Sunday Spectacle CXXVIII

Vulture Investors Get a Bad Rap
(Great speech by Danny Devito from the movie, "Other People's Money")



I haven't seen the movie—speech doesn't reflect the type of moview—but this is one of the greatest investing-related speeches in any movie. It sort of touches on the conflicts between employees, investors, and government. Vulture investors never have a good reputation but they underpin capitalism.

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Greek implied default probabilities

I ran across an article by John Hussman that illustrates the probability of Greek bond defaults (based on what the bond market yields imply):

(source: "Greek Yields: 'Certain Default, But Not Yet'" by John P. Hussman, Hussman Funds Weekly Market Comment, June 20, 2011)

From the article,
First, even with yields on short-term Greek bills pushing toward 20% annualized, the implied probability of a near-term default is very low. Indeed, the only way that Greek yields would be consistent with even a 50% chance of default in the next 3 months is to assume a 95% recovery rate. That sort of default is highly unlikely, because it would do nothing to materially alter the overall debt burden. For plausible recovery rates, the implied probability of a near-term Greek default is less than 7%. Simply put, despite the strained political and social situation in Greece, the bond market is demonstrating very little concern about a near-term default. At the point that a near-term default becomes likely, we would expect to see one-year yields spiking toward 40% and 3-month yields pushing past 100% at an annual rate (essentially pricing near-term bills toward the anticipated recovery rate).

This temporarily reassuring situation, unfortunately, strongly contrasts with the longer-term outlook for Greek debt. Even assuming a 60% recovery rate (that is, assuming a default would wipe out 40% of the Greek debt burden), the implied probability of a Greek default within the next two years is effectively 100%. The only way you get a lower probability is to assume a far lower recovery rate.

...From a time perspective, the only way Greek yields are consistent with less-than-certain default by the end of 2013 is if we assume recovery rates of less than 60%.

This is kind of surprising to me. Given the news and chaos over the numerous strategies being proposed by European governments, I would have thought a near-term default was likely. Yet it seems the bond market isn't expecting a default within 3 months.

The bond market isn't always right but if it is, then the Greek problems will stretch well into next year. Anyone looking for a quick resolution probably won't see one. I don't think a Greek default in and of itself is a big deal. Greece is a small country and the amount of exposure is manageable. What is scaring bond investors, I suspect, is the possibility of setting a precedent. If Greece defaults then others, like Ireland, Portugal and possibly Spain in the worst case, may do the same. It's also not clear what it means to default: can a country just walk away from the Euro? Can it print its own currency? Can it run two currencies at the same time?

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Sunday Spectacle CXXVII

American Home Ownership

(source: Calculated Risk, as of April 27, 2011)

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Insightful articles

Here are some articles that I found interesting and insightful...

