Sunday, November 28, 2010 7 comments ++[ CLICK TO COMMENT ]++

Articles for a Sunday

It'll be interesting to see how the stock market finishes off the year. The US markets are hovering close to +10% right now. I don't find the stock market attractive and probably won't do anything for a while.

Anyway, here are some articles I ran across that you may be interested in...Still have to figure out a better way to quote long text in these link posts I do. If you have any suggestions, feel free to leave your thoughts. Anyway, hope you find some of the articles and essays goes to the original authors.

  • (Highly Recommended) Does Wall Street help the country? (New Yorker): John Cassidy takes a critical look at Wall Street and wonders how benefitial it is to the country.
  • A quick look at Amazon's cloud computing future (Slate via Financial Post): My favourite company (as a potential investment) is Amazon (I never invested in it because it has appeared to be wildly overvalued at almost any time after 2004 or thereabouts). Among many other characteristics, one of the things I like about it is is that it is a modern Internet company, unlike anything the world has seen (Ebay and others are also similar). Unlike a traditional retailer—Amazon is essentially a retailer—these companies are more nimble and often have a strong technology focus. You can see this in how Amazon was able to develop and introduce a successful e-reader, the Kindle (traditional retailers would have had a hard time being so innovative). Such is also the case with cloud computing. Many may not realize it but Amazon has a sizeable presence in the cloud computing market. It remains to be seen how that market evolves and whether Amazon can maintain strong market share.
  • Copper bull market leads to increased copper looting (Bloomberg Businessweek): Can't believe this is happening in America.
  • Mongolia's turquoise hills (Financial Post): Mongolia is emerging as a dominant copper producer... at least on paper. But as anyone who has seen stories about its copper mines knows, there are all sorts of regulatory problems and the government hasn't be shy in using strong-arm tactics on foreign miners.
  • (entrepreneurship) "It's Brazil's day in the sun" (Financial Post): Brazil saw a change in the political landscape with the retirement of Lula, a wide-support left-leaning president. Now it is gearing up for the FIFA World Cup and the Olympics. Most of its growth has been driven by the commodity boom and since I'm bearish on commodities, I am waiting to see how well it can manage without that support.
  • The evolving ad industry... the giants remain dominant (Bloomberg Businessweek): Can the new start-ups in the advertising world steal the crown from the existing dominant ad giants?
  • Is a deadlocked US government good for the markets? (Fortune): Answer seems uncertain... besides, there are way too many factors that can drive returns and the political climate is just one of them.
  • Xi Jinping, China's likely next president (Fortune): A short blurb on the next potential president of China.
  • (Highly Recommended) Is China's econmy becoming more consumption-oriented? (New York Times Magazine; h/t The Big Picture): Perhaps one of the most important questions for the next 20 years... If China does shift its economy towards consumption, it is well set on its way to become the most dominant economy by the end of the centry (it'll enter a phase that roughly resembles the USA's consumption boom from the 1940's to 1970's); if it fails to alter its economy, the outcome is likely to be very bearish for China, at least for the next few decades.
  • (Recommended) Dissenting view: China may not turn into a consumer economy any time soon (Fortune): I like covering dissenting views—in this case, this view is more in line with my guess about the future—so here is one article that is skeptical of a shift in China from a production-based, export-oriented, economy to a consumption-focused, consumer-oriented, economy.
  • "Microsoft' of Machine Tools Runs World's Factories from Base of Mt. Fuji" (Bloomberg): A favourite of Jean-Marie Eveillard, Fanuc is a Japanese robot/automation manufacturer. If you like investing in capital goods equipment companies, you may want to check out this article. I was studying Fanuc a few years ago, along with another Japanese company, Yaskawa Electric, but I didn't like them because (i) they were cyclical capital goods makers and I was bearish on China, and (ii) like most Japanese companies, ROE is very low. I couldn't understand how you can outperform the market by investing in these companies—I hold a similar thought with most Japanese companies... world class leader but never did understand what Jean-Marie Eveillard saw in it.
  • (Recommended) Google - its past, present and the future (New York Review of Books): Pretty good essay examining the history of Google, its impact, and potential future controversies.
  • Want to gamble on the emerging invest-in-private-company derivatives?..The Facebook example (Bloomberg): Nothing like a new way for the wealthy and institutional investors to gamble. It looks like firms are devising ways for investors to invest in private companies like Facebook by slicing up the shares held by some. Given how private companies don't provide financial statements and other business information, this is akin to betting blindly on some company with practically no accounting information. The original, primary, investors, such as venture capitalists, generally have access to the company and know a lot about it, but these new derivative investors appear to have no information at all... momentum investing taken to a new level.
  • Impact of the foreclosure diasaster (Bloomberg): "PNC Financial Services Group Inc. was on the brink of selling Jim Durden a foreclosed house in Weed, California, last month when the country’s biggest banks came under public fire for improperly seizing homes. Now, he lives in an EconoLodge. “I can’t get the house ready for winter, can’t install the missing water heater, can’t whack the weeds down, and can’t attend to the things a new homeowner needs to do,” Durden, 65, e-mailed from the motel. He has been in limbo since Oct. 7 after moving his belongings 640 miles north from a Los Angeles apartment."
  • The foreclosure documentation mess parallels the stock trading mess in the 60's (New Yorker): Interestingly, there was a documentation problem in the late 1960's involving stock market trades.
  • Do bailouts help matters? (The Globe & Mail): Doug Sanders wonders if bailouts, such as the one being hashed out for Ireland, are really helpful.
  • Ten interview myths (Fortune): Pretty good list of interview myths. Although not applicable to all job interviewers, I do think it's important for workers to realize that some things aren't quite what they seem. For instance, the person hired is often based on fit and not qualifications (although if you don't have any skills you obviously won't go anywhere). Another myth that is mentioned is how interviewers are prepared and have been coached on the hiring process. I can't be certain but, as the article alludes to, most of the interviews I have had in my life probably involve cases where the interviewer wasn't trained by HR and probably didn't spend much time thinking about the interviews until the interview.
  • Top 10 business hotels (Fortune): I don't have a good job, or one that involves travel. But maybe some of you do. Even if not, when you rise up the corporate ladder ;) here are some hotels to keep in mind. Of course, the list would have changed by then but oh well ;)
  • Robot sportswriters? (New York Times): hmm... it appears that some companies are developing technologies that automatically generate sports stories... basically robot newswriters. Obviously this isn't going to replace detailed writing, or creative writing of any sort, but the mundane summarized stories may be written by computers in the future.
  • (not investment-related) Algorithms & Our Lives (The Globe & Mail): Algorithms are prevading all aspects of our lives. Is this good or bad? Whatever the answer is, it is certainly changing the way our society will evolve.
  • (Recommended) ((not investment-related) "Foreign aid for scoundrels" (New York Review of Books): It's a travesty how so-called foreign aid generally leads to strengthening of the powers of tyrants. In this essay, William Easterly provides a scathing attack of the whole apparatus:
    The international aid system has a dirty secret. Despite much rhetoric to the contrary, the nations and organizations that donate and distribute aid do not care much about democracy and they still actively support dictators. The conventional narrative is that donors supported dictators only during the cold war and ever since have promoted democracy. This is wrong.


