Sunday readings...

Reading material for a sunday... and beyond...

  • Unintended consequences of China's capital controls (WSJ China Realtime Report): Found a good blog on China by The Wall Street Journal. Maybe it was always there but I never looked at it much before. China followers and commodity investors should check out that blog. Anyway, this story deals with how some in China are hoarding soybeans in a convoluted scheme to raise capital. None of it makes any sense—some of you may have heard of stories a few years ago about hoarding copper and steel but soybeans?—until you think about China's capital controls and how it severely distorts currency and interest rates.
  • Stephen Elop & Nokia (Report on Business magazine): Lengthy profile of Nokia's CEO, Stephen Elop, and some history of Nokia. I've been following Nokia for a little over an year and thinking of making an investment in it.
  • (Highly Recommended) "Should you buy Microsoft?" (Geoff Gannon for GuruFocus): Geoff disects the case for buying, or not buying, Microsoft. A lot of value investors are bullish on Microsoft these days and this is a good analysis of the state of affairs with Microsoft... With respect to the Skype acquisition, Geoff puts forth the unique view that Skype can be thought of as strategic insurance to protect Microsoft's core businesses. Geoff suggests that Windows and Office are worth around $250 billion and spending around $8.5 billion, whether cheap or not, is like spending 4% to protect them. The only question with that thinking is whether Skype actually helps Windows and Office (I am not too familiar with Skype and am unsure how it increases the value proposition for buying Windows and/or Office)... Even if you have no interest in Microsoft or technology stocks, I recommend reading through the article since it illustrates how highly-profitable businesses are vulnerable to changes in their business model. On the one hand, it's great to own those businesses (assuming the price was reasonable) because they are rare and highly profitable; but on the other hand, because they are highly profitable and accomplish something that is difficult in the business world, they are vulnerable to changes.
  • Salman Khan's online academy (Bloomberg Businessweek): I covered Salman Khan and his amazing online educational site. This is a more detailed story on his accomplishment.
  • "The U.S. Postal Service Nears Collapse" (Bloomberg Businessweek): Well, the demise of the postal delivery system probably isn't a surprise to anyone. In fact, it would have been even quicker if it weren't for the continuous increase in (physical) junk mail over the last decade or two. Now that marketers are shifting to online, this is probably the final nail in the coffin. The USPS vs Fedex/UPS battle is a good example of how private companies can often, but not always, be more innovative, efficient, and satisfy customers better. Future generations will be wondering how a monopoly lost to these newcomers. In any case, the situation is still salvageable for USPS (and other mail carriers elsewhere) since, as this chart shows, revenue is still much larger than the courier companies and streamlining the business should allow it to break-even. In the long run, needless to say, mail delivery will shrink as online communication starts dominating all aspects of life.
  • "How Rajat Gupta Came Undone" (Bloomberg Businessweek): Suzanna Andrews chronicles the fall of one of the leader's of American business, Rajat Gupta. An ex-McKinsey leader and a board member of Goldman Sachs, amongst others, Gupta has been embroiled in the Raj Rajaratnum insider trading case. The actions of Gupta are inexplicable unless you assume that he is a greedy person. It's possible that he was always greedy and unethical and rose through the ranks with that behaviour without anyone noticing; or it could be that he faced financial problems after he "retired" from McKinsey and became a different man, for the worse—we just don't know yet.
  • Rajat Gupta's life at McKinsey (Bloomberg Markets magazine): Another story detailing Gupta's relationship at McKinsey.
  • (Recommended) Best business-related movie scenes (CNBC): Here's something fun... some of the best movie scenes with links to Youtube clips dealing with business, stock market, etc.
  • (Recommended) Interview with fromer Morningstar director of equity research, Pat Dorsey (Jacob Wolinsky via GuruFocus): Insightful stuff... Pat Dorsey has insightful comments about moats. In particular, I found his comment about companies having moats but being unable to invest in them quite thought provoking.
  • Chinese stock scams on US exchanges (Reuters via CNBC): Late to the story but some of you may have seen a few articles in the media detailing various scams related to Chinese RTOs (reverse-take-overs) on US exchanges. Most of the problems appear to be in the small-cap and micro-cap area so anyone investing in such small companies may want to read up on the problem. I don't really invest in small companies (except in special situations) so I don't really encounter these issues. I remember Geoff Gannon astutely pointing out a few months ago his distrust of some of these companies. As far back as last year, The Street had extensive articles on some of these scams.
  • Ten things killed by the smartphone (CIO): Most of them obvious but it shows to how a device can destroy several industries
  • "Microsoft's Odd Couple" - Book excerpt from Idea Man by Paul Allen (Vanity Fair): Inside look at the relationship between Bill Gates and Paul Allen, from the viewpoint of the latter.
  • (non-investing) (Recommended) "A Declaration of Cyber-War" (Vanity Fair): America, if speculations are correct, may have escalated the stakes and unleashed what may turn out to be the most influential military weapon over the next century: state-sponsored viruses that damage industrial and civilian infrastructure. This excellent article by Michael Joseph Gross talks about the Stuxnet worm that inflicted Iran's nuclear power plant last year. This will likely be a watershed moment in world history because it is the first virus or worm that was designed by a government—no confirmed proof from the government obviously—and successfully targetted industrial plants. Science fiction and the media has continually speculated about computer viruses that shut down water plants, factories and electric power plants but it has mostly been fiction so far. The Stuxnet incidence is the first real weapon that appears to have resulted in serious damage to a power plant. State-sponsored viruses, worms and trojans are significant because they allow states to mask their operations and deny everything. Now that the weapon has been released, it would not surprise me if some hostile state does the same thing to America or others in the future [one interesting point in the story is how Stuxnet was written carefully to limit collateral damage and to seek out only specific industrial-control systems; I doubt others would be so careful and attempt to limit damage.]
  • (non-investing) "Time Trip - Terrence Malick's 'The Tree of Life'" (The New Yorker): Terrence Malick is my favourite film director and I have been eagerly awaiting The Tree of Life. Somewhat surprisingly, The Tree of Life won the Palme d'Or at Cannes so anyone interested in artistic films is encouraged to check it out. The linked article by Anthony Lane provides a look into the film as well as the director himself. Anyone interested in films may also want to check out Roger Ebert's review.

