Friday, December 30, 2016 0 comments ++[ CLICK TO COMMENT ]++

Jamie Dimon Interview with Economic Club of Washington DC (Sept 2016)

As always, David Rubenstein does a very good job with this interview of Jamie Dimon at the Economic Club of Washington, DC. Conducted in September 2016, it clearly illustrates why some consider Jamie Dimon to be a natural for politics (even though Dimon has said he isn't interested and doesn't think he will have much success in it). I don't think businesspeople are very good in politics--business is all about maximizing profits and doing anything including discriminating against customers, whereas politics is almost the opposite with the goal of satisfying all stakeholders and funding something for the very-long term irrespective of what "profits" may appear to be. But I think Dimon, unlike most bankers and wealthy individuals, has a very good understanding of society at large and what is happening at the street level--hence I think he can probably do a good job.

I neither follow nor know much about the financial services industry but from what little I have read, Dimon is probably one of the top bankers in the last few decades and maybe one of the top in the last century. He sort of  reminds me of a larger version of Ed Clark in Canada, CEO of the successful TD bank--someone who has a good feel for the retail and business customers of the bank, manages risk very well, and has created a lot of wealth for shareholders and employees.

I still think that Dimon underplays the role of banks in the financial crisis and the huge amounts of wealth transferred to the financial firms from other sectors of the economy and from citizens. Like almost all bankers, I feel like he blames regulations and government policy too much. The reason we ended up with so much regulation is precisely because of the huge debt problems. In fact, in this interview he downplays the potential problems in the banking sector in Europe and China. Dimon basically suggests that European banks would do better if regulators were easier on them, when in fact European banks have their problems due to their higher leverage (too much debt relative to American banks even pre-crisis) and the lack of a diversified economy from which wealth can be transferred to the financial sector. Similarly, Dimon suggests that Chinese banks have huge earning power, which is true but as shareholders, employees and customers of Bear Stearns and Lehman Brothers found out, small changes in assets can completely wipe out financial firms due to leverage (for those not familiar, financial firms have massive leverage compared to non-financial firms). I remain bearish on China and I don't see how the banks get out of this without big impairments.

Monday, December 26, 2016 0 comments ++[ CLICK TO COMMENT ]++

Sunday Spectacle CCVI

December Christmas Shopping Declining?

In developed countries, shopping during December for Christmas, which is the largest and most important shopping period for retailers, has been declining. In most countries (except Italy and Japan below*), annual retail spending is higher than it was in the past--at a minimum, rising population and inflation results in higher spending over time--so it doesn't mean people shop less. The Economist posits several possible reasons for the December declines (from The Economist's Daily Chart, Dec 25 2016):
There are at least three explanations for the recent decline in holiday cheer. First, the growth of e-commerce has made it easier for consumers to shop for seasonal items year-round. Second, the rise of gift cards—which are not recorded as sales until they are redeemed by the recipient—has shifted holiday consumption into January or later. Finally, younger shoppers may be dragging down end-of-year sales at many traditional brick-and-mortar retailers. Surveys show that millennial consumers are eschewing “stuff” in favour of experiential gifts like travel and entertainment.

(source: "Holiday shoppers are not spending like they used to," Daily Chart, The Economist, December 25, 2016)

(* You could sort of tell the health of a country by looking at the trend in retail spending. If you had no other information and had to make a blind bet based on the charts above (right side), I would say Japan and Italy are going to be tough environments for investors, as well as workers and society in general. The fact that retail sales are same now as it was 2010 doesn't signal good things. In contrast, you can easily tell that USA and Britain, and to some degree Germany, have clearly trended up and businesses in these countries likely have an easier time... Having said that, elements not reflected in the charts do influence things: low inflation does make the situation a bit better than it seems (such as in Japan); and whether the retail sales are funded by unsustainable debt (possibly in USA and UK more so than Germany??) can present misleading figures. But I think the trend is more important than those two elements for these countries. Japan and Italy do seem way worse off.)

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Friday, December 23, 2016 0 comments ++[ CLICK TO COMMENT ]++

Jim Chanos on Donald Trump and Current Events

I ran across a very good interview with Jim Chanos by the Institute of New Economic Thinking that I found interesting (h/t Naked Capitalism). It is mostly about politics and very little to do with investing per se. I excerpted some of his points below but you should read the whole thing if you are interested in econopolitics. (As usual, bolds are by me.)

source: "Chanos: Is a big change underway in global capitalism?" by Lynn Parramore for the Institute for New Economic Thinking, Dec 21 2016.

Lynn Parramore: What about the rise in bank stocks since the election? Are banks anticipating deregulation?

Jim Chanos: Almost all stocks are going up, mostly because of the belief of lower taxation. But after Obama’s election, most stocks went down and kept going down until the following March — and then they tripled! So I wouldn’t read a lot into the first month or two.

It could be that banks are anticipating deregulation, but so what? Deregulated to what end? They’re still going to have the capital requirements, which are international. Putting capital standards on them is the biggest way in which they were regulated.

In the bigger picture, if you think this is an uncertain presidency and we’re not quite sure where he’s going and how events will conspire, it’s not that important to get too worked up because things will happen and you’ll have to react. If, however, this is a once-in-a-fifty-year change in global thoughts about capitalism, then you have to pay attention.

I think the rumour of lower corporate taxes, including the possibility of overseas repatriation tax holiday, certain plays a role in the rally. But I still don't understand how stocks can be rallying while bond yields are rising and US$ is rising. Corporate profits should go down if US$ rises (makes US companies less competitive and their overseas earnings are worth less) and rising bond yields is also generally negative (increases cost of debt financing and also, theoretically, the discount rate has risen and the value of the firm should decline).

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Tuesday, December 20, 2016 0 comments ++[ CLICK TO COMMENT ]++

Investors Podcast Audio Interview with Bill Miller

I thought Bill Miller retired but apparently not. I thought he wouldn't get a chance to try again but now that he is trying to get his firm going, it looks like he is spending his time on investing (hard to tell what his co-portfolio managers do and how he fits into the decisions). Anyway, I'm still a fan of him and it's always good to hear his thoughts.

One thing I like about him is that he is very frank and open; very honest. He speaks his mind and explains his processes and his stock picks. In contrast, there are numerous investors, including those such as Warren Buffett and Seth Klarman, who never give any details into their analysis and newbies like me can't really learn the basics from them (after a while, it all sounds repetitious and very philosophical--good to know but doesn't help you with securities analysis or the mechanics of investing). As I have said numerous times, I have not seen any value-oriented investor tackle technology companies as successfully as Bill Miller (here was my thoughts on him from 2011).

Investor's Podcast recently had a good audio interview with Bill Miller. If you are a fan of him, check it out. If you are contrarian, definitely check him out.

Original source here (click on embedded audio near the top). Alternate audio is embedded below via Stitcher.

As usual, Bill Miller is very optimistic--hence vulnerable to downturns--but it's good to hear his insights on technology stocks such as Amazon, Apple, and Tesla. A lot of growth investors and momentum investors invest in these companies for totally different reasons but value-oriented examination is very rare (although companies like Google are broadly owned by everyone these days and isn't what they were).