    And there are still modern-day counterparts to Mobutu and Bokassa. Paul Biya, the dictator of Cameroon, is marking his twenty-eighth year in power in 2010 by receiving the latest in a never-ending series of loans from the International Monetary Fund with imaginative labels like “Poverty Reduction Growth Facilities.” Biya, whose government also enjoys ample oil revenues, has received a total of $35 billion in foreign aid during his reign. There’s been neither poverty reduction nor growth in his country: the average Cameroonian is poorer today than when Biya took power in 1982.

    In February 2008, Biya’s security forces killed one hundred people during a demonstration against food price increases and also against a constitutional amendment that will extend his rule to 2018. Many of the victims were “apparently shot in the head at point-blank range.”5 The IMF justification for the newest loan in June 2009 noted laconically that these “social tensions” have not recurred and “the political situation is stable.”6

    Helen Epstein recently described in these pages the support that aid donors give to Ethiopia’s tyrant Meles Zenawi, who has roughly matched Biya in aid receipts in a shorter period of time.7 Peter Gill in his excellent recent book Famine and Foreigners: Ethiopia Since Live Aid (2010) documents Meles’s misdeeds further, which rise to the level of war crimes in his counterinsurgency in Ethiopia’s Somali region (I reviewed the book for The Wall Street Journal on September 7, 2010).8 Other long-serving aid-receiving dictators include Idriss Déby in Chad ($6 billion in aid between 1990 and the present), Lansana Conté in Guinea ($11 billion between 1984 and his death in 2008), Paul Kagame in Rwanda ($10 billion between 1994 and the present), and Yoweri Museveni in Uganda ($31 billion between 1986 and the present).

    The use of foreign aid to support dictators is not limited to Africa. Cambodia’s Hun Sen has been in power for twenty-five years and has received nearly $10 billion in aid during that time.9 Human rights groups have documented a progressive deterioration in rights during his rule, including forcible evictions of the poor from their land, repression of both the press and peaceful demonstrations, extrajudicial killings, and trafficking in women and children.10 Donors periodically protest, such as when the European Union “raised concerns” in August 2009, but aid continues to increase.

    Another region of aid-financed tyranny is Central Asia, where the autocrats of Kazakhstan, Tajikistan, and Uzbekistan have been in power since the breakup of the Soviet Union in 1991. Each has received about $3 billion in aid while in power.


