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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8 Response to Sunday readings...

Frederik fanth
June 2, 2011 at 7:18 AM

What a fabulous post this has been. Never seen this kind of useful post. I am grateful to you and expect more number of posts like these. Thank you very much.

Parker Bohn
June 2, 2011 at 3:42 PM

Cashed out and bought a house. :-D
I've been fully invested for several years, but I sold most of my stocks in early May and got a great deal on a foreclosed house.  Unlike stock prices, house prices here look historically quite cheap (Georgia).

I ran a spreadsheet a few years ago comparing the economics of renting+investing vs buying, and I thought "damn, house prices would have to decline by 40% for this to make sense".

Well, my new house needs lots of work, but I bought it for a little over half of what it sold for in 2005.

I'm not sure what the Canadian real estate market looks like?  I get the feeling that houses are more expensive and better built there in general.  I doubt my house would survive a true northern winter.  For instance, it only snows here about 3-5 days a year on average.

Parker Bohn
June 2, 2011 at 3:51 PM

I'm going to be too busy to read many blogs for a while, but I will keep reading yours. :)

Your clear writing style and macro focus sets you apart from most other financial blogs, which tend to be focused on specific investments.  And since I won't have much money to invest for a while, this makes your posts much more interesting.

Sivaram Velauthapillai
June 4, 2011 at 7:46 PM

Parker Bohn: "I've been fully invested for several years, but I sold most of my stocks in early May and got a great deal on a foreclosed house. Unlike stock prices, house prices here look historically quite cheap (Georgia). "

I think that is a reasonably good decision, especially if you are going to live in it or can rent it out with decent return. My brother, who works in Seattle right now, also bought a house recently (about 30% off peak price) and I was thinking about his situation quite a bit. I think, real estate prices can fall further in the US but that's like waiting for the market to completely bottom in 2009, which would haver resulted in missing out (as was the case with me).

The real estate valuations are what I would call reasonable. The probability of loss over long periods is likely to be low. Furthermore, interest rates are so low that it may not be this low (probably for decades) once the US economy recovers fully.

BTW, congratulations on the home. Good luck and hope you have fun fixing it up :) . I'm not a handy-type but it looks like a fun project for you.

Sivaram Velauthapillai
June 4, 2011 at 7:46 PM

Parker Bohn: "I'm not sure what the Canadian real estate market looks like? I get the feeling that houses are more expensive and better built there in general. I doubt my house would survive a true northern winter. For instance, it only snows here about 3-5 days a year on average."

It's funny you mention that because my brother was commenting about his home in Seattle. There are big differences in build quality and materials but I don't think that's what drives the prices.

One of the things he commented was how homes in Toronto seem to be more durable because they are built of bricks (at least most of the outside). In contrast, most of the homes in Seattle are built of wood. Canadian homes also have central heating (from natural gas) whereas his home has inefficient and weak electric heating (but he wouldn't use it much). His home doesn't have air conditioning (but this was an option choice and Seattle does have mild weather and never gets too hot). How about you guys in Georgia? Do most homes have air conditioning?

A big chunk of the cost of homes up here is operating costs such as heating. I suspect you probably have much lower operating cost in Georgia. If you have air conditioning, how often do you use it? Do you need it only during peak summer periods?

I think some parts of Canada, like Toronto and Vancouver, are probably seeing bubbles. But the big bubble may be in condominums. Totally unaffordable, tiny, condos, although in good location in city (don't need car), being bought by younger people. Not sure how sustainable the condo market is going to be. I was reading somewhere that the condo towers, unlike detached homes, cannot be stopped once started. So it is easy to have gluts if too many condo towers are built.

Sivaram Velauthapillai
June 4, 2011 at 8:17 PM

You do realize that reading my blog is detrimental to your financial health, right? I'm surprised you aren't bankrupt and living in a cardboard box yet ;)

On a serious note, thank you for the compliment. It's always good to get feedback and you have been the only reader with consistent feedback.

Parker Bohn
June 7, 2011 at 1:58 AM

No internet in my new house yet, so I just got around to reading your response.

My house is mostly brick (built in 1970), but a lot of the newer houses here are wood and vinyl siding.  I would say that approximately 100% of houses here have air conditioning.

Just earlier this week it was 97F (36C), which is not unusual for this time of year.  Also the humidity is very high here.  So it does get a bit hot sometimes, though not dangerously so (unless you are stupid and go play sports in the middle of the day without drinking water or something).

To my mind, it gets a bit cold here, too.  It routinely gets below freezing during the winter months!  Brrr... There may have been colder days, but the coldest I noticed this last year was about 14F (-10C).

The cost of AC and heat are roughly equal during peak seasons.  In other words cooling in July and heating in January are about the same cost.  Friends I know that live in small condos spend as little as $50-100 US per month during peak seasons, but I'm betting that in a largeish house like mine it will cost more like $200-300 US per month during peak seasons (but I'm willing to be slightly unconfortable for the sake of frugality).

How does this compare to the expense where you are?  I know that there are gov't subsidies for heating in some northern states in the US (though not in GA), so I wouldn't be surprised if the gov't there gets involved.

I have gas heat, which is not rare, but I get the impression that electric heat is a bit more common.

Sivaram Velauthapillai
June 12, 2011 at 1:14 PM

It's hard to compare heating costs because, as you alluded to, it depends heavily on the size of the home. Without looking at numbers, my guess is that the heating costs in a given amount of time is probably the same over here in Toronto, Canada. However, we have to run heating 100% of the time during winter (October to April) whereas I suspect in you area, you may be using less energy.

From what I have heard from some random Americans I have run into, where they may be a big difference is in electricity. Our electricity costs are around 5cent/kwh off-peak to around 12cents/kwh during peak (typical person isn't home (i.e. at work) during most of the peak so the costs are closer to the lower end). Some Americans I have talked with have been shocked that electricity is so cheap up here. Not sure how electricity bills are in Georgia.

Not housing related but gasoline costs are far lower in most of the US whereas it is higher here (partly due to higher gasoline taxes).

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