Can Turtles Fly?

(source: " Government-bond yields ," The Economist. August 19, 2010)

On the first page a donkey asks a monkey, "What do you have there?" The monkey replies: "It’s a book." "How do you scroll down?" the donkey asks. "Do you blog with it?" Then he asks: "Where’s your mouse? ... Can you make characters fight? ... Can it text? ... Tweet? ... Wi-Fi? ... Can it do this? TOOT!" No, the monkey repeatedly replies. "It’s a book." —Linton Weeks, quoting from Lane Smith's It's a Book A few weeks ago, writing for GuruFocus, Geoff Gannon laid out the bullish thesis that underpinned his purchase of Barnes & Noble (BKS). For those not familiar, Barnes & Noble is the largest bricks & mortar book retailer in North America (and possibly the world?). Since this was a contrarian decision—many have given up on book retailers—and it involved a mid-cap company—I don't generally like investing in microcaps and smallcaps, which are common with many amateur value investors—it piqued my in

I don't know if I'm the only one who finds these funny but I ran across some comments for an article on MarketWatch and found them funny. SUMMER VACATION IS OVER! TIME TO PREPARE FOR "BACK-TO-SCHOOL" "Infinity is just a number" Federal Reserve Institute, Department of Mathematics "Faith can be valued objectively" Federal Reserve Institute, Department of Finance "According to the latest government regulation; Goodwill can be 'printed'..." Federal Reserve Institute, Department of Accounting "Revolution? Well... that's why we need the gun control." Federal Reserve Institute, Department of Political Science   "Run for your lives!" Federal Reserve Institute, Department of Physical Education Credit for all the phrases, except the last one, goes to user ' Profit ' while the last phrase is by ' DavidRicardo .'   The following, which I find funny given the economic environment

(source: " For a Change, U.S. Debt Is Staying in the U.S. " By Floyd Norris. The New York Times Published: August 20, 2010)

The weather depends on where you are but it is raining in Toronto today. Although nothing appears to have happened in the last few months, with stock prices barely below how they started the year, I believe some major changes have occurred. US Treasuries have rallied way beyond what they were an year ago. In fact, depending on the bond you look at, they have declined below any point, except the late-2008/early-2009 crisis period. September is often one of the most volatile months for stocks—both up or down—so it remains to be seen if we are in for a big move in either direction. Not many articles this week... Differences between Canadian and American poison pills (DealBook, The New York Times): Mining super-giant BHP Billiton made a proposal to Canada-based Potash Corporation's management. The offer was rejected and Potash enacted a poison pill. This article talks about some major differences between Canada and USA. Risk arbitrage investors who invest in Canada should check o

"If profit margins do not mean revert, capitalism is broken." — Jeremy Grantham How true is that? Do margins have to revert to the mean? Sticking with the theme of exploring dissenting views (at least relative to my beliefs), let's consider one reason some people like me are very sanguine and bearish about the stock market. Namely, people like me have been concerned for a while that corporate profit margins are unsustainably high. There are many measures of corporate profit margins and each data series is a bit different but the trend is generally the same. Here is one from Wiliam Hester of Hussman Funds, clearly illustrating how high profit margins have been in the last decade : (source: " An Update on Valuation and Forward Earnings Assumptions " by William Hester. Hussman Funds. March 2010) In the chart above, blue is the historical number while red is based on analyst forecasts of earnings and sales (this article was published in March of 2010.)

The Globe & Mail quotes a Scotia Capital analyst's arguments against deflation . Derek Holt, the Scotia Capital analyst, gives the following reasons [ my comments in square brackets in italics ]: "Goods price deflation was what the 1930s was all about. Today's U.S. economy is two-thirds service sector oriented, and service sector prices are stickier than tradeable goods. Have the prices you pay for hair cuts, the trades, and auto repair fallen like the prices of flat screen TVs?" [I don't think there is any evidence of this. About 60% of Japan's GDP is consumer spending and about 66% is the service economy and prices have actually fallen in Japan in the last decade.] "Main street doesn't believe it. Price components to consumer surveys like the Conference Board's consumer confidence index point to inflation expectations that are far removed from the price pressures economists point to in CPI releases. As such, there is no evidence right now

