Can Turtles Fly?

Very strong GDP numbers for America... MarketWatch reports : The U.S. economy expanded at a 3.5% annual pace in the third quarter, as massive government stimulus helped drag the economy out of the longest and deepest recession since the 1930s, the Commerce Department estimated Thursday. Along with improvements in key monthly figures on output and sales, the rise in real gross domestic product means the Great Recession is likely over in a technical sense, even as further job losses occur. A formal call on the end of the recession isn't expected for months. Read more about recessions. ... In the past year, the economy has contracted 2.3%. The economy shrank 0.7% annualized in the second quarter and 6.4% in the first quarter. The figures are seasonally adjusted and adjusted for price changes. Growth was broad-based in the third quarter, with final U.S. sales rising at a 3% annual pace, the fastest in more than three years. Third-quarter growth was due to higher consumer spending, a sl...

People always talk as if America—or Canada or other developed countries—have the biggest difficulty adjusting to China's economic prowess. Yet, what these countries face is very minor compared to the challenges faced by someone like Taiwan. Taiwan has been struggling mightily—it saw one of the biggest plunges in exports of any country during this crisis—and I'm not sure how its future will unfold. There are two big problems for Taiwan. Firstly, China is located close to Taiwan, and, hence, is a direct competitor in almost every industry. Given the huge discrepancy in wealth between the two countries, it is very difficult for Taiwan to compete with China on costs. Americans and Canadians complain about China's low costs but at least you have shipping costs and cost of time—time is money after all—to act a barrier. But imagine if you are situated right next door to China and costs are as little as 1/10th. Secondly, Taiwan's biggest wealth generator in t...

(This post is not related to investing) In 1933, the government of Franklin Delano Roosevelt did something remarkable that changed American history. FDR's government was famous for a lot of 'firsts' but this was unimaginable to conservatives. The government did the unthinkable and legalized alcohol . Thus ended The Noble Experiment . The "experiment" was a total failure from almost day one, with alcohol being widely available in most cities but, nevertheless, the conservatives held sway until the day Roosevelt, and subsequently, Congress, legalized alcohol. Similar to The Noble Experiment , America has been pursuing the War On Drugs for several decades now. It is debatable when the policy was started but, apparently, the concept was first unleashed by Richard Nixon. Nixon was also responsible for establishing the largely incompetent, and somewhat corrupt, Drug Enforcement Agency (DEA). My opinion is that the War On Drugs really got going under the Ronald Reagan ...

As I was speculating a few weeks ago, the Galleon insider-trading case appears to be entangling many leading companies and prominent individuals. In fact it appears to be the largest insider-trading case in American history*. The latest leak seems to imply that Hector Ruiz, former CEO of AMD, the 2nd largest microprocessor manufacturer in the world, was a key insider leaking information to the accused. MarketWatch reports : Shares of Advanced Micro Devices Inc. fell sharply Wednesday as the chip giant reeled from reports of insider-trading allegations involving its former chief executive, Hector Ruiz. The allegations could even cost him his current job. AMD stock plummeted more than 6% at $4.83, as some analysts said the revelations could cause a short-term shock, but likely won't have any longer-term impact on the company or on GlobalFoundries -- the new company spun off from the Sunnyvale, Calif.-based chip maker earlier this year. Ruiz, who serves as chairman of GlobalFoun...

I ran across a Bloomberg article quoting Andrew Smithers as saying that the stock market is overvalued by 40% : The U.S. Standard & Poor’s 500 Index is about 40 percent overvalued and headed for a drop as central banks pull back on securities purchases that pushed up asset prices, according to economist Andrew Smithers. Declines are likely because banks will need to sell more shares to raise capital, the economist and president of research firm Smithers & Co. said in an Oct. 23 interview at Bloomberg’s Tokyo office. The closing price on Oct. 23 of 1,079.6 was 40 percent above 771.14, a level last seen in March, according to data compiled by Bloomberg. “Markets are very vulnerable to an end of quantitative easing,” said Smithers... Andrew Smithers, for those familiar with him, is famous for maintaining and evaluating market valuations based off the q ratio. The following chart, courtesy Smithers & Co, shows the current state of affairs : (source: Smithers & Co ) The CAPE...

