Wednesday, March 31, 2010

Understanding Economic Forecasts

In their book, Understanding Economic Forecasts, David Hendry and Neil Ericsson acknowledge the weaknesses of the econometric models in use. The problem, they say, is that they tend to be based on two key assumptions: that the model is a good representation of the economy and that the structure of the economy will remain relatively unchanged.

In reality, the models are mis- specified and the economy is subject to unexpected shifts. “Thus, the failure to make accurate predictions is relatively common.”

Problems of mis-specification, including the use of wrong variables and/or mathematical misrepresentations, are relatively easy to fix and do not necessarily produce bad forecasts. What really wrecks a forecast is a structural break, some underlying parameter or event that has changed in a way that wasn’t foreseen.

An interesting observation: You only have to remember the famous lament by Goldman Sachs’ chief financial officer when the credit crisis broke in 2008, that “we were seeing things that were 25- standard deviation moves, several days in a row”. When, as Hendry points out, one day should have been enough to recognize that the world had changed.

Direct Link to Full Article

The Begginings of Increased Trade with China, India and Brazil

Logistics group Transnet said on Wednesday it had completed its two-year, R3bn project to deepen and widen the entrance to the Durban harbour.

The project enables Africa's busiest port to receive the largest new-generation vessels, while simultaneously increasing container handling capacity by 720 000 20-foot equivalent units (TEUs) to 2.9 million TEUs annually. The entry channel was widened from 120m to 225m.

The deepening of the port was necessary because of a change in the global shipping industry, which brought about larger vessels that needed deeper and wider ports. In the past five years Transnet has invested R12bn in Durban harbour as part of its R94bn capital investment project.

"As a result of this particular project [berth widening and deepening], we have reduced waiting time for vessels to come in and load or offload cargo from about 55 hours to 30 hours," said port manager Ricky Brikraj. The global waiting average is 35 hours.

In the next five years Transnet will spend another R6bn to increase port capacity, while helping with congestion-easing ground projects on the container and road sides of the harbour vicinity, according to Brikraj.

Moses said Transnet will again be extending the berths from June at an additional cost of R2.3bn. That is set to add another 700 000 TEUs in capacity by 2011. "This puts South Africa in a very good position to support new business development," said Moses.


South Africa and China sign R2.6bn trade deals

China has become South Africa's biggest trade partner and exporter as bilateral trade volume hit a historic high of more than 16 billion U.S. dollars in 2009

China opens bus assembly plant in Cameroon

Tuesday, March 30, 2010

Is Lithium the Oil of the 21st Century?

The demand for lithium is projected to more than double by 2020. Most of the production needed to satisfy the market will come from Latin American countries like Argentina, Chile, and Bolivia which control over 75% of the world's lithium reserves. In this report we seek to analyze the lithium industry while highlighting the special relationship between China and Latin America.

Lithium is probably the source of battery power storage for the future - both in terms of vehicles (see the case of BYD), mobile devices, electronic entertainment and possibly even solar power storage. I highly recommend the White Paper by SinoLatin Capital (click for document).

Monday, March 29, 2010

Natie Kirsh - Property Mogul

Not only is Natie Kirsh a venerable retailer (see post below), but he's also a property mogul!

Property has always been part of Natie Kirsh’s empire, from his first shopping centre in Swaziland in 1966 to his 1970s Nedbank Mall and the centers he built when he controlled Checkers.

Now it is where he wants to invest most of his free capital. Why? “There are many deals floating around,” says Kirsh. “The big guys have got indigestion and the little guys can’t raise funding.” Over the next two years as much as £160bn of property finance matures and must be renegotiated with UK banks that are not eager to lend on property.

“There are also large corporations that have decided to reduce their property exposure,” he adds. “It’s logistically impossible for them to sell their properties one at a time, so they look for investors with deep pockets to buy in bulk.” Kirsh points to a document on his desk. “This is a large US commercial property portfolio that would have a market value of US600m if the properties were valued and sold individually.”

He says there is the income stream that would value the property at a forward yield of say 8% and the price would be the value less the borrowings. “But if we buy the lot, we could pick them up for 350m or 400m, giving us a 14% yield. I then put in say 150m in cash, borrow the rest and I would have an excellent investment with positive cash flow.”

More friendly is his 30% acquisition of Australian listed property trust Abacus. Kirsh’s timing was good. He paid A25c for a 15% share last year and underwrote a rights issue at the same price. The price has since almost doubled. Abacus needed to raise funds to bring its loan to value ratio down to meet its covenants with its lenders. Kirsh showed how to do this and now everybody is doing it the same way.
That is small compared with the deal he has been negotiating in Europe — a huge financial services-owned portfolio of commercial and residential properties with a good cash flow but with a large debt that he will have to refinance. All other bidders have been eliminated, and it’s down to government giving the nod. As the interviews with Kirsh progressed last week, he became more hesitant about going into it. “It’s very complicated,” he says. “ I’ve already got deal fatigue.”

In 1980, he met the mayor of Herzlia in Israel who excited him about the idea of a marina that would transform the city. So with an Israeli partner, Moti Zisser, they built a massive development, that included Israel’s first Marina.

He has other investments in Perth. With his partners, they have a joint venture with the Western Australian Cricket Association to develop the land around the WACA stadium. He recently paid A80m (R550m) for a prestige office building, Westfarmers House, in the Perth CBD.

This will free up Kirsh to think big. “Property needs less management. But it is also a real asset,” says Kirsh.

Natie Kirsh's Cash Cow

The Mechanics of Natie Kirsh's Cash Cow (Jetro):

Every day 3000 giant 16-wheeler trucks fan out across the US, carrying everything from fresh fish, tomatoes and the carcasses of 5000 cattle to imported bottled water, dry goods and kitchen equipment. They are headed for 10 large Jetro stores and the 72 enormous warehouses of Restaurant Depot — a subsidiary of Jetro about the same size as an SA branch of Makro.

Through the day, up to 50000 restaurateurs and small business owners buy fresh produce, meat and seafood from gigantic walk-in freezers. The stores sell oversize sacks of potatoes, huge vacuum- sealed packages of every sort of meat, and live lobsters at big discounts. Their 11000 product items are all you need to run a restaurant or stock a small retail store.

“The trucks carrying loads of single product go to special cross-dock facilities where they are reloaded so mixed products are delivered to each warehouse,” says Natie Kirsh, who owns 63% of Jetro. “It’s a very efficient operation.”

This is Kirsh’s cash cow — Jetro, originally modelled on Metro Cash & Carry , his great success in SA, which he lost to Sanlam in 1986.

“New York is congested with many powerful suppliers competing for hordes of Mom & Pop stores,” says Kirsh. “There are no large shopping centres or supermarkets. There was similarity with SA’s market of small black shopkeepers but we had a steep learning curve.”

Jetro languished through the 1970s and 1980s until Kirsh moved to New York in 1986, when his SA retail and wholesale empire collapsed. He stayed in the US for five years until the business was properly established.