Sunday, December 18, 2016 2 comments ++[ CLICK TO COMMENT ]++

Current Thoughts on Risk Arbitrage

I was writing a long post on risk arbitrage and how it seemed attractive but didn't finish it after things changed rapidly and got scary real fast after the Trump election. Spreads used to be somewhat large (5%+ for somewhat "safe" deals; right now spreads for similar deals appear to be around 1-2%)  and I believe spreads were attractive a few months ago due to:

  1. Peaking credit cycle/private equity/buyout/merger cycle: M&A is very cyclical and I had charts clearly illustrating how they peak (usually very close to stock market peaks). It seemed like we were getting close to a peak--sort of reminded me of 2007 when I was blogging and investing--with almost everyone buying each other for ridiculous prices, including numerous massive mergers/buyouts. Usually risk arbitrage appears to produce larger spreads (hence good for risk arbitrageurs) near the peak and it seemed like that time was now.
  2. Possible capital shortage for risk arbitrage: Merger spreads are usually very tight (1% of deals with moderate "risk" that are about to close within 6-12 months) because arbitrage funds and investors are always seeking out abnormally large spreads. Right now, due to the number of deals, including some mega-deals--basically deals you will see once in your life in those industries--there were some articles suggesting that there isn't enough risk arbitrage capital. I can't be certain but it seems plausible that capital may have been tight given numerous $15 billion+ mega-deals in the agrochemicals, pharmaceuticals, and technology industries were underway. Even if funds had capital, they would have been reluctant to allocate a lot to a few deals--risk arbitrage for professionals is based on entering a lot of deals and spreading out the risk, duration, etc.
  3. Underperformance by big risk arbitrage funds: Sort of tied into the prior point, it is possible that some blow-ups and severe underperformance by big risk arbitrage funds may have kept capital away from some attractive deals. John Paulson, who is famous for his short-selling of real estate but his expertise is really in risk arbitrage, was down something like 18% in his special situations fund (it deals with risk arbitrage as well as things like spinoffs but his losses appear to be mostly from risk arbitrage).
So, spreads seemed wider a few months ago. The election of Trump changed the landscape quite significantly and I would caution small investors pursuing risk arbitrage to be careful for a few reasons:
  1. Bond yields are rising rapidly: I think many expected yields to rise but the pace (without any adverse economic event i.e. no recession/no crash/etc) has been surprising  to me. Rising yields means companies are going to have a harder time financing deals. Those that entered deals may try to back out of them if the situation gets bad. Although not comparable to then but during the financial crisis, there were many companies that tried to back out of mergers. I think this risk is increasing by the minute and you need to be really careful.
  2. US$ is rising rapidly: Situation is different if you are American but if you are a foreigner, risk arbitrage becomes less attractive as US$ increases in value--assuming you don't hedge the currency. Except for a portion of my savings held in a US$ account, most of my investments are from C$ and unhedged. Given how risk arbitrage deals have very small returns (usually 5% to 10%), rising currency can wipe out most of your gains. Unlike when you own stocks for the long term, you won't get a chance to make it back since the deals close quickly (whereas currencies have very little impact for long-term investing).
  3. Incoming US government possibly taking hard stance against foreign investment: Although it is hard to read Trump--he says a different thing depending on who his audience is--I think the US government is going to be strict when it comes to foreign investment. I think many deals where foreign firms are buying US firms are very risky right now. I think you need to be careful with any deals that involve China. I am invested in the Syngenta buyout by ChemChina and I think the risk has increased that the US government will block that deal somehow (Syngenta is a Swiss company but does a lot of business in American agricultural states); similarly, I am not sure if the Bayer buyout of Monsanto will pass easily (Bayer is German but I think Trump administration is negative towards European companies as well).
  4. Potential stock market correction or crash: Impossible to predict a stock market correction but US stocks have been rallying with very little reason in my opinion. I see all sorts of conflicting signals (how could bond yields rise and stocks still go up? Wouldn't a strengthening US$ lead to lower US corporate earnings? so on) and until they are resolved, risk arbitrage seems riskier than usual. In theory, risk arbitrage is uncorrelated with the market. However, companies will try to weasel their way out of deals if things go wrong (this is what happened during the financial crisis; some will try to re-negotiate a lower price if the firm being acquired's stock falls; otherwise will try invoking MAC (material adverse clause) for all sorts of dubious reasons including deteriorating profitability of the firm being acquired; etc). I feel like the spreads need to be wider to get involved now.
As always, one should just watch and wait for the right opportunity. Right now, I'm not finding good risk arbitrage deals.


Sold/Merger: Virgin America

The Virgin America-Alaska Airlines merger closed successfully and I was cashed out on December 16th. This is one of those deals that seemed like it had high chance of being completed but the return was low (unless you are a professional arbitrageur who uses leverage and has positions in numerous mergers at the same time). The spread was somewhat wider a month ago and I thought about increasing my stake but it seemed scary.

Sold/Merger Cash-out: US$72.00
Total Return: 5.37% (annualized: 54% (meaningless--too short of a holding period))

Good luck to all parties involved, especially the employees and customers who are impacted, and we will see if Alaska airlines can develop into a major national airline in the future (right now it is a west coast one).

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Sunday Spectacle CCV

History of American Retail Stores
(select sample)

(source: Internet Trends 2016 - Code Conference, Mary Meeker, KPCB. June 1 2016)

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Saturday, December 17, 2016 0 comments ++[ CLICK TO COMMENT ]++

Articles for the week ending December 16, 2016

Some stuff I found interesting... in no particular order...

  • (Recommended) "Napoleon Is Dead! Wait. That's a Stock-Market Scam." (Barry Ritholtz, Bloomberg, Dec 16 2016): Everyone has heard of fake news, which are more easily spread on the Internet, potentially having a political and social impact, but, believe it or not, it extends into the investing realm as well. Probably doesn't impact long-term investors that much but still something to watch out for. In fact, how many of you have heard of the fake-news-driven Great Stock Exchange Fraud of 1814?
  • "China Halts Trading in Key Bond Futures as Panicky Investors Sell Securities" (Yifan Xie and John Lyons, The Wall Street Journal, Dec 15 2016): Not a major story in itself but something to watch and see if it is a trend... There have been several stories in various media of emerging market bonds selling off (due to rising US$ and rising US interest rates). Some macro investors speculate that emerging markets will underperform and some may even face debt crises (especially those with US$-denominated bonds). The thing about China is that its currency is pegged (within a tight range) and capital is flowing out right now (government is trying to block that flow but having a hard time right now).
  • Tim Hortons/Burger King deal possibly hitting peak (Tara Lachapelle, Bloomberg, Dec 14 2016): Restaurants are definitely outside my circle of competence and they are always puzzling to me. I remember a lot of money being spent trying to integrate Tim Hortons and Wendy's a decade ago and it didn't really do too well (they split up eventually, although they still share some locations in Canada). Now 3G capital has been trying to generate synergies between Tim Hortons and Burger King and I wonder how it is going to pan out in the long run. They may be hitting a peak. For what it's worth, Tim Horton's is still very popular in Canada and very dominant (haven't seen any negative impact from their cost cuts).
  • "The Russian App That Has Destroyed Privacy Forever" (Bloomberg, Dec 6 2016): "Imagine a smartphone app that lets anyone take a picture of anyone and then find that person on social networks." I am generally pro-technology but stuff like this is definitely a bit scary and something few would have imagined 30 years ago. In any case, contrary to what is generally portrayed in science fiction, I think governments utilizing such technology are more of a threat than individuals or businesses. Like most things in life, I think humans will adapt if  things start getting out of control. For instance, Internet technology is way more secure now than when it first became popular (e.g. email used to be plain-text and easily intercepted and read by anyone but nowadays they are encrypted; credit card authentication used to be so simple (anyone could pay for things) but now transactions get rejected if they don't fit complex user profiles (someone using your credit card from a different country is generally blocked)).
  • (Recommended) "Hack Brief: Hackers Breach a Billion Yahoo Accounts. A Billion" (Lily Hay Newman, Wired, Dec 14 2016): The biggest hack in human history was just confirmed when Yahoo disclosed that a billion accounts were compromised (Yahoo apparently had 800 million monthly active users in 2013 so the number of individuals is probably closer to 800 million). An Internet Services company with such poor security raises a lot of serious questions. It's surprising Yahoo didn't focus on security given how it doesn't have meaningful tangible assets and almost the entire worth of the company is due to customer relationships and brand--it's sort of like a food products company not caring about food safety or product tampering. Management and Board of Directors are truly asleep. Rumour is that Verizon is re-thinking its Yahoo takeover given the potential long-term liabilities (adverse impact of losing email addresses, birthdates and phone numbers won't be known for years--since that information is also used to partially authenticate other non-Yahoo services (such as bank accounts, online shopping, etc)).
  • "The Inside Story of Apple's $14 Billion Tax Bill" (Gaspard Sebag, Dara Doyle, and Alex Webb, Bloomberg, Dec 16 2016): Detailed look at how Apple was avoiding taxes by routing them through Ireland. This is a problem and I think quite a number of companies are going to end up with big tax bills (mostly in the technology, biotechnology, and pharmaceuticals industries). This is a situation where what's legal and what's moral is wide apart. People like me who believe in taxes don't want anyone paying low taxes, whereas others who believe in low taxes believe anything legal is fine. Companies like Apple are probably doing what is legally ok (don't quote me on that; I'm not a lawyer) but highly questionable. It's somewhat akin to the argument of whether it is ok for individuals to be investing their assets through low-tax jurisdictions such as Bahamas, Cayman Islands, etc--clearly legal but questionable given that if everyone did that, there won't be enough taxes to pay for government services.
  • "Nokia’s next chapter" (McKinsey Quarterly, Dec 2016): I was close to investing in Nokia about 5 years ago but good thing I never pulled the trigger on that disaster. Interesting to see how things are evolving at the company after it exited the mobile phone business.
  • (Highly Recommended) "A Dozen Things Warren Buffett and Charlie Munger Learned From See’s Candies" (Tren Griffn,, Nov 25 2016): Very good blog post examining See's Candies. A good analysis of a company that doesn't really grow--quantity sold only doubled in 35 years--but has increased its sales significantly with very little additional capital. Unfortunately, unless you are smallcap or microcap investor, I don't think you will run into companies like this. Most companies have much higher unit growth, or have declining quantity; others who do grow very little in terms of output (say mature industries like food products) tend to require capex investment or are commodity businesses with no pricing power. The best Warren Buffett investment to examine in my opinion is Geico (or possibly American Express when he bought it in the 70's), or if you are not into financials then Washington Post (Buffett at his best and probably my favourite investment of his).