(This post is not related to investing) Is it actually possible to generate 100% of the world's energy from renewable sources such as wind, water, and solar? We are not talking about some futuristic society but the present. No doubt this is as utopian a premise as any. Yet Mark Jacobson, a civil and environmental engineer, and Mark Delucchi, a research scientist, suggest that it can be done. In the November issue of Scientific American , they detail how the world can use wind, solar, and water to power 100% of our needs (note that this excludes nuclear; it would be easy if you include nuclear.) You can access the article from the official Scientific American website (requires purchase.) I also Googled and found it freely available here . It's an interesting read. Thanks to Globe & Mail reader Alan Burke for bringing the article to my attention. Key elements of the plan, as cited at Scientific American's website, are the following: The authors’ plan calls for 3.8 milli...

Moody's/REAL Commercial Real Estate Index (CPPI) This chart doesn't have data for the last few months but is the latest I could find on the MIT site. Commercial real estate peaked later than residential real estate and is still weakening. It should also be noted that the data isn't as statistically significant as residential real estate since commercial real estate involves fewer transactions, often with very high transaction sizes. Source: Most up-to-date chart is apparently published first by Moody's with a possibly delayed chart you can find at at MIT .

Some articles I found interesting... (Highly Recommended) When insiders act against shareholders - The VaxGen case (Greenbackd): Special situation investors, as well as microcap investors, should study this situation when they have some time. VaxGen was a potential liquidation that was very close to liquidation but the board of directors decided to enter into a questionable merger with another company at a low price. Depending on the purchase price, a special situation investor investing on the basis of a liquidation is looking at huge wealth destruction regardless of whether the merger goes through! (Further comment below) Going for the trifecta of stocks, bonds & gold (Buttonwood at The Economist): The buttonwood tree is always interesting and so is the Buttonwood column at The Economist : "Gamblers dream of achieving a trifecta: picking the first three horses, in the right order, in a given race. The payout is huge but so are the odds against success. The same could be s...

It looks like the Galleon case is not as fool-proof as it seemed. The Huffington Post picks up a New York Times story revealing one of the major moles is Roomy Khan, apparently a California-based ex-employee of Galleon. A problem for the prosecution is that she apparently had financial problems and appears to have turned on Raj Rajaratnum when he refused to let her back into his firm. This sounds like some desperate move and who knows if she attempted black mail before co-operating with law enforcement so I'm not sure what a judge or jury will think. Furthermore, it appears the Khan family has had two prior legal problems, including a now-settled lawsuit with a housekeeper. They apparently also defaulted on a loan by Deutche Bank, which was settled after being paid with interest. So, it appears, at least to me, that the Khan family is very shady and unreliable. This doesn't let Rajaratnum off the hook—the government has other informants as well—but the case is not as st...

Here are two radically contrarian views. Of course, as always, what is contrarian depends on the crowd you hang out with. I measure it against the mainstream masses (i.e. institutional investors and Wall Street as a whole.) The views I present below aren't that new to me but they go against the Street. US$ To Remain Dominant This is a very long-term call so it's not really actionable for most of us (unless you are willing to invest for 20 years and not touch your money.) Ambrose-Evans Pritchard, a journalist at The Telegraph, makes a widly bullish call on the US$ : The dollar will still be the world’s dominant reserve currency in 2030, sharing a degree of leadership in uneasy condominium with the Chinese yuan. It will then regain much of its hegemonic status as the 21st century unfolds. It may indeed end the century even stronger than it was at the start. Why, you might wonder, could someone say the US$ would be stronger in 20 years: The aging crisis in Asia — and indeed the o...

