Sunday, October 31, 2010 0 comments ++[ CLICK TO COMMENT ]++

Sunday Spectacle XCIV

(source: Ed Stein, Rocky Mountain News, 2007. Downloaded from

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Sunday, October 24, 2010 0 comments ++[ CLICK TO COMMENT ]++

Sunday Spectacle XCIII

Mortgage Payment to Rent Ratios
for USA and Canada

(source: "Buy/rent ratio suggests vulnerability," The Globe & Mail. Published Monday, Oct. 18, 2010 12:15PM)

In reality, it is hard to tell if it's better to rent or buy a home in Canada even though the mortgage payment to rent ratio is 1.85. Unless the mortgage payment shown has been adjusted in some manner, we need to keep in mind that a mortgagee will end up owning the house after a few decades whereas a renter won't own anything. So it's not a simple 1-to-1 comparison. In any case, the chart appears to show that it is better to buy, than rent, homes in USA.

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Saturday, October 23, 2010 1 comments ++[ CLICK TO COMMENT ]++

Sculley on Steve Jobs

Steve Jobs and John Sculley during the good times
(Photo by Diana Walker for Countour/Getty Images)

I ran across a very good interview in Bloomberg Businessweek (brought to my attention by Yahoo! Finance) with John Sculley, discussing Steve Jobs of Apple. John Sculley was the CEO of Apple in the 80's/early-90's and given how he worked closely with Jobs for many years, this is good reading if you are into business, technology, or corporate strategy.

Steve Jobs is a very tough guy to work for—I would hate working for him. But he is brilliant and extremely talented. Sometimes you have bosses who are ruthless but don't know what they are doing; but at other times you have bosses who are knowledgeable—and right! Steve Jobs is the latter.

This is a fascinating interview and I'm going to throw in my opinions below, but if you don't want my views, read the original interview.

(source: "Being Steve Jobs' Boss," Leander Kahney for Bloomberg Businessweek. October 20, 2010. Available on Yahoo! Finance as well.)

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Wednesday, October 20, 2010 0 comments ++[ CLICK TO COMMENT ]++

British government significantly cuts spending

From an Associated Press story via The Globe & Mail:

Fighting record debt, the British government on Wednesday outlined the largest cuts to public spending since World War II — slashing benefits and thousands of public sector jobs with an austerity plan aimed at restoring the nation's finances.

After the country spent billions bailing out indebted banks, and suffered a squeeze on tax revenue and an increase in welfare bills, Treasury chief George Osborne staked the coalition government's future on tough economic remedies.

Mr. Osborne confirmed there would be 81 billion pounds ($128 billion) in spending cuts through 2015, which he claims are necessary along with some tax increases to wipe out a spending deficit of 109 billion pounds ($172 billion).

As many as 500,000 public sector jobs will be lost, about 18 billion pounds ($28.5 billion) axed from welfare payments and the pension age raised to 66 by 2020, earlier than previously planned.
I'm against the "austerity at will" strategy backed by the G20—this is the strategy of pursuing austerity but only if some country wants to, and without any co-ordination between countries—but I do think some countries have to cut spending. USA isn't one of them but Britain is.

As I have said in the past, Britain is kind of screwed because their financial sector is very large relative to the economy. This meant, not only did their economic prospects (taxes on financial income, jobs in the financial sector, etc) weaken, it also meant that the government bailout of failed financial institutions is very large compared to their economy. In contrast, the financial sector bailout in a country like USA isn't that bad. USA can simply socialize the financial sector losses by taking profits from productive sectors (like technology, healthcare, etc) and passing them to the failed financial institutions. Britain and others like it, such as Iceland or Ireland, can't do that without paying a big price. And we are seeing the consequences of it.

The spending cuts appear to be across the board and pretty deep. Eliminating 500,000 jobs over the next 5 years is pretty sizeable, even for a country the size of Britain. Doing so while the economy is weak is going to be painful.
Although some think this is a disadvantage, I disagree and think one advantage in Britain's arsenal is that they can devalue their currency (unlike others who are tied to the Euro or have their currency pegged to something strong). It looks like currency wars, which, as far as I'm concerned, is the modern equivalent to trade wars, looks almost certain.