The skyline never stays still in Beijing... (source: " Beijing's Changing Skyline ," Time) From her leafy, 11th-floor rooftop terrace at the headquarters of Soho China Ltd., billionaire Zhang Xin scans the relentlessly expanding Beijing skyline she helped create. Zhang’s avant-garde buildings -- some sleek as chopsticks, others stepped like rice terraces -- became part of the hottest real estate market on Earth in 2010. Zhang says she’s well aware of the chorus of investors and economists who predict that China’s property boom is about to go bust, taking the global economy down with it. The doomsday scenarios don’t intimidate Zhang, a onetime penniless sweatshop worker who ascended to Wall Street by defying the odds. She hopes to prove skeptics wrong again this year by betting hundreds of millions of dollars on new buildings in Beijing and Shanghai, Bloomberg Markets magazine reports in its September issue. “I don’t see any bubbles,” says Zhang, dressed in a white

The Drug Trade & the Bogus War on Drugs Afghan Opium Production - Druglords Back in Control? (source: " U.S.-built bridge is windfall — for illegal Afghan drug trade ," Tom Lasseter, McClatchy Newspapers. June 28, 2009. Original image edited to show Afghan chart only.) Mexican Drug Cartels and Drug Flow (source: Stratfor. Image downloaded from unknown source ) We may be witnessing the final stage, a failure, in the so-called "war" on drugs. As the Afghan opium production numbers show, things are getting totally out of control. Admittedly the chart only goes up to 2008 and I think it did drop in the last year but contrary to what some claim, I believe the drop was due to the economic recession than any success in combating drugs. In what can only be characterized as shocking, and something that would have been thought impossible even 6 months ago, the Mexican president, who is very anti-drugs and has sacrificed the lives of many drug agents, police o

I ran across a report illustrating the returns that accrues to investors after all expenses, taxes, etc have been paid and I thought some of you may, especially those who are new to investing, may find it useful. The report is by Thornburg Investment Management—I thought Thornburg, which dealth with prime real estate mortages, went bust but looks like this survived—and was brought to my attention by Morningstar . Historical "Actual" Return The following chart, excerpted from the Thornburg report, illustrates what remains after taking out various expenses. It covers the period from 1979 to 2009. As usual on my blog, click on the image for a larger picture (sometimes not available.)

One of the shocking things I encountered when reading up on the Great Depression was how wages actually went up. Yet, huge swaths of the population were unemployed and suffering. One of the things, perhaps the key one, that was driving that scenario was the fact that productivity gains were accruing to those who had jobs while those without jobs barely could find a decent job. Maybe I'm an egalitarian at heart—my egalitarian side and my capitalist side often fight deep inside me—but there's almost something cruel about that. I hate to say it but a similar thing appears to have unfolding right now in America. The New York Times reports on the similarity to the Great Depression : In the deep economic slump of the mid-1970s, the average hourly pay of rank-and-file workers — who make up four-fifths of the work force — fell 6 percent, adjusted for inflation. In the early 1980s, the average wage fell 3 percent. Even in the mild 1990-91 recession, it fell almost 2 percent. But si

Associated Press, via Yahoo! Finance, has an interesting story on the extent of the crisis faced by money-market funds during the financial crisis . The story quotes analysis done by Moody's on the extent of the chaos during that period. For those not following the story back then, a prestigious and influential money-market fund "broke the buck" during the financial crisis because it held some "bad" Lehman Brothers debt. Money-market funds are thought to be "near-cash" and practically no one investing in them expects to lose money in nominal terms (the only possible losses that investors expect is real losses if inflation ends up being high.) So, it goes without saying, it was a big shock when a major fund lost money. At least three dozen money-market mutual funds were at risk of failing during the financial crisis, besides one that did end up collapsing, Moody's Investors Service said Tuesday. The report shows how shaky the nearly $3 trillion

No, it's not what it seems like. Oil companies aren't going to dissapear. But we are seeing a shift in the oil & gas industry and it's not clear to me if this is something temporary. Breaking Views, via The New York Times, points out the shift : U.S. oil companies are becoming less liquid - but not in a financial sense. With natural gas so plentiful Big Oil is fast becoming Big Gas. Shareholders may be underestimating the impact of the shift on future returns while an unexpected advantage is tipping to the oiliest majors. America's energy titans are finding it ever harder to ramp up oil output. Exxon Mobil is on track to pump 5 percent less this year than in 2005 according to Barclays Capital forecasts. Instead the company has turned to gas for growth. A big project in Papua New Guinea and the XTO acquisition are accelerating the shift. Gas which accounted for 38 percent of Exxon's output in 2005 could account for up to 48 percent next year. Exxon isn't

