Tuesday, January 26, 2010 1 comments ++[ CLICK TO COMMENT ]++

Japan's sovereign credit rating under threat

As some may get the feelilng from my posts, I find Japan a paradox of sorts. So many good things yet so wrong on many fronts. I am curious to see how it will adapt over the next few decades. Older generations may have lived a life experiencing the ascent of Japan. Generation X and younger ones will live a life seeing its descent. But the future is not written in a stone so they have control over their future.

All that is a prelude to news that S&P is contemplating cutting Japan's credit rating:

Standard & Poor's Ratings Services said Tuesday that it may downgrade Japan's sovereign credit ratings if data don't improve or if the government doesn't get its fiscal and economic house in order.

The ratings agency said it's placed a negative outlook on Japan's AA sovereign long-term credit rating, saying it could issue a downgrade to AA- "if economic data remain weak and measures to boost medium-term growth are not forthcoming, given the country's high government debt burden and its weak demographic profile."

AA- would put Japan on par with Korea and worse than Taiwan and Trinidad & Tobago. How many, living in the 70's and 80's, would have thought that Japan would be probing the bottom of the AA slice?

Sunday, January 24, 2010 7 comments ++[ CLICK TO COMMENT ]++

Sunday Spectacle XXXXV

(source: The Economist)

Yay... Got a job offer :) I'm accepting it... Kind of nervous, as I'm sure everyon is with a new job but a new chapter in my life... funny how life turns out.

Saturday, January 23, 2010 7 comments ++[ CLICK TO COMMENT ]++

Review of my 2009 performance

As usual, this post will review my investment performance for the year. A bit late this year and I was kind of confused with some calculations but finally wrapped up things.

I did a lot of preliminary research and hunting around in 2009 but ended up doing almost nothing. I actually had zero purchases, if you ignore special situations. I likely missed the greatest buy opportunity in 25 years (since 1974 I'm guessing) but oh well. I feel the market was not cheap and many securities survived only due to government support. My concern last year was not so much that the valuations were sky-high but that they may overshoot to the downside. Even now, I have a feeling that the market will decline or go sideways for a while.

Given how I did almost nothing, I severely underperformed the markets this year. I'm actually satisfied with the performance. Although posting way-below-market returns is not a good sign of investment skill, I am more dissatisfied with losses. I was more dissapointed with my performance in 2007 and 2008, when I actually posted losses—this was especially troubling for someone who professes to be a contrarian-wannabe and who was bearish going into the bust.

Friday, January 22, 2010 3 comments ++[ CLICK TO COMMENT ]++

Articles for the week ending January 23

hmm... the market is starting to sell off but not sure if it's anyting political (taxes on banking...also some suggest that Ben Bernanke won't be re-appointed but I don't think so; but if he does not get re-appointed, the next best canadidate appears to Lawrence Summers. Some of the "back-benchers" on the Fed also have a shot.)

Last year's inflation vs deflation debate—which is not yet resolved—appears to have been sidelined, in favour of the China bubble debate.

Here are some articles I found interesting:

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Wednesday, January 20, 2010 1 comments ++[ CLICK TO COMMENT ]++

Consequences of the subprime mortgage bust

When wokers are laid off, it's very painful but, if you are a capitalist, you should accept it as an important element of capitalism. One of the beauties of a capitalist system is that the free market destroys useless and uneconomic industries and, hopefully, replaces them with more productive ones. This is not limited to uneconomic industries subsidized by short-term factors (such as government spending, fads in clothing, hype over some unknown useless product, and the like); this also means that established industries that used to thrive once may need to be done away with. It's painful for anyone caught in the cross-hairs but that's the reality and society is better off in the long run.

A lot of people on the left—I consider myself left-leaning—don't understand this. They see companies laying off people and think it is some greedy executive or owner trying to make more money. Well, in many cases, the capitalists themselves are losing a fortune and it comes down to survival versus bankruptcy.

Such is the case with many financial services and real estate jobs in USA. Some booming industries, such as subprime mortgage lending, will decline and not recover to prior levels for decades. I ran across a story in The Wall Street Journal, describing the suffering of some workers who depended on those industries:


Found a China bear who shares similar thoughts as me

I never heard of Richard Duncan but, after reading this article on MarketWatch, his thinking is quite similar to mine. He is quoted for bearish views on China but the reality is that the scenario is much larger than that. The problems are global in nature and everyone will be affected one way or another. I don't think many will agree with Duncan's outlook but it's worth contemplating. Before someone dismisses him do note that, at least going by what's said in the article, his 2003 "The Dollar Crisis," appears to explain many of the problems we are facing now.

I have excerpted some key points from the article. For what's its worth he is far more bearish than me. Also, no one bat 100% so many predictions will turn out to be wrong. The key is to avoid getting blown up by major mistakes.

Tuesday, January 19, 2010 1 comments ++[ CLICK TO COMMENT ]++

Bloomberg suggests China should follow the path of Henry Ford

Henry Ford is a controversial character. He is widely accused of being anti-Semitic and he may even have been a fascist but he did contribute positively in one major way. Although the ultimate impact was never clear, his policy of paying way-above-average wages for his employees radically altered the economic landscape—at least in the North-East, particularly New York and Michigan. It's possible that Henry Ford's compensation policy made Detroit into the powerful and influential city* it was in the early part of the 20th century.

It is a well-worn cliche but Bloomberg has a nice article suggesting that China should do what Henry Ford did. Namely, pay higher salaries for its workforce:

Higher wages for people like Xie would help resolve China’s biggest economic challenge: shifting away from growth fueled by exports and investment and moving toward an economy driven more by domestic consumers. China’s communist leaders might learn a lesson about how to create a more prosperous working class from American industrialist Henry Ford.

The founder of the auto manufacturer that bears his name generated headlines around the world in January 1914 by doubling the average autoworker’s pay to $5 a day. The move made Ford’s Model T more affordable, created a more stable workforce and helped stoke the growth of the U.S. middle class, according to Bob Kreipke, the historian for the Dearborn, Michigan-based company.

“This allowed people to increase their buying power and, at the same time, they produced a better product,” Kreipke said.


Japan Airlines flies into bankruptcy

Not confirmed yet but it looks like Japan will see one of the largest bankruptcies in its history when national airline, Japan Airlines, declares bankruptcy tomorrow. This is a good example of how one shouldn't speculate based on government intervention. Apparently many were expecting the government to intervene but that didn't happen. Bloomberg has the story:

“Everyone expected the government to support JAL and now it’s going into bankruptcy,” said Yoshihiro Nakatani, who oversees about 80 billion yen ($882 million) as a senior fund manager at Asahi Life Asset Management Co. in Tokyo. “This could be a turning point for the whole market,” he said, adding he doesn’t own any of JAL’s bonds.

A state-affiliated fund will make a final decision on a proposed restructuring for Tokyo-based JAL today after the carrier sought help following a 131 billion yen first-half loss. The plan will probably include the airline, the recipient of four state bailouts since 2001, seeking court protection, according to three people familiar with the matter.

The yield on JAL’s 10 billion yen in 2.94 percent notes due 2013 widened to 77 percent yesterday from 70 percent Jan. 15, according to Japan Securities Dealers Association prices on Bloomberg. Its 10 billion yen in 3.1 percent notes due 2018 traded at a 44 percent yield compared with 11 percent a month earlier, JSDA prices show.

The carrier will file for bankruptcy at 5 p.m. today at the Tokyo District Court, Dow Jones said, citing people familiar with the situation. The government has repeatedly said that JAL will continue flying.


The carrier has at least 1.5 trillion yen in liabilities and a bankruptcy may be Japan’s sixth-biggest, according to data compiled by Tokyo Shoko Research Ltd. JAL bondholders will likely get 25 percent of face value if the company seeks bankruptcy, according to the median forecast in a Bloomberg News survey of five analysts.