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

Articles to peruse - October 17th of 2010

Some articles I checked out over the last few weeks, that you may find worth reading...

  • (Recommended) Strong bounce from the lost decade for stocks? (New York Times): One of the arguments made by long-term bulls is that the stock market will post strong returns over the next decade because the last decade was extremely poor. That mean reversion has actually been true throughout history. However, what is ignored by bulls is the fact that valuations now are still high and way above what prior averages. This is an excellent article that touches on why we may not see strong returns over the next decade. I concur with some of the analyst comments in the article and think that US stocks will probably post around 7% per year (nominal) going forward. This, as anyone who has studied compounding would know, is a massive difference from 10% per year that stocks haver returned over the last 80 or 90 years.
  • (Recommended if macro-oriented) Timber investment primer (Advisor Perspectives): In this June 29, 2010 article, Charlie Curnow goes over investments in timber. I don't know much about timber and I would probably stay away from it given my knowledge of the problems faced by the forestry industry (housing bust, decline of newspapers, etc). Nevertheless, this is a good newbie article and I think it's worth reading it to understand the market so that we can contemplate an investment in the future.
  • Charles Brandes on Benjamin Graham (Advisor Perspectives): Check out this interview with value investing money manager, Charles Brandes. There is a video version of the interview available here.
  • The downsizing of Japan's ambitions (New York Times): This is the first in a series of articles from The New York Times, examining how Japan has coped with deflation. I find it interesting that some investors, such as Guy Spier of Aquamarine Capital, are bullish on Japanese equities. Japan has always been an enigma and a pardox—both on the way up and on the way down—and its future is as unpredictable as ever.
  • Kyle Bass bearish on Japanese government bonds (Fortune): Kyle Bass of Hayman Advisors, whom I am not familiar with, is taking a bearish bet on Japanese bonds. Namely, it appears he is buying out-of-the-money call options on interest rates. The downside is capped and the upside is very large (you are looking at up to a hundread times the return on the upside versus a maximum -100% loss). This is similar to the investment being made by Hugh Hendry (I was writing a post about Hugh Hendry's thoughts from several months back but just couldn't get off the article. You might want to refer to Hugh Hendry's fundholder letter from early in the year too. Hendry is actually betting on corporate bonds but all yields are likely to rise together.) I think the interest rate call seems almost too easy. After all, are interest rates likely to rise from their present near-zero level in Japan (short-term rates near-zero while long-term rates are a few percent)? Or are they going to fall even lower? Obviously they can't fall much further (ignoring the possibility of the central bank setting rates at a negative rate, which, as far as I know, has only been a (Keynesian) theory and I don't believe any government has ever done it in history.) But as someone who respects the free market, all this begs the question: why is the free market pricing the interest rate options at such seemingly-low prices if rates are unlikely to fall much further below the current levels? In other words, who is on the opposite side of the trade? What are they thinking? It's something to ponder. Another item to keep in mind with bets like this is that the free market can adjust unsustainable economic scenarios using the currency exchange rate. As any deflationist can attest, if a country faces a debt crisis, it is quite possible for us to end up with a deflationary bust. Such outcomes are very rare under non-hard-currency environments—inflationary busts are more common—but it would not surprise me if Japan sees severe deflation, way beyond what they have experienced in the last few decades, if they face a debt crisis. In such a scenario, it would not shock me if the Yen appreciated significantly. You could easily get wiped out with currency losses even if your main thesis appears right. For example, many commodity bulls, who were generally bearish on the US$, got killed in the last few years because the US$ acutally appreciated even though USA was running a big current account deficit, its economy was contracting, and it was experiencing a massive real estate bust. I am speculating here but it is quite possible that what happens in Japan in the next 20 years may something radically different from anything the modern world has ever seen. Yes, such a statement cannot be proven but I just get the feeling that we are in for something new, and very different!
  • (Recommended) A look at the bullish and bearish side of the China story (Institutional Investor): Even if you don't have much time to read this article, the last part is highly recommended for China followers: it covers both the bullish and bearish views of whether the financial institutions will be impacted if there a real estate bust. China followers may know that Chinese banks faced huge NPLs (non-performing loans) in the late 90's/early-2000's but they survived through that. The question is whether they can repeat if real estate cools.
  • (Recommended) The state advances and private companies in China retreat? (Bloomberg Markets magazine): Is China Inc turning into Japan Inc? OK, I admit it's kind of silly to equate China Inc to Japan Inc, but nevertheless, investors who have looked at Japan's history (or even Korea to some extent) may see some parallels in what is happening in China. It appears that the Chinese government is bent on strengthening the power of SOEs (state-owned enterprises) in certain industries. In Japan, during the 1980's, what seemed like successful and powerful Japanese companies turned out to be companies with weak profits and run by government-influenced bureaucrats, more interested in keeping their jobs and placating to the leaders than in innovating or advancing their companies. A development where government-owned companies crush private companies such as Baidu (Internet services) or BYD (automobile & parts) is probably not a good for China in the long run. Some of the investors quoted in the story love investing in the SOEs but that's because these are state-backed monopolies or oligopolies. The country would obviously be worse off with monopolies and oligopolies running around.
