Can Turtles Fly?

Here are some articles, interviews, and commentaries that I found interesting over the last couple of weeks. I don't know if it's a coincidence that quite a number of articles are about China; or am I subconsciously thinking about issues surrounding China? hmm... Overview of China (The Globe & Mail): A nice, detailed, recap of the situation in China. Seth Klarman Harvard interview (Harvard Business School): Forget where I got the original link from but here is a brief interview of Seth Klarman. It mainly deals with his life and his thoughts on life. Changing winds of capitalism (The New York Times): David Leonhardt's essay chronicles the changes that are occuring in economic thought. He suggests how Adam Smith was far less of a laissez-faire capitalist than generally suggested. Marc Faber audio interview with financialtube.com (Financialtube.com; Marc Faber Report, original mention by Alex Garcia at GuruFocus): The usual stuff... didn't find anything th...

I wrote up a somewhat lengthy comment for one of the articles in The Economist on newspapers. I rarely leave comments but felt it was worth expressing my view. I thought I would re-produce most of it here, with some edits. It pretty much repeats the same views I have expressed here many times before. The core problem is that newspapers lived off the network effect and now the network effect is going into reverse and they are getting killed. Advertising and subscriptions/readership is colliding head-on and it's hard for newspaper websites to maximize one without damaging the other. Published on August 27th of 2009 and titled, Now pay up , it examines various strategies newspapers are contemplating , including attempts to charge for news. Charging for news on websites has entered serious strategic thinking at newspapers, possibly after Rupert Murdoch suggested that he may start charging for content everywhere. As I suggested at that time , I see little chance of Murdoch winning. News...

Almost all short-sellers have been getting killed lately—especially the last two weeks. AIG, in particular, has not been very kind to those betting on its demise. The stock, thought to be worth very little, is up around 500% in the last month. You can see the spectacular rise and the heavy volume, due to short-covering, in the chart above. This goes to show the tough life of traders (in this case, the short-sellers.) Once short-covering gets going, it can skyrocket. As of today, anyone that shorted the stock this year is down almost 80%, unless they managed to cover. Of course, this is not to say that the stock won't collapse in the future. In fact, the Bloomberg article quoted below says that the AIG bonds are pricing the stock as if it is worth almost nothing. I'll let Bloomberg has a detailed story on the situation : American International Group Inc., the insurer bailed out by the U.S., gained for a ninth day, reaching a 10-month high as speculators bought back shares they ...

Most Important Japanese Election in 50 Years?

A lot people, including me, rely heavily on P/E ratios to evaluate securities or the market as a whole. One of the problems with the P/E ratio is the denominator, earnings. There are times when one should be extremly careful with the earnings figure. Now is one such time. For the first time since 1933, S&P 500 earnings for a quarter (the 4th quarter of 2008) is negative. The loss is largely due to massive losses reported at financial companies. It's not clear how much of those losses are real, since earnings that depend on write-offs can reverse if the underlying assets gain value. In any case, the negative earnings causes the P/E ratio to be negative for the 4th quarter of 2008, or, if you are looking at the full trailing year, a very large P/E (since that negative quarter plus the other three positive quarters ends up in a tiny earnings numbers.) Impact On P/E Ratios To see what I mean, consider the current valuations of some indexes. The S&P 500 has a trailing 12 month ...

I'm thinking of taking a position in US long bonds through the TLT ETF. Anyone have any thoughts on it? Last time I bet on the long bond, I lost money. The interest rate call was correct but the US$ decline caused losses. The situation is a bit different now. This could be the dumbest idea ever... it's certainly risky. The only positive is that it is very contrarian. Being contrarian for the sake of contrarian is not always profitable, but is this different? The thesis for the investment is a bet on deflation. Almost everyone, including superinvestors such as Warren Buffett are betting heavily on inflation, but is it possible that they are all wrong? I have been researching the issue for a while (I'll write up some blog entries on various ideas related to this over the next few weeks.) The case for deflation isn't solid but neither is the inflation view. Any thoughts?

(This post applies to Canadians only. Taxes vary by jurisdiction so it may be different in your area.) John Heinzl at The Globe & Mail, in one of his columns, goes through the tax treatment of US dividends for Canadian investors . To put it bluntly, US dividends will be taxed at the marginal tax rate (assuming you are not using a tax-sheltered account.) What I never knew before reading the article was how TFSA accounts, which were introduced this year, are treated. Note that the rules will be different for other countries. Taxes, whether on dividends, or capital gains, or some other source, are dependent on tax treaties between countries. So, for example, dividends from Japanese stocks for a company listed on the Tokyo Stock Exchange will be different. I'm not sure how taxes are handled for a Canadian investor owning an ADR of a foreign company listed on the NYSE. Also, this post, and the original Globe & Mail article I will be citing, covers normal dividends. Income paid ...