I decided to mention this story because this may signal a change in Japanese government policy. The new left-leaning government appears to want the free market dictate fate. I wonder if the government will let other insolvent firms seek bankruptcy. If there is a shift towards restructuring through bankrupty, it will alter the face of Japan. My impression is that Japan has historically attempted to prop up failing firms.

Monday, January 18, 2010 0 comments ++[ CLICK TO COMMENT ]++

Opinion: Really tough for media companies to work under the Chinese regime

Almost everyone has heard of the controversy over Google's threats to pull out of China. Some always wondered what type of company Google was, and this situation should finally prove that Google is basically a media company.

I think the currently unfolding situation goes to show how difficult it is for media companies to work within a totalitarian regime. Other industries can sort of get away with questionable practices but media companies will always be, either under the watch of the state, or culpable in human rights violations of the state.

Anyone who knows about politics knows that brainwashing the population is one of the most powerful tools available to governments. In fact, when a crisis unfolds, the first task of many tyrants is to take over the media or to initiate propaganda. I once recall Noam Chomsky pointing out that propaganda was widely used until citizens started resisting it. There was even a book called Propaganda or something like it (don't remember the exact title) that was widely read in political circles. Nowadays if the government mentions propaganda, most citizens would consider it negative, whereas most people considered it positive or just didn't care in the early part of the 20th century (I'm not sure what changed things but it wouldn't surprise me if the total dominance of Nazism probably turned propaganda from a widely used concept to a condemned one.)

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Sunday, January 17, 2010 2 comments ++[ CLICK TO COMMENT ]++

Newbie Thoughts: A bond fund/ETF is very different from a bond

A user, ccyork, at GuruFocus' message board asked if the TIP ETF is the same as owning the TIPS bond. I wrote up a long response and I thought others would find it benefitial (I have edited it slightly here.) Some of you would know far more than me—hell, there are bond professionals reading this blog ;)—so feel free to correct me if I'm incorrect with any of the points.

Bonds vs Bond Funds/ETFs

Is there a difference between owning a bond itself versus owning a bond fund or ETF? Is the TIP ETF the same as owning individual TIPS bond?


Sunday Spectacle XXXXIV

Photo by Doug Mills for The New York Times. "Bankers Face Tough Questions at Hearing on Financial Crisis." January 13, 2010.


New blog template

Partly because I was bored... partly because it was conflicting with Blogger... partly because it was a good time for change given changes in my life that are unfolding...but whatever it was, I decided to change to a new blog template. The prior theme was a hack of two different ones and I'm going to miss it.

Saturday, January 16, 2010 0 comments ++[ CLICK TO COMMENT ]++

Articles for the week ending January 15th of 2010

Yes, a new year... remains to be seen how the year shapes up...

Blogger has a new (beta) editor and it has kind of disrupted my writing. I typically compose in the HTML mode but it doesn't have a picture insert icon in that mode anymore :( Also, I don't like automatic HTML parsing of the regular "rich text" mode since it messes up something on my page :( Having said that, the advantage of sticking with a hosted platform is that you don't pay for any new updates. The platform continuously improves, albeit a bit slowly, and new innovations are seamlessly incorporated into the platform. Since I have a lot of time to kill these days, I'm wondering if I should change the look. I kind of like my current look—it's very unique—but I wonder if I should change it just to freshen up things ??:|

I'm still trying to formulate my investment strategies for the year. Nothing looks cheap but then again, I have been saying that for 6 months. My performance last year, just like the year before, wasn't too good but I'm satisfied given several events that were unfolding in my life.

You could see what's running through my head by noticing how a lot of the links below are about China. I thought China may have been a big story in 2009 but it wasn't. But the situation over there still makes me think that it will send ripples this year. In fact, I'm thinking of ways to profit from any real estate bust in China. If anyone has any ideas, let me know.

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Thursday, January 14, 2010 3 comments ++[ CLICK TO COMMENT ]++

Mega Brands attempts to reduce debt

One of the annoying things about continuously researching investments is that you may spend a lot of time on research yet end up with nothing. For me, such a scenario (lots of research but neither a buy nor a sell in the end) is one of the most depressing things about investing. Small investors like me—I suspect this applies to majority of the readers—don't do this as a full-time job so any "wasted" time seems like a mistake. Unlike professionals, I don't get paid to spend hours searching for information or thinking about industries; a hundread hours spent on research with no final investment is always a disapointment.

Sometimes, though, what seems like a fruitless pursuit can turn out to be a potential investment years down the road. Such is the case with Mega Brands (TSX: MB). I can't remember if I mentioned this stock on this blog before but I have had it on my watchlist for a while now.

Mega Brands is one of the major toy companies in North America. It is a Canadian company whose main competitor is Lego (this was the case when I was researching the company an year or so ago, but keep in mind that things like market share, competitors, etc can change.) I became interested in it because it ran into severe problems after a toddler died from ingesting one of its toys. Needless to say, the shares collapsed and it was very close to bankruptcy. It took on massive debt—numbers that would make any shareholder run away scared—in order to keep it afloat.

As most readers probably know by now, I am attracted to distressed investments—it's just that I haven't made any serious money on them yet :| . Usually when a stock collapses 50%+ or if there is some scandal that makes the newspaper, I check it out. I did some research on Mega Brands and I liked the company. Essentially, the Canadian company was pretty good, with popular toys, good relations with retailers, and so forth. What happened was that it bought out a US company that turned out to be a disaster (toddler death, toy recall, etc.) It looked very much like the classic case of some big mistakes by the sons of the founder (the sons took over the company and were the ones who made the mistake of buying the US toy company.)

I ruled out any immediate investment in Mega Brands because the debt was extremely high. Even if a rosy scenario unfolded and the company recovered, most of the profits generated by the company would go to the bondholders. The company would also have zero financial flexibility for a decade or more! So it was banished to the watchlist with a low priority.

But an important event unfolded today. It's time to re-visit the situation.

The Globe & Mail is reporting that Mega Brands is going to pay down its debt by raising capital from the stock market. Remember how I said the size of the debt was scary? Watch how much dilution is involved here. Pay attention to the share count increase. (As usual, any bolds are by me.)

Financially troubled toy maker Mega Brands Inc. has put in place a restructuring plan aimed at significantly paring its hefty debt.

The Montreal-based maker of children's construction blocks and other toys said Thursday it has hammered out a refinancing plan that eliminates about $300-million (U.S.) of its $430-million debt.

The move triggered a massive selloff of Mega Brands shares on the Toronto Stock Exchange on concerns that the plan will result in a massive dilution of the equity as the company issues millions of new shares. The existing 36.6 million shares – 60.1 million on a fully diluted basis – will balloon to about 556 million shares.

Mega Brands will also issue about 285 million new common shares at 50 cents (Canadian) per share, as well as 234 million warrants exercisable into common shares at 50 cents a share.


The complex plan will see Mega Brands get a capital infusion of $100-million in a bought-deal financing led by GMP Securities. The company also plans a $121-million private placement to Fairfax Financial Holdings Ltd.

As well, Wachovia Capital Finance Corp. has agreed to provide a $50-million asset-based facility The debt reduction will take place as the result of a series of transactions, including the repayment – in cash and equity – of all of its outstanding senior secured indebtedness of about $357.2-million, at a recovery rate of about 70 per cent to holders of the secured debt.


Mega Brands has been hit hard by a series of challenges over the past few years, including the massive recall of its Magnetix line of construction toys after the death of one child in the U.S. following ingestion of small powerful magnets that came loose; 27 other children suffered injuries after swallowing the magnets.


US court freezes Argentinian central bank assets

A potentially minor issue that could turn into a crisis in Argentina:

An American judge has frozen all property held in the U.S. by Argentina's central bank, saying some or maybe all of that money rightfully belongs to corporations that are owed billions of dollars by that country's government.

U.S. District Court Judge Thomas Griesa signed the order Monday in New York. The court made the order public Wednesday.

The amount of money involved still isn't clear because lawyers in the case have yet to tally how much money the bank has deposited in the U.S., but the court has authorized the creditors to attach as much as $3.1-billion (U.S.) in Argentina's assets.