    Why didn’t the end of the cold war change aid practices? One explanation is that something analogous to the cold war is still inducing donors to support some dictators: the “war on terror” that has been going on since 2001. This helps explain the support of tyrants in Central Asia—such as President Islam Karimov of Uzbekistan—whose cooperation is sought for the US/NATO war in Afghanistan. It also explains US support for Ethiopia, which it hopes will be a reliable Western ally in the terrorist war zone of the Horn of Africa. But other corrupt dictators who receive large amounts of aid, such as Biya in Cameroon, are not strategically important to the donors.

    A more important political motive for aid is independent of cold wars or wars on terror. Aid agencies exist to give aid, so they must keep the money flowing.
  • (not investment-related) Bob Dylan, the voice of a nation (New York Review of Books): Very few of the younger generation even heard of him but he is probably the most influential musician—and social commentator!—during the last century, at least in America.

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7 Response to Articles for a Sunday
November 28, 2010 at 9:36 PM

I don't really bother with this stuff anymore, just not sure it does anything besides fog up thinking..
To me the only thing you really have to think about is weighing how an increasing interest rate regime will balance against how much of that money flowing out of the bond market will prop up the equity markets..Alot of start/stop sideways range bound market as far as the eye can see until we are back to some historically ration interest rates.
I'm not really into calling myself "bullish/bearish" on things anymore..too simplistic of a mental model.
Like China..the easy money has been made but surely people have not updated their thinking and still operating on "when is the bull going to start again".
In the US it is the opposite, stuck in "the bull is dead forever".

Sivaram Velauthapillai
November 28, 2010 at 10:21 PM

I agree with you that the bull vs bear argument is way too simplistic. However, depending on the type of investor you are, I do think it can make you think about your overall stance. You said you are not into individual stocks anymore so it's a bit different for you but I'm still trying to be a stockpicker--in fact, I'm more of a stockpicker now than I was 4 years ago when I was writing on the FSO msg board--and it does help somewhat. For instance, I'm bearish on China--rightly or wrongly--and although I don't even know what it means to be bearish on China, I do avoid anything to do with the bullish investments that depend on it.

I think you are also more of a trader, perhaps a quantitative one(?), so capital flows into bonds vs stocks matter more to you than me. To me, what is happening out there is sort of irrelevant. I don't have control over the cards and just need to play with what I get.

Parker Bohn
December 1, 2010 at 5:08 AM

"I don't find the stock market attractive and probably won't do anything for a while."

I agree with your sentiment, but not your conclusion.  Stocks are somewhat unattractive, but unfortunately, so are cash, bonds, and just about everything else (real estate in some areas may be an exception).

To me, equities look like less of a bad deal than everything else.

Cash is non-productive,
Short term gov't debt yields very little,
Long term gov't debt is exposed to ridiculous interest-rate risk,
Gold and commodities are a speculation,
Hi-yield corporate debt is risky,
Lo-yield corporate debt is way over-priced compared to equities,

And that leaves equities, where I've found a few things that are not overpriced.

Sivaram Velauthapillai
December 1, 2010 at 6:41 PM

I'm not a fan of that strategy. I would rather hold cash than invest in the least overvalued asset. I think it was Jeremy Grantham who recently remarked how cash has option value--the option to purchase assets at low prices. The downside to holding cash is that you will underperform for a period of time.

To me, the present looks very much like 2006 & 2007. The economic landscape is different but the valuations paint a similar picture.

Having said that, if you are finding attractive stuff, then it may make sense. I'm constantly researching and I have been watching some stuff (such as a distressed utility like Dynegy (DYN)). The problem with investing now is that the market will mark down the valuations of nearly all assets (the exceptions would be something that is extremely undervalued, underfollowed, and so forth).

Parker Bohn
December 2, 2010 at 8:24 AM

Yeah, you may be right.  Asset allocation is never easy, and there are smart people on both sides of this.  For instance, John Hussman thinks the market is expensive and is fully hedged.  On the other hand, Buffett likes to talk up the attractiveness of equities, relative to cash and bonds.

The issue as I see it is that equities are priced for meager returns, but are still priced for higher expected returns than cash & bonds.  Its reasonable to assume that stocks will deflate at some point in the future, and therefore be priced for historically normal returns. 

The problem is that we don't know when this is going to happen.  If this happens next year, then anyone waiting it out by sitting on cash will feel very smart.  If however, stocks take 10 years or more to return to normal valuations, then equity holders will almost certainly beat those locked into holding lower return assets like cash and bonds.

March 29, 2012 at 2:08 AM

This time 1404 is on the way up, after a selling climax on October 3, 2011. That climax is clearly confirmed. Anything new to the update?

November 15, 2012 at 3:33 AM

Only about 18% favoured Amazon, which might reflect the rift over public versus private cloud computing and the fact that many companies ultimately want to own their hardware and create their own clouds.

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