Can Turtles Fly?

GM just re-emerged from bankruptcy and the IPO looks to have been quite successful. From The Globe & Mail (comments in square brackets by me): They all contributed to what was perhaps the most successful sale in the 102-year history of the company as its new shares began trading Thursday. Investors snapped up 452.6 million shares in the reborn auto maker, none of which carried a rebate, an interest-free loan or even a set of floor mats. The shares rose 4 per cent, or $1.19, to $34.19 on the New York exchange [IPO price was $33]. ... The U.S., Canadian and Ontario governments and the United Auto Workers will all retain a stake in GM for now, but the U.S. government reduced its ownership to a little more than one-third through IPO. The three governments bailed out GM with about $60-billion worth of taxpayers’ money in 2009, with Canada and Ontario providing $9.5-billion of that. Chris Liddell, who was appointed GM’s chief financial officer after it emerged from Chapter 11 ba...

I ran across an article at 24/7 Wall St predicting 7 emerging, American, monopolies . I don't necessarily think they are all monopolies; neither do I think they are worth investing in right now. However, it may be worth thinking about these companies and consider investing in them during a stock market crash or a hard sell-off. Here are the companies they list along with some of author's comment. My thoughts are in square brackets in green: Netflix (NFLX): "Netflix is expected to have more than 19 million subscribers at the end of 2010. Its growth may explode in the coming years Back in April, Trefis Research predicted that it would eventually reach as many as 47 million subscribers. That represents 39% of US households with DVD players. Where Netflix wins is with its library of more than 20,000 titles and its flexible business model that accommodates streaming or DVD by mail." [Mail-order movie rental company poised to dominate the online movie rental market. This...

It looks like retail investors are maintaining the trend they started two years ago, when they started to shift capital out of stocks and into bonds. Writing for Business Insider, Vincent Fernando produces the following chart showing the capital flow over the last two years :

With respect to the abrupt crash from a few weeks ago, well, it looks like the SEC is speculating on a "flash crash." I keep posting about this story because it is an important one. The fact that the stock exchanges rolled back trades, which is extremely unusual and very anti-capitalist, lends credence to the importance of this story. The Globe & Mail reports the following : A preliminary investigation suggests a “severe temporary liquidity failure” was at the root of the incident, Ms. Schapiro said. The SEC has already ruled out a “fat finger” typing error, hackers or terrorists What is clear is that the incident exposed serious flaws in today’s fast-paced computer-driven markets, where billions of simultaneous trades are clocked in nanoseconds. The result is that the market moves faster than the human brain can process, let alone stop. The problem, regulators acknowledge, is that algorithms can be, well, stupid. ### Mr. Gensler singled out an unnamed trader, ...

There have been many rumours and theories floating around, trying to explain how a broad index in the largest stock market in the world can drop more than 5% suddenly and recover almost immediately. Adding to the mix, The Globe & Mail quotes a story in the Wall Street Journal speculating on a new theory : One hefty trade in Chicago last Thursday may have played a big role in the afternoon stock market meltdown, The Wall Street Journal reports today. With markets already under pressure from global developments, the $7.5-million bet in the Chicago options trading pits may have served as something of a spark about 20 minutes before the heart-stopping plunge of almost 1,000 points in the Dow Jones industrial average, the newspaper says. The trade was made by Universa, a hedge fund that, ironically, is advised by Nassim Taleb, who authored Black Swan: The Impact of the Highly Improbable. Universa purchased 50,000 options contracts betting that stocks would continue to fall. Those c...

If you thought the stock market plunge on Thursday was weird, well, things got even more bizarre when some of the leading stock exchanges, such as NYSE, NASDAQ, and TSX (in Canada) cancelled some of the trades . The SEC has apparently also started an investigation. I'm just a newbie that has been following the markets for a few years but my impression is that it is rare for an exchange to roll back trades. It is even rarer when a trade is rolled back with no errors (NYSE and NASDAQ have indicated there were no computer malfunction or other errors on their end.) I find it hard to believe that rogue trades can impact the capital markets so much (BTW, Citigroup has denied that any of its employees played a role in this—there was a rumour that a Citigroup employee punched in 'billions' instead of 'millions'.) It almost feels like there is a big piece missing from this puzzle. The fact that the SEC is investigating lends credence to this view. Stock markets have cra...

Weird market behaviour today, with the DJIA down almost 10% (approximately 1000 points) at one point. As MarketWatch reports, it appears that some of the decline was due to trading errors: The U.S. stock market's rapid freefall Thursday afternoon was accelerated by program trading, which was triggered after a sharp drop in shares of Procter & Gamble and at least one other Dow stock, 3M Co., market watchers said. Shares of Procter & Gamble plunged to $39.37 from around $60. The New York Stock Exchange said each stock has its own circuit breaker level. When these stocks fall below their levels, then they can be traded on any other exchange or platform at any price. When P&G fell below its circuit breaker, a bid came in for the stock at $39.37 from the Nasdaq, the NYSE said. ### Several market watchers said they heard a major firm may have accidentally released an errant program, where a trader accidentaly placed an order to sell $16 billion, instead of $16 million...

