Sunday, July 31, 2011 0 comments

Sunday Spectacle CXXXIII

Corporate Profit Margins Surpass Pre-Crisis Levels

(Data Source: Bureau of Economic Analysis; Chart: The Mays Report, July 31, 2011. Downloaded from SeekingAlpha on July 31 2011.)


There a quite a few corporate profit metrics—pre-tax margin, after-tax, S&P500 companies vs total market, etc—so the results can vary somewhat. According to the data produced by Mays Report, it appears that corporate profit margins have surpassed even the 2007 peak. This is one reason some bears, like me, are really cautious. The valuation looks reasonable—neither overvalued nor undervalued—but the question is whether profits are sustainable. The P/E ratio looks reasonable (for a low-inflation period) because earnings are high but are they sustainable?

Recall that some, in hindsight, admit that the 2007 profit margins were unsustainable. A big chunk of the profits around that period were due to fictitious financial profits yet the current profit margins have surpassed that point (without the assistance of fictitious profits).

I don't think there is anything "fictitious" about the current profit situation. However, what may not last is the high profits earned in emerging markets and in commodity businesses. If corporate profit margins fall, I suspect it will be driven by declining profits from emerging markets. Needless to say, the market doesn't expect that to happen any time soon.

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Sunday, July 24, 2011 0 comments

Sunday Spectacle CXXXII

Shipping Investors Head for the Exits


(source: stockcharts.com)

This is an example of the ugly problem of over-capacity, although weak demand and pricing doesn't help matters either. There were way too many ships built, or contracted to be built, during the commodities/world-trade bubble. Barring a huge boom in trade or increases in pricing, particularly for dry bulk shipping and crude oil shipping, some of these companies may not make it.

The Philadelphia Marine Shipping Index (SHX) tracks the share prices of publicly-traded companies in America. Many shares are trading at around half of book value; however, they may still not be cheap enough since some may liquidate and not get much for their ships.

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Sunday, July 17, 2011 1 comments

Sunday Spectacle CXXXI

Equity, Bond, and Money Market Fund Flows versus Returns

(click for full-size image)

source: 2011 Investment Company Fact Book, 51st Edition. Investment Company Institute.

Some people use charts like these, where funds tend to flow in during peaks and flow out during troughs, to suggest that retail investors are dumb. However, I believe it is not what it seems. As George Soros has suggested under his reflexivity theory, which I support to a large degree, prices may influence investors but investors may also influence prices. The "dumb money" looks dumb because they themselves cause the outcome. In other words, fund flows will almost always be high at peaks and low at troughs.

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Sunday, July 10, 2011 1 comments

Articles you may find interesting

Some articles I either read or am planning to read in the near future...

