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The Stingy News Quarterly (Q3/2011)
New @ StingyInvestor The merry-go-round beats the roller coaster "I have fond summer memories of rushing through the gates of my local amusement park and riding the roller coasters all day long. Up and down, round and round. It was grand fun. Alas, advancing decrepitude makes riding the metal monsters an exercise in nausea these days. They're almost as bad as the stock markets which are currently providing a wild enough ride of their own. If you're also turning a little green, I've some good news. You can hold placid lower-risk stocks and still achieve market-topping returns." Think garage sale "Fling open your closets and clear out your basement because it's garage sale time. If all goes well you might be able to shift the contents down the street. In my neighbourhood, you also get the chance to buy sugary pools in flaky cups from the friendly butter-tart lady. But the humble garage sale yields more than sugar-rush-inducing treats. It can offer lessons for stock investors." Hunt for dividend stocks "The beach is sparkling in the sun, the water looks inviting, and I'm sitting in front of a computer screen because Mr. Market is once again sliding into depression. But a little panic is invigorating because there are bargains to be had, and I'm on the hunt for a few good dividend stocks." The Best of Stingy Links Stingy Links: Academia Great courses, great profits "A teaching company gives the public what the academy no longer supplies: a curriculum in the monuments of human thought." Debt crisis at colleges "With mortgage defaults, banks seize and resell the home. But if a degree can't be sold, that doesn't deter the banks. They essentially wrote the student loan law, in which the fine-print says they aren't 'dischargable.' So even if you file for bankruptcy, the payments continue due. Hence these stern word from Barmak Nassirian of the American Association of College Registrars and Admissions Officers. 'You will be hounded for life,' he warns. 'They will garnish your wages. They will intercept your tax refunds. You become ineligible for federal employment.' He adds that any professional license can be revoked and Social Security checks docked when you retire. We can't think of any other statute with such sadistic provisions." Moody's sounds the alarm on student borrowing "A growing chorus of economists and educators think that the higher education industry will be America's next bubble. Easy credit, high tuition, and poor job prospects have resulted in growing delinquency and default rates on nearly $1 trillion worth of private and federally subsidized loans. Now the ratings agency Moody's has weighed in with a chilling diagnosis: 'Unless students limit their debt burdens, choose fields of study that are in demand, and successfully complete their degrees on time, they will find themselves in worse financial positions and unable to earn the projected income that justified taking out their loans in the first place.'" How to make college cheaper "Derek Bok, a former president of Harvard, once observed that .universities share one characteristic with compulsive gamblers and exiled royalty: there is never enough money to satisfy their desires.. This is a bit hard on compulsive gamblers and exiled royals. America.s universities have raised their fees five times as fast as inflation over the past 30 years. Student debt in America exceeds credit-card debt. Yet still the universities keep sending begging letters to alumni and philanthropists. This insatiable appetite for money was bad enough during the boom years. It is truly irritating now that middle-class incomes are stagnant and students are struggling to find good jobs. Hence a flurry of new thinking about higher education. Are universities inevitably expensive? Vance Fried, of Oklahoma State University, recently conducted a fascinating thought experiment, backed up by detailed calculations. Is it possible to provide a first-class undergraduate education for $6,700 a! year rather than the $25,900 charged by public research universities or the $51,500 charged by their private peers? He concluded that it is." Stingy Links: Accounting Stiffen audit rules "Normally, repos are accounted for as borrowings, which is what they are. The borrower retains all the upside and downside of the securities in question. The lender gets an interest rate. But Lehman found a loophole in an accounting rule, and concluded that if it put up $105 in collateral for every $100 borrowed, it could claim it really was a sale. At the end of each quarter, the company would decide just how much it needed to beautify its balance sheet, and would do repos to produce the desired result. They would be reversed a few days later." Stingy Links: Behaviour Everyone else is biased "Yet he forgets the most profound behavioral bias in this literature that is delightfully recursive: We think we are better than average at not being biased in thinking that we're better than average." A culture of trust "Trust, or the lack of it, certainly matters when it comes to commerce. Knack and Keefer, for instance, showed that for a 10% rise in .trust., as they define it, a country showed a near 1% increase in annual per capital growth, and that civic co-operation was also positively correlated with economic growth. There are multiple possible reasons for this, but if trust is generally reciprocated then the need for all sorts of costly protection mechanisms to defend against being cheated . everything from