Judge Griesa issued the order at the request of two investment firms, EM Ltd. and NML Capital Ltd., which were among the creditors owed billions of dollars from Argentina's default on $95-billion in bonds in 2001.


In the past, they have argued that Argentina's central bank is an independent institution, not a state organ, and as such cannot be raided by the country's creditors.

Argentine Economy Minister Amado Boudou announced Tuesday that at least one government account at the central bank had been seized, but said the dollar amount was relatively small – between $1.7-million $15-million.

The attachment order comes amid a fight over whether the government of Argentina's president, Cristina Fernandez, can tap central bank reserves to pay off national debt.

Argentina is going through a financial crisis, unrelated to this court case, and it's not clear if this court ruling is going to create an even bigger crisis. It's possible that Argentina would have to completely withdraw all ownership of American assets and carry out transactions through other central banks.


Investing in India through some Japanese companies

I ran across a MarketWatch article that highlighted two Japanese companies that are set to profit if India does well. I'm always wary of these indirect strategies suggested by analysts but it's something to consider if one is looking to invest in India without paying the historical premium for US-listed Indian stocks:

Investors looking for an easy way to invest in India's fast-growing market can get it via the shares of select companies in the developed market of Japan, analysts say.

"For the last decade, India has been associated, in the minds of Japanese investors, with motorcycles and small cars," said Macquarie Securities analysts Shih-Han Huang and Peter Eadon-Clarke in a recent report. "The last 18 months, however, have seen major strategic acquisitions in the pharmaceuticals, telecom and steel sectors."

Their two principal India-related Japanese recommendations are pharmaceutical giant Daiichi-Sankyo Co. (TSE: 4568; OTC: DSKYF) because of the strategic benefits from its acquisition of a majority stake in Ranbaxy Laboratories Ltd. (OTC: RBXLF); and steel maker JFE Holdings Inc. (TSE:5411; OTC: JFEEF) because of the benefits of the overseas expansion business plan through its strategic alliance with JSW Steel Ltd.

Macquarie rates both Japanese companies as outperform.

"The strategic attractions of Ranbaxy to Daiichi-Sankyo relates to Ranbaxy's distribution network throughout emerging markets," they said.

Ranbaxy is a giant in its own right -- it has a presence in 125 countries, ground operations in 49 of them, and manufacturing operations in nine nations, the analysts said.

They said that in the third quarter of last year, Europe and North American sales accounted for 36% of Ranbaxy's total, with India and other developing countries making up the rest.


JFE Holdings unit JFE Steel Corp. acquired about a 10% stake in JSW Steel -- India's third-largest steelmaker -- in November 2009, and said it will also license its automotive steel technology.

Toyota Motor Corp. and Nissan Motor Co. plan to build factories in India in 2010, which will spur demand for high-grade steel. JFE's move to tie with JSW could give it a head start on domestic rivals in supplying steel to the fast-growing market, Nikkei reported recently.

Pharama is outside my circle of competence—I have little interest in following that industry—and I'm kind of bearish on steel so I have low interest in any of these mentioned companies. Nevertheless, it is worth checking these out, especially given how Japanese stocks, in general, appear cheap. If one can grab cheap stocks with hidden emerging market potential, it'll likely be profitable in the long run. I'm not sure if these two Japanese companies are cheap so one needs to analyze them.

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Tuesday, January 12, 2010 0 comments ++[ CLICK TO COMMENT ]++

Google threatens to pull out of China

Wow, The New York Times is reporting that Google is considering pulling out of China if an amicable agreement cannot be reached between it and the Chinese government:

Since arriving here in 2006 under an arrangement with the government that purged its Chinese search results of banned topics, Google has come under fire for abetting a system that increasingly restricts what citizens can read online.

Google linked its decision to sophisticated cyberattacks on its computer systems that it suspects originated in China and that were aimed, at least in part, at the Gmail user accounts of Chinese human rights activists.

Those attacks, which Google said took place last week, were directed at some 34 companies or entities, most of them in Silicon Valley, California, according to people with knowledge of Google’s investigation into the matter. The attackers may have succeeded in penetrating elaborate computer security systems and obtaining crucial corporate data and software source codes, though Google said it did not itself suffer losses of that kind.

While the scope of the hacking and the motivations and identities of the hackers remained uncertain, Google’s response amounted an an unambiguous repudiation of its own five-year courtship of the vast China market, which most major multinational companies consider crucial to their growth prospects. It is also likely to enrage the Chinese authorities, who deny that they censor the Internet and are accustomed to having major foreign companies adapt their practices to Chinese norms.

The company said it would try to negotiate a new arrangement to provide uncensored results of on search site, google.cn. But that is a highly unlikely prospect in a country that has the most sweeping Web filtering system in the world. Google said it would otherwise cease to run google.cn and would consider shutting its offices in China, where it employs some 700 people, many of them highly compensated software engineers, and has an estimated $300 million in annual revenue.

This is huge news, although the repercussions won't be known for decades. China is considered by many to be the largest growth market and Google is suggesting that it will give up on it.

Google's market share is far below its competitors in China but I believe it is still over 20% (more than what Bing and MSN have in America.) As the NYT article mentions, Google will be giving up as much as $300 million in revenue, which the Google legal head, in a CNBC interview, remarked as immaterial.

If Google does pull entirely out of China, it's not clear to me if the Chinese government will block all external sites related to Google.


Marc Faber's thoughts for 2010

I always like to check out what people are saying early in the year and here is a Bloomberg interview with Marc Faber. No major actionable idea in this interview—at least for small investors. Faber seems cautious and thinks the market may decline when least expected. He hedges his thoughts a bit too much for my liking. Being an inflationist, I'm not really sure whether he sees a collapse in various assets (particularly in China.) His stance is that the US government will intervene if the American stock market declines but that remains to be seen. A lot of what was politically acceptable two years ago is not so now.


Outlook from a bear, Gary Shilling

Gary Shilling must have had a very bad year in 2009. I think 8 or 9 of his calls were wrong. Nevertheless, going into 2010, he maintains most of his calls. I don't agree with all his views but I do share his thinking for the most part.

Writing for MarketWatch, Paul Farrel summarizes Shilling's 17 picks for the year. Six of the seventeen are buys while the rest are sells. I think there is a typo with the numbering and I have corrected it below. For some of the points, I have chosen not to excerpt the detailed text. You can read the original article at MarketWatch if you are interested. I decided to do this to maintain fair-use (don't want to quote almost the whole article) and to avoid repeating the same points I have quoted in the recent past.


Outlook from a bull, Bill Miller

The Globe & Mail paints Bill Miller's stance as somewhat bearish but I think he is firmly in the bull camp:

But in the midst of a bitter cold snap, we prefer the warmth and good cheer of a true optimist. Which has drawn us to famed U.S. fund manager Bill Miller, who may be the most unreservedly bullish person we know when it comes to the U.S. economy, big-capitalization stocks and even the tattered greenback. And he has plenty of affection left over for Canada, too.

"The outlook for both the stock market and the economy is considerably better than the consensus forecasts. There ought to be strong returns in U.S. equities this year," says the chairman and chief investment honcho of Legg Mason Capital Management. "I don't think that the risks ... are anywhere near as great as what the consensus believes."

In making his case for a robust V-shaped rebound, the erudite market pro cites part of a well-worn comment about the nature of business cycles from the late Cambridge University economist A.C. Pigou: "Prosperity ends in a crisis. The error of optimism dies in the crisis, but in dying it gives birth to an error of pessimism. This new error is born, not an infant, but a giant."

That, says Mr. Miller, "nicely encapsulates what's gone on."

I'm a fan of Bill Miller; right now practically no one is. Yet, I think his flaw is that he is inherently optimistic about many things. This works mightily when times are good but you will get decimated if something bad happens. One thing I disagree with Miller in regards to the recent financial crisis is his blame of government officials:

"I underestimated the damage that would be done by poor Treasury policy coming out of the administration," Mr. Miller says mildly. "One's most generous description of it would be: inconsistent and confusing. They 'rescued' Bear Stearns and so protected the creditors and even preserved some equity value. ... But then they pre-emptively seized, and wiped out equity at, Fannie Mae and Freddie Mac." It was that action that terrified the market and triggered the capital flight from otherwise solvent financial players.