  • (Highly Recommended) "A Dirty Business" (The New Yorker): In this excellent article, George Packer gives us a detailed look at the prosecution of the hedge fund manager, Raj Rajaratnam, who ran a large hedge fund called Galleon. If appeals aren't successful, this case will likely go down as the biggest insider trading conviction of a fund manager in American stock market history.
  • Conversations with Charlie Munger - the final edition (Ben Claremon for GuruFocus): This is likely one of the very last detailed conversations with Charlie Munger. He is ending the annual Wesco conversations now that the company was taken private and is too old. Nothing earth-shattering in the material covered in during this meeting.
  • (Recommended for contrarians) Howard Marks & distressed debt investing (Bloomberg Markets magazine): The article chronicles Howard Marks' journey in the distressed investing world.
  • (Recommended) Is content still king? The Netflix story (The Atlantic): Pretty good article questioning the traditional notion that 'content is king.' The case under examination is Netflix. It's too early to say if we are seeing a paradigm shift but short-sellers betting against Netflix have been burnt badly in the last two years.
  • Barron's looks at Syngenta (Barron's): I don't subscribe to Barron's—I think they are too short-term-oriented—but do read their free articles once in a while. If you are interested in GMO (gentically modified organism) companies, this article gives a basic overview of Syngenta. One of the theories in investing is that sin stocks—alcohol, gambling, sex, weapons, tobacco—outperform the market slightly in the long run. I think one can add companies that produce GMO products, such as genetically-modified seeds, to this list. One of my friends thinks these companies are almost evil but I'm ok with them. Syngenta (NYSE: SYT) and Monsanto (NYSE: MON) are two of the most-hated companies in the world and although they have looked expensive for years, it's worth keeping an eye on them.
  • (Highly Recommended) Thoughts on managing funds and avoiding frauds (Bronte Capital): John Hempton, who has sort of made a name for himself in the last year, specializing on frauds and investigative investing, gives his thoughts on John Paulson's handling of Sino-forest. Even if you have no interest in the Sino-forest saga, or will never be a fund manager, Hempton brings up some issues that are worth pondering.
  • Property rights in China, or lack there of (The Economist): Brief article touching on the risk of investing in Chinese companies through the VIE (variable interest entity) scheme (article suggests that half of US-listed Chinese firms use the VIE structure). It remains to be seen how the Chinese government will rule on many of these vague rules pertaining to property rights. Yahoo! shareholders have been feeling the pain after the company, apparently, shifted the ownership of some key assets to a Chinese national due to threats from the government and it remains to be seen if others will be impacted in the future.
  • Does it make sense to invest in commodities? (Financial Post magazine): A basic overview of the reasons for, and against, investing in commodities.
  • (Recommended for macro investors) Beyond BRIC (Financial Post magazine): You heard of the BRICs, but who stands beyond them? Here is a look at 11 other emerging markets.
  • Can the forestry industry recover? (Financial Post magazine): Some of the Canadian forestry companies are recovering but is that a short-term boost?
  • (Recommended if you are into entrepreneurship) "Stumptown's Duane Sorenson, the Coffee Connoisseur" (Entrepreneur): A good look at an entrepreneur who started a coffee speciality business.
  • (Recommended) "Sheila Bair’s Bank Shot" (The New York Times magazine; h/t The Big Picture): From the article by Joe Nocera: "‘They should have let Bear Stearns fail,” Sheila Bair said. ... She and the F.D.I.C. managed a number of huge failing institutions during the crisis, including IndyMac, Wachovia and Washington Mutual. She was a key player in shaping the Dodd-Frank reform law, especially the part that seeks to forestall future bailouts. Since the law passed, she has made an immense effort to convince Wall Street and the country that the nation’s giant banks — the same ones that required bailouts in 2008 and became known as “too big to fail” institutions — will never again be bailed out, thanks in part to new powers at the F.D.I.C. Just a few months ago, she went so far as to send a letter to Standard & Poor’s, the credit-ratings agency, suggesting that its ratings of the big banks were too high because they reflected an expectation of government support. If a too-big-to-fail bank got into trouble, she wrote, the F.D.I.C. would wind it down, not bail it out."
  • (non-investing) "The Day the Movies Died" (GQ): Movies, like any art form, go through phases. The way I look at movies, they are a mix of 'entertainment' and 'art.' There is a difference between the patrons that favour one or the other. At times, they lean towards the artsy side; right now, they seem mostly to produce entertainment. However, is the industry shifting towards a permanent state where the art itself dissapears?
  • (non-investing) Book excerpt - SEAL Team Six: Memoirs of an Elite Navy Seal Sniper by Howard E. Wasdin and Stephen Templin (Vanity Fair): Excerpt from an upcoming book on Navy SEALs. I'm not a military guy but if you want to know the sort of training the elite SEALs go through, this excerpt provides an inside look.
  • (Recommended) (non-investing) "The Blind Man Who Taught Himself To See" (Men's Journal): Pretty amazing story of how one blind individual survives without vision. Inspirational for anyone that has battled health problems, or seen their family members go through it.

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Sunday Spectacle CXXX

The Cost of Cocaine & Incidence of Use


(source: "The cost of coke," The Economist Daily Chart. June 23, 2011)

I wonder why the usage varies quite a bit between countries. Why do 2.6% of the population (16-64 yrs old) use it in Spain but only 0.6% in France? Is there another drug that is a substitute or is there something more to it?

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Sunday, July 3, 2011 1 comments

Sunday Spectacle CXXIX

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Saturday, July 2, 2011 0 comments

Articles to start off the month of July in 2011

Happy Canada Day to fellow Canadians... and Happy Fourth of July to my neighbours down south.

Here are some articles that have been on my list that I have read or plan to read. As usual, unlike other blogs, I don't necessarily link to recent articles so do keep the timeline in mind when reading my posts.

