Wednesday, June 30, 2010 0 comments ++[ CLICK TO COMMENT ]++

Opinion: Tesla Motors IPO could by the symbol of the upcoming electric car revolution

Tesla Motors (TSLA), the niche electric car maker, had its IPO today. It raised $202 million. Tesla hasn't a made a profit since it was founded in 2003, and is expected to post losses until 2012. The market was very receptive to the stock and it was one of the few that was up today (it was up 41% today.)

If electric cars take off, this could be a very symbolic event that will be looked upon in the future. It'll be kind of like the Yahoo! IPO in the 90's, which ushered in the Internet era. The strong interest in Tesla shares indicates that investors are willing to finance this emerging industry.

On the other hand, electric cars could turn out to be a big bust. There is a lot of hype around them and it remains to be seen if they will revolutionize personal transportation.


Sunday Spectacle LXXVI

World leaders meet... more than $1 billion spent on meeting... citizens protest... "anarchists" run loose...police fires rubber bullets (haven't heard of that before in Toronto)... cop cars set on fire... mass arrests... G20 communique released with little progress on any major issue...

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Saturday, June 26, 2010 1 comments ++[ CLICK TO COMMENT ]++

Real estate bubble in Vancouver (Canada)?

On a bright, warm Saturday in late June, couples and families wandered through the empty village, which has been renamed Millenium Water. It opened for public tours last month and draws about 100 people a day. Millenium Water is a city of the future, built with enviro-touches like green roofs and automatic shades that moderate the temperature inside the apartments. An 815-square-foot, one-bedroom apartment is on sale for C$879,000, which works out to C$1,078 per square foot, or $12 higher than the average price in Manhattan, according to The Corcoran Report. (A Canadian dollar is currently worth about U.S. 96 cents.)

Millenium Water isn't in downtown Manhattan, of course. It's not even in downtown Vancouver, which is across an inlet known as False Creek. It isn't really even in a neighborhood; the nearest establishment is the sales office for another condo development. If all this is starting to sound a little irrationally exuberant, especially given the shaky international outlook, well, that's Vancouver for you.
(source: "Vancouver's Real Estate Bubble Trouble" by Bryant Urstadt. June 24, 2010. Bloomberg Businessweek.)

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Interesting APC and RIG bonds to watch

This is more of a note for myself but others may find it insightful. Since bonds of BP, Anadarko Petroleum, and Transocean may be worth considering in the future—potential still not good enough for me—I have been researching them. For amateur investors without access to bond information, a good site is the freely available FINRA site.

In my opinion, assuming you are not buying them when overvalued, the ideal bonds for amateurs are convertible bonds. Some may not agree with that, especially since convertibles tend to pay very low interest, but if convertibles convert, they can be highly profitable. During bull markets, convertibles look like one of the worst securities around but they provide safety during bear markets or in distress situations. If you look at Warren Buffett's history, many of the distress investments he made have involved convertible bonds or convertible preferred shares.

Another type of bond that can be useful in distress situations, depending on the solvency of the company, is puttable bonds. These are bonds that you can put back to the issuer at specific prices at particular dates.

The strategy with puttable bonds is to buy them with the expectation of putting them back to the company within the next few years. If you buy the bond below par, say $90, and can put it back to the company at $100 in an year, you can earn roughly 10% in addition to the yield. If the put date is further off then the annual return would be lower. I would seriously consider this strategy if the price drops below $80 (for a $100 par value bond.)

We needs to keep two things in mind. First of all, interest income is taxed at higher rates so bonds are not tax-friendly. However, the puttable bond that is bought below par value will mostly result in capital gains so it isn't that bad. Secondly, the company must be solvent and able to buy back the bond. Since the market is betting that the companies involved in the Gulf oil disaster have a higher likelihood of failing sooner rather than later, you need to be sure that the companies don't fail before you put the bond. And if you are confident the companies will survive for a few years, or at least you put back your bond, then it begs the question whether you should be investing in these bonds instead of the equity. Equity would have far more upside if these companies survive***.

Here are some bonds that fit the categories I described above.

(key: bond_symbol, issuer, coupon, maturity_date)

Transocean puttable & convertible bonds:

* RIG.GK shows up when I search for puttable bonds but future put dates aren't listed. It's either a mistake or the put date has passed already.

