Sunday, December 25, 2011 1 comments ++[ CLICK TO COMMENT ]++

Conversation Between Reed Hastings and Michael Eisner (Feb 2010)

Here's a really good video from 2010 of a conversation at Churchill Club between Reed Hastings and Michael Eisner.

Michael Eisner is the former CEO of Walt Disney and, although he is a bit past his peak and semi-retired, he is still worth listening for his experienced views. 

Reed Hastings is the CEO of Netflix (NFLX) and although considered by some to be the worst CEO of the year (for some strategic blunders), I still think he is one of the top CEOs in Silicon Valley. I am always impressed with Hastings and I think he is sort of like a Bill Gates, in that he is a visionary who understands not just technology but the business environment.

A lot of topics are covered in this discussion: technology, media, entrepreneurship, public education, corporate culture, you-name-it. I highly recommend it if you are interested in any of those topics. There are a lot of interesting issues discussed, including, compensation for executives, Netflix's unlimited-vacation policy, how the early DVD-mail-order Netflix chose an area that didn't compete with the early Amazon, how Eisner is not a fan of acquisitions, why Netflix didn't pursue video game rentals, and how the video industry may evolve.



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Classic Value Investing vs Buffett-Prime Investing

If you pursue the value investing framework, one of the key decisions you have to make is whether you want to be a, what I call, classic value investor; or a Buffett-Prime investor. In my mind, a classic value investor largely follows an asset-oriented strategy influenced by Benjamin Graham; whereas a Buffett-Prime-type investor follows an earnings-power-oriented strategy, influenced by Charlie Munger, Philip Fisher, and Warren Buffett of the 1970's.

Some might say Buffett-Prime-type investing is the same as growth investing but I don't like to call it growth investing. The reason is because there is a whole genre of investing called growth investing that appears to be not based on any value investing principles. There are many growth investors, including some successful ones, who don't pay much attention to financial statements (some may call them medium-term traders). For instance, there are many who will form a bullish or bearish opinion of, say, a stock like Google (GOOG) without even looking at the financial statements or having any idea of its financial metrics. In my mind, value investing, which can also be called fundamental investing, must focus on financial statements. That's why I don't like to use the notion of growth investing on this blog.

Of course, I'm painting with a broad brush here and as Buffett and others have said in the past, growth investing and value investing are joined at the hip. Nevertheless, I like to separate them out.

Most of you, especially the newbies, should probably focus on one approach. I am trying to target more of a Buffett-Prime approach but one isn't necessarily better than the other. If you are really good, you can probably pursue both approaches but, otherwise, the skillsets for the approaches are very different.

So what are some key differences between the two styles?

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Sunday Spectacle CLIV



Credit: "Toronto Christmas Market" by dtstuff9. Edited by Sivaram Velauthapillai
Location: Distillery District, Toronto, Canada
Downloaded from flickr on December 25, 2011.

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Thursday, December 22, 2011 2 comments ++[ CLICK TO COMMENT ]++

Netflix's Reed Hastings Being Interviewed by Charlie Rose (from 2005 and 2011)

I have been researching Netflix (NFLX) lately and checked out some Charlie Rose interviews with Reed Hastings, CEO of Netflix. One of the interviews is from December 27, 2005 and the other one is from earlier this year.

Although his star has faded recently, Reed Hastings is one of the visionaries in Silicon Valley. Not only did he build up Netflix, a DVD rental and video streaming service, but he is also very knowledgeable about technology. If you are interested in technology, media, or education—he has some thoughts on education—check out the 2005 interview. I found the 2005 interview quite insightful and it is quite impressive to see him hit the targets his laid out back then.

The recent video from May 4, 2011 is more narrow and is probably best for those who are interested in media, online streaming, and technology. Unfortunately, it seems that Charlie Rose doesn't allow recent content to be embedded so click on this link for the 2011 interview.

As usual, Charlie Rose, arguably the best interviewer in America, shows his skill with excellent interview questions. He cuts off Reed Hastings a few times, in order to keep the discussion going, but overall, the questions were great.

Charlie Rose Interview with Reed Hastings
(December 27, 2005)


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Tuesday, December 20, 2011 1 comments ++[ CLICK TO COMMENT ]++

Crime Never Pays

(Copyright Parker Brothers. Download source.)

(This post was partially written about two months back so some additional details confirming the story have emerged in the last few weeks. The main story remains the same.)

Crime never really pays. Sooner or later, criminals get caught — not all the time, of course, but most of the time (in countries with adequate policing, with "decent" culture and legal system). One big reason criminals don't get away is because it's hard to cover the tracks. There are just too many things that can go wrong when trying to mask a crime's evidence.

Such is the case with the Japanese electronics company, Olympus.

Readers may recall a post from a while back, pointing out how the CEO of Olympus was fired within 2 weeks of being hired. Things looked puzzling at that time and the story kept getting interesting by the minute — assuming you are not a shareholder of Olympus, of course.

Over the last month, the fired CEO revealed that Olympus had carried out questionable financial transactions. It appears that Olympus engaged in questionable deals totalling $1.4 billion, including $687 million paid as advisory fees in a takeover (the fees were exorbitant and make no sense for that deal).

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Poll: How do you like the new layout template?

I posted a poll on the right-hand side of this blog at the top. The question is about how well you like the new template. If you typically visit my website for your content, vote. If you have any suggestions, please feel free to e-mail me or leave a comment. Thanks.

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Sunday, December 18, 2011 0 comments ++[ CLICK TO COMMENT ]++

Updated to New "Glory" Template

Not sure what caused my prior template to fail all of a sudden but whatever it was, it was probably a good thing. I'm one of those who just sits on ideas and need to be pushed sometimes. I upgraded to a new template called Glory. Thanks to the creator for making this template available for free. The upgrade gave me the opportunity to try out some stuff.

I decided to go for a cleaner look. It's still not a truly professional look and I didn't want that since they all look similar. Since this is a personal blog, it allows me to experiment.

Hope all the readers like it. It should be easier on the eyes.

As usual with any technology upgrade (in this case pretty simple), the older posts may be messed up. Also, if you notice any problems let me know.

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Sunday Spectacle CLIII

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Thursday, December 15, 2011 6 comments ++[ CLICK TO COMMENT ]++

My thoughts on Moody's downgrade of Ontario's outlook

Ontario, my home province, is startling to resemble a mini-Greece :( Moody's sends a warning shot by downgrading Ontario's outlook to negative. The Globe & Mail reports,

Moody's Investors Services has turned its wary eye from the basket cases of Europe to Ontario, revising its outlook to "negative" from "stable" and issuing a stern warning on the province's hefty debt burden.

The decision, Moody's said in a statement, reflects the risks surrounding the province's ability to meet its medium-term fiscal targets. It noted the recent slowing of economic growth.

"The negative outlook on the province reflects the softening economic outlook, Ontario's growing debt burden, and the extended time frame to achieving a balanced budget," Moody's analyst Jennifer Wong said.

In his November statement, Finance Minister Dwight Duncan revised his forecasts for economic growth for both this year and next, a significant downgrade to just 1.8 per cent in each year, compared to earlier projections of 2.4 per cent 2.7 per cent.

The government plans to eliminate the deficit by 2017-18, which will require it to rein in growth in program spending. The deficit is forecast to reach $16-billion this fiscal year.

...


