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.

Tags: , , , , , , , , , ,

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).

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

Sunday Spectacle CXLV

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

Tags: ,
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...

Tags: ,
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."

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.

Tags: , , ,

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...

Tags: , ,

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) ("Goodbye" by Robert Padbury. Oct 5 2011)
arvino's posterous Blog (photographer unknown. Jan 3 2010)
Edible Apple blog (April 20, 2009)
Cult of Mac

Tags: ,
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?

Tags: ,