Anadarko puttable & convertible bonds:

** Put date really far off (in the year 2026) so not useful for our purposes


*** Even if you believe the companies will survive, there are scenarios where the equity may not beat the bonds. If the company survives but lingers on, then the stock may go nowhere for years. Also, the bonds won't be as sensitive to the macro environment. If oil prices drop to $40, chances are that the equity will either not recover (from the current 50% decline) or possibly collapse even further. I don't follow the oil & gas industry but my impression is that the market is pricing stocks as if oil prices will be $70 or higher in the long run so any oil price decline is going to kill these companies (especially E&Ps like Andarko and oil service companies like Transocean; integrateds like BP will be hit less by oil price declines.)

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Tuesday, June 22, 2010 1 comments ++[ CLICK TO COMMENT ]++

One reason to be cautious: very high corporate profit margins

There are many reasons to be cautious these days. Issues such as the fiscal problems in Greece are blown out of proportion and largely irrelevant in the long run IMO. Similarly, although it has resulted in irreparable harm to the environment, the Gulf oil spill is likely to have very little on the economy. Those in the impacted regions will feel it but I doubt it will even shrink US GDP by 0.5%.

However, there are other reasons to be really cautious right now. One such reason has to do with the high corporate profit margins over the last decade. I think I brought up this point since the early days of this blog, almost 3 years ago, but the situation hasn't changed. Bloomberg quoted the bearish outlook of Smithers & Co and produced the following chart (h/t Naked Capitalism):


Gulf oil spill disaster and Anadarko Petroleum (APC)

If there is one company that could see serious permanent damage from the Macondo oil well disaster in the Gulf of Mexico, it's likely not BP, but, instead, is Anadarko Petroleum (APC). Anadarko Petroleum is the minority owner of the well (25% ownership) and it may be on the hook for as much as $6 billion. However, unlike BP, which self-insures, I believe Anadarko has external insurance (not 100% sure.) Also, most importantly, Anadarko is a smaller company and is a pure E&P (exploration & production) so it will be hurt by the deepwater drilling ban (it does own properties elsewhere but Gulf of Mexico is important.)

Regardless of what happens to any of the involved companies, the environmental disaster will alter the oil & gas business. I suspect companies won't be allowed to drill in deepwater without some backup plan to handle disasters in the future.

From Fortune:

The partnership [between BP and Anadarko] could cost them up to $6 billion dollars, according to a recent statement by Fitch Ratings. Based on that estimate, Fitch downgraded Anadarko (APC, Fortune 500) from "stable" to "negative." The $6 billion could be conservative considering many of the estimates for BP's total costs are $35 billion or higher. Anadarko has already lost $8 billion in value because of its ties to the well where the exploded Deepwater Horizon was drilling. Anadarko's plight could make other small oil companies think twice about entering similar partnerships in the future.

Anadarko signed a contract saying that it would have to pay a quarter of the costs associated with the well, unless BP (BP) is found guilty of gross negligence, even though no Anadarko employee has worked on the rig.


A non-operating partner pays money up front for the well, approves the drilling plans, then leaves the rest for the operator. Anadarko Petroleum Corp. was one of two non-operating investors on the Macondo well-the other was another an arm of the Japanese conglomerate Mitsui.

Sunday, June 20, 2010 0 comments ++[ CLICK TO COMMENT ]++

Sunday Spectacle LXXV

Fannie Mae and Freddie Mac are Delisted

The government agency in charge of Fannie Mae and Freddie Mac told them to delist their shares. I'm not really sure what this means since the market cap of their shares was still roughly $1 billion... This ends a multi-decade attempt by the government to utilize a public-private partnership structure to facilitate purchase of homes by Americans (there is still Ginnie Mae and Farmer Mac.) The structure probably doesn't make much sense given how profits accrue to private investors during the good times, while losses accrue to taxpayers during bad times. I'm not in favour of such structures and would prefer something to be privatized completely. As you could tell from the charts private investors, including Warren Buffett and several other value investors at one time, made a fortune in the 80's and 90's; but taxpayers ended up massive losses (not shown by the share price graphs) in the late 2000's.