One lesson a chastened Mr. Miller has taken away from the debacle is that even the bastion of free markets could morph into Argentina under the right circumstances. "Investors have to be extremely sensitive to government policy and react quickly when that policy is not capital friendly."

Long-time readers may recall my vehement disapproval of some of the government actions, particularly how they handled the GSEs—a point Miller emphasizes here. But even then, I think Miller is over-estimating the damage from government policies. I think some of what he blames on the government were actually poor businesses, run by employees who were either negligent, incomptent, or greedy. Whatever the case, some of those investments were big mistakes, with or without the government getting involved.

Also, investors like Bill Miller are lucky that governments, particularly the US government, chose to socialize hundreads of billions of private losses. The only reason Citigroup, for instance, is trading at $3.65&mdahs;a market cap of $83 billion if Yahoo! Finance numbers are correct—is because of billions of dollars of injections by the government.

In any case, overall, Bill Miller sees strong returns for US stocks this year. I don't quite share that view but you should form your own opinion.

Monday, January 11, 2010 0 comments ++[ CLICK TO COMMENT ]++

Canadian accused of terrorist plot apparently was trying to blow up the TSX

Apparently the ringleader accused of a terrorist plot in Toronto was trying to blow up the Toronto Stock Exchange, among other buildings. According to The Globe & Mail, he is also said to have contemplated a plan to short-sell stocks before blowing up the exchange:

It's alleged that Mr. Abdelhaleem was a key player, and was particularly fixated with blowing up the Toronto Stock Exchange building in a bid “to affect the economy, to make it lose half a trillion dollars,” according to Crown allegations.

The case against him, according to police, includes a recording of him describing the al-Qaeda-inspired plot. This included detonating a two-tonne fertilizer bomb that was to be built in hopes of destroying the TSE building and the three blocks around it.

Mr. Abdelhaleem allegedly said he would short-sell stocks ahead of the bombing, to reap a windfall that could be used to fund more terror attacks in cities like Chicago and New York.

I just wanted to highlight this story because it shows the emergence of a new type of financial terrorism. What was once relegated to fictional movies and novels, is playing out in the real life now. Terrorist groups like Al-Qaeda primarily target political targets now (WTC, Pentagon, Kenyan Embassy, popular airlines, etc) but if they ever focus on financial terrorism, the consequences would be immense.

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Sunday, January 10, 2010 5 comments ++[ CLICK TO COMMENT ]++

Could be a critical year for China

UPDATE: The Dec 15 CNBC video doesn't show up properly for some reason :( Click here to go to the relevant CNBC page and check out the video on the left, in the article.

I thought China was going to be a big issue in 2009. I was wrong. Nothing happened.

But I am maintaing my stance. Is it still vulnerable to an implosion? Mike Shedlock links to two China bears, Doug Noland and Jim Chanos, who think China may be reaching dangerous territory. Mike Shedlock has also written in the past about his bearish views of China.

I'm not a fan of Doug Noland (too perma-bearish for my likes) but I do pay attention to Jim Chanos. As you may know, Jim Chanos is perhaps the most successful short-seller in the last 30 years. There are others, like Jim Paulson, who profitted off short-selling mortgage bonds but they are not short-selling specialists; they go back to a long-only portfolio afterwards. Chanos, in contrast, is a specialist and very good at detective work. But his techniques are sometimes questionable, and he is, for those not aware, one of the short-sellers that was attacking Prem Watsa's Fairfax Financial.

One thing about Chanos is that he, like most short-sellers, uses propaganda so you have to be really careful (another person who is an even better media influencer is William Ackman of Pershing Square.) I notice that Jim Chanos floats stories to the media and uses that to influence perceptions. For instance, he was apparently the first person to pass along the questionable techniques of Enron to the journalist at Fortune magazine. Without the media publicizing the Enron story, I don't think Enron would have imploded quite the way it did. Enron probably would have collapsed a bit and had to pay huge fines but there is a possibility it wouldn't have declared bankruptcy. I'm not saying what Chanos does is wrong; he isn't doing anything wrong. All I'm saying is that short-sellers love to use the media.

Anyway, the bearish China call appears very different from Chanos' past, successful, bets. Chanos is very good with short-selling individual securities but I'm not clear on his track record on macro bets. If I remember correctly, he was bearish on the Dubai real estate boom but I'm not sure if he made any money. Jim Chanos has been bearish on China for more than an year now and been completely wrong. It remains to be seen if he ends up being right.

Mike Shedlock links to a New York Times story, picked up by Yahoo! News, touching on Jim Chanos. Nothing new in the article but it's a good recap of the battle between bears (like Chanos) and bulls (like Jim Rogers):

As most of the world bets on China to help lift the global economy out of recession, Mr. Chanos is warning that China's hyperstimulated economy is headed for a crash, rather than the sustained boom that most economists predict. Its surging real estate sector, buoyed by a flood of speculative capital, looks like "Dubai times 1,000 -- or worse," he frets. He even suspects that Beijing is cooking its books, faking, among other things, its eye-popping growth rates of more than 8 percent.

"Bubbles are best identified by credit excesses, not valuation excesses," he said in a recent appearance on CNBC. "And there's no bigger credit excess than in China."

A lot of this seems like hyperbole. I don't think there is anything that is 1000x worse than Dubai. Really! I mean, Dubai has a ski slope in the middle of the desert! Dubai has a Tiger Woods golf course that needs something like 100,000 gallons of fresh water a day—again, in the middle of the desert with shortage of fresh water.

So, maybe in terms of dollars. China is much bigger so the number will look big. But the problems are not as bad as Dubai IMO.

Still, betting against China will not be easy. Because foreigners are restricted from investing in stocks listed inside China, Mr. Chanos has said he is searching for other ways to make his bets, including focusing on construction- and infrastructure-related companies that sell cement, coal, steel and iron ore.

Chanos probably got burned badly last year, given the spectacular rally in nearly all assets, but, of relevance here, commodity businesses like coal, steel, etc. But Chanos is a long-term investor so the question is what happens over the next 5 years.

The simplest short-selling strategy is to sell short the ETFs or invest in an inverse ETF. For instance, one may short sell the FXI ETF. I suspect that is not how you make money. Given how short-selling only has a maximum upside of 100%, it is probably best to bet big that something will completely implode (an index won't completely implode.) The best thing may be to short sell individual securities. Because of capital controls, as well as various distortions—for example, most of the major Hong-Kong-listed Chinese companies are majority owned by the government—it is hard to find something that will be profitable.

Short-selling commodities that depend heavily on China, like iron ore, are probably worth considering. I don't know how easy it is for small investors but this would be a clean strategy. Jim Chanos, in the video linked near the bottom of the post, suggests some techniques.
"I find it interesting that people who couldn't spell China 10 years ago are now experts on China," said Jim Rogers, who co-founded the Quantum Fund with George Soros and now lives in Singapore. "China is not in a bubble."

Colleagues acknowledge that Mr. Chanos began studying China's economy in earnest only last summer and sent out e-mail messages seeking expert opinion.

But he is tagging along with the bears, who see mounting evidence that China's stimulus package and aggressive bank lending are creating artificial demand, raising the risk of a wave of nonperforming loans.

"In China, he seems to see the excesses, to the third and fourth power, that he's been tilting against all these decades," said Jim Grant, a longtime friend and the editor of Grant's Interest Rate Observer, who is also bearish on China. "He homes in on the excesses of the markets and profits from them. That's been his stock and trade."

Mr. Chanos declined to be interviewed, citing his continuing research on China. But he has already been spreading the view that the China miracle is blinding investors to the risk that the country is producing far too much.

"The Chinese," he warned in an interview in November with Politico.com, "are in danger of producing huge quantities of goods and products that they will be unable to sell."