  • Gold vault demand increasing (The Globe & Mail): "With the global appetite for precious metals surging, along with the rise of exchange-traded funds that hold gold and silver bullion in reserve, demand for large, secure, vault space is on the rise around the world."
  • Commodity bubble? (Fortune): Howard Penney of Hedgeye suggests we are witnessing a commodity bubble. I have been bearish on commodities for years but I don't think one can call the present situation a "bubble." Although some of the commodities he cites are trading at multi-year, or in some cases, multi-decade, highs, I don't think it is as big of a bubble as it was in 2008. The CRB index is still below what it was in late 2007 (while the US$ is roughly where it was in late 2007). I also don't think the FedRes policy is the one (mainly) driving the commodity prices. My view, as it was back in 2007 and 2008, is that the main driver is China. I would avoid all commodities (except maybe some beaten down ones like natural gas) from a contrarian point of view (i.e. the time to buy them was in early 2000's) but I don't necessarily feel that commodities need to collapse like in 2008. Having said all that, since I'm bearish on China and if China does slow down (say GDP growth gets cut from 9% to around 6%), commodities will fall like a rock—under such a scenario, it would make no sense for, say, copper to be trading near the 2008 levels when most of the developed world is in a slump-of-sorts.
  • The Tea Party & American business (Bloomberg Businessweek): A lengthy article chornicling the unease some business owners have with the Tea Party movement. It'll be interesting to see what comes of all this. On the one hand, some of the ideas of the Tea Partiers will probably help America in the long run. In another sense, though, some of the wild ideas such as dismantling the Federal Reserve, Environmental Protection Agency, cutting taxes further and exacerbating the deficit, stricter immigration, tariffs on imports, etc will hurt America in the long run. The Tea Party movement, which started off very libertarian, has morphed into a paleo-conservative, reactionary, movement. It probably poses more problems for the Republican party than the Democrats at this point.
  • King of American coal (Bloomberg Markets magazine): Coal is dirty and I'm not a fan of it but it is the cheapest energy source and powers a big chunk of America's electricity generation (it's also huge in China, which is one reason for the heavily polluted cities over there.) Chris Cline bet big on high-sulfur, dirty, coal and he became a billionaire.
  • (Recommended) OldSchoolValue's Jae Jun being interviewed by the Kirk Report (Old School Value): A lengthy interview detailing Jae's history and his thoughts about investing.
  • Nokia's new phone not earth-shattering (Bloomberg): I have been following Nokia a bit more closely lately and it seems their latest high-end phone is still behind the competition. This opinion piece is just one man's opinion but it still shows how far behind Nokia has fallen. The Nokia situation also shows why some Buffett-like value investors avoid new technology stocks. Although Nokia had been sleep-walking for a while now, all of its problems happened within a very short period of time. This is a good example of how a seemingly strong company (in 2005) could so easily lose its crown and run into problems within a few years. The way I look at it, they missed two product cycles and it ended up in significant loss of their high-end market share. Their decision not to compromise to wireless carriers, as is common in USA, is also a strategic decision that appears to have hurt them badly. Unlike some struggling players like Motorola or LG, who have been cutting workers due to weak cash flow, you can't give the same excuse for Nokia given its huge cash flow and high R&D spending.
  • David Einhorn's short thesis for St Joe (VIC 2010; h/t GuruFocus): I'm not a Graham-type investor and don't really understand asset-oriented investments but it's always interesting when a successful investor takes a position against another successful one. In this case, David Einhorn of Greenlight Capital makes a bearish case for St. Joe Company (JOE), a Flordia real estate company. On the bullish side stands Bruce Berkowitz of Fairehomle Funds, owner of around 30% of the company.
  • Bullish case for St. Joe (h/t Don't know anything about Broyhill Asset Management or their track record but they make a bullish case for St. Joe.
  • Short sellers get caught up in the for-profit education vs non-profit education lawsuits (Fortune): Short-seller, Steve Eisman of Frontpoint Partners, gets caught up in the battle over for-profit education.
  • (Recommended) Alice Shroeder 2008 speech about Warren Buffett (ValueWalk): I may have linked to this before but in case I didn't, I thought it was important to record it for future reference. An interesting speech from someone who probably knows more about Warren Buffett than almost any other public figure. Most importantly, unlike many others who come into contact with Warren Buffett, Alice Shroeder holds no punches back and is willing to be totally open (I haven't read her book, Snowball, yet but it appears to be interesting.)
  • (not related to investing) Benoit Mandelbrot passes away (The New York Times): Famous for popularizing fractals, Mandelbrot passes away at the age of 85. From the story,
    • "Dr. Mandelbrot traced his work on fractals to a question he first encountered as a young researcher: how long is the coast of Britain? The answer, he was surprised to discover, depends on how closely one looks. On a map an island may appear smooth, but zooming in will reveal jagged edges that add up to a longer coast. Zooming in further will reveal even more coastline. “Here is a question, a staple of grade-school geometry that, if you think about it, is impossible,” Dr. Mandelbrot told The New York Times earlier this year in an interview. “The length of the coastline, in a sense, is infinite.” "
  • (not investing-related) Japan's micro-homes slideshow (Bloomberg Businessweek): Yikes... I don't think even a dog could fit in these homes ;)