  • (Recommended) "Stephen Elop's Nokia Adventure" (Bloomberg Businessweek): This is a good article on Nokia and its CEO, Stephen Elop. This article touches on why Nokia rejected Meego, its internal operating system, and also why Google and its Android platform was rejected. Anyone interested should check out the accompanying video and audio as well. Unfortunately for Elop, Nokia stock has fallen off a cliff and things aren't pretty.
  • Investigation of Muddy Waters' allegations against Sino-forest (James' Analysis): Not sure who this person is but he seems to have started a blog with good analysis of the allegations by Carson Block of Muddy Waters. According to 'James,' some allegations appear incorrect while others may be plausible. I think the Sino-forest saga is only in chapter 1 and there is likely to be more to all this.
  • Fundamentally-weighted passive investing and pure passive investing (Bloomberg): I'm not into passive investing so I don't follow it. This article provides a brief overview of Rob Arnott's fundamentally-weighted indexing. Hardcore passive investors such as John Bogle have apparently labelled fundamentally-weighted indexing as "witchcraft"—I wonder what he calls stockpicking strategies such as value investing?!?—but Arnott's record over the last 5 years looks good.
  • Online retailers may have to start paying sales tax (Bloomberg Businessweek): This is an important story. Online retailers like Amazon don't pay sales tax unless they have a location in the same state as the customer. This has given a big edge to online retailers over traditional, physical, retailers. If online sales tax is implemented, the edge will dissapear.
  • Groupon's numbers (Fortune): A look at some of Groupon's financial metrics. With Groupon poised to IPO, a lot of potential investors have started analyzing the numbers. As for me, I don't consider IPOs.
  • (Recommended) Angry Birds' pricing scheme (Fortune): The popular smartphone game, Angry Birds, is utilizing an interesting pricing strategy.
  • (Recommended if interested in entrepreneurship) Canadian manufacturers' battle to survive (The Globe & Mail): Trying to maintain a manufacturing operation in North America is like trying to keep a farm going in the 1930's. This is a story of how some are battling it.
  • Are colleges a waste of time? (The New Yorker): "More and more Americans are going to college, but how many of them are actually learning anything?" This is a big issue—students are literally paying $30k to $100k with no certainty of getting professional jobs—that I'll try to cover in the future.
  • Story of fashionable Canadian retailer Lululemon (Canadian Business): Stock looked overvalued when it had its IPO a few years ago, with a questionable business model—what's to stop other retailers from copying its trendy yoga-inspired wear?—but it has been hitting its business goals and succeeding against competition.
  • Companies fire back against Chinese short-sellers (Bloomberg): It's very difficult to say who is right in many of these cases but it has certainly made foreign Chinese stock investors aware of the problems.
  • Hackers fight to take over infected computers (Bloomberg): Big battles are happening in the underworld where computer criminals roam.
  • (Recommended) Slideshow: Nigeria and its oil business (The Atlantic): Good slideshow featuring the dirty side of Nigeria's oil business.
  • (non-investing) Fifteen classic books reviewed (The Atlantic): The Atlantic is one of the oldest magazines in USA and here are some original reviews of classic books over the century.
  • (non-investing) "After Japan, where's the next nuclear weak link?" (Reuters): "Imagine a country where corruption is rampant, infrastructure is very poor, or the quality of security is in question. Now what if that country built a nuclear power plant?" My wild guess—I hope this doesn't become true—is that you will see several castastrophic nuclear meltdowns in some poor countries with high corruption and high population count. It would not surprise me if some crazy crisis with millions being irradiated unfolds in China or India within our lives.
  • (non-investing) "If Monterrey falls, Mexico falls" (Reuters): The disastrous 'war on drugs' continues to take its toll: "In just four years, Monterrey, a manufacturing city of 4 million people 140 miles from the Texan border, has gone from being a model for developing economies to a symbol of Mexico's drug war chaos, sucked down into a dark spiral of gangland killings, violent crime and growing lawlessness. ... Since President Felipe Calderon launched an army-led war on the cartels in late 2006, grenade attacks, beheadings, firefights and drive-by killings have surged. ... That has shattered this city's international image as a boomtown where captains of industry built steel, cement and beer giants in the desert in less than a century -- Mexico's version of Dallas or Houston. ... By engulfing Monterrey, home to some of Latin America's biggest companies and where annual income per capita is double the Mexican average at $17,000, the violence shows just how serious the security crisis has become in Mexico, the world's seventh-largest oil exporter and a major U.S. trade partner." If the drug cartels infiltrate US border agents or take over towns on the US-side of the border, it's all over; we may finally see the end of the 'war on drugs' and legalization of drugs.
  • (not safe for work) Book reviews of Living Dolls: The Return of Sexism by Natasha Walter; and Pornland: How Porn has Hijacked Our Sexuality by Gail Dines (The Atlantic): A lengthy book review touching on sexuality, pornography and the relationship between men and women. In liberal societies, pornography has become more prevalent—sex isn't what it once was. The question is, does this trend hurt society and women in particular? I would argue no. One will notice that women's rights has also increased significantly in such societies. It may come as a surprise to some that women are discriminated against and abused more in societies that are less open—say Saudi Arabia, Pakistan or India. I'm not saying there is a causality between 'sexual openness' and women's rights but I do think the issue isn't what it seems. Anyway, interesting topic. I disagree with some of the author's arguments but it's certainly a provocative look at the issue.

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Sunday Spectacle CXXVI

The Decline of Manufacturing in USA
(source: "The Easiest Way to Understand Why We Can't Create Jobs" by Derek Thompson for The Atlantic. Content originally from "An economy that works: Job creation and America's future," McKinsey Global Institute)

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Sunday Spectacle CXXV

World's Biggest Weapons Exporters

(source: "Global arms," The Economist daily chart, March 23, 2011)

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Saturday, June 4, 2011 0 comments ++[ CLICK TO COMMENT ]++

Sino-forest sells off... potentially the biggest Chinese RTO scandal... and one of the biggest in Canada

NOTE: Do not construe anything written below as implying that Sino-forest is a fraud. I'm simply repeating some who are presenting information that casts doubt on Chinese RTOs, including Sino-forest. Their opinions may or may not be correct. Future of stock price movements cannot be predicted with certainty.

As I and others have mentioned, it appears that a big number of Chinese RTOs (reverse-take-overs) are dubious and in some cases, outright scams. So far, most of these have been micro-caps and small-caps. However, one of the bearish research firms, Muddy Waters Research, has tackled a bigger company, Sino-forest (TSX: TRE), whose market cap before the recent sell-off was around C$3 billion. Sino-forest is a forestry company listed on the Toronto Stock Exchange—it was actually a darling of some commodity investors a few years back—with operations largely in China, with some marginal stake in New Zealand.

A few days ago, Muddy Waters Research published an extremely bearish 19-page report on Sino-forest. Saying 'extremely bearish' probably underplays the report since the analyst suggest Sino-forest's shares are worth less than $1 versus the $18+ the shares were trading for before the report came out. The shares promptly collapsed over 70% this week on Muddy Waters opinion and other market events (including the sell-off in the broad markets):


The Globe & Mail has a story summarizing the key details that are available on this story.

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