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, with 2 tickets being used up for two of my friends.

I'm planning to schedule a bunch of posts, many of them written over a period of time, so hopefully people still have something to check out.

As for investments, as you know, I really haven't done anything this year and haven't found too many opportunities worth investigating. I think I made a serious error early in the year by not investing in junk bonds. Stocks were still questionable in my eyes, although they worked out exceptionally well for anyone overoading on them early in the year; but I may have missed a multi-decade opportunity in junk bonds. Stocks can easily collapse 30% to 50% but I'm not sure if we'll see a 20% to 30% yield on junk bonds ever again in the next 30 years (but do note that the original reason for caution still stands: default rates and recovery rates were supposed to set records, and they look like they will.)

The current environment is not the type of market that I find favourable for making long-term investments. So I am spending time contemplating macro bets, particularly investing in long bonds or at least betting on rates remaining low.

I am also refining my investment thinking. I think I have pretty much come to the conclusion that Benjamin-Graham-type investments are not for me. I never really invested in them but now am leaning against pursuing any of them (except in some special cases of fallen angels i.e. popular companies fallen on hard times.) In my view, Graham-type investments tend to be secondary or no-name companies with weak qualitative characteristics (moat, brand name, access to cheap capital, etc) but strong balance sheets (sometimes trading below net cash but generally below net current assets, etc.) There are exceptions to this and I'm being very general here but that's how I look at them (feel free to challenge my view if you believe it's wrong.) Instead, I have decided to pursue Warren-Buffett-type investments (I'm referring to mid-life and late-life Buffett). I think it is probably safer to make concentrated bets on Buffett-type investments.

Anyway, here are some articles you may find useful:

  • Simoleon Sense interview with Joe Ponzio - Part I & Part II (Simoleon Sense): Joe Ponzio writes a really good blog, FWallStreet, that you may want to check out, if you have never heard of it before. I like reading interviews with fellow investors so I'm glad to see Simoleon Sense conduct this interview.

  • Simoleon Sense interview with Ben "Inoculated Investor" Claremon (Simoleon Sense): An up-and-coming investor and the blogger at Inoculated Investor presents his views (I like reading his blog because he is more macro-oriented but I think his stance is too bearish.) Some people would view interviews like these as useless. After all, who the hell is this guy and why should we listen to him? I personally find interviews like these quite useful. As crazy as this may sound, I have nothing to learn from, say, Warren Buffett anymore—and I haven't even read all his shareholder letters! I learn a lot more from new investors or professionals no one has heard of. What I learn is not any deep new insight but, rather, their process and how they think about investing. I don't necessarily agree or follow everyone I read but it makes me think of new possibilities.

  • Thoughts on the US$ and inflation (Accrued Interest): Accrued Interest contemplates the US$ situation.

  • 30 year bond still behaving bullishly (Research Ahead; via SeekingAlpha): The 30 year US government bond is still signalling lower yields. There are a lot of minor disconnects I notice. The 30 year bond appears to be more bullish than the 10 year bond. US govt bonds are acting strong even though the US$ has be extremely weak, with some new lows set against some currencies recently. Gold also rallied somewhat in the last few weeks, and if you believe gold is correlated with inflation (I actually don't believe this but the market does) then why are bonds remaining strong?

  • Chou Funds semi-annual fundowner report (Chou Funds via Controlled Greed): The most interesting thing to me is how Francis Chou is considering using constant maturity swaps (in particular Constant Maturity Swap Rate Caps (CMS RC) and Constant Maturity Swap Curve Caps (CMS CC)) to insure against high inflation. I don't know anything about this instrument but it resembles something Hugh Hendry mentioned in his latest letter. Hendry is betting on deflation while Chou is concerned about deflation so they have opposite views. However, their timing is different, with Hugh Hendry taking a position now, whereas Chou expects to enter into these contracts whe deflation threat is high, which isn't the case right now.

  • Price deflation in 1930's USA, 1990's Japan, and present USA (Thought Offerings; h/t Naked Capitalism): Very good analysis of how price measures behaved during the two major deflationary periods in the past. The CPI is not a perfect measure of inflation/deflation but it does provide a rough guide. Generally growing economies are accompanied by stronger product prices. One can easily see how USA started recovering in 1933 mainly due to FDR's policies (some of them enacted by Hoover but altered and expanded by FDR). One should also note how Japan's price index didn't really collapse like 1930's USA. The main reason, of course, is because USA was anchored to the gold standard while Japan was not. The other reason is because Japan, contrary to the belief of some, has actually grown over the last two decades. The GDP growth in Japan after the bust is something like 1% real. Nominal GDP growth hasn't been good but, nevertheless, there is a positive, albeit small, real growth. In contrast, USA's economy in the early 1930's contracted significantly in real and nominal terms.

