Tuesday, April 27, 2010 0 comments ++[ CLICK TO COMMENT ]++

Apple-influenced police task force seizes popular blogger's assets

In what can only be deemed a draconian move—not surprising given Steve Jobs' history of strong arming everyone—a police force influenced by Apple has seized the assets of the editor at popular technology blog, Gizmodo. MarketWatch has the full details:


The chief deputy district attorney for San Mateo County, Stephen Wagstaffe, said Tuesday that computers and other gear taken from the Bay Area home of Jason Chen, an editor for the popular gadget blog Gizmodo, will not be examined until the office determines whether the material is covered by California "shield laws" that prevent law-enforcement authorities from examining material gathered by journalists.


On Monday, Gizmodo reported that Chen's house had been raided by the Rapid Enforcement Allied Computer Team task force, which seized several computers and related gear. See full story on the raid on the blogger.

Earlier this month, Chen and his employer said they paid $5,000 for an apparent prototype of an iPhone that was found in a bar in Redwood City, Calif. The device allegedly was left by an Apple employee and was found by another patron, who sold it to Gizmodo. The blog ran a detailed story on the new device, which is widely believed to be the next version of the popular iPhone that Apple is expected to introduce sometime this summer.

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Monday, April 26, 2010 1 comments ++[ CLICK TO COMMENT ]++

Sunday Spectacle LVII

(source: The Economist, Innovation Visualization interactive chart from the April 15th (2010) special report)


Watch that line for China... it's amazing to see the line rise so much from 1985 to 2007... I'm still bearish on China but a chart like this shows why it has great potential. Everyone talks about China's strength in cheap labour and the like but the reality is that the country's greatest strength is its human potential. Someone like Wang Chuanfu, founder of BYD, shows how great their scientific and engineering potential can be... the question is whether their totalitarian system will allow these people to flourish. The Chinese government quietly removed one of their horrendous mistakes, the so-called 'one child policy'—I have a post coming up on demographics soon—but they have a few other big problems ahead (including various bubbles)...

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Saturday, April 24, 2010 1 comments ++[ CLICK TO COMMENT ]++

Stock market performance from two bottoms - 1933 vs 2009

History books of the future may mark the stock market bottom set in April of 2009 as a major bottom. It may turn out to be a 100-year bottom in nominal terms. How does the picture look compared to the 1933 bottom?

The following graph illustrates the S&P Composite price performance (monthly data) from the 1933 and 2009 bottoms. I started the chart 6 months prior to the bottom and, in addition, the 1933 line is scaled so that the bottom aligns with the 2009 bottom. As usual, click on image for a bigger picture.



Thanks to Robert Shiller for freely providing most of the data; I also used the current P/E and dividend yield from WSJ Market Data Center (I can't find the current yields for the S&P Composite so I'm going with the S&P 500.)

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Thursday, April 22, 2010 4 comments ++[ CLICK TO COMMENT ]++

One year industry performance from a potential multi-decade bottom

Sorry about the lack of investment-specific posts. I find the market unattractive and haven't really run into anything worth contemplating. Most of my time has been spent thinking about a bearish outcome in China and investigating Mega Brands (TSX: MB.) One of the biggest dangers I see is that many appear over-confident due to strong gains in the last year. Given the big rally in almost everything (except US Treasuries), it's hard to tell if someone was lucky or knew what they were doing.

In any case, as I have done regularly in the past, I thought I would try to gauge where contrarian opportunities may lie. Since a multi-decade bottom may have occurred almost exactly an year ago, I thought it was good time to see the performance of various industries. I should warn people that the industry performance results depend on the industry definition used. Dow Jones' definition can be misleading and the numbers may also be wrong at times (sometimes the case with OTC stocks in these indexes.)

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Wednesday, April 21, 2010 10 comments ++[ CLICK TO COMMENT ]++

Opinion: Time to start curbing the growth of derivatives

When the capital development of a country is the byproduct of the operations of a casino, the job is likely to be ill done.
— John Maynard Keynes
How dangerous are financial derivatives to societies? I don't have an answer so this is more of a post to make you think and maybe respond.

I have never really worried about the damage derivatives pose to society. My feeling is that the damage won't be that bad because derivatives are a zero-sum game.