Full Article here

South Africa's Wealthiest Entrepreneur - Natie Kirsh

In 2003 Kirsh went to US investor Warren Buffett, the world’s third-richest man, and offered him a 27% stake in his 100%-privately held US trading business, Jetro Cash & Carry. Buffett saw the potential in Jetro and accepted a minority holding, against his normal rule of buying control. But they could not agree on the terms.

In the next few years, Kirsh transformed Jetro into one of the largest private companies in the US, worth more than US3,5bn . Now Jetro — modelled on SA’s Metro Cash & Carry, which he once controlled — dominates the distribution of food and dry goods to small stores in big cities. It is his cash cow.

At 78 he has quietly built a private global empire spanning about a dozen countries, worth well over the R20bn or so wealth of each of the three South Africans — Patrice Motsepe, Nicky Oppenheimer and Johann Rupert — on the latest Forbes list of global billionaires.

Direct Link

Friday, March 26, 2010

Effects of Uncertainty on Investing

Humans don't like ambiguity. This is demonstrated in the experiment Hersh Shefrin discusses where subjects are offered either a guaranteed $1000, or a 50/50 chance at $2000. Consistently, fewer than 50% of respondents prefer the gamble for $2000, even though the expected values (i.e. the average value of the result if it were conducted many times) of both offers are the same.

What if the 50/50 odds in the above experiment were instead unknown? This adds even further uncertainty to the situation, and results in even fewer people willing to gamble on the $2000.

Shefrin calls this phenomenon "aversion to ambiguity", and on Wall Street it results in downward pressure on the prices of securities with uncertain outlooks. In order to avoid uncertainty/ambiguity, humans will stay away, even if the odds are favourable (i.e. downside risk is low, upside potential is high).

In his book, Shefrin argues that this ambiguity aversion is the reason for government intervention, even when it is not needed. What would have happened had the government not bailed out the banks? Nobody really knows, but the fact that the outlook was uncertain made the government want to intervene, even at a high cost, in order to avoid the uncertain situation.

As Mohnish Pabrai notes in his book, risk is not the same as uncertainty. Uncertainty can drive down the prices of assets/securities, even if downside risk is low. By capitalizing on situations where uncertainty is high, but risk is low, the investor can put himself in a position to earn above-average returns.

Thursday, March 25, 2010

Lampert on Online Retail's "Unfair Advantage"

The two leaders in online commerce are and eBay. Despite operating no physical stores of their own, these two companies have built tremendous businesses over the last decade serving millions of customers every day in a broad number of categories. They have taken significant market share from traditional retailers by providing convenience, service, and competitive prices. One has to give each of these companies tremendous credit for their foresight, persistence, and execution through the collapse of the internet bubble, early skepticism, and competition against larger and more established retailers.

There remains, however, one advantage that the major online retailers retain that is both unfair and problematic, for competition and for communities and jobs as well. For customers in many states, Amazon and other online retailers are not required to collect sales taxes on purchases made by their customers. Since the 1992 Quill Supreme Court decision, businesses without a local “nexus” have sold goods through the mail or online without being required to charge and collect the related sales or use tax. Amazon, in particular, has argued that when it doesn’t have a physical presence in a state or local jurisdiction, it is not benefiting from police, fire protection, and other local services and therefore shouldn’t be forced to pay for them. Analyses by others suggest that the real issue is competitive advantage, more than other explanations put forward in the past.1

The real story here is that it is not the payment of taxes or the charging of taxes that is at issue. It is the collection of taxes on behalf of local governments from purchasers of goods and services from stores in a locality or for use in such locality. It is the latter fact that is often ignored. A person who buys products from is required by law to pay sales or use tax to their local jurisdiction. In practice, almost nobody does so. The cost and unpopularity of enforcing such laws has allowed customers to avoid paying sales or use taxes, even though they are required in many states and localities. If you buy a work of art or piece of jewelry in NYC, for example, and have it shipped to New Jersey or California, the seller does not collect sales tax on that purchase but the buyer would be required to pay sales or use tax on the purchase where they receive the merchandise and use the merchandise. So, a piece of jewelry shipped to California would require the buyer to pay California sales or use tax.

Amazon’s domestic business has grown to $12.8 billion in revenues for the year just ended. If you were to apply a 6% sales tax to this revenue (reflecting a rough average of sales taxes across multiple jurisdictions), that would amount to almost $800 million in sales and use taxes owed to state and local governments that is likely not being paid. The good news is that it is $800 million that remains in the hands of the purchasers of products from Amazon, but at the cost of jobs and new fees and taxes required to make up for lost revenue. Having delayed a level playing field for as long as they have already, Amazon has been able to build relationships with many customers that give it an advantage, even playing under the same rules as those it competes against.

I would propose that there be a leveling of the playing field for e-commerce merchants. Either we all collect taxes or nobody collects taxes. If state and local governments are going to require retailers like Sears and Kmart to collect sales taxes and not retailers like, they should recognize that over time their sales tax base will erode significantly and that they place companies who have chosen to locate stores locally at a competitive disadvantage. This will lead to a loss of revenues, the closing of local businesses, the loss of tax revenue, and ultimately to the increase in other types of taxes to compensate for the lost jobs and revenues. Alaska, Delaware, Montana, New Hampshire, and Oregon are states that currently charge no sales tax at all. Let me be clear, we have no issue with continuing our current practice of collecting tax on behalf of state and local governments. We just don’t believe that the current set of rules is sustainable without severe competitive and community damage over time.

Wednesday, March 24, 2010

Google, with $25 billion Cash, to Trade Securities

Google (GOOG), the $175 billion internet advertising and search giant, is hiring traders for its new bond trading platform. This is according to published advertisements on its job site.

There are currently three roles listed for trading at the company, and these are: trader of foreign government bonds, portfolio analyst for Google's U.S. government bond portfolio, and a portfolio analyst for agency mortgage-backed securities. All the positions will be far from Wall Street and the hedge-fund haven of Connecticut – they’re all based at Google headquarters in California.

Google is sitting with about $25 billion in cash at the moment, which makes up about 14% of the value of the company. Over the past four years the company has generated on average about $6 billion per year in cash from operations.

Speculation has been ongoing for some time as to what Google plans to do with the vast cash pile amassing at the company. Rival Microsoft (MSFT), after years of building up an immense cash pile which reached $43 billion, decided to start paying dividends to investors in 2003. Google currently does not pay a dividend, while Microsoft yields 1.74%.

Google co-founder Sergey Brin has in the past broached the idea of building a hedge fund given the access to information Google enjoys. Apparently the company’s CEO, Eric Schmidt, talked him out of it. Google as a hedge fund is an interesting concept – similar to an insurance business Google generates large amounts of cash that are not used in operations and earn low interest rates. Assuming Google could earn a market related 5% on its cash, less the return it currently earns in cash and cash equivalents; we’re talking between $650 million and $800 million that Google is losing out on.