"Expense growth leading up to the recent downturn was relatively robust, highlighting the challenge ahead. Indeed, expense growth averaged 7 per cent annually in the five years to 2007-08, with health expenses having grown at an average of 8 per cent. The fiscal plan presented in the 2011-12 budget assumed expense growth of roughly 2 per cent annually for the duration of the plan."
According to the 2010-2011 Annual Report for Ontario, the net debt to GDP stands at 34.9%, while net debt per capita is $16,238. Shown below are some important charts from that report.


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Tuesday, December 13, 2011 0 comments ++[ CLICK TO COMMENT ]++

Characteristics of original video content for online streaming providers

I have been researching Netflix (NFLX) lately and I ran across a good interview from earlier in the year that described the differences between original content being financed by online streaming providers like Netflix versus traditional television companies. By original content I'm referring to sourcing of content in the first window (i.e. you are the first one to show it).

Although online streaming companies are not financing much original content—Netflix is only allocating around 15% of its content budget to original content and Hulu Plus and YouTube have only spent small amounts on original content—I think it may change over time, if streaming customers are willing to pay for original content. So far, judging by the customer backlash over Netflix raising prices earlier in the year, as well as the lack of sizeable deals by YouTube—YouTube has something like 140 million unique viewers and it still hasn't been able to spend $100+ million on original content—it is probably safe to say that customers are unwilling to pay for original content. But this may change.

The interview was carried out by AllThingsD's Peter Kafka with Netflix's content chief, Ted Sarandos, answering the questions. Netflix had just signed an original content deal to produce David Fincher's House of Cards. Original quality content is expensive and Netflix spent around $100 million for 26 episodes over two seasons (this is very expensive for Netflix).

(As is usual on this blog, I typically bold text in the quotes that are interesting.)

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Sunday, December 11, 2011 0 comments ++[ CLICK TO COMMENT ]++

Sunday Spectacle CLII


Digital Economy's Shifting Industry Profits





(source:  “Profit Migration in the Digital Economy,” by David Standridge and Christopher Pencavel, Booz & Company white paper, August 2011, www.booz.com/profit-migration)


Sorry about the small fonts (I hate extracting from the booz&co reports since they aren't designed for online layouts). In any case, this is an important chart for those interested in the digital economy. Certainly any investor in the various industries that represent the 'digital economy' should pay attention to how the market is developing. Even if you don't invest in these companies, you may find the material interesting since the digital economy will play an integral role in society.

The chart from a booz&co report (read the full report for more info) illustrates how the digital economy, which includes numerous different types of industries, ranging from content creators, to service providers to software and hardware, has changed over the last 8 years. The authors picked 2002 as a starting point in order to avoid the distorting effects from the dot-com bust (I agree with their starting point decision).

One important thing to note is that the whole market is expanding so even though, say, service providers actually earn less of the total profit share, they are still bigger than they were 8 years ago. However, the declining share may indicate that the industry is saturated and has hit early-maturity.

The big increase in profitability came from Internet software and services, and from devices. The former, which includes companies like Amazon, Yahoo! and Ebay, used to post losses 8 years ago but are profitable now. A category that seemed like it had no hope back in the early 2000's, is now profitable and healthy.

The devices segment grew largely due to Apple. I never would have imagined that devices would do so well. Not only are hardware components easily duplicated by competitors, hence margins are always under threat, I also never would have expected any of them to overcome the deflationary price effect in hardware (typically hardware costs fall over time but Apple has maintained pricing for the most).

The big losers were the content providers. These are companies like Time Warner, Disney and Washington Post, who are struggling to find a business model that works in the digital economy.

It is always important to figure out which segments are profitable for investors. In any value chain, some segments are more attractive (from an ownership perspective) than others. For instance, if you look at soft drinks, a company like Coca-Cola or Pepsi earn most of the profits (and hence is attractive to investors) than the liquid supplier or bottler or distributor or the local grocery store that sells the drink. You could have made a correct bullish call on cola 80 years ago, but only certain segments were highly rewarding for investors. Since the cola market was expanding, you would still have been ok if you were the syrup ingredient supplier, but you wouldn't have been very rich. But if you bought one share of Coca-Cola 80 years ago...

In the digital value chain, content producers are losing big time right now, while content aggregators and distributors are making a killing. It's not clear to me if this is a permanent trend or if producers will gain power as the market develops. As the booz&co report mentions, entities closest to the consumer gained value while those furthest from consumers lost value (relatively speaking). Does this mean investors should favour the consumer-facing companies? Something to think about.

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Saturday, December 10, 2011 1 comments ++[ CLICK TO COMMENT ]++

Jim Chanos on China and the bear case for Agriculture Bank of China

Same old, same old so skip it if you are familiar with the China short thesis... but the following CNBC interview does provide some insight into what happened in China in the past. In particular, Jim Chanos talks about one of his short positions, Agriculture Bank of China, and how its balance sheet is not quite what it seems.

Thanks to ValueWalk for bringing this video to my attention (there are an additional two on that site).


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Some thoughts from Jeremy Grantham's Fourth-quarter Letter

(Not sure what's wrong my blog template; it seems to be messed up. Oh well...)

Most of you probably already read this but if not, here are some interesting points Jeremy Grantham made in his GMO 4Q 2011 Letter (if you have never heard of Jeremy Grantham and are macro-oriented, you should definitely put his quarterly letters on your reading list):

Well, 15 years ago, Ben Inker and I designed a model to explain (not predict) the ebbs and fl ows of the P/E ratio. It had a surprisingly high explanatory power. We found that everything that made investors feel comfortable worked. That is to say, it was a behavioral model. Fundamentals like growth rates did not work. The two (out of three) most important drivers were profit margins and inflation.
The seemingly unsustainable profit margins is what keeps some who are bearish, like me, on the sidelines. Graham (elsewhere in the letter) feels that normal weight in equities is ok but I'm not so sure.

The long-term behaviour of stocks is so out-of-whack, compared to the past that one may want to be really cautious.
Historians would notice that all major equity bubbles (like those in the U.S. in 1929 and 1965 and in Japan in 1989) broke way below trend line values and stayed there for years. Greenspan, neurotic about slight economic declines while at the same time coasting on Volcker’s good work, introduced an era of effective overstimulation of markets that resulted in 20 years of overpriced markets and abnormally high profi t margins. In this, Greenspan has been aided by Bernanke, his acolyte, who has continued his dangerous policy. The first of the two great bubbles that broke on their watch did not reach trend at all in 2002, and the second, in 2009 – known by us as the first truly global bubble – took only three months to recover to trend. This pattern is unique. Now, with wounded balance sheets, perhaps the arsenal is empty and the next bust may well be like the old days. GMO has looked at the 10 biggest bubbles of the pre-2000 era and has calculated that it Quarterly Letter – Shortest Quarterly Letter – December 2011 3 GMO typically takes 14 years to recover to the old trend. An important point here is that almost no current investors have experienced this more typical 1970’s-type market setback. When one of these old fashioned but typical declines occurs, professional investors, conditioned by our more recent ephemeral bear markets, will have a permanent built-in expectation of an imminent recovery that will not come.
 The risk with overvalued markets is not that a real threat will harm equity prices; rather, it will give an excuse for the market to sell off. Most people who own assets probably know they are overvalued and then will just head for the exits at any sign of smoke.

