Showing posts from May, 2010

Investors starting to shun Chinese real estate bonds

Bloomberg's headline says that China's real estate bubble has burst in the bond market but I'm not so sure. In any case, here is the story : Dollar bonds sold by China real estate companies this year are the worst performers among Asian non-financial corporate debt denominated in the U.S. currency amid concern the nation’s property market is overheating. Yields on the $3.9 billion of bonds issued by Kaisa Group Holdings Ltd., Country Garden Holdings Co. and seven other developers since January widened by an average 2.26 percentage points relative to Treasuries as of last week, according to data compiled by Bloomberg. That’s more than the 2.05 percentage- point increase in spreads for the seven dollar-denominated bonds sold by other companies in Asia outside Japan. Investors are demanding greater yields to lend to China property firms, a sign they expect borrowers will have a harder time meeting debt payments amid a government clampdown down on lending. ###   The

Sunday Spectacle LXXII

Apple's Market Cap Surpasses Microsoft's (source: " A sour taste - Microsoft loses its top spot to Apple ," The Economist, May 27, 2010.) In what would have been unthinkable 10 years ago, Apple's market cap surpassed Microsoft to become the second most valuable publicly-listed company in the world (behind ExxonMobil.) Apple and Microsoft were major rivals in the past but don't really compete directly anymore. Of course, using other metrics the gap is still fairly large (for instance, as the chart shows, Microsoft's earnings are still over 2x higher.)

Is Google (GOOG) a value stock?

There is a long-running debate in the value investing community over whether technology, Internet, and new media companies can be considered as value stocks. Traditionalists tend to believe that these emerging industries cannot generally be considered as value stocks given their uncertain earnings, seemingly high valuations, and the lack of long-term history. There are other value investors, such as Bill Miller—admittedly some don't consider him a value investor—who claim that technology/Internet/etc companies can be value stocks depending on the purchase price. Of course, ultimately a value investment is based on buying at a low valuation and that is in the eye of the beholder. Recently, there has been some debate over Google. Is it really a value stock? GuruFocus recently picked up an opinion by Ockham Research suggesting it was. Vgm , one of the respondents to that story, referenced Glenn Greenberg's thoughts on Google and I thought I would quote it. For those not

An investment opportunity that may interest some - Icahn Enterprises (IEP)

I ran across an article in Barron's —it should be free—detailing a bullish case for Icahn Enterprises (IEP). I don't usually share the opinion of mainstream publications but this is an interesting opportunity. I don't invest in companies like these but I think some of you may find it worth researching. Here is a snippet from Barron's (bolds are by me): ICAHN ENTERPRISES, A diversified investment company run by Carl Icahn, offers the little guy a good way to play alongside the Wall Street billionaire. Structured as a limited partnership, the company has a $2 billion stake in Icahn's hedge fund, Icahn Partners; $1 billion of real-estate holdings, including two office towers in Atlanta and Dallas; $840 million of cash, and $1.6 billion of investments in other public companies, including a 75% interest in auto-parts maker Federal Mogul (ticker: FDML). Shares of Icahn Enterprises (IEP) trade for 33, far below a 2007 peak of 134. They also sell at a discount to the c

Spain loses its AAA rating

Unless I'm mistaken, we may be witnessing the first AAA sovereign rating downgrade since the financial crisis erupted in 2007 (I haven't followed the news enough to know if another AAA was cut—anyone know?.) Fitch downgraded Spain from AAA to AA+ today. S&P downgraded Spain a month ago and now with the Fitch downgrade, a majority of the rating agencies have cut their rating. The Globe & Mail reports on the story : Fitch Ratings cut Spain’s credit ratings to double-A-plus from triple-A on Friday, saying its economic recovery would be more muted than the government forecast due to strict austerity measures passed this week. The downgrade follows a cut by another agency, Standard & Poor’s, last month and heaps more pressure on the government, battling to reassure markets its fiscal, political and social woes will not end up in a Greek-style debt crisis. “The downgrade reflects Fitch’s assessment that the process of adjustment to a lower level of private sector

TIP spread - inflation expecations remain fairly high

Even though bond yields are somewhat low—10-year US bond is yielding a little over 3%—inflation expectations remain quite high IMO. Although not perfect, one of the few market-based measures of inflation expectation is the TIP spread (this is the difference between a "normal" bond and an inflation-indexed bond of same maturity.) The following chart plots the spread as of today (I notice a typo in the title but oh well :| ).

