Can Turtles Fly?

Some people are on holidays; others have light loads—assuming you aren't one of those airport workers stuck trying to clean up from the snowstorms ;) Here is some reading material to keep you busy... (Recommended) Potential actions by regulators to control the too-big-to-fail banks (Reuters Breakingviews via Financial Post): Regulators and government officials created huge moral hazard by creating the oxymoronically-named too-big-to-fail banks. Now they are trying to figure out how to regulate them and, ultimately, prevent the banks from turning into too-big-to-save (i.e. banks that will threaten sovereign solvency). This is a good article that presents several solutions and the ones likely to be followed by the government officials and regulators in the near to medium term... As I have mentioned in the past, the "proper" solution in a capitalist society is to punish the financiers who enable all the risk-taking. In this case, the bondholders have been spared (except f...

I'm bearish on commodities but the only commodity that I would consider is natural gas. Compared to the rest of the commodity complex, natural gas remains quite contrarian, with prices hovering near 7-year lows. Unfortunately for the bulls, nothing much has changed since I last wrote about it , about an year ago. The price is roughly what it was when I wrote that article: Encana, a bellwether—I believe the largest natgas E&P in North America—is just a tad bit above when I wrote my prior post: Note that just because prices are low doesn't mean it is a good contrarian opportunity. There is a good reason why natgas is trading where it is. Unlike oil, natgas is localized and there has been massive production from unconventional sources (particularly shale gas). In fact, Big Oil has become gassy over the last few years—not sure if this is good or bad for the industry??—and it isn't shy to spend money on drilling for more gas. Believe it or not, many are drilling even...

Anyone investing in junior miners would be familiar with warrants; they are a popular means to leverage returns. For those unfamiliar, warrants are derivatives that are identical to options except for some differences: warrants are issued by the company itself so they dilute shareholders (they are similar to employee stock options); and warrants tend to have long expiries, often as long as 5 years. Warrants are common in junior resource capital raisings but not so common elsewhere (mostly because they destroy shareholder wealth due to their dilution). There are some risks in using them and one of them is when the company is bought out. M&A takeovers are a big problem for warrantholders. Many who buy warrants do so for their long expiry date but, generally, these warrants are way-out-of-the-money—the hope is that the price will rally significantly over the years before the warrants expire. So, if a company is bought out, the buyout price may be below the strike price, render...

For some reason, I notice that I tend to write about China on Sundays... hmm... Anyway... When Goldman Sachs made its first forecasts for the BRIC economies (Brazil, Russia, India and China) in 2003, it predicted that China would overtake America in 2041. Now it says 2027. In November Standard Chartered forecast that it will happen by 2020. This partly reflects the impact of the financial crisis. In the third quarter of 2010 America’s real GDP was still below its level in December 2007; China’s GDP grew by 28% over the same period. If real GDP in China and America continued to grow at the same annual average pace as over the past ten years (10.5% and 1.7% respectively) and nothing else changed, China’s GDP would overtake America’s in 2022. But crude extrapolation of the past is a poor predictor of the future: recall the forecasts in the mid-1980s that Japan was set to become the world’s largest economy. China’s growth rate is bound to slow in coming years as its working-age populat...

(charts from " Go Big, The Investment Case for Multinationals ," Robert Hagstrom. LMCM, Nov 2010) Shouldn't be surprising to see that larger companies in the S&P 500 earn more overseas. The difference is very pronounced for S&P 100, which is a subset of S&P 500 and contains the largest companies in America. Around 68% of the companies in the S&P 100 earn 25%+ of their revenue overseas. The bottom chart, showing the local vs foreign profit margin, shows how profit margins have collapsed in America in the last few years. You can read this two ways. The first way is to follow the suggestion of the author of the document containing these charts and favour companies earning foreign income. The profit margins have remained high overseas so a bullish outlook will try to capitalize on that. The alternate view is to remain contrarian. Not only are the foreign profit margins higher than the local (US) one, they have also been higher in the last decade than in...