Google has mastered the art of search on the internet and is a near monopoly in internet advertising. However, the company’s forays into alternate business areas have seen mixed results. While the Android operating system is used to power a number of mobile phone operating platforms, the Google Phone does not seem to be gaining much traction in the marketplace. Starting a hedge fund as a company that specializes in the dissemination of information is also a highly controversial and legally grey area to operate in.

Regardless Google is pushing ahead with its bond trading appointments and shareholders should feel pleased that the company, in lieu of dividends, is going to do something with their massive cash pile.

As well as requiring a host of top skills, as one would expect, the job advertisement also requires candidates to have “a good sense of humor”. It remains to be seen whether trading the company’s cash will be a comical undertaking.

Reverse Urbanization in the US

Data released by the U.S. Census Bureau reveals a reverse urban migration trend in the country.

This interactive graph paints the picture.

The recession has played a big role in determining migration trends in the U.S., with most people either staying where they are or returning to where they came from, particularly in big cities. The New York area lost a net 100,000 people in 2009, (down from 220,000 in 2007) while Los Angeles lost a net 80,000 (down from a massive 222,000 in 2007). Chicago lost a net 40,000 residents which is in line with the 52,000 the recession sent packing in 2007. This runs contrary to historical data which shows a net migration of people to big cities, rather than away from them.

Reverse urban migration will decrease the supply of labor and consumers in the cities which could result in lower prices in terms of real estate and consumer goods, not to mention services such as restaurants. In New York, fewer people will impact high-density high-margin businesses such as Starbucks (SBX). Regional focused banks, such as Chase Manhattan, will also have a smaller market to penetrate as they lack national representation like that enjoyed by Bank of America (BAC).

Just an interesting piece of information, especially considering the huge trend seen in China and other emerging markets of mass migration into urban environments which is largely responsible for rising labor costs, increasing inflation and higher consumer spending (all running contrary to current experience in the US on a 3 year view).

The Wisdom of Great Investors

Don’t Attempt to Time the Market:

“Far more money has been lost by investors preparing for corrections or trying to anticipate corrections than has been lost in the corrections themselves.” - Peter Lynch

Avoid self-destructive behaviour:

“Individuals who cannot master their emotions are ill-suited to profit from the investment process.” - Benjamin Graham

Crises are inevitable:

“History provides a crucial insight regarding market crises: They are inevitable, painful and ultimately surmountable.” - Shelby M.C. Davis

Disregard Short-term Forecasts and Predictions:

“The function of economic forecasting is to make astrology look respectable.” - John Kenneth Galbraith

Tuesday, March 23, 2010

Pay for Non-Performance at GE

I came across an article by Jeff Arends in the Wall Street Journal recently. The article outlines the differences in executive compensation between Berkshire Hathaway (BRK.A) CEO Warren Buffett, and that of General Electric (GE) CEO Jeff Immelt. As of the date of this writing and for some context, Berkshire is valued more than General Electric at $205 billion market cap against $195 billion for GE.

Arends writes that under Immelt, shareholder value creation has been a “disaster”. Since Immelt has been in charge of GE, for almost a decade now, shareholders have not made any money in the stock and have in fact lost tens of billions of dollars.

“The stock, which was $40 and change when Immelt took over, has collapsed to around $16. Even if you include dividends, investors are still down about 40%. In real post-inflation terms, stockholders have lost about half their money”, the article said.

Despite such a loss in value, Immelt has been paid about $90 million in salary, cash and pension benefits. This amount does not include the $5.8 million cash bonus he was “awarded” in 2009, or the bonus he skipped in 2008. Regardless Immelt still went home with $3.3 million in base salary during fiscal 2009 and total compensation of $9.9 million. For the last three years, Immelt has earned $33.5 million in compensation, or an average of $11.16 million per year.

“Since succeeding Jack Welch in 2001, Immelt has been paid a total of $28.2 million in salary and another $28.6 million in cash bonuses, for total payments of $56.8 million. That's over nine years, and in addition to all his stock- and option-grant entitlements.

It doesn't end there. Along with all his cash payments, Immelt also has accumulated a remarkable pension fund worth $32 million. That would be enough to provide, say, a 60-year-old retiree with a lifetime income of $192,000 a month”, an upset Arends wrote.

Immelt has been with GE for 27 years but that pension is ridiculously high and would not be available at almost any other company for a 27 year employee. Immelt also has personal use of company jets (that’s personal use, such as vacations, weekend getaways and so on), which cost GE $201,335 last year. GE also spent $36,000 and change leasing Immelt's car. That's three grand a month. It’s not known what car he drives (Rolls Royce?).

“The critical issue is that this is what the chief executive got because the stock did really badly. This was his consolation prize. It's a case of heads he wins, tails he gets ... $90 million and free trips to Hawaii. As of the end of last year, he had accumulated equity exposure, including stock options, performance stock units and the like, equivalent to about 6 million shares. Of these, just 836,000 shares have been bought with his own money while chief executive. (Some more may have been bought with his own money before he became chief.) What's more, Immelt's just been granted another 2 million options that will vest in stages during the next five years”.

Ironically it was under Immelt’s watch that the company had to seek out emergency capital, which arrived on harsh terms from Warren Buffett. Sadly for Immelt, the large Berkshire provides a damaging contract for GE. “Buffett makes billions when his investors do well. But he also loses billions when they do badly, because he has nearly all his money tied up in stock. His cash salary comes to a mere $175,000 a year, or less than Jeff Immelt spent just on his personal use of GE's aircraft”.

GE is one of America’s greatest companies, but such reward for non-performance is not sustainable. Good corporations and leadership comes from the top, from the board through the CEO. I agree with Arends in that such large pay cannot possibly be justified for a company that is worth less now that it was ten years ago.

Monday, March 22, 2010

Bad Times are Good Times for Some

Daily Journal Corp. (DJCO) is an interesting business:

The company trades for $96 million, but has no debt and cash and marketable securities of $64 million. The company has been consistently profitable over the last several quarters, and it finished 2009 with operating income of $12 million, which results in a return on equity of 15%!

So how does the company manage to turn in such stellar results while most companies out there are struggling to cut costs to avoid large blots of red ink? The company saw large increases in public notice placements, due to the large number of foreclosures in California and Arizona. Public notice advertising for foreclosures is mandated by law, and so this company is likely to continue to benefit from the foreclosures that are continuing to occur in this tough labour market.

Worried about how the company is investing its large stable of marketable securities? How about its corporate governance structure, or how it allocates its retained earnings? We've recently seen a few companies that are not so shareholder friendly, could this be another one of them? Value investors and fans of corporate governance will be pleased to know that the company's chairman is none other than Charlie Munger, Warren Buffett's right-hand man at Berkshire Hathaway.

Friday, March 19, 2010

Yuan undervalued - Big Mac Index

There are a lot of novel ways to measure various economic statistics, but not is more intuitive and universally accepted than the “Big Mac Index”.