I still think that's true but, given how financial institutions making huge mistakes end up running up to the taxpayer, I am slowly shifting my position towards a negative view. I have a bad feeling that developed societies—only they have sophisticated derivatives markets—may be edging closer to irreparable harm.

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SEC's Goldman Sachs case appears to unravel before it even gets going

I'm not too knowledgeable about legal matters and hence am not exactly clear on what the Goldman Sachs civil suit by the SEC entails. It looks like the SEC case is weakening by the day, at least in the public eye. Published reports, including one from Reuters (via the The Globe & Mail,) suggest that ACA was informed of the short sale by Paulson. One of the key portfolio managers at the Paulson fund, Paolo Pellegrini, apparently told ACA of their short-side bet.

It's not clear if Pellegrini's comments were informal and outside of the legal disclosures involved in selling the CDO. If ACA was told before the sale of the CDO by Goldman Sachs, the SEC case would be weak (note: I'm talking about the perception from the public and not about the legal case— I don't know anything about how this impacts the law.) The main criticism appeared to be the fact that Goldman Sachs didn't disclose to ACA, as well as the CDO buyers, that Paulson was not only betting against the CDO, but also played a key role in selecting the assets that constituted the CDO.

Unlike ACA, it's not clear if the CDO buyers were aware of the Paulson short-sale. So there is still some valid criticism that can be levelled at Goldman Sachs. I don't know if the CDO sale occurred in America but if it did not (the big losers were European institutions,) I wonder if the SEC has jurisdiction over the matter if ACA, who was the CDO manager, was actually informed of Paulson's intent.

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Monday, April 19, 2010 1 comments ++[ CLICK TO COMMENT ]++

Sunday Spectacle LVI

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Saturday, April 17, 2010 2 comments ++[ CLICK TO COMMENT ]++

SEC charges Goldman Sachs with fraud


Most of you are likely aware by now that the SEC has made a civil charge* against Goldman Sachs for a CDO that they sold. I wasn't going to comment on this story, since it has been covered by others and you can get better information from those sources; but I changed my mind and thought I would just say something just for historical record-keeping purposes. The more I thought about the situation, the more I realize how significant this event may end up.

To recap the situation, it seems Goldman Sachs sold a synthetic CDO called ABACUS 2007-AC1 in 2007 and the SEC is charging that Goldman Sachs made misrepresentations. Basically, it seems that Goldman Sachs didn't disclose material information. The material information centers on the fact that the CDO appears to have been constructed with the input of the hedge fund run by John Paulson. This is important because Paulson was attempting to short the CDO (for those not familiar, Paulson rose to fame after shorting the subprime mortgage market and making several billion during the bust.)

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Tuesday, April 13, 2010 0 comments ++[ CLICK TO COMMENT ]++

Is there a real estate bubble in China? Charlie Rose interviews Jim Chanos

The Charlie Rose interview with Jim Chanos, which was covered in the media and blogs last week, was finally released. I was really looking forward to this interview given my interest in this topic, and the master interviewer, Charlie Rose, doesn't dissapoint. Rose does an excellent job probing Chanos on most of the key issues.

Even if you are not interested in China, I recommend this interview. Whether you like or hate Jim Chanos, or believe China is seeing a real estate bubble or not, I think it's worth checking out this 30 minute video (or at least read the transcript.) Chanos' insights on the nature of bubbles, especially from someone who makes a living trying to identify and profit from them, is interesting. Chanos is also a liberal so I'm in tune with his political thinking too; not sure about you ;)

There are too many important points touched in the interview but the most interesting to me is Chanos' speculation on what would happen if China actually devalues its currency? Not saying it would happen but something to think about... the other interesting point to think about is who will take the losses if real estate blows in China.

Check out PBS Charlie Rose video here. Alternatively, you can also check out the transcript here (if the link to the transcript doesn't work, go to the site and scroll to the botton and click on the transcript tab.)

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Monday, April 12, 2010 0 comments ++[ CLICK TO COMMENT ]++

Behind the scenes look at Hugh Hendry




A stack of hardbacks sits on the windowsill in the office of hedge fund manager Hugh Hendry. They make up a reading list perhaps now common in London's embattled financial community.