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Sunday Spectacle CXXIV

It pays to be contrarian... sometimes.

Analyst Ratings by Country

(source: "Why you should buy stocks that analysts hate" by David Parkinson. The Globe & Mail, May 20 2011.)
Admittedly the data above isn't very solid... 3 month performance...


Jim Chanos thinks cracks appearing in China's real estate bubble

Jim Chanos, who is bearish on Chinese real estate, thinks that cracks are appearing in China. Chanos maintains his past views but says that his researchers who visited China are seeing bearish signs.

Do keep in mind that Chanos has been bearish on China for over an year now and been wrong. Although, in the video he says his position is doing well since the Chinese market peaked out over 18 months ago. The following chart from of the Shanghai Stock Exchange Composite shows how the stock market over there has been in a bearish trend since it peaked out in the middle of 2009 (do note that, unlikely the majority of investors out there, I view the Chinese markets more akin to a casino and don't draw many conclusions from them).

Thanks to Credit Writedowns for the following CNBC video from last week:

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Jim Rogers interview at Investment U

Thanks to CanadianValue at GuruFocus, I ran across a good two-part interview of Jim Rogers at Investment U (part 1 here and part 2 here).

I haven't followed Jim Rogers much in the last few years. Partly it's because I am bearish on commodities and China and I find that my views aren't consistent with his investment recommendations. The other reason is that I find him a bit repetitious since most of his interviews cover the same topic, with some interviewers even repeating the same questions of others.

Yet, I do keep an eye on Jim Rogers' thoughts once in a while. Long-time readers may know that I started off more as a macro investor—I still am to some degree and you may get this feeling from my writings (haven't done much lately though :( ) and the articles I cover; it's also why I don't think I will ever be a true value investor—and Jim Rogers, along with Marc Faber, were two of my biggest influences. The good thing about Jim Rogers is that he is a straight shooter and doesn't couch his views.

This interview by Investment U is a great one and I thought I would add my comments to some of the thoughts that are expressed. (As usual, bolds within quotes are by me.)