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Sunday, October 17, 2010 0 comments ++[ CLICK TO COMMENT ]++

Sunday Spectacle XCII

Google is backing a wind transmission project off the eastern coast of USA and here is a look at how the energy generation potential changes with the depth of the water:

(source: "U.S. offshore wind resources" by John Sopinski for The Globe and Mail. Published Tuesday, Oct. 12, 2010 6:35PM EDT)

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Wednesday, October 13, 2010 2 comments ++[ CLICK TO COMMENT ]++

The tough life of solar companies in the developed world

From The New York Times:

A few years ago, Silicon Valley start-ups like Solyndra, Nanosolar and MiaSolé dreamed of transforming the economics of solar power by reinventing the technology used to make solar panels and deeply cutting the cost of production.

Founded by veterans of the Valley’s chip and hard-drive industries, these companies attracted billions of dollars in venture capital investment on the hope that their advanced “thin film” technology would make them the Intels and Apples of the global solar industry.

But as the companies finally begin mass production — Solyndra just flipped the switch on a $733 million factory here last month — they are finding that the economics of the industry have already been transformed, by the Chinese. Chinese manufacturers, heavily subsidized by their own government and relying on vast economies of scale, have helped send the price of conventional solar panels plunging and grabbed market share far more quickly than anyone anticipated.

As a result, the California companies, once so confident that they could outmaneuver the competition, are scrambling to retool their strategies and find niches in which they can thrive.

The paucity of capital and the sheer size of Chinese solar panel makers have proved particularly problematic for companies like Solyndra and MiaSolé, which make photovoltaic cells using a material called copper indium gallium selenide, or CIGS.

Unlike conventional solar cells, made from silicon wafers, CIGS cells can be deposited on glass or flexible materials, much as ink is printed on rolls of newspaper. Though the technology is less efficient at converting sunlight into electricity, the promise of “thin film” solar cells was that they could be made cheaply. But producing CIGS cells on a mass scale has turned out to be a formidable technological challenge, requiring the invention of specialized manufacturing equipment.