I have a horrible record so don't listen to me blindly but I think we are vulnerable to a correction similar to the 1966-1974 period. By this, I'm not referring the size of any decline or the type of stocks that are vulnerable; instead, I'm referring to market declines without any serious problems. The economy may not have been ideal but it was fine during that period; inflation was high but nothing like what was in store later in the decade; yet the market kept weakening.

As Grantham and others have pointed out many times, major bear markets always over-shoot for a sizeable period of time. I have a hard time imagining that the bear market that started in 2000 (in my view) will end without overshooting on the downside.

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Wednesday, December 7, 2011 27 comments ++[ CLICK TO COMMENT ]++

Warren Buffett's Evolution and his Three Investment Styles

A Young Warren Buffett

In a comment to one of my posts, Mark Carter, who incidentally appears to have a good blog worth checking out, asked:

"Buffett Prime is 1970's to early 1990's"

Could you elaborate?

I have vaguely indicated how I view Warren Buffett in the past, but I thought I would detail my view of his investing behaviour. This is more of an opinion piece and many others would disagree with me (if you do, I'm curious to hear your thoughts). I don't follow Warren Buffett as closely as many value investors so I may get some facts wrong.

My view is that Warren Buffett went through three different phases, with each consisting of different investment techniques. The overall investment theory remained the same—what people call value investing—but his execution, tactics, and strategy differs across the three phases. Some people may break up his career into additional periods but my feeling is that the three I will describe essentially captures the styles.

I should also mention that I'm painting with a broad brush and some elements overlap across periods. Furthermore, certain investment techniques, such as special situation investing (such as risk arbitrage), has been carried out by Buffett over his entire life; what I am describing is his core investment technique.

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Tuesday, December 6, 2011 0 comments ++[ CLICK TO COMMENT ]++

Interview with Reed Hastings of Netflix (req: free registration)

I have been following Netflix (NFLX) as a potential investment for a few months now and I ran across an audio interview with Reed Hastings that you may be interested in. Anyone interested in the company (or the online-video/television/cable/media markets) should check out the audio broadcast linked below. Unfortunately, it requires free registration and I can't link to it.

UBS 39th Annual Global Media and Communications Conference - Discussion with Reed Hastings of Netflix

(if link doesn't work, try going here and going through the free registration)

Reed Hastings rarely gives public presentations and, although many people think he is the worst CEO in America right now ;), I think he knows his stuff. Not only did he build up Netflix, but he is also a visionary who is closer to an Internet entrepreneur than 'old media.' He just needs to signficantly improve his capital allocation skills ;)

I don't usually post about media stories requiring registration—although now that I'm not Twitter, I might tweet about them in the future—but this is such an interesting discussion. Not only does Hastings talk about Netflix itself, but some of his thoughts on how online streaming is akin to electrification of rural America in the 1930's/1940's, and how fiber to the home is going to result in very-fast, and potentially very cheap, Internet connections is insightful. I also found his suggestion that media may turn into a global business—like Facebook, YouTube—because of the accessibility of Internet quite interesting. It's a subtle point but I never realized how cable/satellite television is very localized while Internet video streaming likely won't be.

Having said all this, I still think Netflix is pursuing a very risky strategy, like many young companies do. They are spending a fortune—about $1 billion to $2 billion—on content in the hope of having customers i.e. build out the business before others enter the market. Well, if you were an America pioneer in the 1600's, you might like this strategy but otherwise, it's not for the faint of heart. Reed Hastings says that online streaming is a secular trend that will see continuous growth (sort of like mobile phones) but it remains to be seen if Netflix can capture those customers.

Reed Hastings also says that HBO Go is Netflix's biggest near-term competitor, yet my read of his shareholder letter from a month ago was that it was MVPD (multi-channel video programming distribution e.g. legacy cable television provider) that was the big threat. In any case, I agree with Hastings' point in the interview that companies like Amazon or Apple haven't shown that they are willing to spend the amount of money Netflix is spendong on content (about $1 billion to $2 billion) and hence likely won't be big competitors (I also think shareholders of those technology companies will likely block those companies from pursuing the media business since media companies tend to have lower ROE and different business characteristics).

In any case, I can see why investors bid up Netflix to some ridiculous price over the last few years. The 'big picture story' is very tempting.

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Something to watch... Australia potentially slowing down

The Globe & Mail reports on the possibility of Australia slowing down:

The boom Down Under may soon be over.

Australia’s central bank has cut its benchmark lending rate for the second time in as many months, confirming fears that Europe’s debt crisis and a slowdown in China are threatening the resource-driven economy.

The Reserve Bank of Australia lowered its cash rate by 25 basis points to 4.25 per cent, Tuesday. That followed a similar reduction in November.

Much like Canada, Australia was a global leader among developed countries in weathering the 2008 financial crisis. A stable banking system, coupled with demand from China and other Asian nations for its commodities such as oil, iron ore and coal, helped Australia endure the downturn.
Why is this important? Because it could be an early signal to a potential global slowdown.

While about 70 per cent of Australia’s exports are destined for Asia, a struggling Europe and potential collapse of the European Union was also a factor in the bank’s decision to reduce rates.

“The likelihood of a further material slowing in global growth has increased,” Mr. Stevens, said. “China’s growth has been slowing, as policy makers there had intended. Trade in Asia is now, however, seeing some effects of a significant slowing in economic activity in Europe.”

Troubles for Australia’s economy could signal comparable problems in Canada. With a similar sized population as well as a resource-heavy economy, Canada, like Australia, has a lofty property market that has yet to suffer a significant correction.
The  author is quite correct in pointing out that Canada may also suffer a similar slowdown.

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Sunday, December 4, 2011 0 comments ++[ CLICK TO COMMENT ]++

Sunday Spectacle CLI

Steve Jobs on Life


(h/t: "The Secret of Life from Steve Jobs in 46 Seconds" by Maria Popova. Brain Pickings)

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Saturday, December 3, 2011 2 comments ++[ CLICK TO COMMENT ]++

Articles to start off the last month of 2011

The year is almost done... hope everyone has had a good year. Now that I'm Twittering, a lot of the articles will be duplicates for any Twitter follower.