Hope everyone had a good year and is looking forward to the holidays. Investingwise, it has been a very poor year for me, but, careerwise and in other matters, the year started off rough but it has been good so far. Google introduces Books Ngram viewer (AtlanticWire): Amazing free tool called Books Ngram Viewer that lets users view trends in words on roughly 10% of books printed, in six languages, between 1500 and 2008 (approximately 5.2 million books). Biggest drug recalls in US history (24/7 Wall St): Some of it is not pretty, especially if you consider how humans were harmed. The iPhone increases US trade deficit (The Globe & Mail): A good article that refers to the study, " How the iPhone Widens the United States Trade Deficit with the People’s Republic of China,"  that suggests that Apple's iPhone, although owned, designed and sold by an American company, actually increases the US trade deficit. I was going to write about this in a standalone po...

The Bernie Madoff debacle, whereby the SEC completely missed his illegal activities, has certainly lit a fire under the SEC. There have been several charges against those benefitting, or abetting, insider trading and the trend continues with four managerial-level employees arrested today. According to MarketWatch, Federal authorities said Thursday that they arrested four people on insider-trading charges, including three former employees of technology companies Advanced Micro Devices, Flextronics International and Taiwan Semiconductor Manufacturing Co. Another person — Daniel DeVore, 46, formerly a global supply manager for Dell Inc. — pled guilty on Dec. 10 to wire fraud and conspiracy to commit wire fraud and securities fraud, the authorities said. He’s cooperating with prosecutors, according to a plea agreement released Thursday. Among the allegations, filed in the U.S. District Court for the Southern District of New York, authorities claimed that the former Flextronics employ...

The Globe & Mail has a brief story on the high expectations of private equity investors (refer to the article for the link to the study): With returns in other asset classes depressed, almost two-thirds of investors surveyed by research firm Preqin say they expect private equity managers to post returns that trump public markets by at least 4.1 percentage points. Three years ago, that number was 17 per cent. A further 23 per cent in the latest survey said they expected at least 2.1 percentage points over public markets returns. Given what some studies have shown, that seems a lot to ask. A recent study by London Business School Professor Chris Higson concluded that investors get "at best a market return." Mr. Higson looked at returns from 1980 to 2005. His conclusion was that only about a quarter of funds outperformed, while the rest underperformed. The survey appears to have sampled over 100 private equity investors—sample size is reasonable—and it seems many h...

It looks like my post on Keynes from a few days ago got picked up by FT Alphaville, setting a record for page hits on my blog... anyway... Those following the markets closely may have noticed that US government bond yields have ticked up, while the US$ has sold off (the Canadian dollar index, which includes the US$ as a major component, has been somewhat flat and this leads me to believe the US$ isn't as weak as it appears). So the question is, are we seeing the beginning of the inflation that inflationists have bet on for years? Let's take a look.

From The Globe & Mail: The deal reached by U.S. lawmakers to extend tax cuts and unemployment benefits will spur economic growth, but brings the country’s vaunted triple-A credit rating one step closer to the chopping block. Moody’s Investors Service Inc. on Monday warned the proposed package will worsen the country’s already stretched finances. That deterioration increases the likelihood that the rating agency will change its outlook on the U.S. rating to “negative” over the next two years, it said. Such a shift would signal that a downgrade lies ahead. The U.S. rating isn’t in imminent danger, but the caution from Moody’s is a sign that the country’s triple-A status is far from guaranteed and will face pressure sooner than expected. Not imminent and doesn't mean it will happen but this is the first time I have heard any of the rating agencies seriously suggest that USA may be placed on credit watch negative within 2 years. The article also provides a handy list of coun...

All You Wanted to Know about Gift Cards (source: " What goes into a gift card " by Jessica Shambora. Graphic by Jason Lee. Fortune, November 26, 2010)

John Maynard Keynes Many readers have likely heard of John Maynard Keynes, arguably the most influential economist of the 20th century. Keynes is most famous for debunking the old theories of classical economics and developing a systematic way of analyzing macroeconomics with consideration of politics and philosophy. Yet, I'll bet that only a few readers would know that he was also one of the top investors of all time. Investing wasn't Keynes' main job and he wasn't exactly a money manager so his investing activities aren't widely known.