The Volatility Machine: Emerging Economics and the Threat of Financial Collapse sits under a copy of Lords of Finance: The Bankers Who Broke the World, a timely examination of the Great Depression. On top of the pile, lies a dog-eared dictionary open at the page with words beginning "sco-". What was Hendry looking up? He bounds around his desk. "Oh, yes," he says, running his finger down the page, "it was for an article I wrote about hedge fund managers last week. I was looking up 'scourge', as in 'scourge on society'."

###
 
Hendry is the boss at Eclectica Asset Management, which he launched five years ago. Like all hedge funds, it takes money from investors and uses it to make bets on their behalf. A good bet means a healthy return for investors – and, of course, a fat fee for the fund manager. Eclectica is, by his own admission, a hedge fund minnow. "The total size of the assets we have under management is about £450m," he says. "There are funds that manage $20bn [£13bn]." Leading a team of a dozen or so fund managers, analysts and traders, Hendry asks his clients (most of whom he says are individuals) to invest a minimum of 100,000 dollars, pounds or euros. He says that most funds demand at least $5m. Talking later about the real big hitters, Hendry says, "Some of these guys, I should be shining their shoes."
 
But it's clear that Hendry does okay. He responds to enquiries about his personal wealth (and many other questions about his private life) with a polite "fuck off", but his financier's uniform of well-cut blue shirt, navy tie, Gucci specs and a chunky Louis Vuitton watch shouts money. Not that all areas of his life conform to the stereotype. His stark, mahogany-free office is not in Mayfair or Knightsbridge but in the shadow of the Whiteleys shopping centre in Bayswater, a short hop in his G-Wiz electric car from his Notting Hill home. Sure, he has a house in the country ("a Cotswolds caricature"), but he reaches it, with his wife and three young children, in a second-hand Land Rover Discovery.

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Sunday, April 11, 2010 0 comments ++[ CLICK TO COMMENT ]++

Sunday Spectacle LV


The Life of the Rich & Famous

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Wednesday, April 7, 2010 1 comments ++[ CLICK TO COMMENT ]++

Canada's largest IPO in a decade: Athabasca Oil Sands

From MarketWatch:


Athabasca Oil Sands Corp. makes its stock debut on Thursday in Canada after the producer of petroleum from Alberta raised nearly $1.4 billion as the richest Canadian IPO since 1999.


Not only is the Canadian dollar at parity with the U.S. greenback for the first time since 2008, but the Great White North appears ready to float the biggest stock offering so far this year in North America.

Athabasca Oil Sands will trade under the stock symbol ATH on the Toronto stock market. Its shares won't trade on any U.S. exchange.

On March 30, Athabasca said it sold 75 million shares, or a 19% at C$18 each, raising C$1.35 billion. With about 400 million shares outstanding after the IPO, Athabasca Oil Sands will carry a market cap of C$7.2 billion.

The IPO ranks as the richest from Canada since Manulife Financial Corp. raised C$2.48 billion in 1999, according to data compiled by Bloomberg.

Santana Technologies priced 31.6 million shares at $18 a share for proceeds of $569 million on March 19 as the richest American IPO so far this year, said John Fitzgibbon of IPOScoop.com.

Visa Inc. priced 406 million shares at $44 each raising $17 billion as the richest IPO in U.S. history in 2008.


Numbers aren't adjusted for inflation so the IPO isn't as large as some of the ones from a few decades ago.

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Tuesday, April 6, 2010 0 comments ++[ CLICK TO COMMENT ]++

Sign of looming pension crises

One of the big difficulties that will be faced by the elderly population in developed countries will be the cut-backs their pension systems will undertake. The problem is that many pension plans, like mutual fund salespeople, over-promised the future and built in rosy asset return expectations. A good sign of the current state of affairs is the situation faced by the Ontario Teacher's Pension Fund.

If I recall, the Ontario Teacher's Pension Fund is the second or third largest pension fund in Canada. It may also be the best managed mega-fund in Canada. Yet, it is facing a short-fall, even after many years of strong performance. The Globe & Mail reports:


The pension fund said Tuesday it earned 13 per cent on its investments last year, boosting its asset base to $96.4-billion from $87.4-billion at the end of 2008.