Sunday Spectacle LXXI

The British have a weird sense of humour—am I the only one who does not find Monty Python and the countless British sitcoms funny?—and I'm all for avant-garde and out-of-the-box designs and styles... but even I can't get over the offiical mascots for the London 2012 Olympics. Yikes. Many children, not to mention athletes, are going to have nightmares after encountering these mascots ;)

Quick look at key commodities

Of all the asset classes, commodities are perhaps the best indicator of forward-looking economic performance. Here is a quick look at 3 key commodity charts (all charts courtesy ): copper, crude oil, and the CRB index.

SEC speculates on a 'flash crash'

With respect to the abrupt crash from a few weeks ago, well, it looks like the SEC is speculating on a "flash crash." I keep posting about this story because it is an important one. The fact that the stock exchanges rolled back trades, which is extremely unusual and very anti-capitalist, lends credence to the importance of this story. The Globe & Mail reports the following : A preliminary investigation suggests a “severe temporary liquidity failure” was at the root of the incident, Ms. Schapiro said. The SEC has already ruled out a “fat finger” typing error, hackers or terrorists What is clear is that the incident exposed serious flaws in today’s fast-paced computer-driven markets, where billions of simultaneous trades are clocked in nanoseconds. The result is that the market moves faster than the human brain can process, let alone stop. The problem, regulators acknowledge, is that algorithms can be, well, stupid. ### Mr. Gensler singled out an unnamed trader,

Li Lu, an up-and-coming value investor

Lately the value investing world has been speculating that Li Lu, an up-and-coming investor, may end up as one of the portfolio managers at Berkshire Hathaway. At one time, the replacement for Warren Buffett, at least on the portfolio management side, mattered a great deal for Berkshire Hathaway. Now, I don't think it really matters very much. Warren Buffett has basically "used up" all his free cash with his Burlington Northern Santa Fe acquisition. My guess has always been that Buffett lost faith in his investment manager picks and decided to safely tuck away all the money into BNSF. Even for Berkshire Hathaway shareholders the future portfolio managers aren't a big issue, compared to 3 or 4 years ago when Berkshire had a big chunk of its net worth in cash. Having said all that, Li Lu looks like an interesting fellow. He definitely thinks like a value investor and appears to be talented. His track record, from what little I have seen, is good but it's too early

Germany bans naked short-selling, short-sales of select financial companies, and CDS on government bonds

From Bloomberg : Germany prohibited naked short- selling and speculating on European government bonds with credit-default swaps in an effort to calm the region’s financial markets, sparking anxiety among investors about increasing government regulation. The ban, which took effect at midnight and lasts until March 31, 2011, also applies to the shares of 10 banks and insurers, German financial regulator BaFin said late yesterday in an e-mailed statement. The step was needed because of “exceptional volatility” in euro-area bonds, BaFin said. ### Allianz SE, Deutsche Bank AG, Commerzbank AG, Deutsche Boerse AG, Deutsche Postbank AG, Muenchener Rueckversicherungs AG, Hannover Rueckversicherungs AG, Generali Deutschland Holding AG, MLP AG and Aareal Bank AG are covered by the short-selling ban. BaFin didn’t provide details on how it will enforce the ban, or whether it would extend to trades outside Germany. The majority of credit-default swap trading takes place in New York and Lo

Sunday Spectacle LXX

(source: " Newspaper industry fights back ," May 15, 2010. The Globe & Mail)

New theory on what happened last week

There have been many rumours and theories floating around, trying to explain how a broad index in the largest stock market in the world can drop more than 5% suddenly and recover almost immediately. Adding to the mix, The Globe & Mail quotes a story in the Wall Street Journal speculating on a new theory : One hefty trade in Chicago last Thursday may have played a big role in the afternoon stock market meltdown, The Wall Street Journal reports today. With markets already under pressure from global developments, the $7.5-million bet in the Chicago options trading pits may have served as something of a spark about 20 minutes before the heart-stopping plunge of almost 1,000 points in the Dow Jones industrial average, the newspaper says. The trade was made by Universa, a hedge fund that, ironically, is advised by Nassim Taleb, who authored Black Swan: The Impact of the Highly Improbable. Universa purchased 50,000 options contracts betting that stocks would continue to fall. Those c

Sunday Spectacle LIX

A New Breed of Protestor in Greece (source: " In Greece, a new breed of protester that won’t be muzzled ," May 7, 2010. The Globe & Mail.)