In December, he appeared on CNBC to discuss how he had already begun taking short positions, hoping to profit from a China collapse.

Here is the CNBC video from December (click here if the video does not show up):

It's interesting that Chanos implies that gold is not in a bubble. He doesn't really discuss it but does say that "no one is building anything out of gold."

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Sunday Spectacle XXXXIII

Tablets vs E-Readers


Where are we?

I ran across a great article in The Economist summarizing the current state of asset markets. Nothing earth-shattering in the article but it does summarize various issues and examines potential bubbles. As the year just started, investors are probably thinking about the same issues so I thought I would quote some key points from that article.

THE opening of the Burj Khalifa, the world’s tallest building, in Dubai on January 4th had symbolic as well as architectural significance. Skyscrapers have long been associated with the ends of financial booms. The Empire State Building opened in 1931, two years after the Wall Street crash. The Petronas towers in Kuala Lumpur were unveiled in 1998, in the depths of the Asian crisis. Such towers are commissioned when money is cheap and optimism about economic growth is at its height; they are often finished when the champagne has gone flat.

The past three decades have been good for skyscraper-building. The cost of borrowing money, in nominal terms, has fallen sharply (see chart 1).

Small wonder that one bubble after another has appeared in financial markets, with the subjects of investors’ dreams ranging from emerging markets and technology stocks in the 1990s to residential housing in the decade just ended. Nor is it surprising, with money so cheap, that consumers and companies have indulged in regular borrowing sprees.

It is absolutely critical to keep in mind that the bond yield drives assets. This may not be the case in the short run but it is certainly the case in the long run. The Economist plots the SDR interest rate—this is the first time I've encountered this—which describes the cost of borrowing for the world.

Even if you are not a bond investor or a businessperson borrowing money, one of the key decisions you will have to make is whether yields are going to rise, fall, or remain whether they are. The ultimate value of an asset will depend heavily on this.

The Stock Market, You Say?

Most people reading this invest primarily in stocks so how does the stock market look?

Well, as usual, it depends on the measures you use and your future outlook. People like me felt that the stock market was not cheap even during trough early last year—a view I still maintain—whereas others, including Warren Buffett, felt it was attractive. The current situation is just like early last year. There is no obvious top or bottom. The Economist has this to say:

As further evidence that there is no bubble, bulls point to the relatively modest level of prospective price-earnings ratios; the MSCI world index is trading on a multiple of 14 based on prospective earnings in 2010, according to Société Générale, around the long-term average. However, prospective multiples can be very dependent on the optimism of the analysts who make the forecasts—and such analysts are in the business of selling shares.

A better long-term measure is the cyclically adjusted price-earnings ratio, which averages profits over the previous ten years (see chart 2).

On this measure, valuations are nowhere near the 2000 peak. They are, however, still pretty high by historical standards; Smithers & Co, a firm of consultants, reckons they are nearly 50% above their long-term average. Even now, after a dismal decade for shares, Wall Street is offering a dividend yield of only just over 2%, compared with a long-term average of 4.5%.

Most readers of this blog would be familiar with the CAPE (cyclically adjusted P/E ratio, aka Graham-Dodd 10 year P/E ratio) since that is my favourite valuation metric. One obviously can't time things based on that but it does provide an overall measure of the market. Based on the CAPE, the market, at least the US one, is nowhere near cheap.

As mentioned above, one has to discount interest rates. Presently the rates are lower than in many prior eras so the current CAPE of around 20 isn't as bad as it looks. Nevertheless, I am not comfortable deploying capital. I have to think more, given my personal job situation, but my feeling is that I will pursue the path of the last few years. Namely, I will likely invest most of my money in investment strategies with low correlation to the market or the economy (such as risk arbitrage and liquidations.) Such strategies tend to underperform when the markets rally strongly (like last year) but tend to outperform when the market does poorly (like two years ago.) Of course, if I find a good business at great prices, it's worth investing heavily regardless of the macro outlook.

Home Sweet Home

Housing is very important even if you don't invest in it. This is because something like 60% of residential real estate is owned by the bottom 50% of the population (in contrast, roughly 90% of the stock market is owned by the top 20%.) If there is a housing bust, the economy is almost always negatively impacted on a grand scale. The stock market, in contrast, may not impact the economy very much (for example, the 2000-2002 stock market crash was one of the largest in history but the US economy had one of the mildest recessions ever—if you were outside the technology industry, you probably didn't even feel anything; 9/11 terrorist attacks probably had a bigger impact on the econmy than the dot-com bust.)

Housing is complicated to analyze (partly because it is localized and depends on local/regional laws) but the measure that approximates the P/E ratio for stocks is the home price to rent ratio. The Economist says the following for a similar measure:

In housing, a measure based on rents shows that American prices are back to fair value but prices in Britain, France, Spain and Australia are all 30-50% above their historic averages. Low mortgage rates (and government schemes to head off foreclosures) have stopped prices falling to the lows of previous downturns.

Similar to how the low bond yields makes stocks less overvalued than it appears, the low mortgage rates makes housing less overvalued than it otherwise would be.

It's surprising to read that places like Britain and Spain are above their historic average while America is close to the average. Canada, from what I see—I don't follow the Canadian market much even though I live here—looks overvalued to me. Canada, like Australia, didn't really see a crash of any sort.

If the conclusions cited by The Economist are correct, America is far ahead of many other developed countries when it comes to the housing bust. Based on what I'm reading here, it's probable that the GSEs—Fannie Mae and Freddie Mac—will stop absorbing losses in the future. They have no reason to be cushioning the real estate bust if home prices are close to the long-term average.

How About Emerging Markets?

Emerging markets, particularly China, are highly vulnerable to bubbles. In fact, bears like me think there are already bubbles. The Economist points out that there are valid reasons for the strong growth—asset markets catching up to the growth of the ecoomies—but also cites some concerns:

This optimism explains why emerging markets now trade at a premium (measured by the ratio of market prices to the accounting value of assets) over developed markets. In the past, such premiums have usually presaged a setback.

In addition, emerging markets are seeing much faster credit growth than their developed rivals. In China, for example, broad-money growth in the 12 months to November was almost 30%. Such growth is the logical result of pegging a currency to the dollar, and thus importing a monetary policy which may be right for America but which is too loose for the fast-growing Chinese economy. Some of that credit growth is leaking into asset markets.

The first point is a very dangerous sign in my opinion. Emerging markets, as a whole, should not trade at a premium to developed markets! Although growth rates are better, their lack of property rights, proper accounting and regulatory standards, political risk far outweigh the growth prospects—at least I think so.

Got Gold?

Another area where a bubble might be developing is in gold. Gold is an unlikely cause of euphoria, given that investors use it as a bolthole when they worry about inflation, currency depreciation or financial chaos. But the metal has seen a speculative peak before, most notably in 1980, when its price touched $835 an ounce, before losing two-thirds of its nominal value over the next 20 years.

The main rationale for buying gold at the moment is that, in the face of the credit crunch, most governments would like to see their currencies depreciate to boost their exports. If paper money is being “debased”, that is bullish for gold, an asset that central banks cannot create more of and that is no one else’s liability.

The gold bugs may be right. But the price has already quadrupled from its low and suffers from no real valuation constraints; it has no yield or earnings against which to measure it, so it is hard to say when it is “expensive”. Dylan Grice, an analyst at Société Générale, has mischievously suggested that, if the Bretton Woods system (under which the Fed was obliged to exchange its stock of dollars for gold with other central banks) were operating today, bullion would trade at $6,300 an ounce.

I am not a fan of gold at these prices. It is definitely not a contrarian asset given how it has gone up 9 years in a row. Gold investors may be in for the roller-coaster ride of their life this year.

Anyway that summarizes the current state of several key assets. Although I have been wrong with many of my macro calls—I'll go over them in the next few weeks—I'm largely sticking with my stance from last year. In particular, watch out for any serious problems emnating from China.

