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Articles for the Week Ending February 4, 2017

Certainly an interesting start to the year, with an unusual US presidency, FedRes tightening underway, US$ strengthening, and Chinese capital outflows still continuing (or at least seems that way). Some governments appear to be becoming nationalist and protectionist and we may be seeing the end of the global trade boom. I need to think about this more but it sort of resembles the change from 1910s/1920s to 1930s. Things aren't exactly the same but that period was also characterized by a trade boom--countries were different and Asia/Latin America didn't play much of a role--followed by extreme retrenching from global trade.

I also have a feeling that labour (workers) may do better over the next decade while capital (investors) don't do as well (relatively speaking). Basically the opposite of the last decade (if you are interested in this thinking, read the Jeremy Grantham GMO letter). Note that everything I say is from a developed country (USA/Canada/Europe/etc) point of view (situation is very different in developing countries).

Anyway, here are some articles over the last month or so that you may find interesting (not in any order):

  • (Highly Recommended) Importance of ROIC: 'Reinvestment' vs 'Legacy' Moats (article by Connor Leonard; John Huber via GuruFocus): Good comparison of a company that is able to reinvest at high ROIC vs one that doesn't.
  • "Is Emirates Airline Running Out of Sky?" (Matthew Campbell for BloombergBusinessweek, January 5, 2017): I haven't read this article fully but seems an interesting read. On another note, some US airlines are lobbying Trump administration to ban the Middle-Eastern airlines on the grounds they are subsidized. Whatever it may be, it's truly remarkable that Emirates has come out of nowhere to be one of the top airlines in the world.
  • "Tesla Flips the Switch on the Gigafactory" (Tom Randall, Bloomberg, January 4, 2017): Important event for Tesla and may end up being one the key events in the history of the electric vehicle (EV) industry. If EVs are to take off, battery prices need to drop significantly--$10,000+ of the cost of an EV can be the battery alone--and it remains to be seen if Tesla's massive factory (along with its partners like Panasonic) can lower the cost of batteries.
  • H&M: Stuck Between a Rock and a Hard Place? (Hurricane Capital, Jan 28, 2017): Very good evaluation of the retailer, H&M. I don't know much about the company as an investment but I do like the store as a customer. I think retailers are outside my circle of competence--although I AM looking at Staples (SPLS) and Whole Foods (WFM)--and I don't really understand them very well. All I know is that many chains come and go and the ones that grow to national level seem to last about 30 years in North America (maybe it is a generational thing). H&M's P/E seems high (20+) and its operating margins have been declining for several years (always risky) but its balance sheet is strong (no debt), big chunk (almost 38%) owned by founders (they will be more careful than random outside management), and is still a top global brand.
  • "Why Trump Tariffs on Mexican Cars Probably Won’t Stop Job Flight" (David Welch and Dave Merrill for Bloomberg, January 4, 2017): Good, quick, summary of the auto manufacturing situation. It doesn't seem like a tariff on Mexican car production will level the competitiveness of American car production as much as some (particularly in the Trump administration) imagine. It will definitely reduce production and hurt Mexico in the near-term but when it comes to the long run, as economists, perhaps going all the way back to Adam Smith, might say, comparative advantages are hard to overcome via tariffs.
  • "Who Will Pay for San Francisco's $750 Million Tilting Tower?" (James Tarmy and Kartikay Mehrotra, bloomberg, February 1, 2017): Sad story for the buyers of condominiums in a recently-built skyscraper in San Francisco that is tilting over :(
  • "“Becoming Warren Buffett,” The Man, Not the Investor" (James Surowiecki, The New Yorker, January 31, 2017): HBO produced a new documentary on Warren Buffett. Haven't seen it but it seems to be more of a recap of his life.
  • (Recommended) "Immigration Orders and Odd Tenders" (Matt Levine, Bloomberg, Jan 30 2017): "If the president can, without consulting the courts or Congress, banish U.S. lawful permanent residents, then he can do anything. If there is no rule of law for some people, there is no rule of law for anyone. The reason the U.S. is a good place to do business is that, for the last 228 years, it has built a firm foundation on the rule of law. It almost undid that in a weekend. That's bad for business." Very good opinion piece by Matt Levine on the Trump immigration order. Not sure if it is incompetence or if they purposely did some of the things they did but I suspect we are going to see even more draconian measures in the future. Biggest future action I can think of is Trump's idea of confiscating Mexicans' (but it can apply to anyone) own money they send back home in order to pay for a wall. Talk about government intrusion into one's personal property (although US laws don't necessarily have to apply to migrants)--anyway we shall see what actually happens. 
  • GMO Quarterly Letter - 4Q 2016 (click here for link to main site): Jeremy Grantham suggests the rise of Trump had a lot to do with rising inequality.
  • (Recommended) "The Real Legacy of Steve Jobs" (Sue Halpern, New York Review of Books, Feb 11 2016)(review of "Steve Jobs: The Man in the Machine" film directed by Alex Gibney; "Steve Jobs" film directed by Danny Boyle; "Becoming Steve Jobs: The Evolution of a Reckless Upstart into a Visionary Leader" by Brent Schlender and Rick Tetzeli"). New York Review of Books is sort of radical and left-leaning but some of their articles are amazing (not this one though). Not sure Steve Jobs fans will agree with everything said here but it's a good read. The documentary, "Steve Jobs: The Main the Machine," is quite good in portraying the negative aspects of Steve Jobs and is more balanced than many Steve Jobs films I have seen. I would recommend that. Another unrelated documentary that shows Steve Jobs' brilliance and his vision of the future is the raw 1990's documentary-interview, "Steve Jobs: The Lost Interview." Most of Steve Jobs' interviews are promotional or attempts to sell his products but this one is not. If you are into technology and want to see why many say he was waaayyyy ahead of the time, check out that interview. Both are on Netflix Canada presently.
  • (Highly Recommended) A Half-Dozen Ways to Look at the Unit Economics of a Business (Tren Griffin,, Dec 31, 2016): "McCaw Cellular Communications sold to AT&T for $12.6 billion in September 1994. And yet the business did not show an accounting profit on its income statement until the second quarter of that year (after the deal was announced on August 17, 1993). The McCaw  Cellular example shows that you can create a tremendous amount of value for shareholders without showing any profit on an income statement. Or not...Amazon and Netflix are examples of the same value creation phenomenon as are many businesses that John Malone has created over the years. This post will try to help people understand why this is true." Very good post on how companies that show losses or very low profits can still be creating value for shareholders. John Malone and Jeff Bezos famous for doing this.
  • "Is the World Big Enough for Huawei?" (Scott Cendrowski, Fortune, Feb 1, 2017): Many may remember Huawei for its dominance in networking equipment but now it has risen to be one of the top mobile phone manufacturers.
  • (Highly Recommended) "The Best Advice I Ever Got" (Fortune, March 21 2005 archive article): From Fortune's archives, here is a gem. Short responses from many successful individuals such as Warren Buffett, Richard Branson (Virgin), Sumner Redstone (Viacom), Howard Schultz (Starbucks), Peter Drucker (great management strategist), and so on. A very good collection of diverse thoughts. Some of them are obvious whereas some of them probably don't apply to you but I always find simple wisdom can go a long way. I said this in the early days of this blog and I'll say it again: most people reading this blog won't be good at investing--probability of outperforming is slim--and many will give up; but even if you don't go anywhere in investing, I hope you learn something that improves your career or family life or entrepreneurship or something...

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