David Armano's Interpretation of Chris Anderson's Free Model (source: Graphic by David Armano of Logic+Emotion ) The Globe & Mail conducted a short interview with Chris Anderson , the editor of Wired magazine and a technology visionary from America, and I thought I would quote some of his thoughts and inject my opinion. I have always had high regard for Chris Anderson. One of the reasons I like listening to him is because he is good at synthesizing business, technology, and science, while presenting it in an easy-to-understand manner. For instance, I really like how he takes advances in technology and tries to explain the impact on business models. There are many, especially those who come from a business background, who attempt to do the same thing but end up failing (in my eyes) because they don't understand science or technology. In contrast, Anderson was educated in physics and apparently wrote for Nature and The Scientist , as well as The Economist . Anderson...

In an interview covering the payments industry, Warren Buffett today called for Wall Street to implement downside penalties into their compensation scheme. Thanks to New York Times' DealBook for bringing it to my attention. You can access the video interview here . The compensation problem is not an easy problem to fix for two reasons. First of all, shareholders of financial institutions have shown themselves to be happy with the current scheme. I mean, can anyone think of too many shareholders, even the majority shareholders who lost massive fortunes, of companies like Citigroup or AIG, complaining about compensation schemes? I have been following the markets a lot during the financial crisis and I haven't seen any strong calls for compensation reform. As far as I'm concerned, it is up to the owners, which means shareholders for public corporations, to control compensation. They are the ones that pay the employees and if they can't control their own compensation polic...

The Rajaratnum case that I was referring to in my prior post has the potential to be a spectacular blow up for Wall Street. Depending on how far the government takes it, we may be looking at the largest criminal investigation ever conducted on Wall Street. Unlike other popular criminal cases, such as the Bernie Madoff case, Enron, or Worldcom, this insider trading scheme appears to impact many firms and involves a huge network of insiders. Let me quote the thoughts of Michael J de la Merced , a New York Times reporter: As I report in the Times article, the case is fascinating on multiple levels. The sheer size of the purported network, riddled with unnamed co-conspirators and tipsters, is tantalizing. Who was the unnamed investor-relations employee who allegedly illegally spilled the beans on Google’s quarterly earnings? Who was the Akamai executive who did the same? The Moody’s Investors Service analyst who divulged that Hilton Hotels was about to be acquired by the Blackstone Group...

Behind every great fortune there lies a crime —Honore de Balzac Passage in Le Pere Goriot (aka Father Goriot ) very loosely translated* Honore de Balzac is credited with the saying in the above quote and, although I don't feel is accurate in a country like America, I do think it applies very well to the period Balzac was living in (18th and 19th centuries) and to modern day developing and undeveloped countries with non-existent or corrupt legal systems. I never even heard of Raj Rajaratnum before the scandal broke late last week. I never even knew a Sri Lankan Tamil was a billionaire—he's the same ethnic group as me grr :(—let alone some major Wall Street player in technology investing. Although it's too early to say for sure, and I'm reserving judgement until the courts rule, it does appear that Rajaratnum was involved in a major insider trading ring. Law enforcement used techniques typically used to bring down organized criminals, including extensive wiretaps...

It's hard to tell how good David Einhorn is with his macro calls. I don't give him the same respect as many others, when it comes to his macro views. In any case, it looks like Einhorn is making some bold calls. MarketWatch reports that he is expecting a major currency crisis (interestingly not in USA): Greenlight Capital is betting on the possibility of a major currency collapse and a surge in interest rates, the hedge-fund firm's manager David Einhorn said Monday, citing ballooning government deficits in some of the world's most developed countries. ... On Monday, he said Greenlight has added new trades to this investment theme, buying long-dated options on much higher interest rates in Japan and other developed regions -- effectively giving the firm the chance to make big profits from a jump in rates. The options, bought from major banks, are tied to interest rates four to five years out, Einhorn noted. "Japan may already be past the point of no return," h...

I Love Liberty (Roy Lichtenstein, 1982) ("I Love Liberty" by Roy Lichtenstein (1982). Being sold during Lehman Brothers liquidation art sale.)