I ran across a Bloomberg story that suggested that China is studying potential overcapacity in several industries: China said it’s studying curbs on overcapacity in industries including steel and cement, adding to concern policy makers may seek to rein in growth fueled by record credit expansion this year. The government will increase “guidance” of industries including steel, cement, coal chemical, plate glass and wind power equipment, the State Council, China’s cabinet, said in a statement on its Web site today. The government will strengthen controls on approval of stock and bond sales by companies in these industries, according to the statement. I have been following (but not very closely) stories pertaining to China for many years now, and this is one of the few times I can remember where the government is actually targetting the overcapacity problem. China has attempted to improve the efficiency of its steel mills for more than a decade now. There are way too many small operatio...

A lot of people look at measures like the S&P/Case-Shiller index or home transaction volume to figure out if housing has hit a bottom. If you are a free-market guy like me, a stronger sign is when homebuilders actually ramp up their activities. Home sales, prices, and so forth, can be distorted by subsidies, bank write-offs, and the like; but when a homebuilder risks their precious capital to start building more homes or acquire more land, it is a powerful signal. Bloomberg is reporting that some are actually starting to acquire land or start new projects: Signature Properties has been trying since 2005 to sell 4,000 finished lots in its Fiddyment Farm community, a former pasture and pistachio orchard northeast of Sacramento, California. The developer sold 41 sites in April to Meritage Homes Inc. for $66,000 each, and another 41 in June to Hovnanian Enterprises Inc. for $68,000 apiece. This month, they got their best offer yet -- $103,500 each for 77 sites. Signature Properties sa...

MarketWatch reports: President Obama made it official Tuesday morning, announcing that he is reappointing Ben Bernanke for a second four-year term as chairman of the Federal Reserve. In a short statement in Martha's Vineyard with Bernanke standing at his side, Obama said Bernanke's background, temperament, courage and creativity helped to prevent another Great Depression. "Ben approached a financial system on the verge of collapse with calm and wisdom; with bold action and outside-the-box thinking that has helped put the brakes on our economic free fall," Obama said. I think this is the proper move. No one is perfect, and I don't think any single person can solve the economic problems, but Bernanke is more capable than many others. The leading candidate to replace him, according to some leaks a few months ago, was Lawrence Summers. Summers was favoured by some Democrats (Bernanke is a Republican although he seems to stay neutral on political issues, unlike Greensp...

(This post is more of a random thought and isn't well written. It's just to generate some thought...) I have been thinking a lot about what Robert Prechter said in his deflation booklet that I referenced in the past. As crazy as this may seem, I have also been thinking about betting on long-term US Treasuries. Last time I made a macro bet on US Treasuries (using the TLT ETF) I lost money (interest rate call was correct but the US$ decline caused a loss.) It's kind of scary thinking about it because you are going against almost everyone—I can't think of anyone who is not bearish on the US$ or US Treasuries! I think Prechter is right in suggesting that more debt can't save the indebted. I'm looking at China and I'm thinking 'this is just crazy.' Depending on the numbers and who you listen to, China is creating debt equivalent to almost half its GDP in one year! We are seeing the biggest economic collapse since the 1930's but I'm not sure if...

The above graphic comes from the freely available edition of Grant's Interest Rate Observer . It depicts the IMF's estimates—who knows how correct these will be?—of the contribution of China to incremental world growth. If these estimates turn out to be correct, it's a scary-looking chart. IANAE (I'm not an economist) and my history is weak but when was the last time one country generated 70%+ of world's GDP growth? Maybe USA after WWII? I don't know but I suspect it would have been very rare. This is a scary situation because, if China runs into problems, as I think it will (although timing is uncertain), the whole world is going to have serious problems. The only saving grace might be the fact that this is on a PPP basis. The share is likely lower on a nominal basis, which is probably more important in this case (I'm not sure.) In terms of investing, this means that most market participants are likely betting their rosy forecasts on China continuing its g...

A History of the Canadian Dollar by James Powell. Free PDF book at Bank of Canada's website .

The model I like to sort of simplify the notion of what goes o­n in a market for common stocks is the pari-mutuel system at the racetrack. If you stop to think about it, a pari-mutuel system is a market . Everybody goes there and bets and the odds change based o­n what's bet. That's what happens in the stock market. —Charlie Munger, "Art of Stock Picking" Although I don't share the same views on politics, I am probably closer to Charlie Munger than Warren Buffett when it comes to how we view the world. Warren Buffett is almost singly focused on business and investing, and is not very opinionated, indeed possibly not knowledgeable, in other areas. In contrast, I am closer to Charlie Munger in the sense that I have diverse interests—you can probably tell by the articles I link to or write about—and have an opinion on almost anything. There is one big difference though: I am not into the field of psychology quite like Munger. So it may be surprising to see me rarely ...