contracts to security guards and from burglar alarms to prenups . go away. When Buchan and colleagues looked at this issue they also found that the degree of trust people exhibited between each other increased with the amount of personal communication between them, no matter how irrelevant. What it seems is that simply getting to know someone is sufficient to promote trust and, with it, reciprocity: we find it harder to cheat people we have a personal relationship with." The halo effect "As management professor Phil Rosenzweig points out in his book 'The Halo Effect,' a soaring stock price can lead investors to regard the company's managers as focused, disciplined and passionate.while, in the negative halo of a falling stock price, the same executives will now seem stubborn, unimaginative and resistant to change. Investors think, at either time, that they are evaluating the stock and the managers independently, but one opinion inevitably colors the other, often leading investors to be too bullish on the upside and too bearish on the downside. The managers haven't changed our perceptions of them have." Risk management and sounding crazy "All this leads me to wondering about Warren Buffett - the greatest fund manager of them all. He is an unusual individual with strange personal predilections. But he sounds so rational. And he is amazingly self-controlled. Indeed his ability to sit on billions of dollars excess cash for years and years at a time waiting for the time to pounce is legendary and extraordinarily hard to duplicate. Buffett says that temperament is more important than brains in investing and I think this is what he means. But it is often Buffett against the world. Buffett is thought of as a has-been by many people. It doesn't matter whether he was avoiding tech stocks in 1998, 1999 and 2000. It does not matter whether he was buying Bank of America now. He is - of course - just mad. The madness is an important part of how Buffett made all that money. But the self control is - I think - more important." Stingy Links: Bonds Negative nominal interest rates "Bank of New York Mellon Corp. on Thursday took the extraordinary step of telling large clients it will charge them to hold cash." Only millionaires should invest in bonds "A Bond ETF will have a management expense ratio of 25-35bp. The bid-offer spread on seven year bonds purchased in amount of $5,000 will almost certainly exceed this. Additionally, there will be costs associated with further trading, unless you spend amounts exactly equal to your coupon income." AAA rating is a rarity "But the truth is, even as the government maintained its AAA grade, the markets suggested long ago that the United States was no longer deserving of such a high rating. The credit-default swap market provided one clue. During the financial crisis in early 2009, the price of insurance that would pay off if the United States government defaulted on its debt was similar to that offered for companies ranked just above junk. Even today, the price of insurance on a government default has been higher than that for Colgate Palmolive, the global toothpaste giant, which has a rating two notches below AAA." S&P cuts U.S. rating "The U.S. had its AAA credit rating downgraded for the first time by Standard and Poor.s, which slammed the nation.s political process and said lawmakers failed to cut spending enough to reduce record deficits." The AAA bubble "The AAA bubble re-inflates and suddenly sovereign debt becomes the major force driving the world.s triple-A supply. The turmoil of 2008 shunted some investors from ABS into safer sovereign debt, it.s true. But you also had a plethora of incoming bank regulation to purposefully herd investors towards holding more government bonds, plus a glut of central bank liquidity facilities accepting government IOUs as collateral. Where ABS dissipated, sovereign debt stood in to fill the gap. And more. It.s one reason why the sovereign crisis is well and truly painful." The difference between AAA and AA+ "We simply don't have enough AAA and AA rated data to be statistically confident in these distinctions ex ante, which is why AA+ and AAA rated securities differ very little in their yields, usually by only 10 basis points (0.1%) on average. Here's the data from Moody's, that excludes Munis and ABS" Stingy Links: Books Why chasing success makes us happy "As he researched his subject, exploring economics, neuroscience and evolutionary biology, Buchholtz became convinced that much of the modern happiness project was a crock.not just unhelpful economically, but unhealthy and unnatural." Stingy Links: Brokers Asking the right and wrong questions "From a behavioral economics point of view, the field of financial advice is quite strange and not very useful. For the most part, professional financial services rely on clients. answers to two questions: How much of your current salary will you need in retirement? What is your risk attitude on a seven-point scale? From my perspective, these are remarkably useless questions" A milestone in low-cost investing "The golden investing rule of controlling fees to generate bigger returns never makes more sense than it does at challenging times like these for financial markets. So, cost-conscious investors, take note of the introduction of commission-free ETF trading at online brokerage Scotia iTrade. There may not be a cheaper way to invest anywhere." Stingy Links: Buffett An hour with Warren Buffett "Warren Buffett discusses his New York Times Op-Ed piece 'Stop Coddling the Super-Rich' which