Too many things to read... (Recommended) Benjamin Graham on intelligent vs unintelligent speculation (CanadianValue for GuruFocus): I'm not a classic value investor and think Graham is wayyy too conservative, but it's still good to think about risk. One distressed company to watch: Deans Foods (Bloomberg): Contrarians and distressed value investors may want to check out Dean Foods (DF), the largest dairy in America. Dean Foods is off around 66% in the last 3 years and is apparently struggling due to, what else, too much debt. I don't like companies like this but I notice many value investors like these old-school companies. One of the big risks with situations like this is a take-under. There is nothing to stop someone from coming in and buying this company at a really low price, especially if the stock keeps sliding for a while. WikiLeaks reveals Pfizer pressured Nigerian officials to drop suit by trying to uncover corruption (New York Times): According to one of th...

In 1998, two American university students founded a company called Google. This post is to record the reasons Google came to dominate the online search business. As is the case with success—or failure—no one can pinpoint the exact reason for why things happned the way they did; nevertheless, I think it's good to consider what authors covering the subject matter think. A few weeks ago, I linked to an essay in the December 9th, 2010, issue of New York Review of Books , " Google and Money! ," where Charles Petersen reviews a few books on Google and pens an essay of what Google was, is, and may be. I decided to extract that essay since it is worthwhile as a standalone post—at a minimum, for future record-keeping purposes (yes, part of the reason I write this blog is to record). Consider this as the second source of Google's success. Some people really have no clue about Google—How could it earn billions off search advertising? It must be a scam!—and the linked article...

From The New York Times' Dealbook: One of Wall Street’s most influential securities analysts is telling investors to brace themselves: some of the nation’s biggest banks could be on the cusp of a credit rating downgrade. In a new report, Glenn Schorr, who covers brokerage firms and banks at Nomura, says that while “it’s not a done deal, at present, Bank of America, Citigroup and Morgan Stanley appear most at risk of being downgraded to Tier 2 status.” ... “While balance sheets are in better shape and fundamentals are improving, the pace of recovery is likely a bit slower than the agencies were expecting,” Mr. Schorr wrote in his report. Among other things, banks are facing new challenges like European sovereign risk and the negative impact of regulatory reforms on revenue. The lower credit ratings could reflect changes in the assumed levels of government support that the rating agencies have assigned the banks. Mr. Schorr says in his report that the rating agencies assume...

During the mortgage debacle, Dimon’s reputation for averting risk suffered a hit. Oddly, the executive who worried about 100-year storms failed to challenge the industry models on home defaults. Many banks, including Chase, issued “stated-income loans” on which applicants were not required to document their income. Some mortgage brokers clearly encouraged borrowers to lie. Dimon says he thought Chase had enough information, electronically, to police such loans. “We didn’t anticipate the lying,” Dimon says, harping on a familiar theme — that bankers were not the only ones at fault. The blame for lying may have been his customers’, but the responsibility is Dimon’s. As Warren Buffett once observed: every bank is offered bad loans; it is the banker’s job to reject them. At Bank One, Dimon had ceased buying mortgages from outside brokers because their performance was poor. At Chase, he bought them. When I asked why, Dimon said underlings convinced him they were exercising proper caution, ...

(source: " Don Draper's Revenge ," Felix Gillette for Bloomberg Businessweek. November 24, 2010)

Here are some articles I found interesting. I have a bunch related to politics and this may anger some of you so if you don't want to hear it, skip over the WikiLeaks stuff near the bottom. As usual, not in any particular order... Some Canadians snapping up US residential real estate (MoneyVille): Real estate bulls such as John Paulson have said that it's a great time to buy American real estate but I am not so sure. Although not as risky as buying near a peak, I can see someone not making any money for years. Having said that, the funds mentioned in this article are buying prime Florida real estate—I assume they are prime?—so they should be ok in the long run. After all, they don't build those sandy white beaches in America. A bubble in private Internet companies? (Dealbook): The privately rumoured valuations of Internet companies like Twitter, Groupon, Zygna, and others, often reach billions of dollars. Some of these companies are revolutionary and likely will dominat...

Writing for The Globe & Mail, Preet Banerjee has a good column pointing out how different ways of measuring returns produces different results : Time-weighted returns v dollar-weighted returns Let's assume that a portfolio has three years of 20-per-cent annual returns, followed by three years of 0-per-cent annual returns. The time-weighted return is 10 per cent on average for those six years. But this is not accurate if you only invested $1 at the beginning, and then added $100,000 at the start of year four. The end value of this portfolio after six years would be less than $100,002, because while the $1 grew at 20 per cent per year for three years, the $100,000 didn't grow at all. The dollar-weighted return in this case would be virtually nothing. That's in stark contrast to the time-weighted average return of 10 per cent a year. Time-weighted returns can help you figure out whether the investment was a good one in hindsight, but dollar-weighted returns will h...