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Friday, December 16, 2016 0 comments ++[ CLICK TO COMMENT ]++

Warren Buffett & Bill Gates Video from 1998

Here is a good video of Warren Buffett & Bill Gates Q&A from University of Washington from 1998. It is a bit more tech-oriented and it's always interesting to hear younger Buffett and Gates. Given that Gates was running Microsoft at that time and Buffett is a value investor (who doesn't invest in technology stocks), it's good to hear the contrasting opinions on some issues.

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Wednesday, December 14, 2016 0 comments ++[ CLICK TO COMMENT ]++

Valuations Seem High... Market Looks Dangerous

If you are a value investor or a contrarian of any sort, it's a tough time to invest right now. I don't have much experience and was away from investing for about 5 years but I did start serious investing a few years before the financial crisis but it seems worse right now. It is really difficult right now to find anything attractive. Everything seems overvalued and the market is rallying unexpectedly (at least in my view).

I was going to write a post on market valuation but ran across an excellent article by John Mauldin that captures my feelings quite accurately so I'm going to quote his work below. I don't always agree with Mauldin and definitely don't share his right-leaning political views but this was a great piece. If you are macro-oriented, I would highly recommend that you read his article, "The Trump Rally Will Morph" (Dec 11 2016), which contains more graphs and thoughts than my post.

"The P/E ratio spent most of the last century between 10 and 25. The times it went below 10 correlate with market bottoms, i.e. “undervaluation,” while the times it spiked over 25 were “overvalued” manic tops.

You might think that the P/E would be a pretty good timing indicator. That’s true for very long periods. The problem is that P/E ratios can stay undervalued or overvalued for years. They can also go to extremes well below 10 and well above 25 and stay there for uncomfortably long spans. Keynes had it right when he said, “The market can stay irrational longer than you can stay solvent.”

Presently, all three P/E versions are near or above 25, indicating overvaluation. This doesn’t mean the end is near – though it could be. But it does suggest that we are not at the beginning of another long-term bull market. The next chart illustrates the past and present trend in a different way."
Mauldin is referring to the S&P 500 P/E ratio above, which has rarely been above 25. Right now it is around 25. The thing is, the P/E ratio has been high for most of the last 15 years so one can't be sure it won't go higher for many years.

Some people argue that the P/E ratio is high because bond yields are low. That certainly is playing a role but the relationship isn't very clear. For instance, bond yields were very low in the 1940's--somewhat akin to now, the FedRes was carrying out unusual activities; basically monetizing debt on a grand scale--but P/E ratios were nowhere near what we have now.

The Wall Street Journal provides a nice summary of the P/Es and dividend yields of the major US indexes and I look at that once in a while. This page also provides the forward-looking P/E which can be useful sometimes. Right now the forward P/E on S&P 500 is 18, which is a forecast of almost 30% higher earnings next year and seems unlikely. Typically the forward P/Es are unreliable.

The S&P 500 and NASDAQ P/Es are about 10% higher than last year, while the DJIA is about 20% higher and the DJTA is a little under 20% higher.

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Monday, December 12, 2016 0 comments ++[ CLICK TO COMMENT ]++

5-Year Industry Performance and My Ideas

Being a contrarian, I like to look at underperforming industries*. There are many different ways of approaching this but one simple method I use is to look at under-performing industries over 5 and 10 years.

If you are looking at 10-year underperformance, you need to be really careful with industries that are becoming obsolete and possibly on their way to a zero. Something like the newspaper industry is a good example of one that has done horribly over 10 years. Having said that, if you are into deep-value investing, distressed investing, or something along those lines, 10 year lows are a good place to look.

Given how the current bull market has lasted almost 8 years--2009 to almost 2017--I think 3 to 5 years is a good time period to look. Depending on what you are trying to do, you don't want to use starting points at the trough of a bear market or a peak of a bull market (for instance, I would avoid any period that started in 2008 or 2009).

In the past, I often looked at the 5-year top and bottom industry performers from the WSJ website. This uses the Dow Jones industry classification and I had no specific reason for using it other than the fact that it was freely available and detailed. You can use alternate indexes and time periods as you see fit. The data can be influenced by the starting point so you should just use this as a rough guide to what has risen and fallen. Here are the best & worst 5 year performers (figures are cumulative % return):

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Sunday, December 11, 2016 0 comments ++[ CLICK TO COMMENT ]++

Sunday Spectacle CCIV

Spending Trend over a Century

In rich countries like America, one of the big changes over the century has been the amount of money spent on food & clothing has declined significantly. In contrast, in many poor countries, the average person still spends a huge chunk of their income on food & clothing. The amount spent on housing/shelter has increased slightly in America to 25% (as of 2002, based on a select sample).

Overall, it's amazing that food, clothing and housing, which was about 80% of a typical household's budget in 1901 has declined to about 50% (in 2002 but probably same now). I don't think anyone living in 1900 could have imagined such a thing. The increased savings on food & clothing has generally gone to leisure activities (such as travel and entertainment). The big beneficiary in rich countries have been the leisure sector. Only the wealthy used to travel in the early 1900's but now almost anyone can.