  • (Recommended) Bitcoins - a novel, virtual, currency (Bloomberg Businessweek): Interesting story of a virtual online currency. I don't know if the US government, and others, will start cracking down on this—it's a threat to the existing currency scheme—but it remains to be seen. It's also interesting to see how the value of fiat currencies—bitcoin is purely virtual but limited by an algorithm—is set. Bitcoin's value appears to fluctuate wildly but that is likely due to the small number of users.
  • "Reinsurance explained" (Liarspoker for Gurufocus): A basic introduction to reinsurance companies.
  • (Recommended) Retained earnings for net-net stocks (Geoff Gannon for Gurufocus): Another great write-up from Geoff on retained earnings.
  • "Understanding Free Cash Flow Series: Depreciation and Accounts Receivable" (Jake Emerson for GuruFocus): Primer on FCF for those new to accounting.
  • Synthetic drugs, a new way to get high (Bloomberg Businessweek): Lengthy profile of a new trend profilerating throughout America. Synthetic drugs that replicate the effects of marijuana, as well as cause new lethal side-effects, are becoming popular. As if the out-of-control 'war on drugs' isn't enough of a problem, this new problem may be even harder to battle.
  • "Chinese Go on Global Homebuying Spree as Local Markets Tighten" (Bloomberg): Many have been saying that the booming real estate market in Vancouver, Canada, has been propped up by foreign Chinese buyers, so this story isn't too surprising.
  • (Recommended) Is shale gas a "near-fraud"? Is there too much hype? (New York Times; h/t CanadianValue): Some people are starting to suggest that some of the shale gas plays are almost fraudulent with economics being overstated. This article by the New York Times questions the economics of shale gas. You may also want to check out this bearish presentation, "Shale Gas - A view from the bottom of the resource pyramid" by Labyrinth Consulting Services (h/t LwC). I usually have an opinion on everything but not sure about this. Given the involvement of supermajors, who aren't forced to be involved in shale gas, I am doubtful about the bearish claims. I would find it hard to believe that supermajors would invest billions into shale gas without doing thorough analysis.
  • "Media, entertainment industries take note: The game industry has figured it out" (The Globe & Mail): Very few would have imagined that the electronic game industry would be larger than Hollywood. One of the unique things about the industry is that it keeps experimenting and re-investing its business models.
  • The video game industry's first "agent" (Bloomberg Businessweek): Interesting how this industry, which brings in more revenue than movie theatres, has evolved in the last decade.
  • (Highly Recommended) China's hard-landing scenario - Part 1 - Part 2 - Part3 - Part 4 - Part 5 (Gary Shilling for Bloomberg): Gary Shilling has been saying it for a while and he maintains his view that China is headed for a hard landing. Even if you aren't bearish on China—this means all you commodity bulls ;)—you should check out this opinion piece...just in case.
  • "The Risk Down Under" (Grant's Interest Rate Observer, vol 29, no 11): If bearish on China, it's probably a logical move to be bearish on Australia too. At least that's what Gary Shilling says in the articles linked above. Grant's Interest Rate Observer makes two older articles freely available and I ran across this one discussing the bearish case for Australia, partly due to the risk from China. I think it ties into Shilling's conclusions so anyone interested in China may want to check this out. (Refer to the first article in the document.)
  • (Highly Recommended) "A Walk on the (Asian) Wild Side" (Jim Chanos, Kynikos Associates): Chanos' China bear thesis outlined in detail, from the Fall 2010 Grant's Conference. Apart from the Fortune article I linked last year(?), this is the only material where I have seen Chanos disclose actual short opportunities. The interesting one to me is Vale (NYSE: VALE). Although speculative in nature and not exactly a prudent move, I wonder if buying put options on something like Vale is an attractive opportunity. Any thoughts?
  • Morgan Stanley goes against some China shorts (Bloomberg Businessweek): According to this article, Morgan Stanley is taking a long postion in Yongye International, which has been under attack by short-sellers. It remains to be seen how this plays out.
  • (interesting) "Reflections of a value investor in Africa" (Francis Daniels, Anibok Investment Research): I have been going through some freely-available presentations from past Grant's Conferences. Here is a story by one value investor—I don't know anything about his track record—from Africa. Here is the related presentation that was given back in fall of 2010. I don't know if any readers from here are from Africa but if you are, you may find it interesting (also leave a comment because I'm curious if anyone reads me from that part of the world). I took a quick look at the presentation (haven't read the story yet, although it looks like a fun read) and I just don't know how an investor factors risk into his decisions. For instance, the author is bullish on Zimbabwean equities that are less exposed to currency depreciations—by owning tangible assets and investing in non-Zim dollars—but I just don't know how you factor in the possibility of government seizure of private assets.
  • Book review - Age of Greed: The Triumph of Finance and the Decline of America, 1970 to the Present by Jeff Madrick (New York Review of Books): In this review of Jeff Madrick's book, Paul Krugman and Robin Wells contemplate why financial busts have gotten bigger over the last 30 years.
  • RBC throws in the towel on US expansion (Report on Business magazine): Canadian banks have been trying to expand into the US market for years, with disastrous results... so far.
  • The fall of MySpace (Bloomberg Businessweek): One of the most important Internet service companies of the Internet era has fallen, and it may have a hard time getting up.
  • "North Miami's Condo Catastrophe" (Bloomberg Businessweek): No other way to describe this disaster other than as a catastrophe. I'm curious to see what comes of all these buildings.
  • (Recommended) Details of the Deepwater Horizon oil disaster (Bloomberg Businessweek): Very good article on what happened. Good job by the authors Peter Coy and Stanley Reed (with contributions from a few others).
  • (non-investing) "Looking for Someone - Sex, love, and loneliness on the Internet." (The New Yorker): Online dating... the evolution of dating and relationships.
  • (non-investing; not safe for work) Book reviews of  The Girl with the Dragon Tattoo by Stieg Larsson; The Girl Who Played with Fire by Stieg Larsson; The Girl Who Kicked the Hornet’s Nest by Stieg Larsson (New York Review of Books): I don't read books, at least not fiction—haven't read one since High School—but I do read book reviews. Yes, I realize that's kind of weird but that's just me ;). Even without reading it, Stieg Larsson's controversial, highly graphic, book trilogy is quite fascinating to me. If interested, you may also want to check out this book review in The New Yorker by Joan Acocella a few months back (a side thing I found remarkable was how Joan criticizes one of the male leads in the story for being too passive (when it comes to love) and not pursuing the lead protagonist).
  • (non-investing) (Recommended) "The Variety of Movie Experience" - a review of the film, Tree of Life (New York Review of Books): Haven't seen the film yet but it looks like Terrence Malick finally releases a film that satisfies most critics, at least when it comes to art films.

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