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Friday, January 8, 2010 6 comments ++[ CLICK TO COMMENT ]++

A newbie question for you: can you show me how to compute some returns?

This is going to show my total newbieness but if you, as the reader, have some time to kill, can you compute the returns outlined below and leave a comment with your answer or e-mail me. As usual, I am trying to compute my performance for the year—all I know is, it's not good this year :|—and am getting confused. I'm starting to doubt the calculation I have performed in the past.

If you have time, can you compute the returns for the following scenario:

Start: You start with $100
Year 1: At the end of year 1, you have $150.

You add $100 so the starting value for year 2 is $250.
Year 2: At the end of year 2, you have $200.

You remove $50 from your portfolio so the starting value for year 3 is $150.
Year 3: At the end of year 3, you have $100.

What is/are the:

(i) Yearly (annual) returns (for year1, year 2, and year3)?
(ii) Overall total (aggregate) return over the 3 years?
(iii) Annualized return over the 3 years?

This is elemental stuff and I can't believe I am so confused by it. Anyway, let's see what you guys & gals think. I'll post my computation later, maybe tomorrow or on the weekend.

Thursday, January 7, 2010 0 comments ++[ CLICK TO COMMENT ]++

S&P: Dividend rebound to be slow

I took a deep look at dividends about an year ago and the situation didn't look too good back then. The economies of the world have been rebounding since then but S&P is projecting a slow recovery for dividends. From The Globe & Mail:

Last year marked the worst on record for stock dividends, but this year is expected to show steady improvement, Standard & Poor's said today. Howard Silverblatt, the senior index analyst at S&P Indices, said in a statement today that 2009 saw the fewest dividend increases and most decreases since S&P began tracking the data in 1955...

“Standard & Poor's believes that the dividend recovery will be slow, and that it will take until 2012 to 2013 to return to where we were in 2007 and 200.”

Since companies are very conservative with their dividend schemes, I think S&P's projection seems reasonable. Dividends shouldn't have much difficulty reaching the 2007 levels in 2 or 3 years from now.

Overall, dividend-oriented investors who grew up in the 80's and 90's will find the next 10 years very slow and unrewarding. Almost a sure 7% to 10% raise in dividends, as was the case with many blue chip companies in the last 30 years, will be a thing of the past.


2009 Asset Performance

How did various assets perform last year?

Here is my regular run down of key assets I like to watch. New for this year, residential real estate will be tracked from now on. I came to the conclusion that home prices are important because it is a large opportunity cost for most people. Whether one ties up capital in their home or not, will likely have a major immpact on the final investment performance over their life. For America, I'm planning to track the widely known S&P Case-Shiller Home Price Index (I'm going with the broader one with the most cities.) For Canada I'm planning to track the GTA (Greater Toronto) home price that is reported by the Toronto Real Estate Board. Barring a move, I suspect I'll live in Toronto for the rest of my life so that's what I chose to track.

Looking at the final numbers is kind of like looking at the ending of a movie without knowing how the movie played out. This year, especially, is one where the plot mattered a great deal. Money was made or lost in a few critical moments and I think there were two key periods:

(i) Start of the year: The market collapsed in the first few months and if you were invested in the wrong assets, you probably got killed and never made it back. This is especially true for those panicking and selling as the market was plunging.

(ii) The trough: Depending on what asset you look at, anyone that nailed the bottom, roughly around March/April/May, made a fortune. If you were leveraged or were concentrated, you made an absolute killing if you bought anywhere near the bottom. People heavily going long made more returns in two months than a typical person makes in 10 years.

I hope most of you made the right decisions. No one is perfect but hopefully your major decisions turned out to be correct. As for me, I severely underperformed the market this year but I didn't really do much so it's not a surprise (as usual, I'll post my results soon.)

Anyway, let's see how various assets ended the year.

US Asset Performance by Style and Size

The following list shows US asset performance by style and size. I'm going with the Standard & Poors segmentation system:

It was very hard to lose money this year—unless you were investing in UNG ;). Almost all the indexes went up this year.

The S&P 500 finished the year with a total return of 26.46%. This is a very strong return and most (long) investors recouped some of their losses from the prior two years.

The small-caps underperformed the S&P 500 this year (ususally the little ones do well off a bottom) while the mid-caps outperformed. I suspect the S&P 500 held its ground against the small caps due to the spectacular rallies in a lot of distressed large-cap financials, energy, and materials companies.

In terms of style, growth beat value across all the size categories. The strongest performer was mid-cap/growth while the weakest was large-cap/value.

Equal Weighting Destroys Market Cap Weighting

In the passive investment camp, which I am not a member of, there is a debate over equal-weighted indexes. Some argue that equal-weighted indexes are better than market-cap-weighted indexes. Well, the equal-weighted S&P 500 won by a landslide this year. I can't believe that it posted 46.31% this year. Wow. That's even better than the S&P 400 or S&P 600.

Think about that for a second. Smaller companies such as those in the mid-cap S&P400 or small-cap S&P600 tend to be riskier but many expect the returns to be higher (yes, I realize value investors don't believe in the risk-return correlation : ). Yet, investors were able to generate strong returns by staying within the large-cap S&P 500. All they had to do was to overweight the laggards (which is what equal weighting sort of does.) The question is whether this is a fluke or something that will repeat in the future.

If you are a passive investor, you should read up on the debate over equal-weighting, as well as fundamental indexing—fundamental indexing is when you weight by sales, number of employees, and the like, rather than market cap—and see if you can gain anything by changing your strategy.

Select Global Asset Performance

Let's look at several key global markets:

Not surprisingly, the two superstar performers were Latin America and Asia. Latin America generated a spectacular 97% while Asia returned 61% (all in US$ terms.) If you assume the stock market returns around 10% per year, overloading on these regions last year meant that you generated 6 to 10 years worth of returns in one year.

The strong rally in Latin America looks good but keep in mind that many of their companies are very cyclical and vulnerable to currency implosions (especially if there is a political crisis.) The important country to watch is Brazil and it remains to be seen how they perform now that 'Lula', their left-leaning leader responsible for stabilizing the country, is replaced with some unknown.

As for Asia, I am not sure of anything. I am too nervous about various potential bubbles that may be developing over there. Good luck to anyone successfully navigating Asia but I'm very cautious.

Continuing the, what seems like, perpetual descent into hell, the Japanese TOPIX 150 posted a return of 7%. I haven't looked up the Yen vs US$ change last year but it wouldn't surprise me if the TOPIX actually posted a negative return in Yen terms. If Japan were to be judged on an investment beauty contest, I think it would end up with the 'ugly' title. No other way to say it. Posting a 7% return when nearly the whole world generated 25%+ return is not a pretty sight.

S&P 500 Sector Performance

This section deals with the various sectors in the S&P 500:

The S&P 500 stands with a market cap of $9.9 trillion. A little over $2 trillion in capital gains wealth was created last year (just for S&P 500.) Several hundread billion more in welath were likely paid out in dividends.

The S&P 500 posted an overall return of 26.46% but that is very deceptive. Only 3 sectors returned more than the overall average! Most of the sectors returned below 20%. The three big winners were information technology, materials, and consumer discretionary.

Information technology, with its heavy weighting, contributed greatly to the overall return. Info tech also didn't get killed as much during the crash (relatively speaking) so tech investors are a happy bunch these days. I'm curious to see how much of this gain is real and how much is unsustainable. On the one hand, a lot of tech companies appear overvalued, with Amazon and Apple being the poster boys of expectations taken to the moon, and it's not clear if profits can satisfy investor expectations. On the other hand, one of the theories I have floated, based on Gary Shilling's thinking, is that certain technology companies will do well during deflationary periods. As an added bonus, a lot of info tech companies are not directly entangled in the housing/debt bust and don't depend on financial profits (although they will still be impacted indirectly.)

Materials sector, which consists of mining firms, and consumer discretionary rallied strongly due to the improving economy. Market was pricing in a gloomy scenario before but many have come around to the think that consumer spending is improving. The big question mark now is to figure out where the new level of spending will be.