  • (Highly Recommended) John Paulson's arbitrage notes (Anh Hoang): John Paulson, before he became popular for short-selling mortgage bonds, was a successful risk arbitrageur. Special situations investing is something that amateur investors should look at.
  • (Recommended) Charlie Rose interviews superinvestor Seth Klarman (CanadianValue for GuruFocus): Arguably the top value investor in the world right now, Seth Klarman rarely gives interviews so you should check this out. However, unfortunately, there isn't anything insightful about investing in the interview. One thing Klarman does point out is that he is still a Graham-type investor whereas Buffett has moved on to a, what I call, 'modern Buffett' investing style. The style that I aspire to is what I call 'Buffett Prime'. Roughly speaking, I would say Graham-type Warren Buffett spanned up to late 1960's; Buffett Prime is 1970's to early 1990's; and modern Buffett is late 90's to present (these are just rough dates without deep analysis). My impression of amateur value-oriented Buffett-aspiring investors (from blogs, message boards, etc) is that probably 50% are Graham-type; maybe 25% are modern Buffett; 15% are Buffett Prime; and 10% are a complicated mix.
  • Bullish article on Netflix that touches all the bear arguments (Fortune): Anyone interested in Netflix or new media should check it out.
  • "Facebook vs. Google: The battle for the future of the Web" (Fortune): Amazing that Facebook has such high number of unique visitors... never would have imagined.
  • Is the Buffett premium dissapearing? (The Globe & Mail): Berkshire Hathaway shares have been off lately and is the market re-pricing Berkshire Hathaway to remove the Buffett premium? For those not familiar, Buffett premium refers the above-typical prices paid by investors for Berkshire Hathaway shares in order to own a company run by the best investor of modern time. According to some, conglomerates should be traded at a discount due to their opaqueness and diverse, non-synergistic, asset holdings, yet Berkshire Hathaway was generally more expensive than a typical conglomerate.
  • "Are banks good businesses?" (Fortune): It's not easy to figure out if a bank is a really good business.
  • Economics of the NBA league (Freakonomics): Interesting article on the economic considerations of the negotiations between the owners and the players. Check it out if you are into the economics of sports.
  • (Recommended) "Are Corporate Balance Sheets Really the Strongest in History?" (Hussman Funds):  John Hussman presents his thoughts on the situation in Europe, along with an examination of the strength of corporate balance sheets in America. I disagree with Hussman and share the same view as the consensus that corporate balance sheets of non-financial corporations are indeed strong. Some of the data supports Hussman's skepticism of the strength of balance sheets but some are inconclusive. For instance, tangible assets to total assets has been declining because of, I believe, the collapse of manufacturing (which tended to have high fixed assets) and the rise of service industries like financial services, computer software, Internet services, and many areas within "information technology." I still think any adverse outcome for equities in America and Canada is more likely to come from the extremely weak consumer balance sheet and, to a smaller degree, government financial issues, than from inherent weakness in coporate balance sheets (this view doesn't apply to financial firms, whose balance sheets are extremely weak IMO.)
  • "After Massive Job Cuts, Wall Street's a Different Place" (Bloomberg Businessweek): "Around the globe, more than 220,000 financial service positions are slated to disappear this year. They won't necessarily come back." My feeling has been that the financial services industry was way too big so, as painful as it is for the workers impacted, it was inevitable and possibly good for the economy in the long-run.
  • Detroit finances near collapse (Bloomberg): Detroit's finances are so bad that the state of Michigan is contemplating "taking over" the city. Although Detroit has unique problems due to the collapse of auto manufacturing, this could be a precursor to what may happen in several other overly-indebted and fiscally-weak cities and municipalities in other parts of USA (and maybe even Canada in the future :( ).
  • (Recommended) Book review - Free Ride: How Digital Parasites are Destroying the Culture Business, and How the Culture Business Can Fight Back by Robert Levine (Brain Pickings): Interesting essay that tackles whether free content on the Internet is destroying the culture business. A lot of jobs are being lost, and companies are being destroyed (think of newspapers and magazines) but is this for the worst? The situation reminds me of when printing press was invented and artisans and craftsmen lost their jobs when books went from carefully prepared, rich, manuscripts to mass-produced goods. There was a painful adjustment period but it's blatantly obvious that it was for the better.
  • Sino-forest just as murky as before the accusations (The Globe & Mail): Potential fraud, Sino Forest, released the independent committe's report on the fraud allegations by short-seller, Carson Block of Muddy Waters. Not surprisingly, nothing concrete came out of the report and it's still not clear what Sino Forest's business model is and who actually owns what. In particular, it is still not clear if Sino Forest actually owns the trees that it claims it does.
  • (non-investing) Can computers ever think like humans? (Philosophy Now): "Namit Arora considers the complexity of consciousness and its implications for artificial intelligence."
  • (non-investing) Ten classic book gift ideas for the intellectual (Brain Pickings): Classics for those who like to think.
  • (non-investing) From 'Brothers Grimm' to 'Stuck,' the 11 Best Picture Books of 2011 (Brain Pickings via The Atlantic): Picture books, including some kids-oriented ones.
  • (Recommended) (non-investing) "The 11 Best Art and Design Books of 2011" (Brain Pickings): If you want to give some book gifts, or just want to entertain yourself with visual books, check out this list.

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Sunday, November 27, 2011 1 comments ++[ CLICK TO COMMENT ]++

Hugh Hendry discussion at the Alternative Investment Conference

Thanks to Value Investing World for bringing this Hugh Hendry interview to my attention. I may not agree with all the things—short-term orientation of hedge funds is actually worse IMO; the sharp pencil effect doesn't always work—but Hendry is a true contrarian and worth listening. Like Marc Faber or Jim Rogers, you also can't take everything Hugh Hendry says seriously.


I had always felt Hugh Hendry was firmly in the deflation camp but I get the feeling that he is now opening up to high-inflation possibilities. Otherwise, his stance appears to be similar to past opinions.

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Sunday Spectacle CL

Blog updated at 4:31 AM, Nov 27 2011

Sovereign Credit Ratings Interactive Map

note: ratings may not be the very latest so double-check official ratings; also note that the Moody's chart has an additional category ("substantial risks") so the colours for the worst categories aren't the same on all three maps.

Click here for interactive map from ChartsBin.com

Moody's


S&P


Fitch


(source: "How Moody's, S&P and Fitch Rate Each Country's Credit Rating," ChartsBin. Downloaded November 20, 2011).

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Thursday, November 24, 2011 0 comments ++[ CLICK TO COMMENT ]++

Jim Chanos' latest thoughts

Twenty minute Bloomberg video of esteemed short-seller Jim Chanos' latest views on USA, China and the current state of affairs. This is sort of like beating a dead horse—at least on this blog—but I think China is an important story if you aren't bearish like me.

NOTE: Bloomberg video has a flaw and the video starts playing automatically for some unexplainable reason.

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Tuesday, November 22, 2011 0 comments ++[ CLICK TO COMMENT ]++

Articles for a November

I just joined Twitter and I can see how people's identities can be co-opted by others. I remember once when Malcolm Gladwell responded to someone asking about a comment of his on Twitter, that he doesn't even have a Twitter account (the point being that whoever that was tweeting using his name was a fake account). It's really hard to tell who is real and who isn't. This isn't a problem for no-name people but it's hard to tell with prominent individuals. Twitter does appear to verify some identities as authentic—for instance, Bill Gates is easy to find and follow—but I'm not sure if the user has to pay for this or not. In any case, it's an interesting world on Twitterland. It is also easy to fall prey to information overload.

Having said all that, here are some articles you may find worthwhile reading...