While Silicon Valley companies were working on the problem, silicon prices fell and Chinese companies like JA Solar, Suntech and Yingli Green Energy rapidly expanded production of conventional solar panels, supported by tens of billions of dollars in inexpensive credit from the Chinese government as well as other subsidies like cheap land.

Arno Harris, chief executive of Recurrent Energy, a San Francisco solar developer acquired by Sharp last month, said he chose to sign a supply deal with Yingli because the Chinese company offered low prices, quality products and financing.

“We realized that would enable us to bid competitive power prices from projects that could also be efficiently financed,” Mr. Harris said in an e-mail.

Chinese solar panel makers now supply about 40 percent of the California market, the largest in the United States, and the bulk of the European market, according to Bloomberg New Energy Finance, a research and consulting firm.
I don't think the developed world can compete against China when it comes to solar power. The economies of scale of Chinese manufacturers, along with the large subsidies by the government, pretty much means the end of solar companies in America, Germany, and elsewhere. Some people on the left want governments to fund solar energy development but I am against my tax dollars going into them (there is little interest in funding solar power in Canada but a lot of money is going into wind power, which I'm ok with).

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Monday, October 11, 2010 6 comments ++[ CLICK TO COMMENT ]++

Very high correlation between gold and US Treasuries

I am a total newbie and only been investing for a few years but I noticed something I have never seen before: there is extremely high correlation between gold and bonds (US Treasuries). I haven't looked at distant history to see how common this is, but it certainly has been rare in the last few years.

What is most strange about this correlation is that both signal different inflationary outcomes. Long-term bonds will not rise if inflation is thought to be a threat. Conversely, many investors buy gold to hedge against inflation (yes, there are some who buy gold for deflation/wars/disease outbreaks/etc but they are in the minority).

Precisely when a lot of brainpower, not to mention ink and bytes, have been spent on the debate over inflation vs deflation, I find it interesting that the market is bidding up both, long-term US government bonds, as well as gold.

Here is a quick look at the relationship between gold, bonds, and stocks. I'm using S&P 500 as a proxy for stocks; the 20-year constant maturity TLT ETF as a proxy for US Treasuries; and the GLD gold ETF as a proxy for gold. Source data is from Yahoo! Finance and S&P 500 dividends may not be accounted for properly (this doesn't impact my conclusion in this scenario).

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Sunday, October 10, 2010 1 comments ++[ CLICK TO COMMENT ]++

Business Insider interviews Jim Grant

I ran across a very good, 30-minute, interview with Jim Grant, conducted by Henry Blodget of Business Insider. The video mostly covers Jim Grant's personal history but it does touch on some interesting topics.

One of the interesting views echoed by Jim Grant—I'm sure many classic value investors will completely disagree—is the notion that Graham & Dodd investing (what I call classic value investing) does not work under all environments. I am not a value investor and don't follow everything that is said but I haven't heard anyone prominent say that before. I have always heard Graham & Dodd proponents say that it always works (albeit it may be difficult if everything is overvalued).

Grant, apparently after suffering terribly in Japan throughout the 2000's, says that Graham & Dodd doesn't work in Japan. His view is that the corporate culture and the governance is so different—"Japanese do not have a market in corporate control"—that buying assets below net current asset value means almost nothing. He basically says that the lack of hostile takeover means that, for instance, cash could sit on the balance sheet and you can't do anything. (If you are interested in this issue, skip to 22:00 where he talks about the Japan experience.)

As in the past, when it comes to other issues, I think Jim Grant is mistaken if he thinks the gold standard is any superior to the present; or that it will save us from our own mistakes.

(Hat tip to The Big Picture for bringing this video to my attention.)

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One CEO's idea of the perfect 4 team members

(This post has nothing to do with investing)

I don't know who Paul Maritz is or his track record. Apparently he is the CEO of software company VMware. But I do find his thoughts on management interesting. Some of you, perhaps including me, will fail as investors but we may succeed in our careers or as entrepreneurs. In a New York Times interview, Paul Maritz shares the following opinions (bolds by me):

Paul Maritz: At the risk of oversimplifying, I think that in any great leadership team, you find at least four personalities, and you never find all four of those personalities in a single person.

