Saturday, November 12, 2011

It's All Just History Repeating

This is a repost of a blog entry from February 2009.

On Globalization

Ran across this during my reading:
Where one nation has got the start of another in trade, 'tis very difficult for the latter to regain the ground it has lost; because of the superior industry and skill of the former, and the greater stocks which its merchants are possest of, and which enable them to trade for so much smaller profits. But these advantages are compensated, in some measure, by the low prices of labour in every nation that has not an extensive commerce, and does not very much abound in gold and silver. Manufactures, therefore, gradually shift their places, leaving those countries and provinces, which they have already enriched, and flying to others, whither they are allured by the cheapness of provisions and labour, till they have enriched these also, and are again banished by the same causes. And in general we may observe, that the dearness of every thing, from plenty of money, is a disadvantage, that attends an established commerce, and sets bounds to it in every country, by enabling the poorer states to undersell the richer in all foreign markets.

-David Hume, Of Money- 1752

Monday, October 10, 2011

Vanity Fair: California and Bust

The succession of financial bubbles, and the amassing of personal and public debt, Whybrow views as simply an expression of the lizard-brained way of life. A color-coded map of American personal indebtedness could be laid on top of the Centers for Disease Control’s color-coded map that illustrates the fantastic rise in rates of obesity across the United States since 1985 without disturbing the general pattern. The boom in trading activity in individual stock portfolios; the spread of legalized gambling; the rise of drug and alcohol addiction—it is all of a piece. Everywhere you turn you see Americans sacrifice their long-term interests for short-term rewards.

The entire Michael Lewis article - filled with comments from Arnold Schwarzenegger, Meredith Whitney, and more - can be found here.

Tuesday, September 20, 2011

Howard Marks: "What's Behind The Downturn"

...Thus at Oaktree, we're making allowances for things that may go less well than they did in past periods. Cheapness provides a margin of safety, but only so much. We're moving forward, but catiously.
For the full memo, click here.

Thursday, August 18, 2011

You Know To Sell When...

....according to the average of more than 900 estimates compiled by Bloomberg. Industrial & Commercial Bank of China (601398) Ltd., China Construction Bank Corp. (939) and Bank of China Ltd. (3988) have 101 ratings equivalent to “buy” and zero “sell” recommendations, data compiled by Bloomberg show.
Bad Debt At China's Banks Growing: Jain

Saturday, August 06, 2011

Market Summary For The Week Ended August 5, 2011

When Warren Buffett made his open call for a Chief Investment Officer, he stated:

"Over time, markets will do extraordinary, even bizarre, things. A single, big mistake could wipe out a long string of successes. We therefore need someone genetically programmed to recognize and avoid serious risks, including those never before encountered. Certain perils that lurk in investment strategies cannot be spotted by use of the models commonly employed today by financial institutions."

That was March 2007.

I still remember the application I wrote to Buffett regarding the position. I went into lengthy detail about Hyman Minsky, his theory of ponzi finance, and how we may be imminently approaching such a moment (This was all before Minsky went mainstream). After explaining the concept, I dug into specifics and I think I came up with seven- Government spending & Social Security, the housing and mortgage sectors, the private equity bubble. I think oil was on that list too, on the premise that traders holding oil add no value. The rest unfortunately are lost. That is to say, the desktop holding the original file is kaput.

Enter today- markets are down over ten percent from their highs, and there are lessons to be learned. I believe successful investment today requires more than just an ability to identify and hold cheap stocks. I think a critical lesson (one that I have failed to apply this time around) is to not only hold cash as markets become frothy, but also to adjust your margin of safety requirements on equities as market levels go up and economic stability comes into question.

I'm still concerned about the overall macro economy. The richest world' nations continue to run government deficits at nearly 10% of their GDP, and there are compelling reasons to believe in a Chinese slowdown. Top amongst them:
  1. housing prices have quadrupled in some markets over the last four years
  2. fixed investment is near 50% of GDP, and there is evidence that a large amount of this is resulting in empty offices and homes

I would want some pretty outrageous buys to entice me to buy right now. As today's Wall Street Journal points out, 10 year P/E's on the S&P500 are still at over 20, and as some people have been pointing out, the real economic earnings of S&P500 companies is considerably lower than what is reported. That being said, here's what I found in my research yesterday:
  • A low-cost producer with a very depressed 16% free cash flow yield, where the rest of the industry is actually losing money. Arguably, it could fairly easily see a rise to 33%.
  • Another company where one segment operates under contracts with very strong credit customers and high switching costs. Yield to value on just that one segment is 20%. Then, you get another segment which is the #2 market player, sells internationally, and at its prime made an additional 16% yield on today's EV.