  • "The End of Borders and the Future of Books" (Bloomberg Businessweek): I can't believe William Ackman wanted to merge Borders and Barnes & Noble at one point — it would have taken down both firms. In any case, a detailed look at the collapse of the second largest bookstore in America.
  • (Recommended) Was Steve Jobs an inventor or an innovator? (The New Yorker): As usual, a thought-provoking, article from Malcolm Gladwell on Steve Jobs. Gladwell continues his long-running view of innovation—you may want to read this post and this one—and the incremental steps involved. In the article, Gladwell calls Jobs a "tweaker" but I think a better word is "innovator." I think the notion of tweaking, as envisioned by Gladwell, can be misunderstood by the general public. You may also want to check out the author interview with Gladwell if this topic interests you.
  • "Financial Reform: Unfinished Business" (Paul Volker for The New York Review of Books): Paul Volker guided the financial reform that is being pursued by the US government—a lot of it is being watered down though—and he presents further thoughts on what need to be done. It's an uphill battle against the status quo.
  • (Highly Recommended) ROIC and growth rates in creating shareholder wealth (Rishi Gosalia for GuruFocus): Excellent article touching on key elements of value creation, including the interplay between growth rates and return on invested capital. I prefer to look at return on equity rather than ROIC but the concept is similar. Study the table included in the article, and notice how, if ROIC is lower than cost of capital (left side of the 10% column), value decreases as growth rate increases (i.e. you actually destroy shareholder wealth as growth rate increases). In contrast, if ROIC was higher than cost of capital (right side of the 10% column), shareholder wealth increases as growth rate increases. I also like the example Rishi uses to illustrate his point in real life. Namely, how Walgreens growing at 14% with 14% ROIC produced less shareholder wealth (16% annual) than Wrigleys growing at 10% with 28% ROIC (17% per year). Having said all that, the difficulty beyond identifying the metrics is to buy a high ROIC (or high ROE) company cheaply. Without looking it up, I would bet that you would have had a hard time buying Wrigley's cheaply whereas Walgreens probably was cheaper more often.
  • (Recommended) The history of Microsoft's Xbox - part 1 - part 2 (VentureBeat): Excellent, lengthy, article on the history of one of the few successful new products by Microsoft in the last decade. Recommended if you are into technology, gaming, or "start-up culture."
  • A look at Canadian microcap, Bennett Environmental (TSX: BEV) (Hardcore Value): Ran across a new Canadian blogger. This is a write-up of Bennett Environmental, which is a struggling, distressed-type, activist play, so anyone interested in such situations should check it out.
  • The evolving television and Internet media landscape (The Economist): I've been studying Netflix lately and this is a good article on the current state of affairs in the media world. Its provides a good synopsis of the various players and what they will gain or lose as Internet video emerges.
  • (Recommended) Book excerpt from Exile on Wall Street by Mike Mayo - "Why Wall Street Can't Handle the Truth" (Wall Street Journal): "Longtime bank analyst Mike Mayo tells the inside story of why it's so hard to yell 'sell' in a crowded room—and lays out how Wall Street needs to change to avoid the next financial collapse." Long-time market followers are aware of the points raised but newbies may want to read the thoughts from an insider on why analysts on Wall Street are, at times, nothing more than cheerleaders.
  • "China Makes, The World Takes" (The Atlantic): An somewhat old, 2007, article on China's manufacturing prowess and the impact on the world.
  • (Highly recommended) Book review of Boomerang: Travels in the New Third World by Michael Lewis (New York Review of Books): Michael Lewis has a habit of painting complex situations with a broad brush but, nevertheless, he often does manage to zero-in on the causes. Some of you may have already read Lewis book or his articles in Vanity Fair but I like reading essays to get a different perspective. Highly recommended.
  • Book review - Google, I love you, I love you not. Reviews of The Googlisation of Everything (and Why We Should Worry) by Siva Vaidhyanathan; In the Plex: How Google Thinks, Works and Shapes Our Lives by Steven Levy; I’m Feeling Lucky: The Confessions of Google Employee Number 59 by Douglas Edwards(London Review of Books): Just like how the public used to debate the power of radio or newspapers about 80 years ago, it's not uncommon to wonder about the power of Google and how much of a threat it is to society. If you are interested in the topic, do check out my prior post on a similar topic.
  • Is there a college education bubble in America? (The New Yorker): Pretty good summary of both sides of the college bubble argument.
  • Book review - Why is higher education failing? Reviews of The Faculty Lounges: And Other Reasons Why You Won’t Get The College Education You Paid For by Naomi Schaefer Riley; The Fall of the Faculty: The Rise of the All-Administrative University and Why It Matters by Benjamin Ginsberg; The Chosen: The Hidden History of Admission and Exclusion at Harvard, Yale, and Princeton by Jerome Karabel; Unmaking the Public University: The Forty-Year Assault on the Middle Class by Christopher Newfield; Crossing the Finish Line: Completing College at America’s Public Universities by William G. Bowen, Matthew M. Chingos, and Michael S. McPherson; Academically Adrift: Limited Learning on College Campuses by Richard Arum and Josipa Roksa; Education’s End: Why Our Colleges and Universities Have Given Up on the Meaning of Life by Anthony T. Kronman; Saving State U: Why We Must Fix Public Higher Education by Nancy Folbre (New York Review of Books): An essay on why universities in America may not be performing well. As the article sort of alludes to, the interesting thing is how the top, elite, universities are world-class but the vast majority of the rest, which is where the vast majority of the future workers are trained, are thought to be under-performing.
  • Top 10 management books of the decade (Strategy+Business): Haven't read any of them but heard of a few. If you are interested in management, strategy, business culture, trade, and innovation, check it out.
  • (non-investing) Profile of Malcolm Gladwell (New York magazine): Lengthy profile of author, Malcolm Gladwell. Some people hate him but long-term readers know that I'm a big fan of his writing, even if I don't agree with all of it.

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Monday, November 21, 2011 5 comments ++[ CLICK TO COMMENT ]++

How good was Bill Miller?

In my prior post on Bill Miller, a reader, McMath, posted a link to a chart at Economicpicdata that appears to make Bill Miller look worse than he actually was. The author at that blog picked some time around 1986 as the starting point and I feel that it misrepresents Miller's career.

Since I'm probably the only remaining fan of Bill Miller ;), I thought I would post what I think is Bill Miller's lifetime performance. I am reproducing below, a Morningstar chart for the Value Trust mutual fund (LMVTX) since 1982. Morningstar is very good with their mutual fund data (unlike, say, Yahoo! Finance) and typically computes real returns properly.

I believe Bill Miller started managing the fund in 1982 but it is not clear how much of the stockpicking was solely up to him in the early days. I really don't know and am ascribing all the performance to Miller. Furthermore, I am not sure if the chart below includes expenses (MER). I suspect it does, since Morningstar is very good at including the proper elements, but I am not entirely sure. (If anyone has more correct data, please provide it so that I can use that.)

Finally, do note that the returns shown below are not necessarily the same as what a fund investor would have earned. Depending on how much you invest and at what time period, it will impact the actual return.

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Sunday, November 20, 2011 2 comments ++[ CLICK TO COMMENT ]++

Why do European companies have higher leverage? Anyone know?

I don't have the answer to the question of the blog post, so does anyone have any idea why European companies tend to have higher leverage than American companies?

I remember noticing this when I briefly looked at US-listed European companies a few years ago. This is just one example and one should be careful with extrapolating off one example but, just compare a company like Diageo (DEO) to Brown Forman (BF/B).

In any case, the leverage issue is starting to pop up in news these days because European banks tend to have higher leverage than American companies. In an opinion piece for Bloomberg, Simon Johnson remarks (bolds by me),

By any measure, Deutsche Bank is a giant. Its assets at the end of September totaled 2.28 trillion euros (according to the bank’s own website), or $3.08 trillion. In the latest ranking from The Banker, which uses 2010 data, Deutsche was the second-largest bank in the world by assets, behind only BNP Paribas SA.

The German bank, however, is thinly capitalized. Its total equity at the end of the third quarter was only 51.9 billion euros, implying a leverage ratio (total assets divided by equity) of almost 44. This is up from the second quarter, when leverage was about 36 (assets were 1.849 trillion euros and capital was 51.678 euros.)

Even by modern standards, this is very high leverage. JPMorgan Chase & Co. has a balance sheet about 20 percent smaller than Deutsche Bank’s, but more than twice as much Tier 1 capital, an important indicator of a bank’s financial strength. Bank of America Corp., whose weakness is a serious worry in the U.S. today, has twice Deutsche’s capital. (These comparisons use The Banker’s ranking of the top 25 banks.)