According to The Economist, the index is based on the theory of purchasing-power parity, the notion that a dollar should buy the same amount in all countries. Thus in the long run, the exchange rate between two countries should move towards the rate that equalizes the prices of an identical basket of goods and services in each country. Our "basket" is a McDonald's Big Mac, which is produced in about 120 countries. The Big Mac PPP is the exchange rate that would mean hamburgers cost the same in America as abroad. Comparing actual exchange rates with PPPs indicates whether a currency is under- or overvalued.

Recent rhetoric has been centered on the accusation that China is a “currency manipulator”. In this article by The New York Times, the paper says:

China’s decision to base its economic growth on exporting deliberately undervalued goods is threatening economies around the world. It is fueling huge trade deficits in the United States and Europe. Even worse, it is crowding out exports from other developing countries, threatening their hopes of recovery.”

“After treading lightly on the subject of China, President Obama vowed last month to ‘get much tougher’ about China’s cheap currency. On Monday, 130 members of Congress sent a letter to Treasury Secretary Timothy Geithner, demanding that the Obama administration designate China as a currency manipulator in a report due to Congress next month. On Tuesday, a bipartisan group of senators introduced a bill aimed to force the administration’s hand. This would ease the way to imposing retaliatory trade barriers against Chinese goods.”

As a result Chinese officials are travelling to Washington to dispute the allegations. Chinese Premier Wen Jiabao last week denied that the yuan is undervalued. "A lot of problems can be properly solved so long as we can avoid politicization and emotionalization," China's commerce minister He Ning told reporters.

So back to the question: just how undervalued is the Chinese currency in relation to the Dollar? The Economist has a wonderful graphic (click here to see it) representing the findings of their research using the Big Mac Index. On this measure, the yuan is about 50% undervalued against the dollar.

The graphic also shows that the euro is about 27% overvalued while the Norwegian krone is close to 90% overvalued. There’s been a lot of discussion about the euro versus the dollar. Interestingly all 5 of the most undervalued currencies are Asian nations, while the South African rand, which is one of the top two performing currencies against the dollar over the past year, is still more than 25% undervalued.

The Big Mac Index is obviously a crude measure of value but historically has proven surprisingly accurate at finding currencies that are out of line and henceforth trend to equilibrium.

Originally published by me at (link)

Making Sense of Business Philosophy - Eddie Lampert

Lampert on "Making Sense of Business Philosophy":

I just finished Thomas Sowell’s most recent book, Intellectuals and Society. For those not familiar with his writings, Thomas Sowell is one of the clearest and most insightful writers of our era. I look forward to every book and column he publishes. In this book, he discusses the “vision of the anointed” and how their views shape society regardless of their merit. He describes how often these views conflict with reality without altering these views and, paradoxically, sometimes strengthening them. I couldn’t help noticing the parallels between his comments and the “vision of the anointed” in the financial and business world over the past few years.

Business leaders, regulators, public officials, and journalists have become an echo chamber of self-support and self-congratulation, whether on TV, in print or at numerous conferences. Their words and their actions are often self-serving (whether right or wrong), and they are typically regarded and reported on as if they were obvious and selfless. They get repeated as if there were no alternative views or possibility of error in their thinking. Dominant narratives develop and get defended primarily by repetition and secondarily by attacks on those who disagree with those narratives. When these favored people and views become endorsed in laws and regulations, some may benefit, but many get harmed.

There are several examples of issues that have been smothered by dominant narratives. Accepting these narratives without critical evaluation can be a contributing factor to some of the negative unexpected consequences they produce. Did the seizure of Fannie Mae and Freddie Mac (the largest nationalization in our country and likely in history) calm or ignite fear in the financial markets and did those urging or supporting the seizure profit from it? Has raising minimum wage rates helped or harmed the individuals that those advocating such policy intended to help? Is there any link between a higher minimum wage and high unemployment? Has the consolidation in financial services helped or hurt depositors and borrowers? Why were some institutions saved and others seized, merged or left to fail? How does regulatory and policy uncertainty impact investment and risk-taking in society?

I fear that Americans have been provided a false choice between a little more and a lot more regulation and taxes. We keep hearing more ideas to create jobs and generate growth that almost exclusively require more government spending. Jobs can come from government, but those jobs get paid for by taking money from the private sector, reducing the private sector’s ability to provide jobs. On the other hand, there are many who believe that less regulation, less government interference, less arbitrary regulation when it does exist, and lower government spending will generate more growth and more jobs. I agree with those views.

As one of the largest private sector employers in the United States, Sears Holdings recognizes the challenges of finding good talent, developing good talent and keeping good talent. We have created not just new jobs, but new job categories and job descriptions as our industry changes and as new technology provides both new opportunities and new challenges.

Some contend that there is an inherent conflict between labor and capital, yet they fail to appreciate that without investment there will be no growth and no jobs. For there to be investment there needs to be an expectation of profit, and, for there to be an expectation of profit, there needs to be hope and belief in the future and confidence in the rules of the game.

The straw man frequently used to justify more regulation and to criticize free markets is to assert that the proponents of free markets blindly believe that they always work and that they always produce good results. Most free market advocates don’t actually make this claim, and they know that it is not true. Free markets respect individual rights and freedom, preserve choice and accountability, and produce superior results compared with non-free markets. When free markets experience problems and produce poor results, critics are fast to proclaim that things would have been better if only there was more, but better regulation. However, in most industries and societies where there is more regulation, there is typically lower growth, lower employment, and less innovation.

Self-regulation is a better idea and it is a better choice, whether for an individual or a corporation. Any corporation can choose to limit or make investments, increase or decrease compensation, and manage risk at different levels. Companies can compete by promoting their “safety and soundness” or by their “willingness to take risks.” Investors, customers, and workers can choose which companies and their associated behaviors and philosophies appeal to them. Let the media and politicians explain, compare, criticize, and contrast the various policies, so there will be little doubt that success or failure is determined by choice and not by ignorance. Then, make sure that government doesn’t reward failure and punish success by interfering with outcomes based upon political contributions, undue influence, or the personal beliefs of the policymakers.

Extracted from Lampert's 2010 Letter to Sears shareholders.

Warren Buffett MBA Talk

Buffett speaks to a group of MBA students, May 2007.

Be sure to see Parts 2 - 10 in addition to this video.

Norman Adami: Case Study on Management Leadership

From a speech by Norman Adami, CEO of South African Breweries, subsidiary of SABMiller:

POLITICALLY and socially, 1994 was a watershed year. It was also the year in which South African companies were finally able to test their mettle against global giants, both within SA and worldwide.

South African consumers’ exposure to choice is now a permanent part of life and local companies have over time radically altered their business models and, in most cases, have gotten better and better.