The following is a graph, courtesy stockcharts.com , of three key indicators I like to look at: stocks, US treasuries, and the US$.

(source: Top image from CBS News ; Bottom image from Esquire ) Today is a historic day in America. After many years of putting the problem aside, not to mention aborted attempts by previous administrations, the Obama administration has staked its legacy on reforing the US healthcare system. In what will go down in history as one of the largest government restructuring of an industry, the US government is finally attempting to tackle the spiralling healthcare cost problem. It is a huge gamble for Barack Obama—I would put the risk similar to that of George Bush's gamble on the Invasion of Iraq—and the pay-off can be an absolute disaster; or it can be one of the most important things the US government has carried out in several decades. I am not a legal expert and haven't followed this issue closely but there is always a possibility of a future government undoing the proposed changes. However, given the highly-complex reform and the difficulty in getting many to agree on any p...

Crazy week for me. I actually went down to a small town in Pennsylvania to buy a used car. Nothing fancy but I wanted a particular car with specific features and it looked like I could save a few thousand so I did it. The trip only took a few days but it felt like I had been gone for a month. I haven't gone on any vaction in several years so that's probably why. Anyway... Retail investors in America have been shifting their portfolio towards bonds over the last couple years and a Scotia Capital analyst comments that cash held by mutual funds is at multi-decade lows : ...Strategist Hugo Ste-Marie is out with a report Monday that shows what’s known as the liquid asset ratio at U.S. mutual funds - that’s cash holdings in plain English - is at the lowest level seen in decades. Mr. Ste-Marie said that data is “signalling that equity portfolio mangers no longer have cash to redeploy. If new inflows don’t kick in soon, the equity rally will sputter.” Scotia Capital also too...

As is normally the case, so-called "junk stocks" (i.e. low quality stocks) have done exceptionally well off the bottom. The Globe & Mail has a nice article quoting a study by Scotia Capital showing companies with S&P credit ratings of BBB or below have significantly outperformed higher-rated stocks from March 9 to September 30. The study also shows that higher quality companies are starting to outperform. Since September 30, companies rated AA or above have outperformed. All I can say is... be careful if you deal with low quality stocks (many small-caps and distressed companies are.) Looking around the web, I notice many value investors and contrarian investors deal in low quality stocks so make sure you have a good thesis for owning what you do. Everyone looked like a genius in the last 9 months but things are going to get tough pretty soon. The worst thing about strong rallies is that, it's hard to tell if one's investment arguments are correct or if they a...

The Rajaratnum case that I was referring to in my prior post has the potential to be a spectacular blow up for Wall Street. Depending on how far the government takes it, we may be looking at the largest criminal investigation ever conducted on Wall Street. Unlike other popular criminal cases, such as the Bernie Madoff case, Enron, or Worldcom, this insider trading scheme appears to impact many firms and involves a huge network of insiders. Let me quote the thoughts of Michael J de la Merced , a New York Times reporter: As I report in the Times article, the case is fascinating on multiple levels. The sheer size of the purported network, riddled with unnamed co-conspirators and tipsters, is tantalizing. Who was the unnamed investor-relations employee who allegedly illegally spilled the beans on Google’s quarterly earnings? Who was the Akamai executive who did the same? The Moody’s Investors Service analyst who divulged that Hilton Hotels was about to be acquired by the Blackstone Group...

Bloomberg has a story that illustrates the difficulty of operating in a market that forces foreign companies to form alliances with local companies. The case here is China but it can apply to numerous other countries. SAIC and other Chinese carmakers that work with overseas companies are introducing their own models to boost margins in a country set to become the world’s biggest auto market this year. Foreign automakers typically have no remedy because Chinese law forces them to work with a local partner. “There’s nothing they can do,” said Scott Laprise, a Beijing-based CLSA analyst. “Your goal as a foreign automaker is just to stay ahead, come up with new technology, spend more money, and be one step ahead of your Chinese partner.” SAIC will add about 30 own-brand models by 2012, threatening Volkswagen and U.S. government-controlled GM. China’s biggest domestic automaker more than tripled sales of Roewe sedans this year. The set up is somewhat similar to how brand-name consumer goods...

I'm thinking of taking a position in US long bonds through the TLT ETF. Anyone have any thoughts on it? Last time I bet on the long bond, I lost money. The interest rate call was correct but the US$ decline caused losses. The situation is a bit different now. This could be the dumbest idea ever... it's certainly risky. The only positive is that it is very contrarian. Being contrarian for the sake of contrarian is not always profitable, but is this different? The thesis for the investment is a bet on deflation. Almost everyone, including superinvestors such as Warren Buffett are betting heavily on inflation, but is it possible that they are all wrong? I have been researching the issue for a while (I'll write up some blog entries on various ideas related to this over the next few weeks.) The case for deflation isn't solid but neither is the inflation view. Any thoughts?