Gary Shilling Bloomberg interview from April 13th of 2010

One of the readers mentioned Gary Shilling and I was wondering what his stance is these days. Well, I ran across this Bloomberg video interview conducted a little less than a month ago (if link doesn't work, go here and click on video at the top .) Gary maintains his past stance (which likely means he hasn't done too well in the last year) and there isn't anything new in the video but it's still good to hear his contrarian stance on several issues. One thing did stand out in the interview for me: Gary is one of the few suggesting that the renminbi could go down. Gary throws in a big caveat—that being that all capital controls are removed, which is highly unlikely—but it's still interesting to see anyone remark that the renminbi could actually go down. Gary Shilling's view is that Chinese citizens will send capital abroad, hence pressuring the renminbi; whereas my view is that renminbi may decline because the Chinese government ends up devaluing it. As one o

NYSE, NASDAQ, TSX, and others cancel some trades... SEC launches investigation

If you thought the stock market plunge on Thursday was weird, well, things got even more bizarre when some of the leading stock exchanges, such as NYSE, NASDAQ, and TSX (in Canada) cancelled some of the trades . The SEC has apparently also started an investigation. I'm just a newbie that has been following the markets for a few years but my impression is that it is rare for an exchange to roll back trades. It is even rarer when a trade is rolled back with no errors (NYSE and NASDAQ have indicated there were no computer malfunction or other errors on their end.) I find it hard to believe that rogue trades can impact the capital markets so much (BTW, Citigroup has denied that any of its employees played a role in this—there was a rumour that a Citigroup employee punched in 'billions' instead of 'millions'.) It almost feels like there is a big piece missing from this puzzle. The fact that the SEC is investigating lends credence to this view. Stock markets have cra

Are we seeing a liquidity crisis develop in Europe?

I don't think so but it all comes down to bondholders and money market investors. The real question, as was the case in America, is how much money taxpayers are willing to to transfer to bondholders if banks holding dubious assets (in this case, Greek and possibly other government bonds,) take losses. The Wall Street Journal ponders the issue : Despite a €110 billion ($138.92 billion) bailout package for Greece, concerns about lending to banks have re-emerged as worries about a looming Greek debt default—or bond restructuring—have spread to other countries, such as Portugal and Spain. "The risk that we move towards a liquidity crunch situation is substantial," said Marco Annunziata, chief economist at UniCredit Group. "I don't think it's a high risk at this stage but tensions are mounting rapidly and it's definitely something that one should be prepared for." Investors, such as money-market funds, which have traditionally satisfied the bulk o

US markets temporarily fall off a cliff...apparently due to quotation problems

Weird market behaviour today, with the DJIA down almost 10% (approximately 1000 points) at one point. As MarketWatch reports, it appears that some of the decline was due to trading errors: The U.S. stock market's rapid freefall Thursday afternoon was accelerated by program trading, which was triggered after a sharp drop in shares of Procter & Gamble and at least one other Dow stock, 3M Co., market watchers said. Shares of Procter & Gamble plunged to $39.37 from around $60. The New York Stock Exchange said each stock has its own circuit breaker level. When these stocks fall below their levels, then they can be traded on any other exchange or platform at any price. When P&G fell below its circuit breaker, a bid came in for the stock at $39.37 from the Nasdaq, the NYSE said. ### Several market watchers said they heard a major firm may have accidentally released an errant program, where a trader accidentaly placed an order to sell $16 billion, instead of $16 million

Gulf oil disaster will probably end up costing $7 billion

Although it won't end up being as damaging as a natural disaster such as an earthquake, the unfolding oil disaster in the southern US will still be quite costly. Oil companies and others in the oil & gas industry have their own estimates of potential costs but perhaps the best estimates are the ones from the insurance companies (and the analysts covering them.) Since insurance companies are the ones that will pay out most of the damages—the oil companies, drilling companies, and equipment suppliers tend to pay a small fraction of the costs—insurance companies don't have any incentive to overstate or understate the losses. MarketWatch has a story on the costs likely to be borne by the insurance industry : At first, the industry focused on the rig itself. Transocean Ltd., its owner, has $560 million of insurance covering total loss and wreck removal. Several insurance industry executives have estimated this could be an $800 million to $900 million event. But a much bigg

Over-rated European problems plus... Marc Faber turns bearish on China

I haven't posted much lately and I haven't found any attractive investment opportunities. Like I alluded to in a post a week ago, comparing the present to the 1930's, valuations have gone so quickly from slightly undervalued to overvalued. Yet, there have been some major developments in the background. The issues pertain to macroeconomic matters and is probably ignored by some, but I wouldn't ignore them. What's making the news comes from the ugly houses in Europe...some of the countries whose ancient civilizations used to represent the pinnacle of humanity on earth... now reduced to the so-called PIGS. But a greater looming problem lies in China. Marc Faber appears to have turned bearish on China.

Sunday Spectacle LVIII

BP's Oil Rig Collapses, Unleashes an Environmental Catastrophe (source: ) (source: The Globe & Mail ) (source: New York Times ) (source: New York Times ) (source: The New York Times )