Showing posts from September, 2009

Operating in heavily protected markets

Bloomberg has a story that illustrates the difficulty of operating in a market that forces foreign companies to form alliances with local companies. The case here is China but it can apply to numerous other countries. SAIC and other Chinese carmakers that work with overseas companies are introducing their own models to boost margins in a country set to become the world’s biggest auto market this year. Foreign automakers typically have no remedy because Chinese law forces them to work with a local partner. “There’s nothing they can do,” said Scott Laprise, a Beijing-based CLSA analyst. “Your goal as a foreign automaker is just to stay ahead, come up with new technology, spend more money, and be one step ahead of your Chinese partner.” SAIC will add about 30 own-brand models by 2012, threatening Volkswagen and U.S. government-controlled GM. China’s biggest domestic automaker more than tripled sales of Roewe sedans this year. The set up is somewhat similar to how brand-name consume

Financial Times interview with Michael Pettis

I ran across a very good Financial times interview with Michael Pettis that touches on some of the key macroeconomic issues pertaining to China (it's a 3-part interview so it will automatically continue to the other parts if left alone.) Michael Pettis, as some of you may know, writes a generally insightful and unique blog at China Financial Markets . I say unique because, on top of being an expert on China, Michael Pettis teaches at Peking University in China and appears to have a greater understanding of the situation on the ground. None of this means that his views are always right but it does mean that China investors should pay attention. The interview with FT covers global trade issues and potential outcomes to the imbalances that permeate through the air. I especially recommend that everyone listen to this 3-part interview because Micheal Pettis clearly explains complex trade mechanics in a manner anyone can understand. On this, he is almost like Paul Krugman and his writi

Investors should never forget the two types of leverage: financial and operational

Writing for The Globe & Mail, Avner Mandelman produces an insightful article reminding investors about two types of leverage present in their portfolio . Leverage comes in two forms: operational leverage and financial leverage. Financial Leverage Financial leverage is the most obvious but most long-term-oriented investors avoid it. Put simply, financial leverage amounts to borrowing money from someone and investing it. If the investment does well, you make more money than you otherwise would have—you make money using other people's money. If it blows up, well, you end up with an even larger loss. My impression is that financial leverage of portfolios—known as using margin—is more common with traders and other short-term investors. It is also commonly used by investors of exotic assets and derivatives. For long-term investing, it is not that common. Following what Warren Buffett has suggested, I personally do not use any leverage in my portfolio and probably never will. It

Sunday Spectacle XXVIII

(Illustration by S Kambayashi. " Chucking the buck ," The Economist . September 24 2009)

Articles for the week ending September 26th of 2009

Here are some written words that may benefit you... The paradox of the US dollar & interest rates (The Economist): Buttonwood touches on an issue that has been puzzling me for months. Buttonwood wonders if the US dollar is destined to decline significantly, whereas I look at it from the bond yield point of view. Namely, why are US government bond yields remaining low if all assets are rising and the US dollar is declining? Sure, it could be due to Quantitative Easing but that doesn't seem to be very large (also, haven't the central banks started reducing their QE?) It's also possible a US$ carry-trade has developed but it is hard to say. (Highly Recommended) Jae Jun looks at Microsoft's Earnings Power Value (Old School Value): I am not familiar with Earnings Power Value (EPV), a method that seems to have been developed by Bruce Greenwald, but it looks interesting. Jae does an excellent job running through the analysis and I recommend that you take a look at i

Who would have thought? Muni bond yields hit a 42 year low!

Bloomberg is reporting that American municipal bond yields hit a 42-year low . This is news because municipalities are supposed to be the hardest hit portion of government (since many rely on property taxes, service fees, and the like.) Yet, it appears new issues have slowed while capital seeking muni bonds has increased. Benchmark borrowing costs for highly rated state and local governments dropped to a 42-year low this week, as the pace of new municipal-bond issues slowed and cash flowing into mutual funds accelerated to a record. Municipal issuers led by Ohio sold about $5.7 billion of fixed-rate bonds with final maturities longer than 18 months, down from $9.9 billion last week, according to data compiled by Bloomberg. California sold $8.8 billion of notes to be paid off by the end of its fiscal year that began July 1 at yields of 1.5 percent and 1.25 percent. The weekly Bond Buyer 11-Bond index, which tracks tax- exempt yields on 20-year general-obligation debt with an averag

Bond yields during three deflationary busts - 1990's Japan, 1930's USA, 2000's USA