Globally, Deutsche’s capital ratios are relatively healthy, judging by the banking industry’s standard measures. At the end of the third quarter, its Tier 1 capital ratio was 13.8 percent (up from 12.3 percent at the end of 2010) and its core Tier 1, which excludes hybrid debt that can convert into equity, was 10.1 percent.

How does such a highly leveraged bank become “well-capitalized”? The answer is that “risk-weighted assets” were 337.6 billion euros as of Sept. 30. But what is a low risk-weight asset in the European context today? Incredibly, it is sovereign debt, which of course is far from riskless at the moment.

Perhaps Deutsche Bank holds mostly German government debt, which still has safe-haven value. But it’s likely that Deutsche also holds a significant amount of Italian and French government bonds.

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Opinion: Thoughts on Bill Miller's Exit

Although I don't post much these days, I do follow business/investment news and Bill Miller, CIO at Legg Mason Capital Management, will retire from managing the main value fund. Legg Mason grew from a no-name Boston shop to one of the largest mutual funds, largely due to Bill Miller. He had a strong streak back in the 90's but ended up performing poorly, with near-catastrophic bets on financials, over the last 5 years.

A lot of people don't like Bill Miller—some "value investors" don't consider Miller as a true value investor—but I was, and still am, a fan of him. In addition to Marc Faber, Warren Buffett, Charlie Munger, and David Dreman (at least his book), Bill Miller was one of the key investors who influenced me during my "formative" early years. I suspect what influenced me in the last 5 or so years—good as well as bad habits and knowledge—will probably, permanently, shape my future.

Although I was a fan of Miller, I don't think he is as good as the media made him out to be. In my eyes, he is better than the vast majority of mutual fund and hedge fund managers but he isn't a superinvestor like, say, Martin Whitman. I would put Miller in the same league as Bruce Berkowitz. Miller's record will look pretty bad given how he is going out near the bottom (so to speak) but I think he is a better investor than the record will end up indicating.

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Sunday Spectacle CXLIX

In Defense of Cash

Performance during Severe
Inflation & Deflation


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Saturday, November 19, 2011 0 comments ++[ CLICK TO COMMENT ]++

Finally joined Twitter (name Sivaram_V)

(This post is cross-posted on multiple blogs)

I finally decided to leave the cave I was living in ;) and decided to join Twitter. When Twitter first showed up on the scene a few years ago, I thought it was some dumb twittering bird that amounted to nothing more than a fad. Who would have thought that short messages, when long messages have near-zero cost on the Internet, would become popular? It also wasn't clear how Twitter would make money and stay in business as it scaled up. Well, needless to say, I was wrong — very wrong!

I'm still not sure if anyone will bother to follow anything I say. In any case, the main reason I joined was to track others. I notice that more and more content, whether from individuals, bloggers, or online magazines are "announced" on Twitter. It is much easier to follow things on Twitter than it is to visit each website, or use an RSS reader or something. I'm new to smartphones but a service like Twitter is also more efficient and quicker on mobile phones than RSS feeds or some bookmarking service (Twitter doesn't necessarily replace those other options but it does compete when it comes a tracking/filtering/following service).

Right or wrongly, I will be using one account labelled "Sivaram_V" (without quotes) for both my personal thoughts as well as my business/investing views. If you were a professional blogging about your job, you probably shouldn't do this (for instance, if you are a fund manager, you should probably keep separate accounts for your business activities and your personal thoughts). I'm intermingling everything because I probably won't post too often and no one really identifies me with any business. However, this probably means that some of you will find my tweets distracting and way-off-topic. I don't know if Twitter lets you filter tweets automatically but if it does, you may want to only pick up messages containing "#in" or "#li" if you want business/investing views. I'm planning to flag all tweets related to investing, business, economics, and econopolitics with that flag so that only those messages are posted to LinkedIn.

Twitter has a flaw with name lengths in that the full name isn't very long—there isn't enough space for my super-long full name—and common nicknames/handles are already taken. So I'm going with Sivaram_V but don't get this mixed up with SivaramV who is someone else.

Click below to start following me:

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Sunday, November 13, 2011 0 comments ++[ CLICK TO COMMENT ]++

Jim Chanos' Presentation from Value Investing Congress

Many of you probably already saw Jim Chanos' presentation from Value Investing Congress in October but I just got around to checking it out. Contrarians should definitely check out the presentation embedded below (Thanks to Jacob Wolinsky for bringing this to my attention.)


I thought I would pick off some key concepts put forth by Jim Chanos. The presentation isn't long but it contains some nuggets so read on if you are interested in my thoughts.

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Sunday Spectacle CXLVIII

Interest Expense and Bond Recoveries
for Distressed Countries

(source: "A ‘haircut’ on Greek bonds? A buzz cut would look smarter," The Globe and Mail. November 11, 2011.)

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Sunday, November 6, 2011 9 comments ++[ CLICK TO COMMENT ]++

Preliminary look at Netflix (NFLX)


Netflix (NFLX) has been in the news lately, and given its steep fall in its stock price, I thought I would take a look at it. This is an early look, focused on its business model.

For those not familiar, Netflix is a US-based distributor of television and film content. It became the dominant DVD-by-mail rental service in the US, and has been transitioning into the online streaming business.

Netflix used to be a "growth story" over the last few years, and favoured by growth and momentum investors. It rose more than 900% within just the last 3 years but has had a spectacular fall this year:


As a contrarian, I became interested given its steep fall. The stock is off given poor results and some strategic mistakes by management.

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Sunday Spectacle CXLVII


Greek Tragedy*? Or is it Comedy?

(source: Kal's Cartoon, The Economist. Nov 5, 2011.)

*GREEK TRAGEDY: Like tragedies in general, a Greek tragedy is a serious play where there are a series of misfortunes. Greek tragedy in particular features masked actors, one storyline set in one location and often many main characters will die at the end of the play...
(source: (partial quote) English Literature Dictionary. ITS Tutorial School.)


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Sunday, October 30, 2011 0 comments ++[ CLICK TO COMMENT ]++

Articles for a Halloween

Here are some articles I read in the last few months that you may find interesting...