You need to have somebody who is a strategist or visionary, who sets the goals for where the organization needs to go.

You need to have somebody who is the classic manager — somebody who takes care of the organization, in terms of making sure that everybody knows what they need to do and making sure that tasks are broken up into manageable actions and how they’re going to be measured.

You need a champion for the customer, because you are trying to translate your product into something that customers are going to pay for. So it’s important to have somebody who empathizes and understands how customers will see it. I’ve seen many endeavors fail because people weren’t able to connect the strategy to the way the customers would see the issue.

Then, lastly, you need the enforcer. You need somebody who says: “We’ve stared at this issue long enough. We’re not going to stare at it anymore. We’re going to do something about it. We’re going to make a decision. We’re going to deal with whatever conflict we have.”

You very rarely find more than two of those personalities in one person. I’ve never seen it. And really great teams are where you have a group of people who provide those functions and who respect each other and, equally importantly, both know who they are and who they are not. Often, I’ve seen people get into trouble when they think they’re the strategist and they’re not, or they think they’re the decision maker and they’re not.


Question (Adam Bryant): How do you hire?

Paul Maritz: I think that in almost any position, you want to have the following attributes: First of all, you want to make sure that people have the necessary intellectual skills to do the job. Second, you want to see if people have a track record of actually getting stuff done. Then, third, you want to look for people who are thoughtful, and that ties into learning and being self-aware.

Often, when I’m interviewing people, one of the most interesting parts for me is when I’ll just pick anything that they’ve done in the past and I’ll say: “Thinking about it now, what would you have done differently? What did you learn from that?”

You learn a lot from people’s answers to that. If they blame everything that happened during that period on somebody else, that tells you that the person is probably not thoughtful or self-aware.

If they can talk in length about what was really going on, why they made the decisions they did and how they would perhaps make the decision differently now, that tells you that this person thinks deeply and is honest enough to really be objective, or as objective as they can be about themselves.

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Sunday Spectacle XCI

Commodity Fund Flows - Physical Commodities vs Synthetic

(source: "Sold on Pork Bellies (and Other Commodities)" by Tim Gray for The New York Times. Published: October 9, 2010)

I find this chart really fascinating. Long-time readers may know that I'm bearish on commodities and I have always wondered if the commodity complex set a multi-decade peak in 2008. If so, I would expect flows into commodities to be weak. Yet, based on the charts above, it looks like way more money is flowing into physical commodities than ever.

I also find it interesting that investors are putting more money into physical commodities than derivatives. Anyone that has tried investing in commodities knows that it is far easier to buy securities tied to some commodity index than one that owns the actual commodity itself. I wonder how much of the chart is influenced by gold. Gold has been on a major tear and I suspect a lot of the increase is due to hedge funds buying physical gold.

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

Articles to start off a rainy October

I was just looking at the list of top brands I posted on Sunday and I notice a lot of technology companies on that list. I wonder if technology companies were as prominent one or two decades ago, and whether the brands have staying power. Thirty or fourty years ago, I would imagine that these lists would have been mostly dominated by branded consumer goods companies. Will companies like Microsoft, Intel, Cisco, Google, Amazon, and so forth, stay near the top? It'll be an interesting situation to watch.

Anyway, here are some articles I encountered in the last few months that you may find worth reading...