Continuing the 1933-like rally, the market continues to push higher. The key questions from my newbie perspective are to figure out what the new sales level will be and what is a reasonable profit margin. A lot of companies, across varying sectors, have seen sales fall 20% to 30%, while profits have declined 10% to 50%. Are these temporary, trough, numbers? Or are these the norm for the next decade? If they are the decade norm, the market is likely overvalued. S&P 500 forward P/E ratio is around 17 right now and the historical average is around 15. However, the P/E ratio is always tricky to read because interest rates are very low right now and hence can support a higher P/E ratio. If you thought short-term rates will remain below 1% for many years, then the P/E ratio wouldn't be perceived as being high by investors. Here are some articles to consider... not as good as last week but some important ones... In defense of value investing (Greenbackd): Megan McArdle at The Atlanti...

Inflationists, as well as disinflationists, present many reasons for why deflation won't materialize. As far as I'm concerned, there is only one serious argument against deflation: 'the central banks of this world won't let it happen.' For a serious argument from the inflationist duo at Pacific Capital Associates, Rich Toscano and John Simon, you may want to review the article, The US Government Will Not Choose Deflation , as well as another one, US Not Going Down Japan's Road , on why they don't see USA following the path of Japan. (Note: When I say inflationist, I am referring to someone who is attempting to profit off inflation. It does not necessarily mean someone that believes inflation is the best thing for society. Conversely, a deflationist is betting on deflation and may or may not believe deflation is benefitial for society.) There is certainly some irony in free-market supporters who generally do not believe the government is capable, nor efficie...

This has been working its way through the US government for a while and we are finally seeing the government crack down on so-called "speculators" in the commodity futures markets. Of course, one can't have a futures market without a speculator—they are the ones that take the opposite position to a commercial hedger—so it all comes down to what is perceived as a "bad" speculator versus a good one. MarketWatch reports: The Commodity Futures Trading Commission said Wednesday that a Deutsche Bank commodities fund and a second, unnamed commodities investor could no longer avoid federal limits on speculating in grain futures. The decision comes as the futures regulator, under pressure by lawmakers to reduce speculative trading in energy and other commodities, considers making it tougher for financial institutions, index funds and exchange-traded funds to build big positions in the futures markets. The CFTC said it was withdrawing a May 2006 exemption issued to DB Com...

Now that Lexmark is on my list of companies to research, I have been paying more attention to the printer market. I think it is essential for investors to figure out the business environment before investing in something. Reading some news stories on the competitors is one quick way to get up to speed. HP is probably the market leader in the printer business. There are many different segments—home, business, commercial; inkjet, laser; etc—and HP doesn't always lead every single market segment but it is dominant in most segments. So, it's always good to see how the market leader is doing. Let me excerpt some points from a New York Times article covering HP's recent earnings results (as usual, bolds are by me): In the last year, H.P.’s sales of printers and related supplies like ink have tumbled. The major cause for the decline remains the weak global economy. Businesses have spent less on printing products, and with unemployment high, fewer workers are around to hit the ink...

The Globe & Mail is reporting that inflation hit a 56 year low in Canada , but what is more relevant is the core inflation, which has been stable: Canada's annual inflation rate slid to the lowest level in 56 years last month, dropping more than expected for the second straight month to set overall prices 0.9 per cent lower than last year, Statistics Canada reported Wednesday. The fall on a month-to-month basis was even more dramatic, as prices in July fell 0.3 per cent from the previous month, reversing the similar monthly increase registered in June. Still, economists say there is little concern that deflation – a broad-based and persistent decline in prices that could inflict further damage on the economy – is setting in Canada, as it did in Japan during the 1990s. That's because only three of the major components tracked by Statistics Canada are experiencing deflation and most of that is based on falling gasoline prices. ... Statistics Canada also pointed out that exclu...

Thanks to 24/7 Wall St for bringing Warren Buffett's latest opinion piece in The New York Times. Dated, August 18, 2009, Warren Buffett's piece is directed at policymakers and others with influence in the US government. Cementing his inflationist stance, he warns about the risk of inflation due to the deficit—unprecedented outside wars. I think Buffett is correct in suggesting that the FedRes will take orders from the government and start printing money if bond buyers stay away from the government debt. Although the FedRes is thought to be an independent institution, it hasn't been always like that. Some claim that it was basically taking orders from the government from the 1930's to 1950's. The question for investors is what the outcome will be, if Buffett's scenario unfolds. Buffett implies that inflation will be high and he has bet on that. I lean more towards deflation (but I don't have much conviction.) The FedRes was monetizing debt in the 30's a...

Financial Times' John Authers produced a video clip a week ago, illustrating the current situation compared to the past. You may have seen similar information from various sources but this video synthesizes the various views. I rely more on P/E ratios and it's really hard to tell if the market has entered a bull market. I don't believe it has because the P/E ratio looks high. Although corporate earnings, at least in America, have soundly beat analyst estimates—my impression is that it is not common to see analyst estimates beat on such a mass scale—the future profit level looks weak. One has a make a macro call here since the forward-looking earnings will be unlike anything we have seen (this isn't a normal recovery from a recession.) As Authers points out in the video, P/E ratios are influenced by interest rates and interest rates are really low. If interest rates remain low—I lean towards deflation so I think they will stay low—then the P/E ratio isn't so bad....