From a business and investment perspective, one of the biggest opportunities in developing countries is the leisure sector. Industries such as airlines, tourism, media, and so forth will likely grow spectacularly.

For developed countries, I wonder what the future holds? Living in Canada, I feel like we are already "maxed out" on tangible "stuff." People just have too much of the basics. In contrast, healthcare is one area where developed countries are spending a fortune and I am almost certain we will spend less (as a % of total income) in 50 years than now. I also wonder what new societal developments await that we can't even imagine...

(source: "100 years of Family Spending in the US," Visualizing Economics, Dec 5 2013.)

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Sunday, December 4, 2016 1 comments ++[ CLICK TO COMMENT ]++

Sunday Spectacle CCIII

Bitcoin You Say?

Still not sure what to think of Bitcoin (for those not familiar, it is the original and most popular cryptocurrency). It has the potential to change financial transactions as we know it. Numerous authorities are against it and have been trying to regulate it for years. Some private investors are bullish--most notable are the Winklevoss twins from Facebook lore who suggest it is the gold for the modern age. Wall Street and some Main Street banks have been trying to get into the action. Matt Levine of Bloomberg, one of the top business journalists I have come across (that is freely accessible), isn't sold on the idea yet. Whatever it is, you definitely need stronger, more secure, and more professional Bitcoin financial institutions before the public will get involved to any large degree (the $400M+ loss at Mt Gox a few years ago probably set back Bitcoin by years--who the hell would want to get involved in such an amateurish operation (and that was the top Bitcoin exchange too)).

Bitcoin in US$
(source: Downloaded Dec 3 2016.)

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Articles for Week Ending December 3, 2016

Not in any order, here are some articles I ran across recently that you may find interesting... I often link to old articles so if there are stock suggestions or macro speculations, pay attention to the date (thesis may have changed by now).

  • The Oscars of Paper Currency (James Tarmy for Bloomberg Businessweek, Dec 1, 2016): Didn't know some entity actually gave out award for best currency design. Kind of fun to see the artistic style of various currencies.
  • Horizon Kinetics presentation on indexation and ETF problems (Steven Bregman, Horizon Kinetics, for Grant's Fall 2016 Conference - Oct 4 2016): Pretty good presentation on some issues with ETFs and indexation. If you invest in ETFs, check it out.
  • Bear case presentation on Home Capital Group (Marc Cohodes for Grant's Fall 2016 Conference - Oct 4 2016): Bearish thesis on Canadian mortgage lender. If the Canadian housing market falls, HCG might be one of the first ones to get hit badly.
  • Contender for the worst trade of all time? Snowball interest rates swaps (Matt Levine for Bloomberg, Mar 7, 2016): I have been working my way through Matt Levine's articles on Bloomberg. He is one of the top financial journalists that is freely accessible, with his background and focus being legal issues. All of his articles are excellent and often presents some contrarian views on various corporate activities. You probably won't improve your investing by reading him but if you are interested in knowing how Wall Street operates, they are great reading. I don't agree with everything he says but he makes me think... The linked article refers to a swap deal that Portuguese train companies entered into with Banco Santander, a mega-European bank. The companies have lost $1.43 billion and decided to take legal action to get out of the trade. It's a fascinating look at the notion of risk and how improbable events can materialize and end up threatening your existence (incompetence also played a role but let's leave that aside for now). On top of the idiotic cumulative spread feature (where spreads are added to prior quarter's), what seems to have killed the company is the fact that Euribor floating rate dropped below 2% after the financial crisis whereas the companies probably assumed it never would (it has never been below 2% in its history). If you are a macro-oriented investor, you should always think about what happens at the extremes that seem impossible.
  • (Recommended) Underwriters and the IPO process (Matt Levine for Bloomberg, Nov 25, 2016): I didn't care so much for the article itself, but found this piece insightful in regards to the description of the whole IPO process. I certainly didn't know about the mechanics of 'stabilization' or how the underwriters are short the stock for a period of time. I would recommend reading the first 5 or 6 paragraphs to learn what happens in an IPO.
  • (Highly Recommended) "Michael Dell Bought His Company Too Cheaply" (Matt Levine for Bloomberg, Jun 1, 2016): Unlike the prior two Levine articles, this one is relevant to small investors. This article deals with the lawsuit against Michael Dell for his management buy-out of Dell, a large computer company famous for pioneering mail-order build-to-order computer sales. Some argued it was a take-under. I liked the almost-philosophical question raised about the true price or value of a company. I liked how the article provided some insight into how parties with differing interests approach things.
  • Subprime auto loan delinquencies rise (Rachel Beals for Marketwatch, Dec 3, 2016): Looks like subprime auto loans are starting to concern some. However, higher quality auto loans seem to be doing ok. Recent economic numbers indicate stronger employment and wages so it remains to be seen if this means anything.
  • "The 2016 Daily Journal Meetings Notes: February 10, 2016" (The Charlieton): Can't remember if I linked to this already but anyway, it is Charlie Munger at his greatest.
  • China's attempt at mass control via online tracking (Josh Chin and Gillian Wong for The Wall Street Journal, Nov 28, 2016): Although in the early stages and success uncertain, it's amazingly scary how close to Orwell's 1982 we are. China is attempting to build a social profile for each citizen (somewhat akin to a credit rating but for social activities) and to reward or penalize citizens based on their social profile. I wonder if, in a few decades, companies like Facebook and Google and their future counterparts, who have huge amounts of data on people, will succumb to their temptations and government strong-arming and enable such a thing to take place in the West--I really hope the people running these companies don't roll over every time the government tells them to. (article requires registration; can paste title in Google and click on link for free access)
  • Trump picks Bill Walton (Max Abelson for Bloomberg, Nov 29, 2016): Cited this in a prior post but amazing how Trump administration is surrounding itself with some shady characters. In this case, Bill Walton was the CEO of Allied Capital, the company profiled by David Einhorn in his book.
  • (Highly Recommended) "How Should We Read Investor Letters? Considering the correspondence between C.E.O.s and shareholders as a literary genre." (John Lanchester for The New Yorker, Sept 5, 2016; Book review of "Dear Chairman: Boardroom Battles and the Rise of Shareholder Activism"): Essay that looks at shareholder activist letters as an art form. The book "Dear Chairman..." looks interesting and I'm going to put it on my list of books to buy at some point.
  • "World Chess Has a Big Problem" (Carol Matlack for Bloomberg, Nov 28, 2016): Pretty good profile of the current state of the major chess federation, including some insight into the dark side it is entangled in.
  • (Recommended) "The Amazon Tax" (Stratechery, Mar 15, 2016): Ben Thompson talks about the toll-road-like web services business that Amazon is developing.

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Saturday, December 3, 2016 0 comments ++[ CLICK TO COMMENT ]++

Opinion: You Can't Build a Society with Flat Taxes

Libertarians, classic conservatives and many on the right* love flat taxes and always seem to be in favour of flat taxes but I have never seen it ever last. I thought I would comment on it after reading that Estonia has started to abandon its flat tax. Apparently the first country to introduce flat tax in Europe, Estonia is starting to back off the flat tax.

In my opinion, you just can't build a society with flat taxes. If anything, history seems to indicate that as societies advance, their taxes become more progressive.

The flat tax helped a lot of ex-Communist states after they gained independence when no one was paying taxes and the system was completely dysfunctional, but it is hard to build a society with such a system. Wealth grows exponentially and hence accrues to the top few disproportionately--most investors probably know that 80% of the American stock market is owned by around 10% of the population--and it's hard to do anything at the societal level if most of the wealth in society only pays a small amount of it in tax.