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Sunday Spectacle CXXIII

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Sunday readings...

Some articles, including some important ones summarizing the Berkshire Hathaway meeting held a few weeks ago.

  • (Highly Recommended) Warren Buffet 2011 shareholder meeting notes (Ben Claremon for GuruFocus): Very detailed and extensive notes from last week's shareholder meeting. Too bad it's in scribd format (am I the only one on the planet without a Facebook account yet? ;) )
  • (Recommended) Summary of Warren Buffett 2011 shareholder meeting (Epic Investor): Another pretty lengthy summary of the shareholder meeting from earlier in the month.
  • (Recommended) TV interview of Warren Buffett and Ajit Jain (NDTV via GuruFocus): First time I've seen the publicity-shy Ajit Jain... I wish someone would ask Buffett to walk through one of his past investments. The canned questions and short TV-oriented questions have been repeated a million times and are a complete waste of time for people like me. Oh well. Maybe Alice Shroeder will write an investment book soon.
  • (Recommended) "What makes a good business?" (Geoff Gannon for GuruFocus): An important question. The ideal business is a non-capital-intensive business but it's more complicated than it seems. Many capital intensive businesses have high barriers to entry and tend to be "cheaper" so they are not necessarily bad investments. But if you are Buffett-Prime-type investor, one should seek non-capital-intensive businesses since you are potentially holding them forever.
  • Canadian REITs paying out more than they earn (Report on Business magazine): Not a pretty sight when companies pay out more in dividends than they earn. Generally the only winners in such a scenario are the employees and management of those firms, while investors end up with destroyed wealth.
  • SuperValu and its misaligned employee compensation (Barel Karsan): "Last week, SuperValu announced an incentive program from 2012-2014 that will see employees participate in increases in the company's market cap. Specifically, employees will receive up to 4.8% of the company's market cap increase! There are a few major problems with this compensation structure. The first is the sheer size of the amount. If the stock price just returns to its 2007 level (so shareholders who have owned the stock over this period would end up with no gain), the bonus payout could be around $250 million. This is more than the company has generated in operating income over the last four years combined!"
  • Steve Jobs on leadership (Business Insider): When you join the managerial class, just like when you become a politician, leadership starts to matter most. You will be held accountable for results irrespective of the cause. For example, the CEO of BP was blamed for the Macando well blow-up even though he has little visibility into the hundreads of wells that are being drilled by BP. Steve Jobs comments on what happens when you cross into management: " 'When you're the janitor, reasons matter,' Jobs tells newly minted VPs, according to Lashinsky.'Somewhere between the janitor and the CEO, reasons stop mattering,' says Jobs, adding, that Rubicon is 'crossed when you become a VP.' In other words, you have no excuse for failure. You are now responsible for any mistakes that happen, and it doesn't matter what you say."
  • Charlie Rose interviews Reed Hastings, Netflix CEO (Bloomberg Businessweek): It's always insightful to hear what the leaders of disruptive technologies have to say.
  • The golden age of drive-through fast-food restaurants (Bloomberg Businessweek): Fast-food drive-throughs are kind of like movie drive-ins from the 60's. They are innovative and a sign of the times. Future generations may never know what they really are. This article talks about Taco Bell, a popular fast-food restaurant in America and Canada, and how they are almost like the modern assembly line.
  • Job search tips for new grads (Bloomberg Businessweek): Basic stuff but some of you may be interested.
  • The evolution of product placement in television and live media (The Globe & Mail): As media evolves, so does the advertising.
  • Somali pirates are earning 100x ROI on their pirating activities (Bloomberg Businessweek): Not sure if the priates from the 1700's earned quited the same loot back then.
  • Brazil's emergent middle class goes on a debt spree (Bloomberg Businessweek): If the incomes are stable and can back the debt, the increasing levels of debt should be ok. The difficulty in figuring out Brazil is that it is fairly cyclical and vulnerable to a commodity bust.
  • South Africa and its 25% unemployment problem (Bloomberg Markets magazine): It remains to be seen how South Africa adapts as their historically-strong mining (in gold, copper, etc) sector declines to almost nothing and chaos in neighbouring regions drive labour costs down.
  • (non-investing) "The Double Game" (New Yorker): Writing for The New Yorker, Lawrence Wright chronicles the outcome of America's funding of Pakistan over the last 50 or so years... (On a different note, there is also an excellent article by Malcolm Gladwell about the invention of the computer mouse and how Apple was influenced by Xerox PARC in this week's New Yorker. Unfortunately it's not free... Another interesting story for those interested in film is an essay by Anthony Lane on Pixar. Again, not free.)
  • (non-investing) "Silver or lead" (New Yorker): "The drug cartel La Familia gives local officials a choice: Take a bribe or a bullet." An article written almost an year ago, William Finnegan provides an in-depth look at one of the most notorious drug cartels, La Familia Michoacana, which is famous for carrying out torture and essentially being inhuman.