(Sorry about the lack of posts. I wrote this post over several months so the text is a bit rambling and incoherent. Hopefully someone finds it useful :) ) Deflation is probably the last thing on anyone's mind. After all, gold has surpassed $1000, oil is up over 100% from its low this year, and, well, stocks are on fire. But then again, this is a contrarian blog and I don't quite think like the mainstream. This doesn't necessarily mean that I am right so it's up to you to figure out if my thinking is right. I haven't altered my stance, which amounts to a tilt towards deflation. Apart from specific stocks, I have been investigating a macro bet on deflation. Apart from shorting select assets, you really don't have many choices if you are betting on deflation. The simplest bet is to overload on cash—cash is king during deflation—but the classic investment is long term government bonds (assuming the issuing government is solvent.) As I mentioned a while ago , Hug

Thoughts on Jim Grant's change into bull costume

(source: Mick Coulas for The Wall Street Journal) Most of you may have seen The Wall Street Journal article by Jim Grant , where he morphs from a bear into a bull. Surprising to some perhaps. I thought I would post my views (made on a GuruFocus message board) on his opinion piece. Jim Grant isn't just any other bear. The fact that he is bullish is big news, at least to me. However, it's not clear to me if he is bullish on assets like stocks and bonds, or if he is bullish on the economy. The two, as historians would know, are not correlated (for example, the economy actually did quite well in the 70's but the stock market did not; conversely, the stock market did well from 1932 to, say, 1938, but the economy did not.) If he is turning bullish on stocks, I think he may be a bit late to be riding the bulls and I would bet against him. But if he expecting a strong economy, he may turn out to be right (although I'm still not convinced.) The way I look at it, the fore

Sunday Spectacle XXVII

US$ Index (source:

Articles for the week ending September 19th of 2009

Was busy with my movies at TIFF*, thinking about my future, and starting my job hunting. Hope no one minded the infrequent posts this week... (* Non-investing thought: Of the 7 films I saw (still one more left,) none of them really blew me away. I think the best one that will appeal to mainstream fans is The Road , directed by John Hillcoat, and starring a young Kodi Smit-McPhee and Viggo Mortensen. It should open in theatres soon so keep an eye on that. If you are into pure science-fiction or drama, you may enjoy it (it's not an action film.). Cinematography, set design, and special effects were excellent, while the acting was superb too. The film deals with a post-apocalyptic world where a man and his young son are trying to survive. It's based on a book and, as usual, people who read the book may not find the film as enriching (I don't read novels so I can't say about this film.) Unlike post-apocalyptic worlds in movies like Mad Max or video games like Fallout ,

A value investor takes a quick look at Lexmark

UPDATE: Fixed a tiny grammar mistake as suggested by reader Guest . A little less than a month ago, I e-mailed Geoff Gannon and inquired about Lexmark (LXK). I don't usually do that but decided to ask him about his opinion of Lexmark because he was wrong with his initial view a few years back. I was curious about his views of how the company has changed (apparently for the worse if the stock price was an indicator) in the last few years. Geoff Gannon was kind enough to post a lengthy response detailing his thoughts and I thought readers would benefit from his comments (used with permission.) Even if you could not care less about Lexmark, read this post because it illustrates the thinking and approach of a value investor. He also responded to a follow-on questoin and another unrelated question pertaining to Coca-Cola which I will quote in future blog entries. The topics of the other e-mail were slightly different and it is useful to read them as a stand-alone piece. This first e

The casino known as the Chinese stock market

I have repeated this point many times but here is another look at the Chinese stock market and how it resembles a casino. This story, about IPOs, comes from The Globe & Mail : The China Securities Regulatory Commission quietly shut down new stock offerings nearly a year ago, after uninhibited speculation fed a freefall on the country's stock exchanges, and the demise of Lehman Brothers warned of darker economic times ahead. This June, with China's economy growing on the back of government spending and more cash infusions to continue that growth, regulators reopened the field to IPOs, armed with a new set of rules designed to limit speculators' ability to cash in. The scene on China's benchmark Shanghai composite index before 2008 was something akin to a Wild West of stock markets. Eager, fast-growing companies launched IPOs with spectacular results, grabbed up by an equally eager public for whom the stock market represented a new kind of excitement: gambling, onl

One analyst forecasts a huge bubble in China...but not yet

Thanks to a link from Naked Capitalism , I ran across a blog entry quoting an analyst that foresees a massive bubble in China —one that surpasses the 1980's Japanese bubble. I actually don't share the analyst's outlook but am referencing it as a dissenting argument to my views. The interesting thing to me is that the analyst suggests that China will enter a massive bubble after capital controls are removed. The thinking, obviously, is that foreign capital will flood into the country causing misallocations (don't forget that a bubble is a misallocation of resources.) This view goes against my view since I believe China may have already entered a bubble in real estate and manufacturing (the stock market may be a bubble too but I don't care about their stock market bubble since it is tiny and has little impact on anything.) Another way to contrasting our views is as follows. People like me are bearish on China and staying away from it. The analyst's view, inter