Although Fannie Mae and Freddie Mac get a lot of blame for the subprime problems, they really weren't a player in that market and basically curbed their activities in the early 2000's. Once the current problems are long forgotten, I believe Fannie and Freddie will be remembered for putting a floor to the real estate market during the collapse in 2008-2009. Without the government "forcing" them to provide liquidity to the real estate market during that time, USA would likely have seen a far worse real estate bust with even more financial insitutions failing (basically no mortgage lender wanted to finance anyone in 2008/2009 and the GSEs were the only ones that stepped in to fund mortgages.) I think the cost borne by the taxpayers was worth it but the ultimate outcome won't be known for a few decades... It's just that these companies never should have been allowed to be owned by private individuals while the company was backed by the taxpayer.

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Added to watchlist: Nokia (NOK)

I remember a time, perhaps not even 2 years ago, when I was looking at Motorola (MOT) as an investment opportunity, and wondered if Nokia (NOK) is the type of company that would never "get cheap." At that time, and even to this day, Motorola was going through serious problems in their mobile phone division. In contrast, Nokia seemed to be sailing smoothly, gaining market share throughout the world.

My, how things have changed. Nokia's shares hit a decade-low this week, after Nokia's guidance came in weaker than expectations. In particular, the market appears to have voted that Nokia is going to lose the smart phone market. Given how smart phones are forecast to be the ubiquitous mobile phones in a decade, this is a big deal for Nokia.

Given the big decline in share price over the last few years, I felt this was a good contrarian opportunity to investigate. Here is my very preliminary, early, look at the company. My goal has been to avoid investing in mega-caps (since upside is smaller and they are correlated too much to the broad market) but I may make an exception here.

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Thursday, June 17, 2010 4 comments ++[ CLICK TO COMMENT ]++

Interesting... Jim Chanos short oil supermajors, amongst others

Thanks to The Big Picture, I ran across a very interesting Bloomberg interview excerpt with Jim Chanos. The interview is apparently set to be released on June 25th, and in the mean time, Bloomberg released a video excerpt. I'll reference the full video when it comes out but for now, check out the video referenced at The Big Picture blog or, for a shorter one on Ford (F), visit Bloomberg.

Chanos suggests that it has been a tough sledding this year. He implies or says outright that he is short automakers (not clear if it's just Ford or others as well); stocks related to the China bust thesis; for-profit education companies; and most interestingly, oil & gas supermajors. His justification for shorting the oil & gas supermajors is very insightful to me (bolds by me):

Chanos: "“[Decision to short oil majors] predates [the Horizon Deepwater rig], and it has to do with financing. If you look at some of the biggest oil companies in the world — and I’ll let you use your own imagination as to which ones those are, there’s a small handful. If you look at their cash flow statements relative to the income statements, you will see companies that haven’t replaced reserves in years and haven’t seen any increase in revenues in years and yet their capital spending eats up all of their cash flow, meaning they are borrowing their dividend. They are in effect liquidating. And investors don’t realize that. It’s one of the reasons why – and the market does [realize it] to some extent – that’s why the yields are so high. But they’re not earning, in economic terms, in many cases, those yields. And if people did a careful analysis of the cash flows of some of the biggest, most well regarded, integrated oil majors, I think they would be surprised at what they’d find"

Wow, shocking. Who knows if what he says is as bad as it seems but I never would have expected supermajors to be in such a bad situation. I don't follow the oil & gas sector very closely anymore so I'm not sure which companies are increasing their reserves and which one aren't. In any case, I took a quick cursory look at sort of found what Chanos was talking about. The American supermajors seem to be ok but the European ones seem a bit questionable. However, do note that I'm just looking at Morningstar data, which is aggregated data and it's not clear if some numbers are being slotted into incorrect categories.

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Innovation Ventures gets off to an interesting start with TerraPower

(This post is not related to investments. Skip it if you are not interested in science or venture financing.)

What Nathan Myhrvold and his cohorts were trying to accomplish sure was exciting, perhaps even the start of a new structure for science, invention, and technology. Some are critical of organizations that just invent or acquire patents without manufacturing the product or providing the service but I'm not so down on them. Given my diverse interests, I read quite a number of stories on people trying to accomplish certain things but I never quite encountered anyone like Myhrvold. He is definitely someone special and I hope he succeeds.