The returns beat several other major public pension funds that have so far reported 2009 results, including the Caisse de dépôt et placement du Québec, which earned 10 per cent last year, and the Ontario Municipal Employees Retirement System, which posted a 10.6-per-cent return for 2009.

But Teachers chief executive officer Jim Leech said 2009 was “confounding” because the strong returns did little to hold back a soaring funding deficit.

By the end of 2009, Teachers estimated its pension funding shortfall was $17.1-billion, up 580 per cent from just $2.5-billion at the end of 2008. The shortfall is the difference between projected future benefits and the actuarial value of the plan's assets.

“2009 was great from an investment and member service perspective, yet may seem confounding from a funding perspective,” Mr. Leech said in a release.

The rapid increase in the shortfall was due to falling interest rates last year, which caused the fund's liabilities to rise. Pension funds measure their long-term liabilities based on interest rates.

Mr. Leech said every one percentage point reduction in real interest rates – that is, the rate of interest after inflation – increases the fund's pension costs by $25-billion. With real rates falling 0.6 per cent last year, it added $15-billion to funding costs, he said.


Reading this story it appears that the short-fall is due to increasing present value of future obligations (if the discount rate falls, present value of future obligations will be higher.) Barring a highly inflationary environment, the pension fund requires some changes: cut benefits or increase fund contributions.
 
In addition, I would say that the increasing number of retirees (relative to workers entering the workforce) and the possibility of somewhat poor asset returns in the future (although it's hard to see returns worse than in the last decade,) will compound the difficulties.
 
I feel this is an important story because if the Ontario Teacher's Pension Fund, one of the best managed with the strongest returns (for a mega fund,) is seeing some issues, one doesn't need to think hard to realize the sorry state of affairs for other pension funds, who are not as well managed. The public, government-influenced, pension funds at least have strong transparency but I really wonder about private, corporate-influenced, pension plans.
 
 
Institutional money managers, as well as managers of hedge funds and private equity funds that pension funds invest in, were probably cruising to riches in the last few decades but I suspect they may finally have to start earning their paycheque.

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Sunday, April 4, 2010 0 comments ++[ CLICK TO COMMENT ]++

Sunday Spectacle LIV



A History of the Canadian Dollar by James Powell. Free PDF book at Bank of Canada's website.

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Does the working population drive asset returns?

It probably isn't a surprise to many that my favourite column in the business weekly, The Economist, is the Buttonwood column. It closely parallels my interests, with a blend of macro views intermingled with investing. I have no idea how useful any of it is to investing but I like reading it :)

A few weeks ago, Buttonwood had an interesting column, "The very long view," talking about how asset returns typically depend on when you invest. This isn't true for stockpickers since they will do well in any conditions if they are right. Indeed, it's hard to say what type of environment suits someone like Warren Buffett or Walter Schloss, given their strong performance in almost any environment. Yet, for the general public, it is likely true that your returns will depend heavily on the timing.

The article quoted a Barclays Capital analyst, Tim Bond, as saying that asset returns are strongly correlated with the 'saving age' portion of the population. Buttonwood suggest, in my view a bad guess, that the poor returns in the last decade may have been due to the decline in the 'saving age' population. Let me quote the relevant portion:


Tim Bond of Barclays Capital argues that demography may be to blame. The key “saving age” is the cohort of 35-54 year-olds. As they prepare for retirement, they pile into the asset class du jour. Mr Bond shows that since the second world war there has been a close correlation between American equity valuations and the proportion of 35-54 year-olds in the population. That the “noughties” proved to be a dismal decade for equities was hardly surprising. The number of retirees (who run down their portfolios) was rising relative to the number of savers.



I don't access to the quoted report but I thought I would take a quick look to see if there is any correlation.
 

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Saturday, April 3, 2010 0 comments ++[ CLICK TO COMMENT ]++

US Treasury bond debate - Jim Grant vs David Rosenberg

During Grant's 2010 Spring Conference, Jim Grant of Grant's Interest Rate Observer debated David Rosenberg of Gluskin Sheff + Associates  on the merits of buying US Treasury bonds. Grant is very bearish on the bond while Rosenberg took a bullish stance. For the video of the debate, click on the top video from this link.

Overall, anyone versed in the bull vs bear cases for US Treasuries wouldn't learn much from the debate. But if you want a refresh of the two sides, it is worth checking out.

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