Having said that, what Estonia is doing to implement a progressive tax system is the wrong way to do it: it appears to be simply introducing credits. This just complicates the taxes and creates inefficient tax collection authority. Simplest is to have practically no credits (except possibly to those that society determines shouldn't be burdened (those with serious health issues, etc)) and just have an escalating rate based on income or something. Introducing credits is the dumb way to build a bullet-proof system. It is that way because lawyers are the ones who run politics but if it were up to a more rational person (ie. scientific-thinking), you wouldn't have so many credits and special clauses, with so many potential line items on a tax form.

I think the only time flat taxes make sense for a large society--it may be ok for small islands, city-states, etc--is if it is undeveloped/developing or the government is dysfunctional. It made sense for the ex-Communist states after the collapse of their societies, as Estonia was in the 90's. Similarly, I think it makes sense in most of Africa and South Asia. It will probably work better than what they have right now in countries like South Africa, Congo, India, Pakistan, and so forth. Countries with high tax avoidance and a general distrust of government, such as Greece, might be better off with a more flat tax as well.

To sum up, natural state of human affairs is probably towards more progressive tax as societies advance. Of course, I can't prove it and you can't disprove it, so humans will probably argue about the ideal taxation system for another hundread years.

(* Some on the right support flat taxes but not because they want a simple one-tax system or want to improve the efficiency of the tax system, but rather because they want to shrink the government. They will argue the opposite but the reality is that flat taxes result in less government tax income and consequently less government services. This will result in a smaller government in the long run. [I'm a typical liberal in that I support progressive taxes and "high taxes" but I do think governments are too big and should be shrunk. Governments should not be engaged in some activities they are presently involved in and spend a lot of money overseeing.])

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Wednesday, November 30, 2016 0 comments ++[ CLICK TO COMMENT ]++

Opinion: Potential Consequences of Trump Presidency

Given the unpredictable nature of Donald Trump and the lack of a well-articulated platform and ideology that he adheres to, it has become a cottage industry to predict how the US government over the next several years--at least until mid-term elections in 2 years--will behave. I don't like Donald Trump, his policies or the people he surrounds himself with--Steve Bannon, the ex-Goldman Sachs banker/ex-film producer and almost-far-right proponent, and Bill Walton, the former Allied Capital CEO who some of you may recall being profiled by David Einhorn over a decade ago with some employees eventually being convicted of fraud come to mind (it's almost farcical that Trump would put Walton in a role to influence the policies of the SEC and SBA when those two agencies contributed to the conviction of wrongdoing by Walton's firms)--but as I have mentioned in the past, unlike most other countries, the US President has far less power than many imagine. Having said that, since  the Republican Party controls the House and the Senate, and will likely pick key justices for the Supreme Court, Trump will likely get through quite a number of his policies (unlike the Obama presidency where he couldn't get the Republican House to agree to anything substantive (except foreign wars)).

If you are a pure value investor then you should just ignore what is happening in econopolitics and focus on companies. Otherwise, if you are more macro-oriented like I am, it's worth contemplating some scenarios.

The market has rallied strongly over the last couple of weeks but I see all sorts of conflicting behaviour. For instance, I think the movement in the US$, equity prices and inflation expectations are contradictory with each other to a large degree. I think one of these elements will overpower the others.

Some have suggested the market is starting to price in high inflation. It's not clear to me that this is the case. There is definitely more inflation being priced in but not "high" inflation. If you look at the TIPS breakevens (10yr here; 30yr here), it doesn't look like a drastic change. The chart below of the 10yr breakeven:

(source: St Louis Fed Res FRED, downloaded Nov 29 2016)

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Sunday, November 27, 2016 0 comments ++[ CLICK TO COMMENT ]++

Sunday Spectacle CCII

Interesting Facts about the US Currency

I ran across a good Dallas Federal Reserve publication ("Money" from 2013) that explained the basics of money. It is one of those government propaganda-type publications aimed at the general population but, surprisingly, it does a good job of going over almost all the major concepts related to money including inflation, expansion of the money supply due to multiplier effect of reserve banking, and even highlights the major events (such as Bretton Woods, FDR banning ownership of gold, etc).

Anyway, it had some interesting historical facts that very few, including Americans, know about the US currency and I thought I would post it here. I certainly didn't know about them. For instance, I knew about the era when banks issued their currencies but didn't know there were 30,000(!) distinct currencies in USA at one point. This implies that there were maybe 20,000 banks (another 10k could be other entities) and that surprises me given how America wasn't that big in the 1800's. Also didn't know that a $10,000 bill existed.

Finally, the most interesting fact I learned--I doubt even 1% of anyone who visited this blog since inception know this--had to do with overprinted US currency issued in some areas in case those areas fell under foreign ownership during WWII. Seems like a draconian move to punish citizens in those regions if they went over to the foreign side (imagine if most of your net worth, at least whatever is in currency form and in banking accounts*, became worthless if your region was taken over by a foreign country during war.)

(* This is another reason why it is preferable to hold your wealth in physical assets or even securities like company shares. Governments could easily alter currencies. Incidentally, in India, within the last month, the government has undertaken some draconian measures by banning two of the most popular bills, which apparently represent 86% of currency in circulation. Apparently it was to combat corruption but the most impacted are the poor who don't even have bank accounts--some stats indicate that 50% of Indians don't have bank accounts--and it will only weaken the confidence in the country's currency--what's to stop the government from doing something similar again in a few years?)

I can't upload it properly as one large image so I have broken it up into 3 pieces. Click on each one for larger image.

(source: "Money" by Federal Reserve Bank of Dallas, 2013. Only portions of the document are extracted above and graphic layout altered from original document.)

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Saturday, November 26, 2016 0 comments ++[ CLICK TO COMMENT ]++

Articles of Interest for the week ending Nov 26 2016

Here are some articles I read recently that you may find interesting. This time around, very few are investing-related...

  • "Google, Facebook, and Microsoft Are Remaking Themselves Around AI" (Cade Metz for Wired): Overview of how these tech companies are leading the research into AI.
  • "Inside Fitbit’s Quest to Make Fitness Trackers Invisible" (David Pierce for Wired): I was thinking about wearables as a potential investment. In particular, Fitbit (FIT) has sold off since the IPO--it's kind of confusing since it seems like there was a big share dilution along the way--but is this a fad or is it the future? Fitbit certainly has the leadership position and strong brand (so far) and its balance sheet and income statement looks ok too. I probably won't invest since history is too short and it's hard to predict the future but I'm studying it a bit.
  • "Can America’s Companies Survive America’s Most Aggressive Investors?" (Alana Semuels for The Atlantic): Debatable argument on whether activist investors are too short-term-oriented and hurting the long-term success of corporations and the country. One can never be sure with these things. Companies are cutting back R&D and not investing in workers or plant & equipment, but is that because of excessive short-term pressure or is it because opportunities aren't available or they are unable to compete against other companies (possibly from other parts of the world)?
  • "Mapping the End of Malaria" (Bill Gates): Gates Foundation has played a major role in combatting malaria--did you know that mosquitoes are the #1 killer of humans?--and Gates suggests that Malaria may be eradicated by 2040. If so, it will definitely be the #1 accomplishment in human health for the 1st half of this century.
  • "Our Driverless Future" (Sue Halpern, New York Review of Books; review of 'Driverless: Intelligent Cars and the Road Ahead' by Hod Lipson and Melba Kurman): Author goes over the developments in driverless car technology and its potential societal impact. I think it is going to take much longer than many believe but when it does happen, it will be revolutionary.
  • Bill Gates on Warren Buffett (article here and slideshow here; July 5, 2016): Gates briefly recounts the first time he met Buffett and has some photos of their private lives.