Well, it looks like Myhrvold and his team may be on the verge of commercializing their first, serious, idea—and it sure is a revolutionary idea! As a bonus, unlike many ideas that get floated around with no backing, this idea seems to have financial banking of several venture investors, including Bill Gates (For those interested, Marketwatch has a story on Gates increasing his investment by another $35 million.)

The idea that Innovation Ventures, the company founded Myhrvold and his team, is attempting to commercialize is a new type of a nuclear reactor. Innovation Ventures is backing a company called TerraPower, which is developing a Traveling-Wave Reactor. I know very little about nuclear technology and not sure how much of this is purely theoretical and hype, but what makes this interesting is that it does not rely on enriched uranium. It can use depleted uranium and run a very long time without re-fueling. Technology Review has a brief overview of the proposed system:

Unlike today’s reactors, a traveling-wave reactor requires very little enriched uranium, reducing the risk of weapons proliferation. The reactor uses depleted-uranium fuel packed inside hundreds of hexagonal pillars. In a “wave” that moves through the core at only a centimeter per year, this fuel is transformed (or bred) into plutonium, which then undergoes fission. The reaction requires a small amount of enriched uranium to get started and could run for decades without refueling. The reactor uses liquid sodium as a coolant; core temperatures are extremely hot--about 550 ºC, versus the 330 ºC typical of conventional reactors.

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S&P concerned about junk bonds over the next 5 years

Standard & Poor’s is growing increasingly concerned that many companies in the United States could find it difficult to refinance their enormous debt loads in the coming years, possibly leading to an explosion of defaults and bankruptcies.

Of particular concern are companies at the low end of the ratings scale, S.&P. said in a report released on Wednesday. These companies were busy in the second half of 2009 and early 2010 refinancing their debt.

Much of this debt currently owed by American companies was a result of heavy borrowing during the leveraged-buyout boom, which lasted from 2005 to 2007.

Private equity firms borrowed enormous sums of money from banks to finance the buyout of companies and then loaded the target companies up with debt.

But the target companies have since had a hard time paying down their debt because of the down economy, which blunted profits.

S.&P. believes that these companies have been successful in pushing back their debt maturities past 2010, avoiding a potential rash of defaults and bankruptcies this year.
One area that has surprised me over the last year—this is code for saying I was completely wrong ;)—has been the junk bond market. It's amazing to me how well the market has received low quality corporate bonds. I think some of the rally in junk bonds made sense given the sell-off in 2008, but it still amazes me how easily the weak companies, especially the over-leveraged Private Equity purchases, were able to re-finance in the last year. It remains to be seen how this situation unfolds over the next few years. If bonds default, the big losers will be pension funds, insurance companies, and others who invested heavily in private equity earlier in the decade.
According to S&P, the US bond maturity schedule stands as follows:

Tuesday, June 15, 2010 1 comments ++[ CLICK TO COMMENT ]++

BP's Bonds

The Gulf of Mexico oil spill has caused distress in various assets and I have been researching them lately. BP shares are the most obvious opportunity but other affected parties, including oil service companies and drilling companies that operate in the area, are worth considering as well. Companies involved in the disaster, such as Transocean and Halliburton, are worth researching. The ideal securities to own are convertible bonds and I see that Transocean has some convertible bonds.

One thing that makes this whole affair a bit risky is the oil price. People like me are bearish on oil and think oil is more likely to trade at $40 (or even lower) in the long-run than $140. You can make the right call and still end up losing money if the market marks down oil & gas companies because the expected long-term oil price declines (the mostly likely catalyst for such a re-valuation would a slowdown in China, which changes the long-term growth expectations.)

Bonds You Say?

In any case, one way to avoid the oil price risk is to invest in bonds. You introduce a whole set of new risks—inflation/interest rate being the big ones—but at least you are not exposed to the oil price risk directly. If you believe the company is likely to remain a going concern, then the bonds will provide a fixed return regardless of whether the valuation of the company goes down or not. I will note that a big decline in oil prices will weaken the cash flow of the company but given how these companies are paying out big dividends, there is a cushion for the bondholders.