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Sunday Spectacle CXXII

One-hundread-year commodity price index

(source: "Time to Wake Up: Days of Abundant Resources and Falling Prices Are Over Forever," Jeremy Grantham. GMO Quarterly Letter, April 2011.)

Haven't read the article yet but I don't quite share the paradigm-shift argument. I think a lot of it is based on strong perpetual growth from countries like China and India—I don't buy this view—and it's also not obvious that the market hasn't priced in the future growth already (after all, commodities have been in a bull market for over 10 years now.)

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Wednesday, May 11, 2011 1 comments ++[ CLICK TO COMMENT ]++

Galleon hedge fund founder, Raj Rajaratnam found guilty of insider-trading-related charges

In probably the biggest insider-trading-related conviction in several decades, Raj Rajaratnam of hedge fund, Galleon, was found guilty on all counts put forth to the jurors:

Raj Rajaratnam, the hedge-fund tycoon and Galleon Group LLC co-founder at the center of a U.S. insider-trading crackdown, was found guilty of all 14 counts against him in the largest illegal stock-tipping case in a generation.

A jury of eight women and four men in Manhattan returned its verdict today after hearing evidence that Rajaratnam, 53, engaged in a seven-year conspiracy to trade on inside information from corporate executives, bankers, consultants, traders and directors of public companies including Goldman Sachs Group Inc. He gained $63.8 million, prosecutors said.

The trial came as Manhattan U.S. Attorney Preet Bharara promised to crack down on “rampant” illegal trading on Wall Street. Rajaratnam was convicted on five counts of conspiracy and nine counts of securities fraud. Prosecutors today said he faces 15 1/2 years to 19 1/2 years in prison at his July 29 sentencing.

“Rajaratnam, once a high-flying billionaire and hedge fund manager, is now a convicted felon, 14 times over,” Bharara said in a statement after the verdict. “Rajaratnam was among the best and the brightest -- one of the most educated, successful and privileged professionals in the country. Yet, like so many others recently, he let greed and corruption cause his undoing.”

The jury, which had filled out a verdict sheet at 10:11 a.m., sent a note to U.S. District Judge Richard Holwell nine minutes later telling him it had reached a decision, according to copies of the documents released by the court.

If the charges stick, a certain behaviour on Wall Street will diminish. There are several other pending cases related to insider trading, "expert networks," and the like.


Sunday Spectacle CXXI

Economic Losses from Weather in USA


Some articles to start off the week

If you didn't have enough reading for the week, fear not. Information overload is just around the corner ;) Here are some items that you may find interesting...