Here's an interesting revelation, courtesy of  Crestmont Research : The long-term average return from the stock market is 9.75%. As the elder baby boomers are now beginning to retire, they will be relying upon their investments and pensions for income. The youngest boomers have less than two decades to compound their savings into a retirement payload. Many boomers young and old—so to speak—have a vested interest in stock market returns for a secure retirement. So, from 2010, what length of time is needed to assure the long-term average return? What do you think the answer to that question is? How long would it take someone to generate a 9.75% annualized return going forward? (Note that we are not talking about posting 9.75% in a particular year but, instead, generating that as an annualized return over a period of time. Also note that, like most discussions, this is nominal return. Crestmont Research is using Morningstar data, sourced from Ibbotson, that starts in 1926. The lon

(source: " Secular Cycles Explained ," Crestmont Research. Updated to end of 2009)

Sorry about the lack of posts. Hopefully the linked articles will keep you busy :) (Recommended) Top-down look at Microsoft (Bronte Capital): John Hampton of Bronte Capital takes a detailed industry-level look at Microsoft. The comments by readers is also worth reading IMO. I haven't looked closely at Microsoft but my feeling is that it is probably an investment that will produce market(or maybe 1% or 2% more than market) returns. The problem for companies like these is that they are very large and its hard to see a big upside. As for the downside, it is probably exaggerated. As long as Microsoft produces high profits and reinvests a lot in R&D, its downside won't be that large. Microsoft's historical strength is in turning products, often after competitors get first-mover advantage, into relatively lower cost, mass-market, products... Investing in Microsoft is kind of like inesting in Coca-Cola in the 70's or 80's. That is, you really need some high growth m

This probably isn't news to anyone but I thought I would reiterate the point... One of the benefits of long-term investing is that accounting changes can generally be ignored. In contrast, shorter-term investors have to be careful in reading the financials. For example, consider Amazon's accounting change that is described in an article in The Globe & Mail : But a recent accounting change by the company will effectively goose Kindle revenue for all of 2010. Amazon says in its disclosures to investors that it has become an early adopter of a new accounting standard called ASU 2009-13, addressing “revenue arrangements with multiple deliverables.” In Amazon's case, the “multiple deliverables” are the Kindle hardware, the ongoing wireless connectivity, and any subsequent software upgrades for the device. Apple Inc., which has also adopted the standard, said earlier this year that its iPhones and Apple TV services fall under the standard. Under previous accountin

Thanks to a mention at Calculated Risk , I ran across an interesting article in The New York Times on the shift of some state-owned and municipality-owned Chinese corporations into the real estate business. Anhui Salt is hardly alone among big state-owned companies. The China Railway Group is developing residential complexes in Beijing after winning the auction for a huge piece of land there. Likewise, the China Ordnance Group, a state-led military manufacturer best known for amphibious assault weapons, paid $260 million for Beijing property where it plans to build luxury residences and retail outlets. And in one of China’s biggest land deals yet, the state-run shipbuilder Sino Ocean paid $1.3 billion last December and March to buy two giant tracts from Beijing’s municipal government to develop residential communities. All around the nation, giant state-owned oil, chemical, military, telecom and highway groups are bidding up prices on sprawling plots of land for big real esta

I hate losing articles and such was the case with one I was typing up earlier this week grr :( One area I have been researching lately is the historical behaviour of large-cap and mega-cap stocks. Some of you may have noticed it but I find it very bizarre that the market is pricing large-cap and mega-cap American stocks at relatively low valuations. In fact, depending on the measure you use, the market is pricing them lower than small-caps and mid-caps even. As an example, consider the P/E ratios of the following (I'm not recommending any; just picked some random big ones): Microsoft has a forward P/E of 9.7 and a trailing P/E 12.3. Intel (cyclical) has a forward P/E of 9.7 and a trailing P/E of 12.3. IBM has a forward P/E of 10.4 and trailing P/E of 12.1. ExxonMobil (cyclical) has a forward P/E of 8.8 and trailing of 13.4. JP Morgan (vulernable to dervatives implosion) has a forward P/E of 8.8 and trailing of 11.9. Pfizer (potential value trap) has a forward P/E of 6.7 an

Apple A True Growth Stock (source: " How Apple maintains explosive earnings growth " by Andy M. Zaky. Fortune, July 12) Richly valued and possibly overvalued but Apple is definitely a true growth stock. Similar to the performance of another famous growth stock from the 1930's, Coca-Cola, Apple has managed to increase sales and profits in the thick of the worst recession in decades.