I haven't talked much about bonds because the yields have been too low for my liking...until now, that is. Several of BP's bonds have hit yields of around 8%. It's still not that great, especially given how bonds are taxed at higher rates in most countries including Canada, but it's getting there. The upside is very small—the stock could rally 100% but you are looking at earning 8% with the bond—but the risk of capital losses is remote if you solvency analysis turns out to be correct. In contrast, you could lose a fortune with the common shares, not to mention being stuck with them in a possible bear market.

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Monday, June 14, 2010 0 comments ++[ CLICK TO COMMENT ]++

While we are on the issue of environmental risk... nuclear power plants

(This post has nothing to do with investing per se.)

Bloomberg reports,

China’s Daya Bay nuclear power plant had a “very small leakage” from a fuel rod last month that has been contained, CLP Holdings Ltd., Hong Kong’s biggest electricity supplier, said in a statement.
“On 23 May 2010, a small increase in radioactivity (radioactive iodine and noble gases) is observed in the reactor cooling water at Unit 2 of Daya Bay,” according to the statement sent today. “The reactor cooling water is sealed in completely and isolated from the external environment, thus causing no impact to the public.”

The Daya Bay Nuclear Power Station is located 50 kilometers (31 miles) from Hong Kong’s Tsim Sha Tsui district. The facility has been in commercial operation since 1994 and generates 10 billion kilowatt-hours of electricity a year to Hong Kong and Guangdong Province, according to the website of the Hong Kong Nuclear Investment Company Ltd., a CLP unit that owns 25 percent of the plant. State-owned Guangdong Nuclear Investment Co. owns the remaining 75 percent.
This is very minor and nothing to worry about...but I always wonder if we are going to end up with some major nuclear disaster in Asia.

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What's the worst that could happen to BP?

USA is lucky that a supermajor caused the oil spill in the Gulf of Mexico. If it were caused by an independent E&P, it is likely the company wouldn't be able to pay more than a few billion and taxpayers would be footing most of the bill. I think "reasonable" damages shouldn't cause any financial problems for BP given that it is one of the largest companies in the world (and hence one of the most profitable in terms of raw dollar profits.)

However, the big risk for BP shareholders would be special penalties that may be levied by the US government. For instance, if the US government takes some operating licenses or disallows BP from bidding on future leases, it would likely cause permanent destruction of shareholder value. I don't know which ones will stick in a court of law but Bloomberg speculates on some penalties:

BP Plc may lose control of its U.S. oil and natural gas wells and be barred from doing business with the federal government as punishment for the worst oil spill in U.S. history, industry and regulatory analysts said.

President Barack Obama and lawmakers are debating penalties that would cripple the company’s ability to do business in the U.S. as public outrage intensifies. In addition to BP’s culpability in the Gulf of Mexico spill, a 2005 explosion at BP’s Texas City refinery that killed 15 workers and a 2006 pipeline leak that dumped 200,000 gallons of crude at Prudhoe Bay, Alaska, will figure in the debate, said Michael Wara, associate professor of environmental law at Stanford University in Palo Alto, California.

“The government weighs whether there is a pattern and practice,” Wara said. “They’ll consider whether BP runs these incredibly complicated systems, where accidents can and sometimes do happen, or whether the company has a culture that disfavors safety and environmental compliance.”

The U.S. may revoke BP’s status as operator of producing wells in the Gulf of Mexico, such as Thunder Horse, or of leases at Prudhoe Bay, said David Pursell, a managing director at Tudor Pickering Holt & Co. LLC, a Houston investment bank. Separately, Congress is considering measures to bar BP from contracts with the Department of Defense and Environmental Protection Agency.


“We think there’s a good chance the government not only doesn’t allow BP to operate going forward, but could rescind operating control,” Pursell, an oil specialist, said in an interview. “It’s a way to keep BP alive and a way for the government to say we’ve really done something to penalize BP.”

Such a move would force BP to sell part or all of its interest in some of its most profitable oil and gas fields, said Michael McKenna, president of MWR Strategies, a consulting firm in Washington. Other partners in a lease are unlikely to take on the risk of being the operator without also taking the lion’s share of profits, McKenna said. Even if BP breaks even on the sale of its stake, it would lose the profits from future oil production.


The EPA can disqualify companies convicted of Clean Water Act or Clean Air Act violations from receiving federal contracts or financial assistance, according to an agency e-mail responding to questions. Those penalties apply to individual facilities, not an entire company, it said.