  • Current state of Live Nation (Fortune): One of the companies on my watchlist is Live Nation (LYV), a ticketing and events promoter created out a merger with Ticketmaster. Fortune has a story updating the current scenario.
  • Sal Khan's free online teaching modules (Fortune): Apparently a favourite of Bill Gates, Salman Khan's webiste,, offers free online video tutorials on subjects ranging from history, to science to mathematics. These are good tutorials for students and others who want to learn on their own. There are even some good investment tutorials, such as this excellent tutorial on P/E ratios for newbies.
  • Canadian Coffeeshop Tim Hortons to take over the world? (Report on Business magazine): I have no interest in the cofeeshop business but I always find it worthwhile to read long articles on various businesses. Although it doesn't help your immediate investing, it can provide insights that may be useful in the long run.
  • (Recommended) "Beware of Greeks Bearing Bonds" by Michael Lewis (Vanity Fair; h/t,106875,106915): As usual, an entertaining, no-holds-barred article from the great business writer, Michael Lewis. There were some funny moments in the story and it's worth reading just for that.
  • Does a poor 10-year return lead to strong future return? (Hussman Funds; h/t GuruFocus): Bill Hester evaluates the thinking used by many to justify an expectation of strong stock market returns over the next 10 years. Historically, poor 10-year rolling returns has almost always resulted in very strong, above-average, returns for the following 10 years. Hester argues this may not be the case right now given how valuations aren't low and the forward-looking economic picture looks poor (compared to the historical cases where the returns off a poor decade were strong).
  • (Recommended if macro-oriented) Hugh Hendry audio interview with King World News (King World News; h/t Vlado): A pretty good interview, although I didn't learn much from this. Hugh Hendry reiterates his super-bearish view of Japan—so much so that he appears to have taken a $2 billion bearish bet on Japanese corporate bonds. Some of what Hugh Hendry does seems very speculative to me but macro investors always do this. Betting a small amount with a potentially large upside sounds good on paper but a 100% loss is still a total wipeout, whether you invest a small amount or not.
  • (Recommended if you are into entrepreneurship) Slideshow - America's most promising start-ups (Bloomberg Businessweek): Interesting ideas being worked on... who knows which ones will be successful...

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Monday, October 4, 2010 2 comments ++[ CLICK TO COMMENT ]++

Changing economics of the book business

If anyone ever wonders why legacy businesses often have difficulties competing against new ones, the current changes in the book industry should prove helpful. Jeffrey Trachtenberg's article in The Wall Street Journal from a few months ago, "E-Books Rewrite Bookselling," says this about the changing landscape:

E-books have turned the economics of book retailing upside down.

When it launched the iPad last month, Apple championed a new approach to e-book pricing. Earlier this year, most large publishers agreed to establish a so-called agency model, where the publisher receives 70% of the digital price while e-book sellers act as agents and receive 30%. While some best sellers remain at $9.99, many major authors are priced at $12.99 or $14.99.

For many digital booksellers, the new model is good news: Instead of having to pay publishers half, or $12.50, for the e-book edition of a $25 hardcover book, and then sell that book at a loss—for, say $9.99—to match Amazon's cutthroat prices, the bookseller now gets 30% of the newly-set $12.99 price, or $3.90. Since it hasn't paid anything for the title, it is ahead of the game.

But for Barnes & Noble, the model can't hide a brutal reality: $3.90 is a fraction of the $12.50 it now earns on a full-priced hardcover priced at $25. If e-book sales become a quarter to a third of the market, store revenue would plunge.

This is a point that I made in a prior article about Barnes & Noble but it's worth reiterating. Bricks & mortar bookstores have used the $12.50 they used to earn, to pay for the physical bookstores, employees, etc. With a collapse down to $3.90, the fate of companies like Barnes & Noble, Borders, Chapters Indigo (Canada) and so forth depends on if they can develop a business that survives on $3.90 versus the former $12.50 and/or they can reduce costs.
On top of all this, it's not clear to me if e-books are a winner-takes-all business—many Internet service industries are! If there is only room for one, it'll be a tough battle for someone like Barnes & Noble or Chapters to dislodge Amazon.

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

Sunday Spectacle XC

2010 Best Global Brands
by Interbrand

source: Interbrand

2010 Most Valuable Global Brands

by MillwardBrown Optimor

source: MillwardBrown Optimor


Flash Crash report released

Perhaps the most important, yet seemingly innocuous, event of 2010 was the so-called "flash crash" that occurred on May 6th of 2010. The sudden crash and recovery in share prices, including in some of the biggest and most liquid names, raised serious concerns about the reliability of stock exchanges. I am still shocked that something like this can happen, especially when the culprit (see below) is apparently a $4.1 billion transaction.