  • (Recommended) "The second economy" (McKinsey Quarterly; free reg required): An insightful article on, what the author calls, the second economy. This is the largely invisible, rapidly expanding, economy that underlies the physical economy. Information technology, particularly digitization and automation, drives this second economy and the author suggests it may be as large as the physical economy in 20 or 30 years. The emergence of this second economy can potentially increase wealth on par with what the Industrial Revolution did, while also causing large unemployment due to its nature (i.e. automation of jobs). The author almost suggests that the biggest problem in the near future will not be creating wealth but distributing it. Very Peter-Drucker-like article that is worth reading. If you are interested in economic changes to societies, it's worth checking out.
  • The Technology Battle of 2012 (Fast Company): A little over the top—these companies don't necessarily compete directly against each other—and missing some key players but, nevertheless, a good recap of the battle between Apple, Amazon, Facebook, and Google.
  • (entrepreneurship) Interview with Facebook founder, Mark Zuckerberg (Startup School via TechCrunch): Interesting thoughts from Mark Zuckerberg on entrepreneurship and the evolution of Facebook.
  • The state of farming in Canada (The Walrus): Interesting and insightful article on how small farmers are facing the challenges in farming.
  • (Recommended for contrarians) "How did Yellow Media's stock go from $17 to 17 cents?" (Report on Business magazine): Yellow Media was the distributor of phone directories in Canada. I actually looked at the stock around 4 or 5 years ago and wondered how this company could survive in the Internet age. Several years later, it looks like the final act of its life is playing out. This is a well-written story and I think contrarians and deep-value investors should read it to get a feel for how distressed companies could fall apart.
  • "Alaska’s Billion Dollar Mountain" (Bloomberg Businessweek): Good story of rare earth minerals and the big potential in Alaska, of all places. I personally think rare earths are a fad—substitution with more common materials is a big threat—but whatever you think, this is a great article.
  • Shai Agassi's Better Place attempts to conquer electric cars (Smithsonian): An article from late 2010 profiling the founder of Better Place, a company that is trying to deploy charging stations and battery swap technology for electric cars. The business looks uneconomic and has huge hurdles in North America, where gasoline is cheaper than most of the world, but it'll be an interesting story to watch.
  • "Economics has met the enemy, and it is economics" (The Globe & Mail): Interesting essay on the evolution of economics and the flaws it can't shake off.
  • What if USA paid off its debt? (NPR): Seems like a ludicrous view right now but back in 2000, the US government was thinking that the debt would be paid off by 2011 or so. Many of you may recall how Alan Greenspan was fretting that there may be adverse consequences if US government stopped issuing so many bods. Needless to say, the situation is opposite what it was a decade ago.
  • (opinion) "Where's today's Dorothea Lange?" (Los Angeles Times): "Economists and politicians told us that the recession was over, though some of them now worry about it taking a double dip. For those of us living farther from the ledger sheets and closer to the reality of what's happening in our towns and on our streets, this has been and remains a depression. It's hard to make the word stick, however, because we haven't developed the iconography yet. We don't have bread lines, dance marathons, guys selling apples on street corners or men jumping from high buildings because they've been wiped out in the stock market."
  • (Recommended) "Rise of the machines: America’s jobs challenge" (Reuters via The Globe & Mail): "Since 1999, business investment in equipment and software has surged 33 per cent while the total number of people employed by private firms has changed little. The gap between man and machine widened even further after the 2008-09 recession, helping explain why the United States is struggling to bring down an unemployment rate stuck above 9 per cent." This situation reminds of the 1930's and it remains to be seen what new industries will emerge to create jobs.
  • (Recommended) "California and Bust" (Vanity Fair): Latest article from Michael Lewis, tackling California this time around. As usual, Lewis paints with broad brushes and borderline stereotypes but retains his flair for writing entertaining pieces. What is happening in California may be a precursor what other states, as well as my province, Ontario, in Canada may face soon.
  • Book review — Money and Power: How Goldman Sachs Came to Rule the World by William D. Cohan; Wall Street and the Financial Crisis: Anatomy of a Financial Collapse by the US Senate; Report of the Business Standards Committee by Goldman Sachs (New York Review of Books): In this essay reviewing a book and two government reports, the author attempts to answer the controversial question, "Should some bankers be prosecuted?" My view is that the financial calamity wasn't a crime per se—although some criminal acts were committed by some small players and there was clearly unethical behaviour by some—but a failure of capitalism. The main "crime" I see is that of greed but beyond that, people and institutions were just wrong! The masses want to hang someone but the reality is that, if it were a crime, how come almost every major bank in America, as well as respected investors/financiers lost their shirt?
  • Book review — Deng Xiaoping and the Transformation of China by Ezra F. Vogel (New York Review of Books): Arguably, the person who had the greatest influence on China in the last 40 years is Deng Xiaoping. I don't think anyone else even comes close. He is known as the man who re-oriented China from a so-called Communist economy to a capitalist country. When it comes to darker events, he is also known as the man who ordered the massacre that came to be known as the Tiananmen Massacre. It remains to be seen how history will treat Deng Xiaoping.
  • The emergence of a supercity: Shanghai (Smithsonian): We may be entering the era of supercities. Science-fiction has always imagined massive cities but the 21st century may end up being the era of New-York-sized cities. This is certainly the case in China, where there numerous cities housing more than 5 million people. Perhaps the one that has ascended the most in recent decades, with more than 200 skyscrapers, is Shanghai. The linked article profiles the history of Shanghai and its current state (do check out the pictures that accompany the article to get a feel for the city).
  • "All the Single Ladies" (The Atlantic): Often large economic shifts also result in the change of social structures and norms. One just needs to think of the Roaring 20's to the decades afterwards. America and many other developed nations are going through something similar now and I believe it will become blatantly obvious how the pre-2000 period is quite different from the post. This article is on the topic of relationships and marriage. "Recent years have seen an explosion of male joblessness and a steep decline in men’s life prospects that have disrupted the “romantic market” in ways that narrow a marriage-minded woman’s options: increasingly, her choice is between deadbeats (whose numbers are rising) and playboys (whose power is growing). But this strange state of affairs also presents an opportunity: as the economy evolves, it’s time to embrace new ideas about romance and family—and to acknowledge the end of “traditional” marriage as society’s highest ideal."
  • (non-investing) Slideshow - Boutique coffee brewers in America (Fortune): I'm not into coffee but coffee brewers have become a popular thing in America over the last decade. Starbucks popularized good-quality coffee for the masses, while some are drifting to niche high-end brewers. One thing about coffee is that it is cheap compared to many other pleasures in life :)
  • (non-investing) "Adrift on the Nile" (The Walrus): A detailed account of the revolution the Egyptian revolution, and what it may mean for the future.
  • (non-investing) Review of the film, "Margin Call" (The New Yorker): This might be one of the best Wall Street movies in recent years. I haven't seen it but hope to check it out soon.

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Sunday Spectacle CXLVI

Potential Precursor to What May Happen in Europe... MF Global Stock Collapses

MF Global is a mid-sized brokerage firm—at the end of 2010, its market cap was around $1 billion, book value hovered around $1.5 billion, and had assets totalling roughly $40 billion—that is being sold off by the market. Investors are clearly heading for the exits and, as many market followers would know by now, loss of confidence in a financial firm often results in its end.

I don't know much about the company but it appears to be mostly focused on commodity brokerage operations. There was a commodities broker, Refco, that failed during the financial crisis era a few years ago but the problems faced by MF Global are different and may signal what may unfold in Europe.

MF Global is collapsing, not because of its commodities derivatives business, but because it appears to have made outsized bets on European sovereign debt of some questionable countries. The firm is run by a former CEO of Goldman Sachs, who was also the governor of New Jersey at one point, and he seems to have bet the fate of the firm on some dubious European bonds. As reported by Bloomberg,
Corzine, the former co-chief executive officer of Goldman Sachs Group Inc., began adding sovereign debt about a year ago, according to a company presentation. The positions accounted for 16 percent and 12 percent of net revenue in the quarters ended in March and June, MF Global said.

The firm, which has a market value of $198 million, holds $6.3 billion of sovereign debt from Italy, Spain, Belgium, Portugal and Ireland that it’s using in repurchase agreement trades with customers.

“The tactical decision to assume this outsized proprietary position highlights the core profitability challenges faced by MF Global and the scope of the re-engineering challenge facing the firm’s management,” Al Bush, a Moody’s analyst wrote in yesterday’s report.
So, basically, the company has large exposure to bonds from the PIIGS (excluding Greece) and Belgium. The reason I wanted to highlight this story is due to the fact that the company hasn't lost money yet — at least not anything catastrophic (it did post a loss last week). What is interesting is that investors in America are not willing to hang around. They are selling off this company due to its European exposure without even waiting to see what happens.