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Tuesday, November 22, 2016 0 comments ++[ CLICK TO COMMENT ]++

Newbie Thought: What Type of Investment Edge Do You Have?

I was listening to this Manual of Ideas podcast with James Roumell and he briefly mentioned the three  types of edge investors could have and I thought it was worth thinking about. The three of them are:

  1. Information edge
  2. Analytical edge
  3. Behavioural edge
There are many different ways of slicing and dicing the idea of investment advantages that are required but these three do a good job IMO.

This is a very simple thing but it is always worth thinking and periodically reminding oneself about basic concepts in investing.

Information Edge

Information edge is when you have knowledge that most others--say the market as a whole--doesn't possess. Some people do it through illegal means but we are talking about fully legal activities here. It sounds like James Roumell believes this may his edge. Those with large budgets may get an edge by sourcing information that is not easily accessible to others, either due to cost or exclusivity (for example, getting very detailed market research data, or foreign country data). In most cases, it involves acquiring information that the market doesn't know about by talking to customers, competitors, management, and so forth. It might involve going to industry conferences, physically visiting the company, checking out the goods/services being sold, etc.

Essentially, scuttlebutt and hitting the road.

Warren Buffett used to do a lot of this in his early days of investing. For instance, he used to count railroad cars, or go to government agencies/libraries to search for public records no one else bothered looking at. I'm not sure how much this helped Buffett but he did suggest several times that he gained a lot of knowledge from his early scuttlebutt-type work and because of that, he didn't do it later on.

I think if I was a professional investor, I would do more of this. If you are a professional investor, you should seriously think about seeing if you can develop an information edge somehow (Roumell suggests others do more of this as well). Not everyone is suited for this but you never know until you try.

Having said that, it is usually hard for amateur investors to develop an edge this way. There are two difficulties with trying to get an edge this way. Firstly, it is costly, hence not worth it if you have a small portfolio. You have to pay quite a bit to acquire information (such as market research data or highly specialized industry reports). It can cost thousands to attend industry conferences or subscribe to industry trade journals.

Secondly, amateur investors just don't have time. Even if you are dedicated to investing and it is your primary hobby, you only have a few hours per day. It's kind of hard to go to conferences or visit numerous locations and so on. Maybe you can get away with it if you are only looking at local companies where you live but otherwise it's tough. I find that even listening to the quarterly conference calls, which don't really give you much edge since everyone listens to them (it's more to just "keep up" and understand basic things), is already time-constraint.

Analytical Edge

Developing an analytical edge probably looks the easiest, but is likely the hardest. You have to be naturally talented or develop above-average investing skill through experience and knowledge.

This is the one that most amateur value investors gravitate towards, at least from what I see on the Internet. Certainly this is the one that you can do sitting at home.

I don't have much to say on this because it isn't easily explainable--investing has elements of art and science--and only a few will outperform, although there are multiple paths. There isn't one way to analyze an investment.

This is probably Warren Buffett's greatest strength. The way he analyzes companies is truly remarkable and unmatched by anyone. He is a superstar for sure. It's amazing how he can look at financials that are available to everyone else and make a decision within a few hours. In fact, he does that even when there is very limited information, as with most private companies he buys. It's just amazing. I am also impressed whenever I look at some investments that look "dumb" whenever everyone else, including me, look at them but turn out to be very good. His purchase of high P/E companies in low growth, mature, industries involve superior analysis and I'm always impressed by them.

Small investors are probably on an even level with professionals when it comes to analytical edge. Professionals do have teams of analysts that help them out but one person's superior analysis is better than a whole committee of decision-makers.

Behavioural Edge

People may have differing views of what a behavioural edge is, but I take it to mean that you don't succumb to "bad behaviour." Namely, you shouldn't blindly follow the crowd; you need to do something a little bit different from others; and so on.

Amateur investors probably have an automatic edge in this but it is hard to master. It's probably something you are born with. Professional investors will have a difficulty with this because fund management is very pro-cyclical and correlated with bull markets. Fund manager's behaviour matters less than what the fund investors do: when fund investors start pulling money out during corrections, it's hard for fund managers to act independently.

To sum up, in a simple sense, there are three ways to have an edge on the market and the rest of the competition. So, which of these are you good at? Which one can you beat most others with? Something to think about.

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Monday, November 21, 2016 0 comments ++[ CLICK TO COMMENT ]++

Bloomberg Markets on Renaissance Technologies

Arguably the most successful hedge fund of all time is Renaissance Technologies' Medallion fund. I don't know much about hedge funds and don't have visibility into any of them, and furthermore, Renaissance is very secretive, so I'm just going by what others say. Since many people keep saying the same thing, I suspect Renaissance is indeed as good as it is.

Bloomberg Markets has a very good article on Renaissance Technologies, "Inside a Moneymaking Machine Like No Other." Given how the fund is secretive, there isn't much that is known but Katherine Burton, the primary author, does a good job with whatever is available. Even if you are not a quantitative investor, well worth a read for a markets history perspective.

Medallion is a quant fund and Renaissance employs numerous, highly educated and highly skilled, mathematicians and scientists. The founder of Medallion, Jim Simons, is a former mathematics professor.

Medallion's record is truly remarkable. It posts something like 50% per year on a $10 billion fund, including through bear markets.

(source: "Inside a Moneymaking Machine Like No Other," Bloomberg Markets. Nov 21 2016)

Extremely skilled small investors may be able to generate 50% per year on a small portion of a few million but it is almost impossible for a $10 billion fund. Having said that, Renaissance doesn't retain its earnings so it prevents itself from getting bigger.

Of course, when you post very high returns, it can be fake/fraud/misleading-numbers or it can involve a lot of skill. Some will always argue it is fake or a fraud--just like how numerous people claim Warren Buffett is a fake and Berkshire Hathaway will go bankrupt when he isn't around--but I don't believe it is. I do think Renaissance is for real.
For outsiders, the mystery of mysteries is how Medallion has managed to pump out annualized returns of almost 80 percent a year, before fees. “Even after all these years they’ve managed to fend off copycats,” says Philippe Bonnefoy, a former Medallion investor who later co-founded Eleuthera Capital, a Switzerland-based quantitative macro firm. Competitors have identified some likely reasons for the fund’s success, though. Renaissance’s computers are some of the world’s most powerful, for one. Its employees have more—and better—data. They’ve found more signals on which to base their predictions and have better models for allocating capital. They also pay close attention to the cost of trades and to how their own trading moves the markets."
At their core, such models usually fall into one of two camps, trend-following or mean-reversion. Renaissance’s system had a foot in both.
How much money an employee has in Medallion depends on his overall contribution to the firm—and collaboration is key to getting a bigger piece of the pie. Employees are awarded an allocation of shares they can buy. In addition, a quarter of one’s pay is deferred and invested in Medallion, where it stays for four years. Employees must also pay fees of as much as “5 and 44.”

Simons determined, almost from the beginning, that the fund’s overall size can affect performance: Too much money destroys returns. Renaissance currently caps Medallion’s assets between $9 billion and $10 billion, about twice what it was a decade ago. Profits get distributed every six months.

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Sunday, November 20, 2016 0 comments ++[ CLICK TO COMMENT ]++

Sunday Spectacle CCI

Global Agriculture

Some important agricultural graphics I extracted from Syngenta's "Our Industry 2016" report (PDF direct link)...

(As with most graphics posted on this blog, you can click on the image for a larger one)

(Image source: Syngenta, "Our Industry 2016"; PDF direct link)

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Saturday, November 19, 2016 1 comments ++[ CLICK TO COMMENT ]++

Articles of Interest for the week ending November 19, 2016

Since getting back into investing, here are some articles I found interesting/worthwhile. Since I'm catching up, some are really old so you may have seen them already (if it is stock ideas or macro themes, pay attention to date it was written). Hope you find them useful.