South African Breweries (SAB) learnt how to compete globally from the start. This gave us the ability to grow internationally and become a good case study for South African companies expanding globally. It also provided the capacity and expertise to compete at home against formidable competitors in the form of two of the biggest and most capable powerhouses in the global beer industry — Heineken and Diageo. These are not fledgling entrepreneurs chasing a dream. These companies are among the most professionally run global fast-moving consumer goods companies in the world, which take a very serious view of SA as a key market in their international portfolios.

Our approach to competition has had to be no less radical.

There are five questions we have answered in positioning ourselves to compete successfully. The first concerns our mind-set. Our challenge in SA is from a company selling a brand that we used to manage and promote and which, over the decades, we ironically turned into one of the best-established brands in the country. We view the challenge as motivation to become the kind of company required to thrive in 21st-century SA. That means being market-facing and brand-led.

The second question is “What is winning?” Winning could be defined as having the largest and dominant market share. Often, this means that one competitor cuts prices in the hope of eradicating a smaller competitor. At the other extreme, margins become the only focus at the expense of volume. This means higher prices for consumers and job cuts. These options are both clearly unattractive, unsustainable and value-destroying. Both are based on the flawed assumption that this is all a zero-sum game , and that your gains will be your competitor’s losses.

We see winning as understanding that the South African marketplace offers plenty of profitable growth opportunities for all the players. Beer consumption in SA is moderate and, given a growing economy, we see tremendous growth potential. Importantly, competition itself should be a strong driver of sector growth. Our success will be measured on our ability to consistently generate profitable growth, no matter what the competitor is doing.

The third question is about who decides who wins and who loses. SA’s new beer wars will not be won or lost based on one competitor’s ability to trounce the other. Victory will be based on who can create superior demand, deliver the best economic value and service with retailers and make the most meaningful contributions to society.

Mainstream beer still accounts for 82% of all beer purchased in SA. But, for many years now, the premium segment has grown at a faster pace. This is probably what motivated our competitor to establish its own venture.

Over the years, we have responded to the growth in premium by introducing strong international brands of our parent and creating new ones . This took a lot of energy — and a lot of investment. The unintended consequence was that our mainstream brands were not getting the support they needed at a time they needed them most. We let them get boring. We’ve corrected that , with massive investments behind our power brands . On a strategic level, we are now also focusing on marketing brands, not segments, because consumers buy brands, not segments.

We’ve also adopted a far more targeted approach to building our premium brands, employing a fairly straightforward process we call “create-build-expand”.

Heineken is clearly the 800-pound gorilla in the super-premium segment and it doesn’t make sense for any of our smaller premium brands to try to out-gorilla the gorilla. We see ourselves in the challenger role in premium . And we love the idea that in markets around the world, no segment evolves faster or fragments more quickly than premium. While the premium segment may be where all the glamour is, mainstream brands still account for more than 75% of the profits retailers generate through the sale of beer. And that’s where we are really strong.

In servicing customers, whether we are talking to the tavern owner, the most sophisticated supermarket chain or the hippest club of the moment, we are focused on stepping up our ability to be a superior partner.

Our fourth question is around principles. Despite the global firepower that comes with the combined R500bn-plus market capitalisation of the two parents, Diageo and Heineken, our competitors appear to be positioning themselves quite effectively as the “little guy”. And using the competition authorities as leverage is a pretty well-known tactic.

We have pursued pricing strategies that have cut the real price of our beers in half over the past 35 years and have actually put our scale and productivity to work on the consumer’s behalf. The price of beer in SA is well below the worldwide average. Few companies can claim the degree of multiplier effect we have; our beer business generates more than R50bn a year in value, accounting for 3,3% of SA’s gross domestic product.

But as competition intensifies we will have to be vigilant and ensure competitive zeal doesn’t lead to inappropriate behaviour.

First, we will deal only in truth, and we will stick to facts. There is no room for innuendo, speculation or whisper campaigns. If we think one of our beers provides superior value, we will say so, without any exaggeration. If we believe our competitor is trying to confuse the truth, we will not be shy to speak up.

Second, we will focus on issues consumers care about, and will not scare-monger on issues that are bad for the beer industry. Some of the advertisements run by our competitor damage the whole category.

The last question is about how much fun we can have. Fun-spirited competition rejuvenates the category. Mean-spirited competition only drags it down, because nobody wants to buy a mean-spirited beer.

Competition for SAB provides an opportunity for us to become a model competitor. We have to be progressive — not only in terms of societal leadership, but in being the people who drive progress.

We must also be principled. That means adhering to the law, but also competing with a clear understanding of what is in the best long-term interest of our brands and our relationships.

Third, we must be capable of outperforming our competitor in every dimension of our business, of marketing our brands in ways that make our brands the preferred favourites of consumers, of delivering superior value and service to retailers and of demonstrating superior societal leadership.

The last requirement is for us to be passionate. We’re not going to be sheepish about being big. Big is good when it can be made to work in the best interests of consumers, retailers and society.

Beer people, by their very nature, are passionate people and SAB people are particularly so. We love to win, and we hate to lose. Most of all, we view SA as sacred ground. We’re enjoying the competition. It’s good for consumers and it’s very good for us.

Tuesday, March 16, 2010

Verizon and Too Much Cash Syndrome

Verizon (VZ), the second largest communications company in America, has too much cash and they don’t know what to do with it. The firm has almost 100 million wireless users, or about 36% of the United States mobile market. That’s about the same number as all the mobile subscribers in Canada and Mexico combined.

With such a massive recurring revenue stream and resultant cash flows, Verizon has amassed a massive pile of cash of $2.5 billion. That’s about 3% of the value of the entire company, at a market capitalization of $85 billion. It's been at $10 billion just a few years ago and may even return to those levels. That cash pile is only going to grow – the company generates over $30 billion in cash per year.

Having such a large cash pile explains why the company trades at a dividend yield of 6.38%. That yield is one the highest on the market from a blue chip stock and is likely to remain either at or around a similar level going forward. Or it could be lower. I make no predictions.
Currently there is in existence a share buyback program which commenced in 2008 and allows the company to buy back 100 million of its shares. That’s about 1.17% each year. There were no repurchases of common stock during 2009. During 2008 and 2007, the company repurchased $1.4 billion and $2.8 billion of common stock, respectively.

So, with so much cash being generated, and with such a high dividend being paid out, what is Verizon going to do with all the extra cash?

Something really ridiculously silly, in my humble opinion.

According to a press release issued on Friday, “Verizon Communications Inc. will list its stock on the NASDAQ exchange along with its existing New York Stock Exchange listing. Verizon, whose ticker symbol is "VZ," has approximately 2.5 million share owners and approximately 2.8 billion shares of common stock outstanding. Verizon has a broad and diverse shareholder base, and we believe that the additional support provided by dual listing will benefit our current and potential investors.”

The annual listing fee for the NASDAQ is $95,000. There’s also an initial listing fee of $150,000. Assuming the above press release is correct, the average investor in Verizon has about $32,000 invested in the company. Just how making the shares trade on another exchange with little or no benefit to the “average” investor makes no sense to me whatsoever. Does Verizon want to increase the shareholder base to 5 million by “doubling” liquidity? What is the point of having millions of shareholders with little to no net worth in the company? There are also tremendous costs to mail out circulars and documentation to these investors, most of whom I’m guessing don’t read 10-Ks or Annual Reports.

