Can Turtles Fly?

UPDATE: The monoline saga continues... added a bunch of links near the bottom dealing with the criticism and rebuttals of the New York Times story from yesterday. Personally I think the story is decent except for the fact that they presume that the regulator would take over MBIA any minute now and are not doing that because of the CDS insurance contracts. William Ackman, speaking at a Jones Day conference , says that Financial Security Assurance (FSA), a monoline, is going to go bankrupt as well. William Ackman has purchased CDS on FSA's bonds. Hedge fund manager Bill Ackman, who correctly predicted shares of MBIA Inc. and Ambac Financial Group Inc. would tumble, said he now is betting against Financial Security Assurance Holdings Ltd. Financial Security may be insolvent because it sold investment contracts backed by mortgage securities that have tumbled in value, Ackman, 42, told a conference hosted by law firm Jones Day yesterday in New York. Financial Security, a New York unit ...

I feel that Japan is one of the most undervalued markets out there, and have been looking for an investment in some Japanese company. I kept getting dissapointed with the low ROE of Japanese companies. For example, why even consider Makita (6586) when Black & Decker (BDK) has consistently had substantially higher ROE? If you do look at Japan, do note that a lot of companies are cyclical industrial companies (P/Es may look low near the top.) A couple of companies that seem attractive are Fanuc (6954) and Yaskawa (6506), two world-class industrial companies producing motors, factory robots, and the like. I decided to concentrate on Toyota Industries (TSE: 6201). I decided to look at it after seeing its stock price fall quite a bit over the year. Toyota Industries is a long-term Martin Whitman pick. I just started going through his shareholder report history and he first bought it in 1998 . He has been adding to it lately and I figured I should study this company further. Here are som...

Following the lead of MBIA a few months ago, Ambac announced that it is terminating its rating contract with Fitch : Our decision to refocus and realign our business around our core expertise in the public finance and infrastructure sectors has led us to re-evaluate our ratings needs. As part of this review, we have asked Fitch to remove its ratings on Ambac and all its subsidiaries effective immediately. As I had said before, Fitch basically destroyed its business a few months ago by almost saying that it is incapable of pinning any concrete figures for the structured products ( Jay Brown commented on this in his letter to Fitch a few months ago). Ambac's decision was inevitable. The problem isn't that they downgraded Ambac; instead, the problem is that they give a huge advantage to pure muni-bond insurers and new entrants. Their models have always been questionable and were only a minor player in the industry. Unfortunately this prolongs the rating agency duopoly between Moo...

There is a story in The New York Times speculating on why the insurance regulator can't seize control of MBIA's insurance subsidiary . The New York Times is liberal and pro-government (I'm a liberal too but generally anti-government) so many of their articles generally criticize businesses if government is seen to be under attack. One can quibble over many points in the story. Felix Salmon of Portfolio.com raises some questions over the sloppy writing. I don't have a problem with most of the article except for one point which the article rests on and assumes to be the case. The article is about the inability of the regulator to take control of the insurance company. That's fine but it never explains how the regulator can legally seize control. In fact, the regulator likely can't for the forseeable future. There are many other monolines in far worse shape (some downgraded below A), such as CIFG, FGIC, etc, and the regulator hasn't taken over. The NYT article...

Is oil in a bubble? Who knows, but we are certainly entering an unprecedented area. Shown below is a chart of real oil prices stretching back to the late 1800's when oil was commercialized (the first oil well was actually drilled as far back as 347 CE in China , and oil itself was discovered even before that). (source: Price of Petroleum , wikipedia.org. SVG image downloaded June 17 2008) The above chart from 1861 to 2007 shows oil in real prices (using 2007 dollars). If I'm not mistaken, given the run up in oil in 2008, oil has actually hit an all-time real peak (for those not familiar, when we say 'real' we mean prices adjusted for inflation). In the super-long-term, real crude oil prices have been flat (somewhere around $25.) The following is real gasoline prices in the US: (source: Short-term Outlook , EIA. Image downloaded June 17, 2008.) Unlike crude oil, note that gasoline prices, like nearly all commodities, have been deflationary over time (at least in USA). Th...

Brian Milner of The Globe & Mail conducted an interview with Jeremy Grantham , a superbear, who sees some terrible things unfolding in the stock market and the economy. Jeremy Grantham oversees investments at GMO, a big institutional money manager. Here are some excerpts: (source: Grantham: the bear growls , by Brian Milner, June 17, 2008. The Globe and Mail.) Milner: You draw comparisons between what's happening today and the start of the Great Depression. Grantham: We're in that 1929-30 window, where we've had a shock to the system. But the secondary effects - less consumption, lower profit margins, lower GDP, lower employment, lower global trade - are beginning to work through the system. They're steadfastly ignored because they're still quite slight. It takes a year, 18 months [or] even longer for some of these effects to show up. I'm not that familiar with Grantham so don't really know what type of investor he is or what his track record is. He is...

I'm sure some of you have seen the running debate (in the post comments) between Synchro, ContrarianDutch, and I, on investing styles, philosophies, and the future. Synchro raises one of the the most important questions we, as small investors or contrarians, should get a handle on: Synchro: By the time it is so obvious that the business is "so misvalued" by you, presumbably it would be obvious to all the other investors too, who are excavating the same grounds. I am at a loss to understand what your edge is. I'm just a newbie, with a poor investing record, and I don't want to speak for others, but let me provide my thoughts. What Synchro asks is something everything should be able to answer for themselves. The question is, 'what makes you think that you can beat the professionals out there?' Professionals out there have way more resources. William Ackman spent something like $100,000 on photocopying MBIA documents. My net worth isn't even $100,000! Pra...