I'm also trying to rebuild my blog and website list. Quite a number of blogs I used to read are gone or don't really cover what I find useful. If anyone has blogs that are worth following (especially anything new started in the last 3 or 4 years), let me know (email me or leave a comment at the bottom).

  • (Recommended) "Should You Buy Net-Nets or 'Desert Island' Stocks?" (Geoff Gannon for GuruFocus): Good to see Geoff Gannon writing articles again. I probably learn more from Gannon than anyone else on the Internet. Lately, I have been reading through his past articles at GuruFocus and there is always a nugget I pick up from each one. The linked article is one that touches on the investing approaches small investors can pursue. Gannon basically touches on what I call classic value investing (net-nets, companies trading below liquidation value, focus on assets, etc) vs event-driven (risk arbitrage, liquidations, spinoffs, etc) vs Buffet Prime (buy & hold forever, great businesses, strong moat, high ROE, etc). I share Gannon's views that event-driven type investing and Buffett Prime type are probably the best ones to pursue in USA (and Canada). In other countries, the situation may be a bit different (in developing countries, maybe you'll find higher quality net-nets but no special situations since corporate restructuring is limited). My personal opinion is that, just like anything else in life, there isn't one path to take. Many roads lead to success and you need to find the one that works for you. Too many people attempt to clone Warren Buffett without realizing the amount of skill or effort required. That's like people trying to be Michael Jordan or Wayne Gretzky without having the talent; better to figure out and focus on your strengths instead (more in the next bullet, article from Howard Marks). Also, the vast majority of investors will fail and won't beat the market--maybe even me. If you don't have an interest in investing, and aren't performing well (in the medium to long-term), you may want to focus on other things in life. If you like doing it, that's fine but otherwise, one needs to realize their limitations.

  • (Highly Recommended) "It's not Easy" (Howard Marks, Oaktree Capital, Sept 9 2015): I might write a standalone post on this in the future but in any case, this is a great piece from Howard Marks on how investing actually requires a lot of work and thinking. He quotes Charlie Munger as saying "It's not supposed to be easy. Anyone who finds it easy is stupid." Newbies who haven't read this should definitely read it.

  • (Recommended) "You can't Eat IRR" (Howard Marks, Oaktree Capital, July 12 2006): I used to use personal finance software (MS Money and Quicken) to track my portfolio but am down to computing everything by hand in a spreadsheet. So, I was revisiting this classic piece on how to measure returns properly. Some of it is not applicable to small investors but it is good to set up a system so that you understand how annualized returns can differ from IRR and how opportunity cost of not deploying capital (holding cash) should be factored in.

  • "Measuring the Moat - Credit Suisse" (Credit Suisse, h/t Hurricane Capital): Ran across this new blog, Hurricane Capital, that is quite good (the author transcribes some key points from videos he links to so his blog so that's something different and takes effort). The author cited the updated Credit Suisse report on moats. I read the old one (some of it at least) from years ago and it is quite good. If you want to read about moats that is not a book, it worth spending your time on this. The thing about moats, though, is that it is easy to identify in hindsight but hard when the business is building it. Also, even if you identify one, you might be looking at its peak and it can disintegrate; many value investors don't seem to pay attention to that.

  • Ritholtz Bill Miller interview (Bloomberg audio podcast): I am probably one of the few who still believes in Bill Miller. Many wrote him off him off after the financial crisis as someone lucky and unskilled, but I still think he is one of the best investors in the last few decades (especially for the size of the fund he was running). I haven't capitalized on anything yet but he definitely changed the way I think about growth stocks. I think he is prone to blow-ups given the type of investor he is (a bit speculative, kind of like Mohnish Pabri) and don't necessarily agree with Miller on everything, but you can't deny that he brings a different perspective on many issues. For instance, I don't share his view in the interview that stocks are cheap--he, like most institutional investors, are comparing it to bonds--but he is probably right that bond yields may have peaked (apparently global bonds hit a 5000 year peak in the summer). His bullish view of Amazon is also hard to accept--he seems to rely more on the Silicon Valley approach of looking at addressable market, which is extremely large for Amazon (relatively speaking, Amazon is barely where Walmart was in the early 90's), rather than on current and future "probable" earnings. He does make a strong point that Amazon is one of the few companies with $100 billion in revenue that is able to grow it 20%+, a truly remarkable feat for sure.
  • "Bob Diamond's Misadventures in Africa" (Bloomberg, Oct 11 2016): Profile of former Barclays CEO (who stepped down after LIBOR interest-rate manipulation scandal--not clear but I don't think he is ethically challenged) who is running a new fund/holding company, Atlas Mara (trades in London, LSE: ATMA). I find his company interesting because it gives investors an opportunity to invest in Africa. Not only that, his fund is exposed to frontier African markets rather than the popular, more developed, South Africa or Kenya. Africa is the least developed region, which consequently means it has the highest growth potential. It is also one of the most corrupt--only parts of South Asia and Central Asia are more corrupt in my opinion--and filled with quasi-dictatorships (many are run by democratically-elected-dictators). So if someone is interested in frontier markets and wants super-high-risk/very-high-return potential, this is the place to look. When an economic growth is good, one of the absolute-best sectors to invest is financial services (especially banks and stock exchanges in undeveloped/developing markets). Atlas Mara is a holding company with stakes in several banks and is trying to consolidate them into larger, more efficient, operations. The stock is down something like 80% since IPO because their banks are doing terribly. The commodity bust has negatively impacted many of those countries and loan losses are high. Some of their investments were likely duds and they might have spent millions on worthless banks. Assets are likely overstated and probably worth less than what's on the books. Management skill is also unclear, although Bob Diamond built up Barclay's Africa operations over the decades so he knows the region (he is also apparently good with forex which is where Atlas Mara is making money right now). What makes this worth looking at is the fact that Price to Book is something like 0.4 (I haven't looked deeply and confirmed it). Assets are likely overstated and asset quality is likely poor but even then, after adjustments, if P/B is less than 0.6, it is worth investigating given the long-term secular banking growth (if you are ok with high-risk investments). There is a risk that management may destroy shareholder wealth by raising funds by issuing shares way below book value but hopefully they don't. Unfortunately, I don't really understand financials--outside my circle of competence--so any investment will be more speculative than anything.

  • Syngenta 2016 Industry Report (PDF; alt website link): Was studying the agricultural industry and found this industry report useful (it's similar to the ExxonMobil oil & gas industry report, which is one of my favourites in the energy sector). Things have changed so much in agrichemicals/agribiotech industry in just 5 years. I invested in Syngenta (SYT) as a risk arbitrage position and it has sold off significantly recently (possibly due to increased deal failure risk from the election of Trump and his impact on European regulatory agencies; if Trump blocks the Monsanto merger or severely penalizes Chinese companies, then maybe the EU will block the Syngenta buyout). Anyway, I was wondering if I should raise the stake (you are looking at something like upside of 20% and downside of 30%, depending on stock price). Deal might fail so not sure if it's worth it. I always liked the company and was looking at it more deeply as a potential long-term investment (I would have no problem holding this company long-term). The problem I see is that the industry did really well in the 2000's but has gone nowhere in the last 5 years.