There are a lot of academic studies that show managers with very large cash holdings can sometimes be lulled into a false sense of security and do things that are not beneficial to shareholders. This is one case in point. Listing in another exchange only serves to increase liquidity which encourages investors to trade frequently. It should be the goal of management to seek out long-term, dividend oriented investors who want to own a stake in one of America’s great companies. A secondary listing will not achieve this objective and is a cost to shareholders. Verizon is not a charity; it is a company operating for the ultimate benefit of the owners of its common stock.

I might just contact the other 2.45 million shareholders who hold 1,100 shares and start a proxy fight.

I originally published this article at BestCashCow.

Monday, March 15, 2010

The Importance of Trustworthy Management

Integrity, Intelligence and Energy - in that order - are the three key ingredients in any management team. Safe to say the crowd at Lehman Brothers didn't make it past the Integrity test.

"Lehman never publicly disclosed its use of Repo 105 transactions, its accounting treatment for these transactions, the considerable escalation of its total Repo 105 usage in late 2007 and into 2008, or the material impact these transactions had on the firm’s publicly reported net leverage ratio".

See my article and extracts of the report by the Southern District of Manhattan on the Lehman Bankruptcy.

Thursday, March 11, 2010

Seth Klarman's Lessons and False Lessons of 2008

Extracted from Baupost Group's 2009 Letter to Shareholders, written by Seth Klarman:

Twenty Investment Lessons of 2008:

1. Things that have never happened before are bound to occur with some regularity. You must always be prepared for the unexpected, including sudden, sharp downward swings in markets and the economy. Whatever adverse scenario you can contemplate, reality can be far worse.

2. When excesses such as lax lending standards become widespread and persist for some time, people are lulled into a false sense of security, creating an even more dangerous situation. In some cases, excesses migrate beyond regional or national borders, raising the ante for investors and governments. These excesses will eventually end, triggering a crisis at least in proportion to the degree of the excesses. Correlations between asset classes may be surprisingly high when leverage rapidly unwinds.

3. Nowhere does it say that investors should strive to make every last dollar of potential profit; consideration of risk must never take a backseat to return. Conservative positioning entering a crisis is crucial: it enables one to maintain long-term oriented, clear thinking, and to focus on new opportunities while others are distracted or even forced to sell. Portfolio hedges must be in place before a crisis hits. One cannot reliably or affordably increase or replace hedges that are rolling off during a financial crisis.

4. Risk is not inherent in an investment; it is always relative to the price paid. Uncertainty is not the same as risk. Indeed, when great uncertainty – such as in the fall of 2008 – drives securities prices to especially low levels, they often become less risky investments.

5. Do not trust financial market risk models. Reality is always too complex to be accurately modeled. Attention to risk must be a 24/7/365 obsession, with people – not computers – assessing and reassessing the risk environment in real time. Despite the predilection of some analysts to model the financial markets using sophisticated mathematics, the markets are governed by behavioral science, not physical science.

6. Do not accept principal risk while investing short-term cash: the greedy effort to earn a few extra basis points of yield inevitably leads to the incurrence of greater risk, which increases the likelihood of losses and severe illiquidity at precisely the moment when cash is needed to cover expenses, to meet commitments, or to make compelling long-term investments.

7. The latest trade of a security creates a dangerous illusion that its market price approximates its true value. This mirage is especially dangerous during periods of market exuberance. The concept of “private market value” as an anchor to the proper valuation of a business can also be greatly skewed during ebullient times and should always be considered with a healthy degree of skepticism.

8. A broad and flexible investment approach is essential during a crisis. Opportunities can be vast, ephemeral, and dispersed through various sectors and markets. Rigid silos can be an enormous disadvantage at such times.

9. You must buy on the way down. There is far more volume on the way down than on the way back up, and far less competition among buyers. It is almost always better to be too early than too late, but you must be prepared for price markdowns on what you buy.

10. Financial innovation can be highly dangerous, though almost no one will tell you this. New financial products are typically created for sunny days and are almost never stress-tested for stormy weather. Securitization is an area that almost perfectly fits this description; markets for securitized assets such as subprime mortgages completely collapsed in 2008 and have not fully recovered. Ironically, the government is eager to restore the securitization markets back to their pre-collapse stature.

11. Ratings agencies are highly conflicted, unimaginative dupes. They are blissfully unaware of adverse selection and moral hazard. Investors should never trust them.

12. Be sure that you are well compensated for illiquidity – especially illiquidity without control – because it can create particularly high opportunity costs.

13. At equal returns, public investments are generally superior to private investments not only because they are more liquid but also because amidst distress, public markets are more likely than private ones to offer attractive opportunities to average down.

14. Beware leverage in all its forms. Borrowers – individual, corporate, or government – should always match fund their liabilities against the duration of their assets. Borrowers must always remember that capital markets can be extremely fickle, and that it is never safe to assume a maturing loan can be rolled over. Even if you are unleveraged, the leverage employed by others can drive dramatic price and valuation swings; sudden unavailability of leverage in the economy may trigger an economic downturn.

15. Many LBOs are man-made disasters. When the price paid is excessive, the equity portion of an LBO is really an out-of-the-money call option. Many fiduciaries placed large amounts of the capital under their stewardship into such options in 2006 and 2007.

16. Financial stocks are particularly risky. Banking, in particular, is a highly lever- aged, extremely competitive, and challenging business. A major European bank recently announced the goal of achieving a 20% return on equity (ROE) within several years. Unfortunately, ROE is highly dependent on absolute yields, yield spreads, maintaining adequate loan loss reserves, and the amount of leverage used. What is the bank’s management to do if it cannot readily get to 20%? Leverage up? Hold riskier assets? Ignore the risk of loss? In some ways, for a major financial institution even to have a ROE goal is to court disaster.

17. Having clients with a long-term orientation is crucial. Nothing else is as important to the success of an investment firm.

18. When a government official says a problem has been “contained,” pay no attention.

19. The government – the ultimate short- term-oriented player – cannot with- stand much pain in the economy or the financial markets. Bailouts and rescues are likely to occur, though not with sufficient predictability for investors to comfortably take advantage. The government will take enormous risks in such interventions, especially if the expenses can be conveniently deferred to the future. Some of the price-tag is in the form of back- stops and guarantees, whose cost is almost impossible to determine.

20. Almost no one will accept responsibility for his or her role in precipitating a crisis: not leveraged speculators, not willfully blind leaders of financial institutions, and certainly not regulators, government officials, ratings agencies or politicians.

Below, we itemize some of the quite different lessons investors seem to have learned as of late 2009 – false lessons, we believe. To not only learn but also effectively implement investment lessons requires a disciplined, often contrary, and long-term-oriented investment approach. It requires a resolute focus on risk aversion rather than maximizing immediate returns, as well as an understanding of history, a sense of financial market cycles, and, at times, extraordinary patience.

