommended; over 90% is highly recommended) As anyone continuously following this blog would know, this isn't a typical investment blog. Most blogs are focused on certain aspects of investing—fundamental analysis, technical analysis, macroeconomics, trading, value investing, dividend stocks, and so forth—whereas I tend to write about anything. I'm sure this is frustrating to some and it will probably keep my readership very low forever (for instance, I haven't analyzed any stocks, other than special situations, in more than an year—anyone looking for investing...

(source: 2007 GM Annual Report )

As initially suspected, it looks the Stanford International Bank was indeed a Ponzi scheme. It looks like the bank's liabilities exceed assets by $6 billion : The Caribbean offshore bank at the centre of an alleged Ponzi scheme by a wealthy Texas businessman has a $6-billion (U.S.) shortfall between assets and liabilities, a court-appointed liquidator reported Friday, confirming fears that investors will likely get little of their money back. Stanford International Bank Ltd. in Antigua, run by financier R. Allen Stanford, owed about $7.2-billion, including interest, when regulators closed it in February after the U.S. Securities and Exchange Commission alleged it was offering fraudulent certificates of deposit, the liquidators said in a letter to investors. But the liquidators said they have found less than $1-billion in assets, including just $46-million in cash at accounts in Antigua, Canada, the U.S. and the United Kingdom. The cause of the “very significant shortfall” is unknow...

IEA is forecasting oil demand to contract this year. The contraction is expected to be the largest since 1981: World oil demand this year will post the sharpest annual decline since 1981 as the economy struggles to bounce back, the International Energy Agency (IEA) said on Thursday. Demand will contract by 2.56 million barrels per day (bpd) in 2009, the agency, which advises 28 industrialized countries, said in a monthly report. It previously forecast demand would contract by 2.4 million bpd this year. As is obvious now, oil equities are down in the last year mainly due to this demand contraction. There were some who have suggested that there was irrational sell-offs in oil equities last year but it seems fundamentals back up the decline. Oil has rallied recently but IEA thinks it isn't based on physical demand: The agency added a rise in oil prices, which topped $60 a barrel for the first time in six months this week, was due to sentiment and oil fundamentals remained weak. Pric...

Bloomberg is reporting that 18 banks have sued MBIA over its split : Bank of America Corp., JPMorgan Chase & Co., UBS AG and 15 more of the world’s largest financial companies sued MBIA Inc., saying the biggest bond insurer’s split of its guarantee business illegally cut their odds of getting paid on policies. MBIA stripped $5 billion of assets out of its MBIA Insurance Corp. division to fund a new unit amid “an ongoing financial crisis that has made it increasingly likely that MBIA Insurance will have to pay out billions” of dollars, according to the complaint filed today in New York State Supreme Court in Manhattan. The case adds to two previous lawsuits filed by funds over the February restructuring by Armonk, New York-based MBIA, which New York State Insurance Superintendent Eric Dinallo approved. Banks concerned that the split of the business hurt them had met with state regulators in March, David Neustadt, a spokesman for the New York State Insurance Department, said at the ...

GreenBackd reported yesterday that PureChoice is offering to buy Mathstar for $1.04 . This is way below the liquidation value— my guess is around $1.3 —and I hope management and other shareholders don't pursue this deal. There is no reason to accept anything widely below the liquidation value given how there is very little to liquidate and most of the value is residing as cash. The share price has jumped and is trading close to the offered price. I had been trying to increase my stake in the last few weeks but haven't had much success (maybe I'm too greedy and bidding too low of a price?).

I didn't get much time to review the results but Ambac announced its quarterly results today--MBIA announced after market close as well. Ambac posted a loss $392.2 million : Ambac Financial Group, Inc. (NYSE: ABK) (Ambac) today announced a first quarter 2009 net loss of $392.2 million, or a net loss of $1.36 per share. This compares to the first quarter 2008 net loss of $1,660.3 million, or a net loss of $11.69 on a per share basis. The first quarter 2009 results reflect pre-tax net income amounting to $279.7 million resulting primarily from a positive net change in fair value of credit derivatives. The unrealized gain in credit derivatives was partially offset by loss and loss expenses primarily related to the residential mortgage-backed securities (RMBS) portfolio and other-than-temporary impairment write downs of RMBS securities in the investment portfolio. During the quarter Ambac increased its deferred tax asset valuation allowance by approximately $600 million, causing the af...