BP’s facility in Prudhoe Bay and its Texas City refinery are already under EPA sanctions. Negotiations to lift them were suspended after the Deepwater Horizon explosion and leak, the agency said.


Last month, Gutierrez successfully pushed through an amendment to a broader Defense Department bill requiring the secretary of defense to review whether BP is a “responsible” contractor.

If BP doesn’t meet that standard, which includes having a “satisfactory record of integrity and business ethics,” the legislation would require Secretary Robert Gates to bar the oil giant from defense contracts, according to Gutierrez’s office.

BP has six contracts with the Pentagon worth a combined $2.1 billion, mostly for fuel.
The damage caused by this deepwater drilling operation makes me wonder about the risk with Brazilian supermajor, Petrobras, who is set to drill far more complicated, and deeper (if I'm not mistaken) wells off the coast of Brazil.

Sunday, June 13, 2010 0 comments ++[ CLICK TO COMMENT ]++

Sunday Spectacle LXXIV

Saturday, June 12, 2010 0 comments ++[ CLICK TO COMMENT ]++

Jim Rogers appears to be close to turning bullish on the Euro... bearish on EM... plus my thoughts on BP

Interestingly, Jim Rogers appears to be on the verge of turning bullish on the Euro. Check out his CNBC interview via GuruFocus.

He is expecting a recovery due to technical and contrarian reasons, but I still find it interesting that a super-bear on the Euro is close to turning bullish, even if it's only temporarily. As for the pound sterling, he is maintaining his bearish views and thinks it will decline. I concur and think the pound will decline because Britain is facing a very bad fiscal situation and isn't competitive (one of the ways adjustments happen under capitalism is through changes in the value of the currency.)

Jim Rogers also says he is short US technology, emerging markets, and one major North American financial institution. His short selling is based on contrarianism (those assets rose sharply in the last few years.)

On the bullish side, Jim Rogers maintains his long-term bullish view of commodities. He says he prefers to own the commodities rather than commodity stocks since governments may target financial assets in the future.

BP & the Oil Spill
When asked about BP, he says it may be worth looking at when it's out of the news. I may follow his suggestion and take a more serious look in 6 months or so. I have been looking at BP recently and although I don't like their poor management in the last decade—they also had a few pipeline spills and refinery explosions in the last few years so their safety and environmental handling appears to be weak—I do think it is a classic contrarian opportunity.

In the last few years, BP has earned around $20 billion (about $30 billion pre-tax; FCF around $10 billion) so it can absorb losses as high as $40 billion, spread out over a few years. BP's debt-to-equity ratio appears to be around 30% and debt-to-EBITDA is under 1 so BP can probably issue another $20 billion in debt to pay the oil spill damages. The real risk is over draconian US government penalties that may be enacted into law in the future (since the British government appears to be defending BP, I suspect the Obama administration will back off.) We should get more clarity in a few months, hopefully when BP has brough the spill under control.

I don't know much about BP's business but anyone contemplating investing in it should also figure out how their worldwide operations are. I know they have had serious problems with their BP-TNK joint venture in Russia in the past—this was supposed to be one of their crown jewels driving their future growth, before the Russian government and various proxies started cracking down on them—and one needs to figure out their risk in their operations.

In addition to all this, one reason I don't find this situation as attractive as otherwise is because I'm bearish on commodities. If oil prices drop to, say, $40, which is probably the marginal cost of production, BP's earnings will probably be around $10 billion, with pre-tax income around $15 billion and free cash flow around $5 billion. The valuation would obviously be much lower in such a scenario.

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If companies were World Cup teams...

Now that the World Cup is in swing, I thought some of you may find this article by Derek DeCloet of The Globe & Mail humourous (here is an excerpt):

If Companies were World Cup Teams...

Germany equals the Royal Bank of Canada: Ruthlessly efficient, joyless, and ridiculously competent. They always have a few detractors, but when it matters, they seem to perform better than almost everyone else.

Odds of winning the World Cup*: 16 to 1
Stock price: $53, down 6 per cent this year
Price-earnings ratio**: 12


Portugal equals Lululemon. Pretty boy striker Cristiano Ronaldo wouldn’t look out of place wearing a pair of tight yoga pants. Female soccer fans swoon at the thought. But a brave investor would see a short-selling opportunity in something that seems overhyped.