False Lessons:

1. There are no long-term lessons – ever.

2. Bad things happen, but really bad things do not. Do buy the dips, especially the lowest quality securities when they come under pressure, because declines will quickly be reversed.

3. There is no amount of bad news that the markets cannot see past.

4. If you’ve just stared into the abyss, quickly forget it: the lessons of history can only hold you back.

5. Excess capacity in people, machines, or property will be quickly absorbed.

6. Markets need not be in sync with one another. Simultaneously, the bond market can be priced for sustained tough times, the equity market for a strong recovery, and gold for high inflation. Such an apparent disconnect is indefinitely sustainable.

7. In a crisis, stocks of financial companies are great investments, because the tide is bound to turn. Massive losses on bad loans and soured investments are irrelevant to value; improving trends and future prospects are what matter, regardless of whether profits will have to be used to cover loan losses and equity shortfalls for years to come.

8. The government can reasonably rely on debt ratings when it forms programs to lend money to buyers of otherwise unattractive debt instruments.

9. The government can indefinitely control both short-term and long-term interest rates.

10. The government can always rescue the markets or interfere with contract law whenever it deems convenient with little or no apparent cost. (Investors believe this now and, worse still, the government believes it as well. We are probably doomed to a lasting legacy of government tampering with financial markets and the economy, which is likely to create the mother of all moral hazards. The government is blissfully unaware of the wisdom of Friedrich Hayek: “The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.”)

Read my article about this here.

Tuesday, March 9, 2010

ROE for the S&P 500 (1970 - 2008)

Courtesy Pzena Asset Management.

Monday, March 8, 2010

China's Local Government Debts

Keeping track of the Chinese economy is a full-time occupation. In all my reading on the topic I've come across many, many red-herrings and warning signs. Business Week recently ran an article about local governments by-passing regulations to heap even more debt onto their balance sheets. This comes after an explosion of credit in that economy:

"China’s local governments are raising funds through investment vehicles to circumvent regulations that prevent them borrowing directly. The extra borrowing, not counted in official calculations, could lead to debt rising to 96 percent of gross domestic product ratio next year and in “the worst case” trigger a financial crisis".

Sunday, March 7, 2010

Jason Zweig on John Laporte

Jason Zweig, editor of the most recent edition of Ben Graham's Intelligent Investor, talks about John Laporte of T Rowe Price, who has just retired. An investor who put $10,000 in the fund when Mr. Laporte took the helm, three weeks before the crash of 1987, now has $78,000. Laporte is well-know for sticking to a holding period of 4 years and emphasizing the Graham approach to investing.

Saturday, March 6, 2010

Jim Chuong on Value Investing

I came across this Canadian fellow by the name of Jim Chuong, who writes a quite fantastic annual letter.

"Shop during bull markets, buy during bear markets. This may seem intuitive, but most don't do this. During rising markets, many people rush to invest their RRSP and non-registered funds into stocks and equity funds."

"A recent example was 2007 where equity funds flourished with infusions of capital. In 2007, my portfolio was heavily weighted in cash. Stocks were expensive so I spent time window shopping. When the economy soured at the end of 2008 and beginning of 2009, when it was time to buy, investors rushed to the exits and equity funds began reporting massive redemptions."

"Meanwhile, the cash portion of my portfolio shrank dramatically as I deployed all available cash. As a general rule, in a 10 year period, an investor should be spending 9 of those years in research and 1 year (in a downturn) buying the best asset that was researched in the last 9."

Chinese Economy: Miracle or Mirage?

"...while the Chinese people are satisfied with their incomes and the direction of the country now, it is only because they don't understand the shaky foundation of China's economy and the improbability of further expansion under the current mode of economic development based on cheap labor made cheap by the excessive devaluation of the yuan. And the Chinese people are increasingly concerned with the inequity of wealth distribution. In another ten years if there were no major shift to domestic development, the incomes of the Chinese people will remain stagnant while their purchasing power will decrease due to inflation. And they will realize too late that the current economic miracle was actually a mirage hiding a dangerous trap. If the CCP wants to implement a true economic miracle, then they must quickly reduce foreign trade while increase domestic consumption through the urbanization of the farmers, advance domestic technologies, and protect the domestic enterprises from foreign predation. Only by increasing domestic consumption based on the increased productivity enabled by advanced domestic technologies will the Chinese economy grow normally and constructively and allow the Chinese people to become the richest in the world and the Chinese nation to become the sole ultra-superpower in the world. And that is the only way to achieve an economic miracle in China."

The rest of this fascinating forum post is available here, I highly recommend it for anybody intrested in the Chinese economy and it's current state/growth prospects.

Soros: Don't expect Fed to Raise Rates; Yuan to Appreciate

“The overheating, the inflation, the harsh policy tightening is happening right now and it will continue to happen until the economy cools off. And with this explosion of credit, there are bound to be non-performing loans in due course.”

Read more about what Soros has to say here.

Why is Buffett selling?

"Buffett’s selling is therefore necessary in order to raise liquidity in the business and maintain ratings high enough for insurance purposes, the bulk of the company’s business. It’s by no means a sell sign and investors holding stocks in any of the above-mentioned companies should not panic and consider selling (unless they too are buying railroad companies)."

See the link here.

The Inflation Conundrum

After printing endless amounts of money and growing an unsustainable fiscal deficit, the US economy and inflation outlook is dire. However, it's my opinion that we are not going to see anything like the "hyper-inflation" most people expect.

I do not think the US is facing a hyper inflationary environment going forward, and here's why.

The Goldman Greek Fiasco

I think the best explanation of the situation comes from Gikas Hardevoulis, a former advisor to the then-prime minister of Greece, who said “The trade should not have been done”. He then added, "It was done to dress up the debt figures by some smart idiot in the finance ministry".

For details and reasoning check out this link.

Hedge Funds buying Citigroup stock

“In the U.S., this was not a bankruptcy, but it’s gone through a scrubbing process, very similar to a bankruptcy, by the U.S. Treasury. Citigroup has spent a good amount of time with the U.S. government and many of its financial regulators, going through every liability and asset in the books. After such a period of time, you normally are able to count the cockroaches. That is, the liabilities have been under a microscope for quite a period of time. There’s been huge capital injections by the government. There’s been a massive amount of dilution to old shareholders. And you’re starting to see some stability, the beginnings. It’s very much what I call now the pig in the python. You have to look at their liabilities. So you have to look at their bad debt, and you have to continue to watch how the company is digesting its bad debt. At the same time, you have to see the new debt that’s coming in, the new loans that they’re giving out. It’s fascinating. It amazes me, with financial institutions, the extent, the amount of new loans that are being created in relation to the total loan portfolio. So it’s just now, in my opinion, a question of time, an ingestion period, where how many more quarters is it going to take before the new loans start to outweigh the old, existing loans”.

