Some articles for the week ending May 9 of 2009

Some articles to consider, in no particular order...

• Disney P/E at 20-year low (Financial Post): Supposedly the Disney P/E is below 14 and it hasn't traded at those valuations for decades. My impression is that Disney is not a cyclical (with unsustainably high earnings) so that's actually an impressive valuation. Anyone that has liked the company in the past may want research it further. However, do note that almost everything else is cheap too. I wanted to highlight this story, not because I am interested in Disney, but to highlight how companies that have never traded at low valuations for 20+ years are doing so now without (I'm guessing) any major permanent impairment in fundamentals (in contrast, a retailer, bank, or even oil & gas company trading at low valuations may have permanent damage to some fundamentals.)
  
• Bank of America plans to avoid relying on government (Fortune): Well, Ken Lewis dug himself and his company into a hole but is trying to get out of it. In a surprising move, Bank of America says it will attempt to raise the capital required by the regulators on its own. Instead of converting the government preferred shares to common shares, it will attempt to sell of stakes in various banks, issue several billion worth of shares, and convert non-government preferred shares to common shares. If the economy doesn't completely fall off a cliff from here, it should have enough money once you factor in its profits (even Countrywide should be highly profitable this year.) Keeping the government from having any ownership position is the ideal solution and Ken Lewis is trying to make that happen.
  
• France's model (The Economist): As a capitalist magazine, The Economist rarely ever praises anything coming out of France—too socialistic, too protectionist, too much welfare, low economic growth, undynamic—but this has to be one of the rare times an article is written favour the French approach to the current crisis. The article praises certain elements of France, including its current strategy of boosting short-term infrastructure jobs—fixing cathedrals for instance—rather than what is being pursued in America in trying to boost consumer spending. The way I look at it, capitalist models generate higher economic wealth but are volatile, while those that incorporate socialist ideals end up poorer but safer. One can compare France to Britain but the best example is USA vs Canada. Americans are richer than Canadians; America's GDP growth tends to be much better (although you need to discount slightly because USA is larger and harder to grow fast); unemployment rate in Canada is higher; and so on. But "suffering" tends to be less in Canada than America.
  
• Reasons why Russian productivity may be low (Businessweek): Reasons range from outdated technology, inefficient middle management, weak information and process technology, and poor processes in general. Oh, a government that doesn't know what property rights is also doesn't help ;)
  
• Defaulted bond recoveries very low right now (The Economist): As a layperson, it's amazing to me that bond recoveries for defaulted businesses (unsecured seniors) are projected to be far lower than the 20% supposedly common during recessions. Yes, we had all those cov-lite stuff, not to mention bonds backing overvalued assets; but it's still amazing that bondholders are ending up with almost nothing. The table in the article pegs recovery for senior unsecured on Nortel bonds (using market prices) at 12.2%. (Long-time readers may recognize the highest recovery on that list as coming from Spectrum Brands, a stock that was on my watchlist (good thing I never invested in the shares of it ;) ).
  
• Another LBO deal that may blow up: Reader's Digest (Fortune): The popular magazine, Reader's Digest, was bought out by private equity a few years ago, and it looks like it is facing some serious problems. I'm not sure the problem was the buyout per se. It seems that the problems are largely macroeconomic (i.e. economic slowdown, magazine readership changes, etc.)
  
• Most valuable comic books (The Toronto Star): This article provides a fun overview of comic books as collectibles. You know, if you are interested in investing, you don't have to invest in stocks, bonds, or real estate. You can make money in many different assets and becoming a collector or a dealer is something that may suit some.
  
• (Recommended) Israel and its clean technology pioneers (BusinessWeek): Interesting story on how some entrepreuners and inventors are leading the push for alternative energy in Israel.
  
• FWallStreet's articles on commodity investing - part 1 - part 2 - part 3 (FWallStreet): If you are macro-oriented, investing in commodities right now seems kind of risky to me. It is possible that the commodity bubble has burst and future going may be really rough (mainly because the boom in world trade has likely ended; there is also a possibility of China running into problems but this is uncertain.) Blindly betting on a secular trend in commodities, as was the case for the last 5 years, probably wouldn't work anymore. However, if you are a value-oriented investor or a contrarian-type investor who is trying to capitalize on (possibly) irrationally low prices, commodities may be ok. Investing in commodities right now is probably similar to investing in technology stocks after the dot-com bust. Those trying to ride a trend (say 'internet boom' or 'telecommunications revolution') would have had difficulties after the bust; but those who were able to invest when prices were irrationaly low, as in 2002, would have done well.
  
• (Recommended) Is America following the path of Japan? (James Surowiecki for The New Yorker): The stock market loves the Obama administration bank strategy—essentially letting banks earn their way out—but is it a good one? Surowiecki wonders in a blog entry. But, as you will see in the next bullet link, some think the banks can earn their way out.
  
• (Recommended) American banks aren't like the Japanese banks - Part I - Part II (Bronte Capital): While we have the skeptics of the Obama bank plan, John Hempton of Bronte Capital is not one such fellow. I linked to posts he had made in the past on the same argument but he provides some arguments on why American banks won't become anything like the Japanese banks.