No, I will give no specifics. These are probably buys now. So long as the business risk on these companies is as minimal as I see it (especially in times of economic hardship), then the market cannot ignore these earnings yield when they compare so favorably to your 3% ten year treasury. Opportunities today exist, but investors must be careful. I can give no greater warning than this: Team Hamblin Watsa at Fairfax Financial implemented their stock market hedges when the S&P and Russell Index were still 10% lower than this. And their long-term record is near the best.

Sunday, June 12, 2011

"Monstrous Risks" in Emerging Markets

From Reuters:

Brazil's and India's government yield curves are inverting, a condition in which short-term rates rise above longer yields. Historically, such an inversion almost invariably precedes a recession, as investors temporarily accept lower long rates in anticipation of the decline in yields that typically accompanies an economic downturn.
"If you look at inverted yield curves around the world, the most inverted yield curves are Greece, Ireland and Portugal, and then comes India and Brazil. There is your warning sign that no one is talking about," he said.

Monday, May 30, 2011

ECB Executive Lorenzo Bini Smaghi

There's a terrific interview that came out this weekend in the FT. They talk with ECB board member Lorenzo B. Smaghi about the mess that Greece is currently in:

FT Why would it not be possible to organize a so-called “orderly” debt restructuring?

LBS It is a fairy tale because it tries to apply the Latin American experience of the 1980s to the current Greek situation, which is totally different, in many respects.

First, ...
He goes on to mention five real, compelling economic models that are well worth understanding.


Tuesday, April 19, 2011

This Time Is Different

Two passages worth remembering, followed by its comparison to China.

From Carmen Reinhart & Kenneth Rogoff's "This Time Is Different : Eight Centuries of Financial Folly"

Banking Crises in Repressed Financial Systems
Our sample includes basically two kinds of banking crises. The first is common in poor developing countries in Africa and elsewhere, although it occasionally surfaces in richer emerging markets such as Argentina. These crises are really a form of domestic default that governments employ in countries where financial repression is a major form of taxation. Under financial repression, banks are vehicles that allow governments to squeeze more indirect tax revenue from citizens by monopolizing the entire savings and payments system, not simply currency. Governments force local residents to save in banks by giving them few, if any, other options. They then stuff debt into the banks via reserve requirements and other devices. This allows the government to finance a part of its debt at a very low interest rate; financial repression thus constitutes a form of taxation....

Governments frequently can and do make the financial repression tax even larger by maintaining interest rate caps while creating inflation. For example, this is precisely what India did in the early 1970's when it capped bank interest at 5 percent and engineered an increase in inflation of more than twenty percent...)
Inflation rate in China: 5.5%
Average rate on deposits: 1.4%
Average rate on Chinese bank assets: 3.7%

The Lessons of History

The lesson of history, then, is that even as institutions and policy makers improve, there will always be a temptation to stretch the limits. Just as an individual can go bankrupt no matter how rich she starts out, a financial system can collapse under the pressure of greed, politics, and profits no matter how well regulated it seems to be.
We have come full circle to the concept of financial fragility in economies with massive indebtedness. All too often, periods of heavy borrowings can take place in a bubble and last for a surprisingly long time. But highly leveraged economies, particularly those in which continual rollover of short-term debt is sustained only by confidence in relatively illiquid underlying assets, seldom survive forever, particularly if leverage continues to grow unchecked.
China's Fixed Asset Investment as a percent of GDP: 47 - 65% (depending on what figure you use)
That is a $3.5 trillion+ investment program.
According to a recent article, it now takes $4.3 of debt to create $1 of growth in Chinese GDP. The average for the US from 2001-2010 was about $4 to $1.

Buffett used to say, bubbles usually have their beginnings in something fundamental; public mania just takes the concept too far. China began its fabulous growth by becoming the world's exporter of choice. Yet gradually, an ever larger amount of GDP was composed of new fixed investment. And after the financial crisis, the Chinese government enforced a higher, unprecedented level of investment, taking its share of GDP from the mid 30's to where its at today.

Step back and think about that for a minute... through one of the biggest drops in demand ever... with Chinese wage pricing and currency levels rising... their level of new investment soared. It should be concerning.

As for commodities... Is this time really different?

Source: Macleans

Sunday, January 23, 2011

Wells Fargo's CEO On Taking Market Share, Repurchase Risk

It pays to listen to your quarterly conference calls. When Wells Fargo (NYSE: WFC) held its fourth-quarter presentation on Wednesday, CEO John Stumpf offered two golden pieces of news to his patient followers.
. . .

See the full article here

China's Risk To Your Portfolio in 2011

China's scored plenty of obvious economic successes in the past few years. . . .

See the full article here