The scene is a cocktail party high above the Shanghai skyline on a summer night a few months ago. Our host is a Master of the Hedge Fund Universe, one who doesn't want to be identified in the press. We'll call him Pete. Pete comes to China at least twice a year to stay abreast of what's happening in the world's most dynamic economy. He has said, in fact, that if he didn't have kids in school in the U.S., he would consider moving here, so bright is the future. In attendance are other hedge fund investors, venture capitalists, and fund managers, China bulls all. If there is one sure-fire way to ruin the atmosphere on such a pleasant evening, it is this: Ask the crowd what they think of the legendary short-seller James Chanos, CEO of Manhattan-based Kynikos Associates. So that's what I do. "Hey," I say to a cluster of people surrounding Pete. "Did you guys see what Jim Chanos said about China on Charlie Rose the other night?" "No,...

It'll be interesting to see how the stock market finishes off the year. The US markets are hovering close to +10% right now. I don't find the stock market attractive and probably won't do anything for a while. Anyway, here are some articles I ran across that you may be interested in...Still have to figure out a better way to quote long text in these link posts I do. If you have any suggestions, feel free to leave your thoughts. Anyway, hope you find some of the articles and essays useful...credit goes to the original authors.

(source: " Book Review: All the Devils Are Here ," Ian McGugan. Bloomberg Businessweek, November 24, 2010. Image credits: Andrew Harrer/Bloomberg; David Karp/Bloomberg; Karen Bleier/Afp/Getty Images; Steven Puetzer/Getty Images; Frances Twitty/Getty Images)

(This post is not related to investing) I ran across an interesting article by Jay Goltz for New York Times' You're the Boss blog. It covers the emerging online coupon marketing channel and the author suggests that such schemes be considered as an advertising strategy rather than a sales strategy. The author covers Groupon but I like to generalize and think about his comments as they apply to any of the emerging coupon internet services. I'm only excerpting a small portion and leaving out some key assumptions so read the full article if you are interested in this topic. (I bolded some items I thought were important in the quote below.)

I've bearish on commodities for years but as long time readers know, I like to cover dissenting views that contradict me. This post is one such case. I ran across a Globe & Mail interview with the author of The Little Book of Commodity Investing,  John Stephenson,   covering commodities. I don't know anything about this author or how good his record is but sometimes it doesn't matter what the track record of someone is; what matters is their ideas. Here is an excerpt of some of the key questions, along with my thoughts. Since I'm bearish I'll be challenging the author's points (most of you have heard my arguments before so skip to the article directly if you are not interested in that):

If you are already feeling information overload, let me make it worse and offer you the following articles ;) As usual, not in any particular order... GM changes its logo on its HQ building (The New York Times): Subtle but changes like this are important to motivate the employees and project a new brand image. The IPO was successful; the company has reduced its costs; new leadership; betting big on the Volt... Let's see if it re-invent itself, a la IBM in the 90's, or if it will continue its long decline into oblivion. Consulo Mack's Wealthtrack interview with David Einhorn (Wealthtrack; via Gurufocus): David Einhorn is a sharp, up-and-coming, value investor. If I'm not mistaken, he hails from the midwest and is kind of like a young Warren Buffett (less proven than Buffett though; also seems more shorter-term-oriented and doesn't employ strategies of 'Buffett Prime' i.e. 1970's+). He rarely gives interviews worth talking about but I thought I would l...

The Hope in America... This measure is based on the Current Population Statistics survey, which among other things asks respondents the question "Do you have a business?" Dr. Fairlie matches this response with the response in the previous month to identify the number of new businesses created (subject to meeting criteria, such as devoting at least 15 hours per week to this business, and restrictions, such as the exclusion of adults over age 65). Importantly, Fairlie's measure of new businesses picks up new nonemployer businesses, many of which are not incorporated. What is particularly interesting about Fairlie's research is that he shows not only that this measure of entrepreneurial activity has surged, but that it is closely related to movements in local unemployment rates. That is, he has potentially uncovered an "entrepreneur of necessity" effect caused by high unemployment. For many unemployed workers, the benefits of starting a business during a we...