The final official report to the SEC and CFTC was released a few days ago. From a New York Times summary,

In a long-awaited report on one of wildest days in Wall Street’s history, regulators said that the automated sale of a large block of futures by a mutual fund — not named in the report, but identified by officials as Waddell & Reed Financial, of Overland Park, Kan. — touched off a chain reaction of events on May 6. The Dow Jones industrial average plunged more than 600 points in a matter of minutes that day and then recovered in a blink.


The mutual fund started a program at about 2:32 p.m. on May 6 to sell $4.1 billion of futures contracts, using a computer sell algorithm that over the next 20 minutes dumped 75,000 contracts onto the market, even automatically accelerating its selling as prices plunged.


The report set out the sequence of events that began with the sale by Waddell & Reed of 75,000 E-Mini Standard & Poor’s 500 futures contracts, using computer sell algorithms. Normally, a sale of this size would take place over as many as five hours, but the large sale was executed in 20 minutes, the regulators said.

The algorithm was programmed to execute the trade “without regard to price or time,” the report said, which meant that it continued to sell even as prices dropped sharply.

The algorithm is one used widely across markets. It was provided to the firm by Barclays Capital, but it was up to Waddell & Reed to set the parameters dictating the way it sold the futures contracts.

There was no explanation from officials why the firm chose to sell so many contracts all at once, except to speculate that it was already late in the trading day when it made the sale. Neither would officials explicitly say whether or not the firm was under investigation, but they pointed out that the firm had made similar trades in the past.

In response to Friday’s report, Waddell & Reed put out a statement it had already issued in May. It said it had sold the contracts because it was worried about the European crisis spreading to United States.

After the firm started to sell, the report found, many of the contracts were bought by high-frequency traders, computerized traders who buy and sell at high speed and account for a big part of trading in today’s markets.

As they detected that they had amassed excessive “long” positions, they began to sell aggressively, which caused the mutual fund’s algorithm in turn to accelerate its selling.

Startlingly, as the computers of the high-frequency traders traded contracts back and forth, a “hot potato” effect was created, the report said, as contracts changed hands 27,000 times in 14 seconds, but with eventually only 200 actually being bought or sold.

The selling pressure was then transferred from the futures markets to the stock market by arbitrageurs who started to buy the cheap futures contracts but sell cash shares on markets like the New York Stock Exchange.

Automatic computerized traders on the stock market shut down as they detected the sharp rise in buying and selling. Altogether, this led to the abrupt drop in prices of individual stocks and other financial instruments like exchange-traded funds, and caused shares of some prominent companies like Procter & Gamble and Accenture to trade down as low as a penny or as high as $100,000.

The rout continued until an automatic stabilizer on the futures exchange cut in and paused trading for five seconds, after which the markets recovered.

The report’s findings will be put to a joint S.E.C.-C.F.T.C .advisory committee, which will determine if any new policies are needed.

Following the preliminary report in May, the S.E.C. announced it was instituting circuit breakers on all the stocks in the S.& P. 500-stock index, in an effort to prevent another crash.

Friday, October 1, 2010 1 comments ++[ CLICK TO COMMENT ]++

Mobile phone industry unlikely to be a winner-takes-all market

Fortune's Apple 2.0 blog referenced a post from Tulip Farmer, a blogger at SeekingAlpha, suggesting that the mobile phone business is a winner-takes-all type of business. Tulip Farmer appears to suggest that the mobile phone business will follow the path of the computer industry, where one or two operating systems ended up dominating the market. The computer market  ended up with a few dominant OS because customers bought systems due to applications and those applications only existed on certain platforms.

Tulip Farmer goes as far as to suggest that developers can only support one or two OS platforms:

Where developers go, buyers follow. It no longer matters if RIM comes out with a better OS or a new device, because developers only have the bandwidth to support one or two platforms well, and they've already made the investment in iOS and Android. The only chance for survival Nokia and RIM probably have is to adopt Android or retreat into tiny niche markets. Even the king of low cost handsets Nokia has to worry, because in 5 years even low end mobile phones will have iPhone 4 level capabilities. There will be no single function simple phone market because hardware will continue down the path of Moore's Law toward lower cost and higher function.
I believe this thinking is flawed.