  • Japan's debt situation (Geoff Castle; via GuruFocus): This title for this article has to be one of the most misleading out there. Anyone looking at the title might think it is supposed to be about the "Japanese Warren Buffett," Takeda Wahei, but there is little about Takeda Wahei nor about his investing techniques. Instead, it is a summary of Japan's debt situation. I am linking to it because the article provides some numbers for various countries, including Japan in 1945. It's interesting to see how the ability of debt payments vary across countries—simply looking at overall debt figures can be misleading. I also didn't realize that Japan had an inflation of 500% in 1945 (non-investing political note: as a side note, as much as the atomic bomb drops by the Americans will be hard to justify in the long run—500 years from now, descendents of Americans, orbitting Saturn on a spaceship, will agree that it was an unfortunate action—America could have let Japan disintegrate and suffer like many failed states but Americans actually helped Japan avoid a catastrophic collapse. Too bad humans make war and kill everyone (Japan started the war in this case) and then kiss and make up. An alien would never understand how crazy humans are :( )

  • One analyst predicts further natgas pricing weakness (Hard Assets Investor; via SeekingAlpha): Just when you thought there wouldn't be more bearish news for natgas, here is one analyst who doesn't see any light at the end of the tunnel. Of course, it's hard to say what is already priced in. Furthermore, natgas is very sensitive to hurricanes so it can easily rally if there is hurricane disruption. I'm more interested in what happens in the off-hurricane season.

  • (Recommended if resource investor) Primer on MLPs (Wachovia; thanks to user LwC on GuruFocus): MLPs are tax-advantaged security structures that are in the same class as income trusts (but there are differences.) This 100-page analyst report describes MLPs in detail. I find the standard analyst report analyzing a specific stock and giving a recommendation unhelpful most of the time but reports like these, which provide detailed summary of industries, are extremely helpful. If you have access to some good brokers, you should keep an eye out for reports like these... As for MLPs, which are an American corporate structure, I am not sure if Canadians get much benefit from them (I'm not sure). I have historically disliked Canadian income trusts and I would probably take the same stance with MLPs. If I were to invest in oil & gas, I would prefer plain E&P or integrated companies. Like other securities, whatever you do, do not blindly chase yield. For what it's worth, Seth Klarman invests in quite a few of these but he is extremely complicated to figure out.

  • Pornography industry suffering (The Economist): Los Angeles is not just famous for regular films but also for pornographic films. The industry is thought to resistant to economic slowdowns but appears to be suffering this time around. I suspect it has more to do with Internet piracy and the decline of exclusivity than the economy. The interesting thing to me is how little the "actors" are paid. Amazing that some can make a living off this.

  • Why are people worried about inflation? (James Surowiecki for The New Yorker): James Surowiecki wonders why people seem to be scared of inflation.

  • The financial industry "tax" (Buttonwood for The Economist): The financial industry extracts a small "tax" from the economy. There is some benefit to an expanding financial industry but not when it gets too big.


  1. I enjoy your blog.  I am curious about the statement you made about junk bonds.

    "I'm not sure if we'll see a 20% to 30% yield on junk bonds ever again in the next 30 years".

    Which companies were you considering at such yields?

  2. One note: all the bonds trading above 20% late last year or early this year were distressed or had looming problems.

    The most serious interest to me was Sears. A bunch of their bonds were trading around 30% to 40% yield to maturity (note that you are getting around 10% from the par value i.e. a lot of the bonds were trading at 50% to 80% of par value.) They were highly illiquid but some of them could have been acquired if one tried hard enough.

    I also contemplated a few homebuilder bonds. Martin Whitman invested in Standard-Pacific (or something like that) and I had looked at the Pulte exchange-traded bonds several years ago so I was watching them. I can't remember what their yields were but I think they were over 20% (but not quite 30%).

    I also was looking at the ones I listed on my watchlist page:

    Convertible bonds:
    Coueur d'Alene (CDE.GJ / CUSIP: 192108AQ1)
    Midway (MWY.GB / CUSIP: 598148AB0)
    AMD (AMD.GG / CUSIP: 007903AL1)
    Novagold (NVGD.GA / CUSIP: 66987EAA5)
    Evergreen Solar (ESLR.GE / CUSIP: 30033RAC2)
    Sandisk (SNDK.GC / CUSIP: 80004CAC5)

    Convertible Preferred shares:
    Bunge (PK-OTC Grey Market: BGEPF)
    Freeport McMoran (PK-OTC Grey Market: FCXGL)

    Not all of these were trading at 30% yield but they were around 15%+, except for a few. I was never close to investing in these but I did start thinking about them. These are all distressed or high risk industries.

  3. BTW, I would not necessarily recommend any of these right now... I haven't looked into them lately and the situation has changed materially...

  4. that is intersting.. i was also considering sears, since i already hold thier equity.


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