  • "Can Monsanto Save the Planet?" (Fortune): I also was researching Monsanto (MON), which is a competitor to Syngenta (although Monsanto deals more with seeds and Syngenta with crop protection chemicals). I'm thinking the stock may be worth investing if the merger fails and stock falls 25%+ from here. Monsanto has been one of the most hated companies in America in the last 50 years. Some of it for very valid reasons: Monsanto has been in some of the most serious health controversies in American history. It was a major producer of harmful chemicals such as DDT, PCB, and Agent Orange. That was the past. Recently, over the last two decades, it has been controversial due to its main business, genetically-modified-organism (GMO) products. Namely, Monsanto invented and pioneered genetically-modified seeds. It is also controversial for enforcing patents and going after farmers that violate its GMO seed policies. Presently many countries, particularly in Europe, are very concerned and resistant to GMO food. The impact of GMO foods will not be known until decades afterwards but GMO foods are one of the most regulated and scrutinized products so I am somewhat less concerned than others. Everyone has a moral compass and you need to decide if you want to invest in such a company. For instance, I don't invest in weapons manufacturers (so-called Aerospace and Defense industry) or tobacco. But I have no problem with Monsanto. The industry has not done so well over the last 5 years and because this is a high P/E (high ROE) stock, one needs to be clear on the future prospects. Hard to tell but the stock probably trades at a discount due to its controversial nature.
  • "Salt at the source: A day in a Lake Huron mine" (, date unknown): I am researching Compass Minerals (CMP) as a potential investment and ran across this video/photo overview of their main salt mine. Compass' valuation appears high and not sure what its long-term stable earnings are. I will do a detailed write-up if I research more.

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Thursday, November 17, 2016 1 comments ++[ CLICK TO COMMENT ]++

Jeremy Grantham 3Q 2016 Letter: Not a Classic Bubble

I'm getting back into investing and one of my favourite big-picture thinkers is Jeremy Grantham of GMO. One of the things that makes this blog not much of a value investing blog--I don't necessarily consider myself a true value investor--is my incorporation of macro thinking. Grantham's latest 3Q 2016 letter is out and he devotes it to the high market valuation, which in my opinion is a bubble. He essentially suggests that valuations are high and will mean-revert, but doesn't think it will happen quickly as in most large bubbles. He thinks the most probable outcome is a drawn-out mean reversion.

I don't necessarily agree with Grantham on everything--for instance, I'm still not sold on his recent bullish call on (some) commodities and his thought that oil will hit $100 again (within a reasonable time period)--but he is an expert on bubbles and is one of the few that was bearish on the 2000 and 2008 bubbles (apparently also the 1989 Japanese bubble too but I wasn't investing back then ;) ). Although Grantham and his firm GMO isn't 100% perfect with their asset forecasts, they are mostly right than wrong. He is one of the few that I am aware of who treated timber as a major distinct asset class and was bullish long before anyone else (this wasn't an investable asset for small investors but it was valuable to pension funds and other large funds).

For macro-oriented investors, I highly recommend reading his 3Q 2016 piece, "Not with a Bang but a Whimper (and Other Stuff)," which is the 2nd letter in the document at GMO (main site here).

Click through for my full thoughts. Underlines are by the author but as is usually the case, bolds and square brackets are by me. I don't like quoting so much but I'm going to do it here since Grantham writes so well and his thoughts are very valuable for future reference.

Well, the US market today is not a classic bubble, not even close. The market is unlikely to go “bang” in the way those bubbles did. It is far more likely that the mean reversion will be slow and incomplete. The consequences are dismal for investors: we are likely to limp into the setting sun with very low returns. For bubble historians, though, it is heartbreaking for there will be no histrionics, no chance of being a real hero. Not this time.


Hidden by the great bubbles of 2000 and 2007, another, much slower-burning but perhaps even more powerful force, has been exerting itself: a 35-year downward move in rates (see Exhibit 1), which, with persistent help from the Fed over the last 20 years and a shift in the global economy, has led to a general drop in the discount rate applied to almost all assets. They now all return 2-2.5% less than they did in the 1955 to 1995 era (or, as far as we can tell from incomplete data, from 1900 to 1995).

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Wednesday, November 16, 2016 0 comments ++[ CLICK TO COMMENT ]++

Talk about Short-covering Rally -- Shippers Rise 500%+

Some shipping companies had one of the biggest short-covering rallies in recent memory when they rose 500% or more within a few days.

(source: Yahoo! Finance, downloaded November 16 2016)

I came across this unusual outcome after reading the story at Marketwatch. There are always some crazy short-covering rallies but I haven't seen, nor heard of, such huge moves across multiple stocks. DryShips had a recent reverse stock split and not sure if that threw off some quantitative fund or something.

The stocks above are for DryShips (DRYS) and Globus Maritime (GLBS). These are shipping companies and long-time readers may recall how I have touched at the extreme volatility of DryShips and dry bulk index, and even wondered several years ago if DRYS was an investment opportunity. The whole industry is distressed and facing some catastrophic problems. I have been looking lately at Navigator Gas (NVGS) and Seacor (CKH) but the issue is the massive overcapacity. For instance, Navigator Gas is seeing declining prices and shipping volumes yet it is contractually committed to pay and take delivery of even more ships over the next few years--so are some of its competitors! So the situation is not pretty at all.

Companies like DryShips are on the verge of bankruptcy and the shares are essentially extremely-low-probability-potentially-high-return "options." As the chart below shows, the company had a similar huge rise near the Financial Crisis in 2008 and collapsed. This time around, it may be the final nail in the coffin...

(source: Yahoo! Finance, downloaded November 16 2016)

Monday, November 14, 2016 0 comments ++[ CLICK TO COMMENT ]++

Berkshire Hathaway Bets on US Airlines

Berkshire Hathaway just disclosed that it took stakes in major US airlines. Pretty sure it is not Warren Buffett, rather his co-CIOs, making these investments. Buffett joked that he wouldn't invest in airlines after his disastrous--disaster for him is exiting with a small gain ;)--bet on US Airways in the 90's and, although he can always change his mind, I doubt he did. Also, Buffett usually makes concentrated bets and this isn't one. What is interesting to me is that they seem to be making a sector or macro bet since they took stakes in multiple airlines--either that, or they are trying to obscure their true intention (the stock they want to own) but buying multiple ones.

It was only yesterday when I was commenting on Mohnish Pabri and his investment in Southwest Airlines (LUV). I wondered if the airline industry has changed from its money-losing ways. I wonder if the Berkshire investment managers are thinking the same thing. In an interview with CNBC Buffett confirmed that Berkshire also took a stake in Southwest Airlines (this happened after the end of the quarter which the 13F filing reflects). Really interesting to see Pabri take the same position.

One possibility is that the Berkshire CIOs are betting on airlines due to the decline in oil prices, which are a major cost for airlines. Although they may factor this in somewhat, I doubt this is the case since pure value investors don't generally speculate on future commodity prices.

In the Alaska Airlines-Virgin America merger presentation, the following slides were presented to illustrate how the American airline industry is supposed more profitable now. This document is likely biased (since it is there to sell the merger) but it is something to think about. Has the airline industry really changed?

(source: "The Premier Airline for People on the West Coast," Alaska Airline and Virgin America.

The bottom slide clearly illustrates that the top 4 carriers have 84% of the market share, whereas as recently as 5 years ago, it was only 65%. Either economies of scale or pricing power could have led to improved operations for those top 4 carriers.

One thing going against an investment right now is that P/E ratios are very low right now. According to this Bloomberg article, TTM P/Es for the 4 largest US airlines are around 8, with American Airlines actually trading around 5. Cyclicals should generally be bought when P/Es are high (or infinite i.e. loss). I haven't done any research but one should be careful that they are not buying these companies near peak earnings, with high risk of markdowns during economic recessions--a recession and a stock market correction is way overdue and I think we will have one very soon.

Maybe it is worth investigating airlines as potential investments. This is certainly an industry that has historically been ignored by many amateur investors, for very good reasons.

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