Financials ended the year with a 14.8% return. This is an amazing return if you think back to their fate in the first few months of last year. Financials were sold off sharply earlier in the year, with questions of nationalization hanging over their heads. Many financial company shares were down 20% to 50% within 3 months and things looked very dangerous. Fortunately for shareholders of financial companies, world governments, particularly the US government, decided to socialize the losses and transferred hundreads of billions from taxpayers to shareholders and bondholders. What seemed like a disasterous investments ended up being decent in the end. To get that 14.8% return, financials had to go through a lot and I'm not sure if anyone wants a repeat of that.

Worst performing sector was telecom services with a return of 2.63%. No big surprise here. Safe sectors do poorly when the market rallies strongly.

Performance of Bonds, Commodities, Real Estate

Moving away from stocks, I think important assets worth reviewing are bonds, commodities, and real estate:

Government bonds were not the place to be in 2009. The US long bond posted a terrible -21.4% return last year. If you assume the long bond has a long term return of 5%, it lost 4 years worth of gains in one year. It gave back most of the gains from last year. Shorter duration government bonds also ended up negative.

The star in the bond markets (at least the mainstream bond markets—not sure about mortgage bonds or other non-retail stuff) has to be junk bonds. Posting a 58.21% return with better claim on corporate assets during bankruptcy than shares (usually bondholders have stronger claim on a corporation than shareholders) this is almost a dream investment. Not making any junk bond investment was the biggest mistake of omission I made in the last 2 years :( I don't care much about missing the stock market rally (because I think some of it is speculative and doesn't fit my macro outlook) but I was so close—and bullish—yet didn't pull the trigger on several junk bonds. A huge mistake on my part :(

Moving on to commodities, the broad S&P GSCI commodity index underperformed the stock market and only generated a return of 13.48%.

Gold continues its 9 year streak with a 23.95% return. Gold slightly underperforms stocks this year. I am still not sold on gold and think it is closer to a top than the bottom. I am waiting for it to hit US$1500 or $2000 and then will consider shorting it.

Oil gained 77.9% in 2009. A huge gain that invigorated the energy complex. I remain (mildly) bearish on oil but any key bearish development will come from China so watch China closely. Setting a price target for oil is very difficult and I wouldn't bet serious money on that. Oil is heavily manipulated by cartels and various governments and it's hard to predict anything. For instance, OPEC has huge control over the price but at the same time, countries like USA also have huge control with their influence of the House of Saud.

I have inserted the S&P Case-Shiller index change for this year. The year-over-year number, up to October of 2009, comes in at -7.3%. Many real estate analysts expect housing in America to stabilize but a lot depends on government actions. Due to my personal job situation, I haven't been following business news much but I think the GSEs are still absorbing huge losses. If so, it will come down to what happens with them. If the US government orders Fannie Mae and Freddie Mac to tighten their operations, housing can continue to fall. It remains to be seen how much longer the GSEs can provide a cushion.

As for Toronto, the housing boom continues unabated. People are still lining up to buy condominums in Toronto at prices only professionals and higher ups can afford. Overall, home prices increased 4% in Toronto last year. The average price of home in Toronto (includes suburbs) was $395,460. I just started following this metric so I'm not sure if this refers to stand-alone homes or wehther it also includes condominums, townhomes, and so forth.


If you were cheering for the bulls or were one yourself in 2009, life was good... if you were a bear, well, there is always another year to flex your paws...

Oh, this is probably one of the few years when pigs also won. Rarely does anyone betting blindly on any asset ever make a lot of money but 2009 was such an year...perhaps the governments dropping money out of helicopters had something to do with that ;)

In my opinion, 2009 is very similar to 1933... new president... unthinkable government intervention... huge stock market rally... economy starts its slow climb out of the valley...

Wednesday, January 6, 2010 12 comments ++[ CLICK TO COMMENT ]++

Worst non-leveraged ETF of the year: UNG

Commodity investors may know UNG as the ETF that tracks natural gas. Well, it apparently posted the worst return of any non-leveraged ETF last year. MarketWatch reports:

United States Natural Gas Fund lost almost 60% in 2009, but its difficulties went beyond falling prices for natural gas due to the poor economy and oversupply issues.

U.S. Natural Gas Fund, with assets of about $5 billion, was the worst-performing ETF in 2009 that doesn't use leverage. The natural-gas exchange-traded fund was off 56.5% for the year, while the SPDR S&P 500 ETF, which tracks U.S. large-cap stocks, gained 23.4%, according to FactSet Research.

Aside from the decline in natural-gas prices in 2009, the fund was also hit by a condition in futures markets known as "contango," in which the price of longer-dated futures contracts is higher than the spot price.

"Investors should be mindful that this fund invests in natural-gas futures and not the spot price of natural gas," wrote Morningstar's Paul Justice in his most recent analyst report on the ETF.

"This fund mostly invests in near-month futures contracts," he added. "As each month draws to a close, the fund rolls over to the next month's contract, and so forth. When the prices of those out-month contracts exceed the price of the near-month contract ... the fund loses money each time it rolls futures. That explains why this fund has oftentimes declined in value even as natural gas prices rose, as the natural gas futures market was in contango at that time."

Traders attempt to game the huge ETF by trying to jump ahead of its trades when it rolls into the near-month futures contract. Investors in the natural-gas ETF are hoping the long-anticipated rebound in prices plays out in 2010.

News to me is the following note about UNG being one of the best selling ETFs in 2009:

Despite its terrible performance, U.S. Natural Gas Fund was one of the best-selling ETFs in 2009.

According to the latest data available from the National Stock Exchange, the natural-gas ETF as of November had year-to-date net cash flows of about $5.4 billion. It placed fourth on the list of top-selling ETFs.

Commenting on the big inflows in 2009 despite the decline in prices, Hyland said it appears large numbers of investors were looking for a rebound in natural gas prices, which have risen over the past few weeks.

Matt Hougan, editor of IndexUniverse.com, said it's remarkable that in November, the ETF's year-to-date inflows were larger than its assets as investors kept pumping money into the fund all the way down. The fund in 2009 was "an inferno for destroying investors' money," he said.

There were also problems with the arbitrage mechanism because UNG stopped creating shares for a period last last year, due to some investigations over commodity manipulation by the CFTC.

Anyone following this blog wouldn't be surprised—I had several posts similar to what I'm writing now—but for those not familiar, this is a very good lesson in commodity investing.

When I say commodity investing, I'm referring to investing in actual commodities. This is completely different from investing in businesses that deal with commodities. If you are investing in natural gas, the nature of the futures curve matters a great deal, whereas natural gas stock investors aren't as vulnerable. To see how horrible this ETF was, check this out:

The top chart shows the price of natural gas while the bottom is the ETF. Although the ETF doesn't track the index that is shown above, it is supposed to be very close. Yet, we had massive losses for the UNG fundholders. The price of natural gas was largely flat last year, while UNG declined 56.5%! One of the most painful things in investing is when you get the macro call right but the security you invested in turns out to be a total dud. If you thought natural gas would hold its ground, you ended up being right; but if you invested in UNG, you had little chance of coming anywhere near break-even.

Jim Rogers always says that commodities are safer than stocks but if you aren't very good, you will lose large amounts of money very quickly and without knowing why (in contrast, stock market investors are generally bailed out by the economy because it tends to grow over the long run.) In this case, anyone misjudging the contango was roasted alive with slim chance of breaking even any time soon. However note that those betting on the contago in oil late 2008, when it looked bad for oil, when people were storing it on anything they can get their hands on, made a killing earlier last year.

Tuesday, January 5, 2010 0 comments ++[ CLICK TO COMMENT ]++

Burj Khalifa opens for business...with spectacular opening ceremony

(source: Toronto Sun)

Yes, for those following this blog and this story, the Burj Dubai has been renamed to Burj Khalifa, in order to appease the rulers of neighbouring sheikdom, Abu Dhabi, who came to Dubai's aid. Dubai is often attacked for using, what amounts to, modern-day slave labour—if you are not familiar check out this opinion piece by Johann Hari in The Telegraph earlier this year—but let's leave that aside for a moment. Let's also ignore the fact that this building, like many built during booms, will be major loss for the original financiers. Let's, for the moment, reflect on this spectacular accomplishment.