(This post has nothing to do with investing. Skip this if you are not developing your communication skills.) In 1994, Barnett Helzberg, Jr. was walking by The Plaza Hotel in New York City when he heard a woman hail Warren Buffett. Helzberg approached the legendary investor and said, "Hi, Mr. Buffett. I'm a shareholder in Berkshire Hathaway and a great admirer of yours. I believe that my company matches your criteria for investment." "Send me more details," Buffett replied. A year later, Helzberg sold his chain of 143 diamond stores to Buffett. Helzberg's story is a classic example ofa powerful elevator pitch. An elevator pitch gets its name from the 30second opportunity to tell-and sell-your story during a three-or four-story elevator ride. The 3D-second parameter is based on the typical attention span, according to the book How to Get Your Point Across in 30 Seconds or Less by Milo O. Frank. It's one reason why the standard commercial or television ...

Thanks to GuruFocus for bringing this Bloomberg interview with Jean-Marie Eveillard to my attention. It deals with Japan, which I'm sure is of high interest to contrarians and deep value investors. Japan, for those living in the cave for a few decades ;), has been in a 20-year bear market. That alone should warrant a look from contrarians. It is rare for equity markets to go into such long bear markets in the modern era. Nothing new in the interview but I always like to hear the thoughts of successful investors. Even if there are no new stock suggestions, I like to get a feel for their thinking. For instance, Jean-Marie mentions how he was in Japan an year ago and they seem slightly more open towards immigration. I don't want to beat the horse to death, since I have repeated these points many times, but here are some reasons to be cautious of Japan: Horrible corporate governance : Shareholders basically don't own the companies except in name (I might be exaggerating a tad ...

I'm not the only one you should be using as an example of how not to invest ;) You should add Harvard University's endowment fund to that list as well. Readers may recall the numerous problems Harvard's fund faced last year so it shouldn't come as a surprise when Bloomberg reports that Harvard paid $500 million, plus another $425 million over 40 years, to cancel interest rates swaps : Harvard paid $497.6 million during the fiscal year ended June 30 to get out of $1.1 billion of interest-rate swaps intended to hedge variable-rate debt for capital projects, the report said. The university in Cambridge, Massachusetts, said it also agreed to pay $425 million over 30 to 40 years to offset an additional $764 million in swaps. The transactions began losing value last year as central banks slashed benchmark lending rates, forcing the university to post collateral with lenders, said Daniel Shore, Harvard’s chief financial officer. Some agreements require that the parties post c...

MarketWatch is reporting that the founder of of Galleon Group, a large technology-focused hedge fund, is being charged in federal courts with insider trading : Galleon Group's billionaire founder, Raj Rajaratnam, was charged Friday in a sweeping insider-trading case, according to court documents filed in Manhattan by federal prosecutors and the Federal Bureau of Investigation. Rajaratnam and five others allegedly involved in the scheme have been arrested. A phone message seeking comment that was left at Galleon's New York headquarters Friday morning wasn't returned. The other defendants are: Rajiv Goel, a managing director at Intel Capital, a unit of Intel Corp.; Robert Moffat, a senior vice president at IBM Corp.; Anil Kumar, a director at consulting firm McKinsey & Co.; Danielle Chiesi, portfolio manager at $1 billion hedge-fund firm New Castle Partners; and Mark Kurland, a senior managing director and general partner at New Castle, which was the equity hedge-fund gr...

The Globe & Mail, via a Reuters story, is reporting that S&P is concerned that Dubai may be insolvent : Dubai has “insufficient” funds to pay back billions of dollars worth of debt coming due, an analyst at credit rating firm Standard & Poor's said Sunday, putting added pressure on the struggling city-state to raise additional cash. The sheikdom and its network of state-controlled companies amassed at least $80 billion (U.S.) in debt on projects like manmade islands and opulent high-rises during a multiyear building boom that saw the city-state craft itself into the Middle East's financial, trade and tourism hub. About $50 billion worth of that debt needs to be covered over the next three years, said Farouk Soussa, S&P's head of Middle East government ratings. A lack of government information has left investors wondering how it all will be repaid. I haven't mentioned Dubai in a while given the crises that have unfolded elsewhere but it looks like the Dub...