MarketWatch reports: President Obama made it official Tuesday morning, announcing that he is reappointing Ben Bernanke for a second four-year term as chairman of the Federal Reserve. In a short statement in Martha's Vineyard with Bernanke standing at his side, Obama said Bernanke's background, temperament, courage and creativity helped to prevent another Great Depression. "Ben approached a financial system on the verge of collapse with calm and wisdom; with bold action and outside-the-box thinking that has helped put the brakes on our economic free fall," Obama said. I think this is the proper move. No one is perfect, and I don't think any single person can solve the economic problems, but Bernanke is more capable than many others. The leading candidate to replace him, according to some leaks a few months ago, was Lawrence Summers. Summers was favoured by some Democrats (Bernanke is a Republican although he seems to stay neutral on political issues, unlike Greensp...

Financial Times' John Authers produced a video clip a week ago, illustrating the current situation compared to the past. You may have seen similar information from various sources but this video synthesizes the various views. I rely more on P/E ratios and it's really hard to tell if the market has entered a bull market. I don't believe it has because the P/E ratio looks high. Although corporate earnings, at least in America, have soundly beat analyst estimates—my impression is that it is not common to see analyst estimates beat on such a mass scale—the future profit level looks weak. One has a make a macro call here since the forward-looking earnings will be unlike anything we have seen (this isn't a normal recovery from a recession.) As Authers points out in the video, P/E ratios are influenced by interest rates and interest rates are really low. If interest rates remain low—I lean towards deflation so I think they will stay low—then the P/E ratio isn't so bad....

Yes, all you Americans are richer this week. It might not feel like it but you are indeed richer, for the US Commerce Department has revised up its GDP numbers all the way back to 1929. Crossing Wall Street has the scoop : The Commerce Department released its second-quarter GDP report this report and along with it, they revised ALL the GDP numbers going back to 1929. ... Here are the recent old and new quarterly growth numbers. There are some significant changes. For example, the fourth quarter of 2007 was -0.17%, now it’s positive 2.12%. According to NBER, the recession began in December 2007. The first quarter of 2008 used to be positive 0.87%, now it’s -0.73%. Growth for the second quarter of 2008 was nearly cut in half. The contraction for the third quarter of 2008 was more than five times worse than originally thought! So, if you thought life was tough, it was a figment of your imagination. Just remember: you are richer than you thought! As for Canadians, we are still poorer and n...

(source: Image by AFP/Getty Images. Pictured: The cargo ship smashed to pieces just minutes after 31-strong crew were plucked to safety , By Daily Mail Reporter. Last updated at 9:36 AM on 12th October 2008) One of the most volatile industries out there is the shipping industry. The transportation companies, in particular, are very volatile and only a few brave souls will ever invest in them. The stock price charts are volatile enough to scare off most investors. Given the collapse in world trade, it shouldn't be surprising how badly the industry has been hit. The Economist has a story updating us on the present state of affairs: World trade in general remains in its worst slump for generations, although it too is no longer falling. Two of the biggest shipping banks (RBS and HBOS) are in state-backed rehab. The parlous state of the world economy could mean more shipping companies following Eastwind Maritime, which went bankrupt in June. On July 28th Hapag-Lloyd, Germany’s largest ...

The post where I was speculating on Seth Klarman's performance generated a lot of interest. A lot of it was due to the excellent blog, Distressed Debt Investing, picking up the post . Everyone has their own view on performance evaluation—some don't even think you can compare performance—but I want to address one point that was raised by several people. It has to do with Klarman holding high levels of cash. Several people feel that Klarman should be looked upon more favourably because he holds high levels of cash. What do the rest of you think? Is Klarman being handicapped by his cash levels? My answer, which is strictly my opinion, will probably be controversial. My view is that I would not give a bonus to Klarman just because he holds cash. The way I look at it, what matters in the end is the actual performance. If you were risk-averse, you may value cash but I personally don't. If one used debt, then I would be a bit wary but it depends on the levels. Holding cash will be...

In a opinion piece for MarketWatch , David Weidner wonders about the reliability of bank earnings in America. This is a story that the bank bears, and maybe even the broad stock market bears, were making over the last week. I wasn't going to write about it but then realized that this might turn into an "unexpected" event which could impact the markets. With the large commercial banks, David Weidner says: Commercial banking is essentially about one thing, net interest margin. A bank makes its profit, or net interest margin, by simply lending money at a higher rate than it has to pay to get the money. The environment for net interest margin has rarely been better. Banks only have to pay depositors interest of around 1%. Even better, they can borrow money from the Federal Reserve at a rate between 0% and 0.25%. The banks are lending it at rates of at least 5% all the way up to 30%. The problem is that borrowers aren't paying back their loans. Bank of America Corp. said ...