Rises During Tough Times

Regardless of what one thinks of the circumstances surrounding Dubai, Burj Khalifa is one of the greatest architectural achievements in the last century. It is on par with the Chrysler Building and the Empire State Building in New York, which were completed under a similar economic cloud right after the stock market crash in 1930. The Economist had an interesting graphic showcasing tall buildings, along with their economic growth rates during completion and 5 years prior to completion:

Investors shouldn't be surprised with so many tall buildings being completed after the economy heads south. In fact, it might even be a minor indicator of peaks. This should be expected because cost of capital, especially debt, is very cheap during booms. You can't undertake these massive projects if bond investors weren't on a high ;)

At least the bondholders can console themselves in knowing that the project appears completed on time—real estate is notorious for cost over-runs and delays—and seems to have cost a lowly $1.5 billion. I believe some of the projects on the drawing board like the Freedom Tower in New York is supposed to cost 2x to 3x more, be shorter, and have less surface area. Obviously the lower cost comes from cheaper labour (some of it bordering on slave labour), lower cost of living (not expensive like New York), and lower taxes (taxes on input materials can be a big portion of the cost.)

Most Important Architectural Achievement of My Life?

Burj Khalifa rises far above any prior building built by humans. Prior to this, the tallest freestanding structure was the CN Tower, in my beloved Toronto :) Here is a comparison (following images from Burj Dubai Skyscraper):

Unlike the CN Tower, which is largely a tower with small usable area, the Burj Khalifa is a massive skyscraper where businesses, individuals, and others can locate. I haven't looked up the numbers but it wouldn't surprise me if the area in Burj Khalifa is as much as half of the commercial building space in downtown Toronto.

Burj Khalifa also rises far above anything else on the drawing board or under construction. The second tallest in a few years will likely be the Shanghai Tower and the Burj Khalifa rises far above that:

The following graphics, courtesy Burj Dubai Skyscraper, compare various buildings already completed and on the drawing board:

Given my bearishness for the economies of the world and capital markets in general, I suspect we are seeing the dwindling glory days of skyscrapers. We have probably witnessed the last glamourous buildings being built for the rest of our lives. Sure, there will be some building going up here and there, but I don't think we will see a major boom with 3 or 4 skyscrapers competing for the 'Tallest Earthling Building' title ;) A similar thing happened after the 1930's, when a concerted boom in tall buildings didn't repeat for a long time. We are seeing several spectacular buildings going up in China but they may be the last of them.

A Special Accomplishment

I'm not into architecture but I have the following point also places the Burj Khalifa into a unique category. Not only does the Burj Khalifa beat skyscrapers and other free-standing structures, it also seems to have surpassed the tallest communications towers in history. This is a special accomplishment because radio towers are easier to build and aren't really buildings per se. Yet, we have the Burj Khalifa rising above the now-defunct Warsaw Radio Mast:

It's possible that we may see taller communications towers but it's still amazing to think about how a skyscraper with actual floors, elevators, washrooms, etc, is able to compete against these towers.

Lasting Legacy

Some say it will last for 300 years—well beyond my life. This is quite possibly the most prominent skyscraper that will be built in my life time. Yes, there will be other buildings that will be more aestheticaly pleasing—people who are into architectural art will definitely encounter better ones—but they won't be pure skyscrapers. I have already commented in past about the engineering innovations, including the massive spider-like robot to clean the windows.

The building apparently sways around 1.5 meters at the top! Yikes. Here is a video from the tallest man-made location on earth... so silent, lonely, and scary:

It's too bad all this was built with quasi-slave labour, in a totalitarian country, with dubious economic merit. But, as I have pointed out before, even with all its warts, Dubai is more liberal than most of the Middle East.

Just to top it off, Burj Khalifa enters history with one of the most amazing fireworks show I have ever seen (try playing this full screen in HD; let it load/cache fully first):

Sunday, January 3, 2010 0 comments ++[ CLICK TO COMMENT ]++

Sunday Spectacle XXXXII

World Map by German Cartographer,
Johann Baptist Homann
(Published in Nürnberg, 1707)

(source: Ancient World Maps)

What's the chance of a boom in space exploration within my life? I wonder...


Top 10 Investment Stories of the Decade - 2000-2009

Every decade seems wild; at least that's what old timers always say ;) But I don't think anyone quite expected the first decade of this millenium to be as crazy as it ended up being.

Politically, I think the decade was actually pretty calm and uneventful. Even with the 9/11 terrorist attacks in America, the decade wasn't as bad as some of the past ones. I would say the 90's was even more volatile with horrible genocides, collapse of various former Soviet countries, and so on.

However, the situation was completely different when it came to investing.

Depending on the measures you use, the first decade of this millenium will go down as the worst investment decade for investors—it's worse than the 1970's or the 1930's (but note that the 1929 crash happened before the start of the 1930's decade.)

I like lists so I thought I would mark down what I feel are the top 10 investment stories of the decade. Hope you guys & gals enjoy it. I only started investing, and following the markets closely, in the mid-2000's so my list might be a bit skewed to the last 5 years. Sometimes various events are related to each other and I decided to list them along with the key event. Feel free to discuss the list and perhaps add what you feel I missed.

It was a good decade to cut your teeth and learn investing... the first decade of the millenium only comes around once every hundread years so hope you found it interesting, if not entirely enjoyable :)

Top 10 Investment Stories
of the Decade:

- 1 -

Dot-com Crash

Bursting of the TMT Growth Bubble

Might actually be the largest investment bubble in history...

- 2 -

America's Subprime Mortgage Crisis

Worldwide Credit Bust
Collapse of Lehman Brothers, Washington Mutual, AIG, HBOS, Royal Bank of Scotland, Hypo Real Estate...

Not a conventional investment bubble... long-simmering credit volcano...repercussions to economies all over the world...subprime was the least of the worries but it'll be always known as that...

- 3 -

China's Ascent

Rapid Growth of BRIC Countries
World Trade Boom

Riding a once-in-100-years trade boom, China rapidly rose to the top echelon in the world

- 4 -

Commodity Boom

Decline of the US$

How many in 2000 thought oil would hit $147?

- 5 -

Wireless Communications Revolution

Rise of Nokia/RIM/Motorola/Apple/HTC/etc and Decline of Traditional Telcos

Spectacular scientific advance on par with flight

- 6 -

Success of Internet Businesses (Social Networking (Facebook, myspace), Retail (Amazon, Ebay), Search/E-mail (Yahoo, Google), Media (YouTube), Numerous Others)

Collapse of Traditional Media

The 90's dot-com investors were sort of right; it's just that they were too early, way too optimistic, and didn't consider the potential impact on social relationships

- 7 -

Creation of the Euro

For the first time since the fall of the Berlin Wall, the US$ had serious competition in the global currency competition

- 8 -

Popularization of Hedge Funds

Hedge funds entered the popular vernacular... inaccessible to retail investors so direct impact was very minor on retail investors but greatly impacted institutional and wealthy investors (who own 90%+ of the stock market.)

- 9 -

Scandalous 2000's: Enron Scandal, Worldcom Bankruptcy, Tyco Scandal, Adelphia Controversy, Collapse of Arthur Andersen, Nortel Accounting Fraud, Numerous Others

Passing of Sarbanes-Oxley Act (aka Public Company Accounting Reform and Investor Protection Act)

Fraudsters, cheats, and white-collar criminals thrive during booms and the bursting of the dot-com bubble revealed many for what they were...

- 10 -

GM Bankruptcy

GM, once the largest company in the world and an American icon throughout the world, declared bankruptcy and needed large capital injections from various governments to avoid total collapse. Still one of the largest companies in the world with revenues 3x more than Microsoft and more than 240,000 employees.