  • Book excerpt - The Wizard of Lies: Bernie Madoff and the Death of Trust by Diana B. Henriques (New York Times): Major bubbles are often marked by criminal actions and the stock market crash that started in 2007 was no different. Bernie Madoff will be remembered for centuries, well beyond our lives.
  • Book excerpt - Money and Power: How Goldman Sachs Came to Rule the World by Wiliam D. Cohan (vanity Fair): Haven't read it yet but it seems to be about the battle between Jon Corzine and Henry Paulson for the leadership of Goldman Sachs.
  • Carl Icahn at 75 (New York Times; h/t The Reformed Broker): Hated by some, loved by some, we are seeing the final moments of one of the most influential shareholder activists that ever lived.
  • ROIC in various industries (Barel Karsan): Although returns for stockpickers is dependent on specific picks, it does help to be in an industry that has high ROIC (or ROE).
  • Portfolio concentration (Value Investment Institute): Concentrated investors may want to take a quick look at this. Nothing earth-shattering here but it's still good to read thoughts about concentrated investing.
  • (Highly Recommended) Prem Watsa at the Benjamin Graham School for Value Investing (Richard Ivey School of Business; h/t CanadianValue at GuruFocus): Haven't watched this video fully yet but it's always good to hear what, arguably the best value investor in Canada, Prem Watsa, has to say.
  • (Recommended) "How Warren Buffett Protege David Sokol Lost His Way" (Businessweek): This article seems a bit too critical but it's still worth reading if the subject matter interests you. I'm not too familiar with legal matters but it still doesn't seem as if David Sokol did anything illegal. Nevertheless, one should not leave themselves to be doubted by the public. Truly an unfortunate action by Sokol and a (minor) mistake by Warren Buffett.
  • The Credit-Anstalt failure of 1931 (Businessweek): A good, quick, recap of the major event that caused the spectacular crash during the early 1930's.
  • The amazing recovery of Alcatel-Lucent (Businessweek): I have to say it has been pretty impressive to see what has happened at Alcatel-Lucent. The stock is up around 100% so far this year, after terrible few years, in a tough industry. I have been following Nokia for a while and half of its business (under the Nokia Siemens banner) is wireless infrastructure so it's impressive to see what its main competitor has done. If Nokia can carry out even half of what Alcatel-Lucent has done, its market cap should see significant increase.
  • China bubble - a few quick thoughts (Buttonwood for The Economist): Buttonwood has a short blog entry citing some who think China may be seeing a bubble. I have been bearish on China for years and been completely wrong. (I have also been bearish on commodities and it'll be interesting to see what will happen there. Oil prices are starting to hit levels that should start to cool the economy. Also, the outcome to the parabolic rise in silver remains to be seen.)
  • Horace Deidu's thoughts on the future of mobile phones and PC computing (asymco): Every analyst has an opinion of the future and few turn out to be correct. Nevertheless, some people are worth reading or listening to because you may gain some insights about the industry, business models, customer behaviour and so on. Horace Deidu writes the excellent mobile phone blog, asymco, and I like checking out his views.
  • (Recommended for Canadians) The saga of the most valuable vacant lot in Toronto - 1 Bloor Street East (Report on Business magazine): "It's the sexiest vacant lot in Canada. What it lacks in amenities, it makes up for in location, location, location: the southeast corner of Yonge and Bloor Streets, Toronto’s crossroads, where the city’s most important subway lines meet underfoot. Just to the west is the snootiest row of shops in the country—Holt Renfrew, Cartier, Tiffany, Hugo Boss. A bit to the east soar the stately headquarters of corporate titans Manulife and Rogers... If you were making a movie of this saga, you’d set the first scene on Nov. 13, 2007. Hundreds of people line up on the sidewalk for the opening of the neighbouring sales office for One Bloor East. The proposed 80-storey condo and hotel tower will be the tallest in Toronto. Many of those in line are stand-ins, hired by real estate agents, and they’ve been waiting in line for days..."
  • Google's Patent Search (Fast Company): Some of you may find it useful. So far seems to be limited to US patent office. Direct link to Google patent search here.
  • "What LeBron James And The Miami Heat Teach Us About Teamwork" (Fast Company): Talent alone isn't good enough. Teamwork matters just as much.
  • (list) Ten most innovative companies in retail (Fast Company)
  • (slideshow) Apparently the world's largest producer of oil paintings is in China (The Globe & Mail)

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Stocks entering dangerous zone

I don't know if others get the same feeling but stocks appear to be entering a dangerous zone. Valuation just doesn't seem to be attractive. This has been the case for more than year but now it's much worse IMO. The following chart from of the 10-year cyclically-adjusted P/E (CAPE) ratio (aka Graham-Dodd P/E ratio) shows the present state (as of April 2011):


Sunday Spectacle CXX

American Bank Failures

(source: "Map of Banks Failed in 2008/2009/2010,"

Cost of American Bank Failures

(source: "Monthly bank failures cost to FDIC,"

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