Odds of winning the World Cup: 28 to 1
Stock price: $41.76 (U.S.), up 38.7 per cent this year
Price-earnings ratio: 36


Brazil equals Google – powerful, creative and slightly scary. It’s not enough to win; you have to do it with elegance, too. Bet against them at your peril.

Odds of winning the World Cup: 4 to 1
Stock price: $488.50 (U.S.), down 21 per cent
Price-earnings ratio: 18


France equals Goldman Sachs. Suave and successful, they’re dogged by critics who accuse them of cheating their way to the top.

Odds of winning the World Cup: 20 to 1
Stock price: $135.64 (U.S.), down 19.7 per cent
Price-earnings ratio: 7


The Netherlands equals Rogers Communications. The stylish Dutch breezed through the World Cup qualification rounds hardly breaking a sweat. Rogers cruised to the top of the wireless industry in similar fashion. In each case, we’ll soon know the truth: how much was simply because the competition was weak?

Odds of winning the World Cup: 9 to 1
Stock price: $36.87, up 12.8 per cent
Price-earnings ratio: 13


North Korea equals BP. And it’s hard to know which one is less popular with Barack Obama.

Odds of winning the World Cup: 2,000 to 1
Stock price: $33.97 (U.S.), down 41.4 per cent
Price-earnings ratio: 6

LOL ... love the North Korean selection :)

I'll be cheering for The Netherlands...

Wednesday, June 9, 2010 0 comments ++[ CLICK TO COMMENT ]++

Opinion: US government over-stepping property rights?

Barack Obama is having a bad few months. The Gulf oil disaster has been an absolute disaster for all, with the helpless wildlife taking the most damage so far. On the positive, some environmentalists suggest that the ocean will be back to "normal" in 5 years. Depending on when the leak is brought under control, the Gulf and some of the Florida coast may never be the same.

One of the biggest losers in all this has been the Obama administration. In addition to the questionable back-room startegy to push out Hamid Karzai in Afghanistan—I'm no fan of Karzai but this is a terrible strategy in my opinion—Obama had horrible timing with his move to open up the sea for drilling, just a few weeks before the BP oil disaster unfolded. In order to combat the perception that the government has been slow, it appears, at least to me, the Obama administration is on the verge of trampling property rights and setting all sorts of precedents.

I don't have any vested interest, either positive or negative, in BP but I do think the Obama administration is proposing some dubious penalties for BP. In particular, I am totally against one proposal floated by a senior official to force BP to pay the damage suffered by competitors and oil service companies. In particular, the government wants BP to pay the lost salaries and wages of oil service workers. Let me quote the relevant portion from Nathan VanderKlippe's article in The Globe & Mail:

One worry: that BP could be forced to pay salaries for a huge number of oil workers laid off by the current six-month moratorium on U.S. deepwater drilling. Interior Secretary Ken Salazar said Wednesday that BP will be asked to make whole service companies that go bankrupt and the workers they are forced to lay off.

Mr. Salazar said the moratorium could actually be cut short depending on the speed with which a presidential commission into the spill is able to report. But he warned that “significant additional” safety rules will be have to be met before activity resumes.

The number of salaries could be enormous. In one state alone, Louisiana, as many as 330,000 jobs are at risk, Democratic Senator Mary Landrieu has said.

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Thought of the day: Which is overvalued - junk bonds or stocks?

I ran across an interesting article in The Globe & Mail today. The article refers to research from Montreal-based firm, Brockhouse Cooper, pointing out that junk bond yields and stock yields are almost about to touch. That hasn't happened in over 25 years:

So this begs the question: which is overvalued? Junk bonds? Or stocks? Or is it both?

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You know your government is desperate when...

From Bloomberg...

Japanese women are seeking men who invest in government bonds, according to an advertisement being run by the Ministry of Finance.

“I want my future husband to be diligent about money,” a 27-year-old woman says in an ad being run in free magazines promoting a fixed-rate, three-year note that started last week. “Playboys are no good.” She’s one of five women featured in the page, which says “Men who hold JGBs are popular with women!!”