Read why Soros, Paulson, Berkowitz and others are buying.

Prem Watsa: The New Warren Buffett

Watsa is a long-term conservative investor who makes investments based on value relative to price. His record so far has been outstanding and it is not unreasonable to think he can at least produce returns in excess of the risk free rate. This cause for optimism can be summed up by Watsa himself, who said in his 2009 Letter to Shareholders, “For the first time in more than a decade, we are very excited about the long term prospects of our common stock investments and believe that these investments have been purchased at prices well below their intrinsic values. This, of course, does not mean stock prices cannot go lower! Mark-to-market gains or losses on these investments will make our book value more volatile, but in the next five years, these investments should be a major reason for our success”.

More available here.

Riskowitz Capital: Four Key Investment Tenets

1. We are conservative value investors:

It is always our aim to buy securities in companies for less than intrinsic value. By working out what a company is worth and comparing it the market price, large long-term gains can be realized at a lower level of risk.

Hence we emphasize margin of safety in all our investments. It is not sufficient for a security to be trading at a small fraction below what we think it is worth. There must be a large enough discount so that if our intrinsic value estimate is over-stated we still face minimal capital loss.

2. We believe investing is most intelligent when it is most business-like:

Through a professional research-oriented approach, we invest only where the odds are in our favor. We try to remain intelligent in our stock picks and ignore fads or popular talk. Rather, we approach each investment as if we were buying the entire company.

3. We take no large risks:

We do not sell short, use leverage or trade on margin. There is no risk of capital loss greater than the amount we invest. The biggest risk any investor faces is the permanent loss of capital. It is almost impossible to recover from this situation, and any investment mechanism that increases the probability of loss is too risky.

4. We believe that price is what you pay; value is what you get:

This is probably the most important investment tenet out there. The best investors can easily distinguish between price and value, and hence pay little attention to short-term market fluctuations.

Read more.

Taleb: Buffett is Lucky

“I don’t want to spend too much time on Buffett. George Soros has 2 million times more statistical evidence that his results are not chance than Buffett does. Soros is vastly more robust. I am not saying Buffett doesn’t have skill—I’m just saying we don’t have enough evidence to say Buffett isn’t doing it by chance.” - Nassim Taleb

Read about why I strongly disagree.

Average Wall Street bonus of $123,000

Bonuses at Wall Street firms have increased 17% during 2009, with an average bonus of over $123,000 per worker. This is despite the industry staring into the abyss in 2008 having received taxpayer funded bailouts.

Market Return Expectations are Too High

"A national survey last year revealed that investors expect the U.S. stock market to provide average annual returns of 13.7% per year for the next ten years. The survey was conducted by Robert Veres of Inside Information newsletter."

It’s my opinion that this figure is extraordinarily optimistic.

The Case for Emerging Markets

"Since 1999, Emerging Markets have been financing industrial economies (including the United States). In most Emerging Markets, such as China, Brazil, India, Russia and South Africa, the current account (exports – imports) provides income which is then invested mostly in US government debt. The United States is then able to fund this deficit with these borrowings. This situations means many emerging economies have stronger fiscal positions than their Western rivals; they are the creditors financing the American budget deficit."

Read my views here.

Peter Lynch on The Recession and Picking Stocks

Peter Lynch delivered a compound annual return of 29.2% over 13 years at the Fidelity Magellan Fund. In a recent interview, Lynch shared some of his insights on the economy and offered timely and excellent advice for all investors.

Earnings versus Market Movements

"Markets around the world have moved into rather expensive territory after the large rally experienced since March last year. While short-term market movements are by their nature unpredictable, it’s my opinion that the patient and conservative long-term investor should sit on the sidelines at the moment until low valuations present themselves. I am not advocating timing markets, but rather the patience necessary to wait for good opportunities in terms of price and valuation to emerge."

See more here.

Goldman (GS) Rejects Shareholder Demands

The Board of Directors of Goldman Sachs has rejected demands made by a group of shareholders to overhaul the way it pays it's executives and employees. A lawsuit has also been filed.

Read my article here.

US Real Estate Slump Recovery in 2011: Buffett

In his annual letter to shareholders, Berkshire Hathaway Chairman Warren Buffett said he expects the real estate slump in the US to improve by 2011. Buffett also has some choice words for CEOs and some penchants of wisdom for the average investor.

Read my post here.

America is Not Dead

Based on an article by Paul Krugman which says:

“We’ve always known that America’s reign as the world’s greatest nation would eventually end. But most of us imagined that our downfall, when it came, would be something grand and tragic.”

“Instead of re-enacting the decline and fall of Rome, we’re re-enacting the dissolution of 18th-century Poland.”

Warren Buffett recently made the biggest acquisition of his career in railroads, when he bought Burlington Northern Santa Fe. Why railroads? “It’s an all-in bet on the future of the US economy”, said Buffett. And given the great man’s prowess, I see no reason to jump on the bandwagon, disagree and declare, “America Is Dead”!

The first part is available here.

The second piece to this article was written some days later with the following conclusion:

"In essence the United States is the world’s dominant economy and that advantage will be eroded to some degree by countries like India, Brazil, China and South Africa. However because of the fabric of the people of the US and the economy’s ability to rebound and emerge stronger after what appeared to be impossible odds, the US will still be the world’s most prosperous country in the next 100 years. China has problems which are far vaster in an economic, environmental and social standpoint than the US does yet the ability of the US people know the problems they face; to question, demand answers and hold politicians accountable is one of the very reasons this country will not see it’s own demise. Rather, your kids and grandkids will live a better life than you did, and that’s the ultimate investment one can make."

The Fallacy of Unemployment

"The official unemployment rate grossly understates the actual number of people who, by all realistic measures, are unemployed. It’s very hard to come up with a reliable figure as it’s almost impossible to count all these people accurately. Estimates, however, range from 16% all the way to a gigantic 17.5% ! The Wall Street Journal reckons it’s at about 16.8%!"

"Realistically speaking we are looking at an unemployment rate of closer to 16.5% than the 9.7% we’ve been getting officially. Using my above calculations the situation is dire – around $600 billion in lost income and spending, closer to 5% of the economy."

The full post is available here.

Shorting Global Bonds

“A once-in-a-generation short opportunity might now be occurring in the fixed-income markets. My experience is that the magnitude of Thursday's [Feb 4th] price rise is the sort of occurrence that ends an asset class's move. It is the essence of the anti-implosion trade and a statement that, among other things, oil will not remain under $50 a barrel and that, at some point in the near future, order will return to the world's markets.”

For my full article click here.

Why Gold is Necessary

“Under the rule of the Roman Empire at the time of Christ (1st Century AD), one ounce of gold would have purchased a Roman citizen his toga (suit), a leather belt, and a pair of sandals. Today two millennia later in the west, one ounce of gold will still buy a man a suit, a leather belt, and a pair of shoes. Nothing has changed.”

The full article is available here.