I thought sovereign wealth funds were swimming in cash

One of the thoughts that was popularized last year, and early this year, was the belief that sovereign wealth funds (SWF) would come to the rescue of troubled, capital-short, institutions. Well, it appears some of those funds weren't exactly swimming in cash as they were commonly portrayed. Bloomberg has a nice story on Istithmar World , Dubai's soverign wealth fund, detailing the possibility that it may liquidate. Istithmar World is not as big as the SWFs of Singapore or China, but I wonder if it is a sign of things to come—or is this an isolated case? Unlike the widely held view that SWFs use cash, it seems Istithmar World used debt (hence it was more like a private equity fund than a mutual fund or a government institutional fund.) I'm not sure if the SWFs of China/Singapore/etc use a lot of debt. Dubai investment firm Istithmar World may be the first sovereign wealth fund to liquidate after a $27 billion spending spree financed largely with borrowed money, people bri

The left wing & protectionism

I'm left-leaning and kind of an extremist in that I only vote for left-wing parties. The only exception is libertarian parties, which are neither left nor right from the conventional definition (I have only voted once for a libertarian party, the Ontario Libertarian Party. I never voted for them again since I don't like their reliance on Ayn-Rand-type policies; I favour more of the classical liberal philosophies.) I don't vote for any parties on the right because they are socially conservative. The downside to left-leaning parties is that they are almost always a fan of tariffs—protectionism if you will. The reason is ideological. The left wing favours labour and the best way to protect labour in the short run is to enact tariffs on foreign imports. Of course, these fail in the very long run (15+ years) but this, unfortunately, is overlooked by many on the left. I have favoured Barack Obama and Democrats in general. I still prefer someone left-leaning like him but I ment

Sunday Spectacle XXVI

Illustration by William Haefeli for the New Yorker. Illustrated books and other gifts available from New Yorker's Cartoon Bank .

Articles that may be of interest - week ending September 12th of 2009

( Minor Update: Altered the link for Geoff Castle's piece on Japan so that it links to his site directly. The GuruFocus title was very poor.) Posting on this blog is going to be erratic for the next few weeks, or possibly even months. I'm starting to look for a new job due to various reasons. Doing this in the thick of a severe recession, with forecasts of a jobless recovery, is not the ideal time; I should have done this a long time ago but I guess I'm a slow-moving turtle :( But as capitalists (I'm not a "true" capitalist), we know that heroes—whether individuals or businesses or countries—are born during tough times. So we'll see how my life turns out. I hope I find something by the end of this year. Wish me luck. As usual, I am also checking out a bunch of films at the Toronto International Film Festival and that is going to keep me busy for the next two weeks or so. I usually purchase 10 tickets each year. I'll be watching 8 films this year,

US trade deficit starts expanding

The US trade deficit had been shrinking in the last few years but appears to be reversing trend and starting to expand again. The following chart from CalculatedRisk illustrates the trend: The overall trade deficit is back to 2001 levels. It had declined significantly during the last two years. Notice how the trade defict excluding petroleum actually started shrinking back in early 2007. The big wild card is oil. If oil prices stay where they are now, or decline, the trade deficit will likely shrink. I believe the non-petroleum deficit may never go back to what it was in 2005. The trade deficit is sort of a theoretical measure that is ignored by many investors but I feel is important in the long run. As Marc Faber has suggested, the US trade deficit provides liquidity (in US$ terms) to the world (i.e. it acts as cheap money and possibly depresses the value of the US$.) When it started shrinking last year, liquidity dried up. A shrinking trade defict also means that someone on th

Barrick issues shares to close out hedges

The Globe & Mail is reporting that Barrick, the largest gold company in the world and one of the largest companies in Canada, is closing out a big chunk of its hedges using proceeds from a massive share sale: In a major bet that gold's rally has a long way to go, Barrick Gold Corp. unveiled plans to largely eliminate its troublesome gold hedge book with a massive equity issue worth as much as $3.45-billion (U.S.) – potentially the largest stock sale in Canadian history. On a day when the price of gold topped $1,000 (U.S.) an ounce, the Toronto-based company said it is selling 81.2 million shares at $36.95 each. It will use the proceeds to eradicate more than half of its hedge contracts which have locked the company into receiving a fixed price for some of its gold production. The world's largest gold miner, Barrick produces about 8 million ounces a year. But its hedge book totals 9.5 million ounces, fixed at prices hundreds of dollars less than the $1,009 gold hit yeste