Retail investors keep shifting capital from stocks to bonds

It looks like retail investors are maintaining the trend they started two years ago, when they started to shift capital out of stocks and into bonds. Writing for Business Insider, Vincent Fernando produces the following chart showing the capital flow over the last two years:


Sunday Spectacle LXXIII

Biggest Oil Spills

(source: Oil spill, Extracted on June 6, 2010.)

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Saturday, June 5, 2010 8 comments ++[ CLICK TO COMMENT ]++

Bruce Greenwald interview with Forbes

I came across an interesting video interview with Bruce Greenwald, conducted by Steve Forbes. You can also access a transcript on the right side of the webpage (Thanks to Henry W. Schacht for bringing this to my attention.) Most people who read or listen to Greenwald do so for his thoughts on value investing (he is very close to a modern Benjamin Graham.) In contrast, I find him more interesting for his macro thoughts and his general views on industries.

If you are interested in some macro-oriented thoughts from Greenwald, you may also want to check out these posts from last year:

Interview with Advisor Perspectives part 1
Interview with Advisor Perspectives part 2

My comments on some topics that he covered follows..

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Sold: BCE

I hope this doesn't turn out to be a mistake. I am not good with timing and hopefully this wasn't done due to boredom and impatience. Whatever it is, I finally decided to get rid of my BCE position. This, long-time readers may recall, was a failed risk arbitrage investment (the original thesis is here.)

I have no idea why I'm selling this now because I don't really need the cash (I'm around 50% cash right now.) I think I pulled the trigger due to my bearish feelings. One shouldn't let emotions get in the way and I hope this doesn't turn out to be a mistake.

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Thursday, June 3, 2010 0 comments ++[ CLICK TO COMMENT ]++

Shorting China... more complicated than it seems

I ran across a brief article in The Economist (from May 27, 2010) describing various ways to short China. One of the readers of this blog commented on this topic recently and I thought I would quote the article:

Futures and options markets for equities either do not exist locally or barely trade. It is possible to buy credit-default swaps (CDSs), a form of insurance against default, on China’s sovereign debt, but few think that would really go belly-up anyway. A pair of widely circulated reports on how to hedge a downturn, written in April by Goldman Sachs (stamped “highly confidential”) and Morgan Stanley respectively, spell out some of the alternatives for investors. In each, the underlying idea is similar: if shorting China is impossible, find things tied to China.

In Morgan Stanley’s view, that means starting with various financial assets—shares, credit instruments, and currencies—in South Korea and Australia (see chart [not included]), the two countries with the strongest connections to China after adjusting for re-exports. Both places offer numerous financial products, such as exchange-traded funds linked to indices, that can be shorted. The report also cites three commodities that are particularly tied to China’s growth: copper, above all; then soyabeans; and oil.

In its hedging scenarios, Goldman’s report concentrates on some different products. It looks at the value of buying CDSs on Hutchison Whampoa, a telecoms company in Hong Kong with deep ties to China; an index of Asian (excluding Japanese) CDSs; and a combined option structured to benefit from a decline in the Australian dollar, Goldman’s own commodities index and the Hang Seng China Enterprise Index, comprising Chinese companies listed on the Hong Kong stock exchange.

Tuesday, June 1, 2010 2 comments ++[ CLICK TO COMMENT ]++

Bank of Canada raises interest rates to 0.5%

From The Globe & Mail:

The Bank of Canada Governor became the first central banker in the Group of Seven to raise borrowing costs since the financial crisis and recession, increasing the benchmark overnight rate Tuesday by one-quarter of a percentage point to a still exceptionally low 0.5 per cent.


By comparison, Canada’s benchmark rate now matches that of Britain and is only half as much as the European Central Bank’s 1 per cent, so there’s a lot of ground to cover before borrowing costs are at a level economists consider “neutral.” At the same time, even the Reserve Bank of Australia, which started tightening last fall, kept its benchmark rate at 4.5 per cent this week. It, too, cited “various factors” in the world economy that “need to remain under review,” among other things.

Although Canada is doing fairly well, it's still a gutsy move by the central bank. It looks a bit premature to me but I might be biased due to my overly bearish views.

On another note, I was thinking today about the possibility of a recession without an inverted yield curve? Typically an inverted yield curve precedes a recession but given the talk by some of a double-dip recession, I wonder how likely it is without an inverted yield curve.