MF Global may be a precursor to what happens to some of the exposed financial institutions in Europe. Already the market has sold off several French and Belgian banks but the market hasn't lost total confidence. However, with MF Global, it does appear that the market is very bearish on any positive resolution in Europe (at least from a debtholder's point of view).

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Monday, October 24, 2011 0 comments ++[ CLICK TO COMMENT ]++

Sunday Spectacle CXLV


source: Quarterly Review and Outlook, Third Quarter 2011. Hoisington Investment Management.

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Sunday, October 16, 2011 2 comments ++[ CLICK TO COMMENT ]++

Sunday Spectacle CXLIV

Long-term Industrial Commodity Price Index (real)



From The Economist,
For 150 years, commodity prices have trended ever downward. As Mr Pielke notes, a spike in prices in the 1970s prompted the famous Ehrlich-Simon bet, between an ecologist and an economist, over whether resource prices would rise or fall between 1980 and 1990. The economist, Julian Simon, argued that they would fall, as rising prices in the short-term would prompt markets to find new supplies and efficiencies that placed downward pressue on prices over the longer-term. As it turned out, he won the bet. Had it been a 30-year bet, however, he would have lost.

Mr Pielke then asks the inevitable question: are the commodity price increases of the past decade likely to trigger a similar market response, such that a decade from now we're once again enjoying a time of plenty? Or is dramatic emerging-market growth combining with dwindling supplies of critical resources to push the world against fundamental limits, the end result of which will be sustained increases in commodity prices?

To answer the question, one has to state one's beliefs in the likely path of elasticities of demand with respect to price. To put it another way: over the next decade, how successful will humanity be in substituting away from scarce resources?
(source: "Hitting our limits?" The Economist. October 14, 2011)

For investors, the issue being raised is quite important. As most know by now, commodities have been in a bull market for more than a decade (oil, as an example, hit a trough in 1998). Not only does this allow investors to make money by investing in commodities, it also greatly impacts the cost structure of the economy. The question is whether this bull market in commodities will continue into the future; or, as in the 1970's, 1940's and 1910's, trend back down.

I have been bearish on commodities for several years precisely due to the trend illustrated in the chart (another big reason I'm bearish is because prices have already run up significantly). Namely, commodities—in this case, industrial commodity prices, adjusted for inflation—have trended down in the long run. Either productivity improvements (think of soft commodities and the fertilizer revolution), new discoveries (consider the huge oil field discoveries in the 1940 to 1990 period), or substitutes (think of the emergence of plastics in the 60's) have kept a check on prices. Will this pattern repeat in the future?

The commodity bulls argue the past—big productivity improvements, large deposit discoveries, or emergence of substitutes—won't recur in the future. Some, such as Jeremy Grantham, argue that the world is running out of natural resources. Others argue that the entrance of big undeveloped and developing countries (i.e. undeveloped countries need to build up their physical infrastructure, whether it is housing, or roads, or sewage plants) portends to strong long-term demand.

Which side are you on? The debate continues...

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Thursday, October 13, 2011 0 comments ++[ CLICK TO COMMENT ]++

Talk about a CEO getting fired before he even gets started

This must be one of the quickest CEO firings... can't believe it lasted less than two weeks:

Olympus Corp. shares fell 13.5% in Japan on Friday morning after the Japanese camera maker dismissed chief executive officer Michael Woodford just weeks after appointing him to the role. Olympus named Woodford, who was also the firm's president and chief operating officer, as its new chief executive on Oct. 1. In a statement, the firm said: "Woodford has largely diverted from the rest of the management team in regard to the management direction and method, and it is now causing problems for decision making by the management team."

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Sunday, October 9, 2011 2 comments ++[ CLICK TO COMMENT ]++

Opinion: USA shouldn't create a repatriation tax holiday

The Obama administration has been looking into waiving the rapatriation tax on foreign income. The thinking is that this would lead to investment within the country and lead to job creation. For those not familiar, many US corporations are sitting on huge cash balances but a lot of that money is overseas (earned from their foreign operations). If they bring that back into the country, they would pay a repatriation tax. Many executives of multinational firms have been pushing the US government to waive the taxes. Most readers, that own shares in these firms, would benefit from such a tax holiday.

I am not American so take it for what it's worth but I believe the US government shouldn't waive the tax.

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The computer is the... bicycle for our minds... -- Steve Jobs, 1955-2011



Steve Jobs was born in 1955, into an era of rotary phones and room-size computers. He died on Oct. 5, 2011, having put a computer inside a phone and that phone into 120 million pockets.
— Bloomberg Businessweek

Unlike many others out there, I am not a huge fan of Steve Jobs. His demanding personality doesn't sit well with me and if I was working for him, I may not survive for long. I was sort of a "geeky" guy who grew up with computers in the 90's but I was a PC user and hence not too familiar with Apple products.

Having said all that, I do respect Steve Jobs as one of the most influential people of all time. He was an entrepreneur and a designer and a salesperson and a leader and an executive. He is, without a doubt, one of the top executives in American history. His resurrection of Apple may be one of the biggest business turn-arounds in modern history.

One of the most remarkable lessons about the life of Steve Jobs is how he battled failures and bounced back. This is a good lesson for anyone that faces adversity, whether in their careers, school life, with relationships or their family. I judge a man or woman by what they do when they are down and out, and Steve Jobs' actions during his struggles in the 90's is a testament to his character.

If you don't have time to read my writing and want to read one good blog entry that encapsulates what Steve Jobs was all about, read "On Steve Jobs" by Matthew Panzarino at TheNextWeb. He does a better job than I ever could. Otherwise, read on...

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Sunday Spectacle CXLIII

Computer Industry Pioneer...

Consumer Electronics Industry Pioneer...

One of a Kind...


Image Source:
Esquire (Diana Walker/Time Life Pictures/Getty Images)
Harishragunathan's Blog (photographer unknown)
Dribble.com ("Goodbye" by Robert Padbury. Oct 5 2011)
Technoedge.com
arvino's posterous Blog (photographer unknown. Jan 3 2010)
Edible Apple blog (April 20, 2009)
Cult of Mac
Apple

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Sunday, October 2, 2011 0 comments ++[ CLICK TO COMMENT ]++

Sunday Spectacle CXLII

Americans Protest Against Wall Street


I don't support the protests (although I understand their frustration with crony capitalism, including some questionable actions unfolding in Europe) but this could turn out to be a pivotal moment in American history. Although the protests are small, serious protests against Wall Street probably hasn't occurred since the 1930's (there have been many protests against WTO, IMF, UN, police departments, Federal government, Federal Reserve Bank and other similar bodies but not specifically against Wall Street banks in the recent past—someone correct me if I'm wrong because my knowledge of historical American protests is weak). If the youth lose faith in the system, change is certain.

It's also interesting to me that the two protest movements, the current Wall Street protest and the Tea Party movement, started mainly due to dissatisfaction with the bank bailouts (The Tea Party is driven by much broader causes but bailouts were one of the key elements early on). The Tea Party movement is less driven by the younger generation but, nevertheless, I do see some support from the youth. It looks like the youth, both on the left and right, are losing faith — perhaps a symptom of the unfolding lost decade?

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