Articles for a Friday - December 17, 2010

Hope everyone had a good year and is looking forward to the holidays. Investingwise, it has been a very poor year for me, but, careerwise and in other matters, the year started off rough but it has been good so far.
  • Google introduces Books Ngram viewer (AtlanticWire): Amazing free tool called Books Ngram Viewer that lets users view trends in words on roughly 10% of books printed, in six languages, between 1500 and 2008 (approximately 5.2 million books).
  • Biggest drug recalls in US history (24/7 Wall St): Some of it is not pretty, especially if you consider how humans were harmed.
  • The iPhone increases US trade deficit (The Globe & Mail): A good article that refers to the study, " How the iPhone Widens the United States Trade Deficit with the People’s Republic of China," that suggests that Apple's iPhone, although owned, designed and sold by an American company, actually increases the US trade deficit. I was going to write about this in a standalone post but I just don't feel like it right now and it is a complicated matter. The issue touched on by this paper is extremely important in the long run and it shows how trade deficits are not what they seem and much harder to tackle. Once upon a time, all you did was to try to promote or advance your local companies and this increased the trade surplus. Right now, that is not sufficient. Nowadays, you probably shouldn't care whether a company is local or not, and instead worry about whether a company employs workers locally, pays taxes locally, and so forth. There is less capital control these days so a local company may actually be owned by foreigners and hence profits will flow to them than the locals.
  • (Recommended) Satellite images of ghost cities in China? (Business Insider): Interesting analysis but attempts like these can be severely flawed. Looking at city activity from the sky can be influenced by the time of the day (industrial towns won't have too many people wandering around during work time), wealth level of the city (poorer cities won't have cars), holidays (cities are deserted during some holidays in some countries), and so on. Nevertheless, this article does provide one data point for the China bears. (This analysis shows the power of Google, or more precisely, low-cost mass information. Such as thing wouldn't have been possible a decade ago. Too bad the bureaucrats and politicians are cracking down on free speech, Internet in general, and Google specifically :( )
  • Alternate measure of China's economic performance (The Economist): WikiLeaks revealed last week that Li Keqiang, future potential leader of China, does not trust Chinese GDP numbers. Instead, he is said to favour, according to The Economist, "the cargo volume on the province’s railways, electricity consumption and loans disbursed by banks." Note that the first metric is one that is favoured by Warren Buffett — rail shipments.This article presents a chart of an alternate index composed of those metrics and compares it to the reported GDP. From the chart, I don't see anything that deviates materially from the GDP in the long run. The alternate index is more volatile but seems to track the reported GDP numbers.
  • China's labour market problems (Fortune): Structual issues with China's labour market...
    "Now the number of migrant workers is shrinking. The U.S. census bureau predicts that the number of 15 to 24 year old Chinese nationals ready to work will fall by almost 30% over the next 10 years. Even this past year, excess workers were scarce, particularly in eastern China. Some factories couldn't fill all their orders.


    At the same time, the unemployment rate among college-educated Chinese youth is rising. According to a recent paper from the National University of Singapore, 30% of the 6 million graduates who enter China's job market each year can't find work. The number of applicants for public servant jobs, for instance, surged from 87,000 in 2003 to 1.4 million in 2009, according to official data. This may point to China's increasingly patriotic Gen Y, but it also reveals the sheer number of college-educated workers looking for jobs outside of factories and farms."

    "In a normal economy, the unemployed urban youth would start to compete with the migrants for jobs," says Dr. Mary Gallagher, a professor and China specialist at the University of Michigan. "But they're not. Both sides need to adjust their expectations."

    In some respects, the labor mismatch can be chalked up to a cultural side effect of China's one-child policy. A study recently published by the Chinese Academy of Social Sciences and reported in state-run media found that Chinese university graduates receive almost equal starting salaries as migrant workers: graduates' starting monthly salary was $226, compared to $181 for migrant workers.

    Yet this generation of "only children" has a different idea of modern life than their factory-working forefathers, and it looks like they are holding out for something better.
  • The difference between capital-intensive Internet businesses and capital-efficient, scalable, Internet businesses (New Yorker): The ideal company to own is one that is not capital intensive (hence each incremental customer doesn't cost much and you don't need to keep deploying millions into maintaining the business), has a moat, is almost a monopoly, and deploys all its profits into the business (i.e. doesn't pay dividends or buy back shares). The Internet is a new environment where many new businesses are being created. A company like Amazon is an example of the ideal business—not perfect but good enough for me to consider it great. But you also have capital intensive Internet businesses that are emerging. An example of that is Groupon. This article touches on the characteristics of Groupon, which makes it different from, say, Amazon. (note: the article suggests that a company like Amazon is capital intensive and is like Groupon but I disagree and think it is more like Google or Ebay.)
  • What is Icahn planning to do with Dynegy? Hard to say. (Fortune): I have been following this company recently—both shares and bonds—and Icahn recently proposed buying out the whole company. His strategy seems unclear.
  • (recommended) A primer on poison pills (Dealbook for The New York Times; h/t GannonOnInvesting): Poison pills differ by jurisdiction and this article is about USA. If you are into risk arbitrage, it's important to understand poison pills. I haven't given it much thought but for what it's worth, my feeling is that poison pills often destroy shareholder value and, hence, I'm not a fan of them (I'm also not a fan of golden parachutes and various other schemes to block hostile takeovers). If shareholders don't like a hostile bid, they can vote it down.
  • "Stop, Look, Listen! The Shareholder's Right to Adequate Information" by William Z. Ripley (The Atlantic): An article from the January 1926 The Atlantic magazine that apparently influenced the establishment of the SEC. This is a good example of how unfettered capitalism, as desired by many extreme libertarians and free-market-oriented individuals, is actually not the best solution. Although criticized by many with an extreme free market stance, the SEC has done far more good than any private institution in advancing shareholder rights.
  • (recommended for insurance industry investors) David Merkel's detailed thoughts on the insurance industry from his many years of experience- part 1, part 2, part 3, part 4, part 5, part 6, part 7, part 8, part 9, part 10, part 11, part 12 (Aleph blog): After investing in Ambac and Montpelier Re, I have come to the conclusion that the insurance industry is outside my circle of competence. It's too much of a black box and too complicated for me. But I know a lot amateur value investors invest heavily in insurance companies so you may want to read this long series on the insurance. David Merkel does a good job channeling his years of knowledge into explanations of the insurance industry.
  • (Recommended) (non-investing) Ron Paul defends WikiLeaks (Huffington Post): I don't agree with everything that US Congressperson, Ron Paul, stands for—I completely disagree with his misguided views that the gold standard is better; that the Federal Reserve should be abolished; that taxes should be almost nothing; etc—but I do agree, and indeed respect him, on many issues related to liberty—free speech, property rights, individual rights over government power, etc. Ron Paul puts his reputation on the line and stands up for his libertarian views by defending WikiLeaks in this speech (contrast this with other hypocritical big-L and small-l "Libertarians" who speak of liberty but are the first ones to become slaves of the government, especially when it comes to security or war). Too bad the rest of the US government doesn't cherish liberties like the Founding Fathers did. The biggest dissapointment to me is Barack Obama, who is was suposed to be liberal on many of these issues but has turned into another George Bush. The biggest joke of all is giving Obama the Nobel peace prize a while ago (not that the prize means anything these days).
  • (non-investing) Best NASA photographs of 2010 (New Yorker): Nothing spectacular in this list but it's worth checking out the photos given that it's the 20th anniversary of the Hubble Space Telescope.
  • (non-investing) Ten important photos from 2010 (New Yorker): Powerful images from the year it was...


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