calls on Congress to increase taxes on the Super-Rich like himself" Buffett's BofA stake "Warren Buffett may have earned $1.3 billion in one day on his $5 billion investment in Bank of America Corp. (BAC)" Stop coddling the super-rich "Last year my federal tax bill . the income tax I paid, as well as payroll taxes paid by me and on my behalf . was $6,938,744. That sounds like a lot of money. But what I paid was only 17.4 percent of my taxable income . and that.s actually a lower percentage than was paid by any of the other 20 people in our office. Their tax burdens ranged from 33 percent to 41 percent and averaged 36 percent. If you make money with money, as some of my super-rich friends do, your percentage may be a bit lower than mine. But if you earn money from a job, your percentage will surely exceed mine . most likely by a lot." The lower stocks go, the more I buy "U.S. Treasuries are still triple-A in that there is no question that we will repay the interest and the principal. Every contract will be repaid. So our bonds are triple-A. Our currency, the dollar, is not triple-A. Our bonds are." Stingy Links: Crime The roots of the Sino-Forest mystery "Part of what is so astonishing is that Sino-Forest and its business activities failed to arouse serious suspicions or concerns with most investors until June of this year when a short seller named Carson Block and his firm, Muddy Waters LLC, first levelled accusations of fraud against the company." Betting against flimsy Chinese firms ".Historically, stock scams are promoters promoting stories. The actual numbers will tell a more truthful story,. he said. .If it's a mining company and there is nothing in ground and the numbers don't lie. The people do. The trick here is that the numbers are made up.." Madoff of the Midwest "The indictment charges that from 2005 to 2009, Durham masterminded a Ponzi scheme that defrauded 5,000 investors in Fair Finance out of some $207,246,329, of which only a fraction may be reclaimed. If convicted, Durham and his alleged conspirators could each face 45 years in prison and $3 million in fines. The case is due to go to trial next year, and the court has registered not-guilty pleas for the three defendants, all of whom declined or did not respond to interview requests. But from interviews with numerous associates, a profile of Durham, who Indianapolis has taken to calling the .Midwest Madoff,. has emerged. In retrospect, Durham.s alleged fraud is almost as impressive for its size as for how obvious it should have been." Catch and release "Spencer Lanthier, who serves on a variety of boards, recently asserted during a speech in Toronto that, despite recent advances in regulation and enforcement, large frauds still unfold in Canada largely with impunity. He claimed this country has .the weakest standards of enforcement in the G8.. Other critics routinely call for speedier investigations, more charges and more serious punishments. Even IMET superintendent Dean Buzza concedes that his units haven.t lived up to expectations. .We overpromised and underachieved,. he says." Nothing for money "While the major stock exchanges, securities regulators and police have made significant progress in the past dozen years purging the old-style boiler rooms and pump-and-dump schemes from the public markets, the marketing of suspect securities continues to thrive in the private domain. Typically, a company advertises or otherwise promotes a particular venture to investors, usually at a fixed price and for a fixed term. At the end of the term, the asset (usually real estate) is meant to be sold, and investors get their money. Sometimes, it begins producing an income stream for the investors. At least, that.s how it works in theory." Stingy Links: Debt Debt endangers growth "Our empirical research on the history of financial crises and the relationship between growth and public liabilities supports the view that current debt trajectories are a risk to long-term growth and stability, with many advanced economies already reaching or exceeding the important marker of 90 percent of GDP." The clash of generations "Anyone who thinks that this economic crisis, if prolonged, won.t also hasten a global power shift has never heard of the Golden Rule: He who has the gold, sets the rules. .We are so used to the Americans providing the solutions for Europe and leading,. said Vassilis T. Karatzas, a Greek money manager. .But what happens when we are both in the same boat?. What happens is that both the American and European dreams hang in the balance. Either we both put our nations on more sustainable growth paths . which requires cutting, taxing and investing for the future . or we.re looking at a world in which democracies are going to turn on themselves and fight over shrinking pies, with China having a growing say over how big the slices will be." The great debt scare "It might not seem that Europe.s sovereign-debt crisis and growing concern about the United States. debt position should shake basic economic confidence. But they apparently have. And loss of confidence, by discouraging consumption and investment, can be a self-fulfilling prophecy, causing the economic weakness that is feared. Significant drops in consumer-confidence indices in Europe and North America already reflect this perverse dynamic." Debt junkies "The world is led by debt junkies who think that debt doesn.t matter. They are leading us to a greater crisis where the only thing that does matter is debt, and for political reasons, some governments will not be willing to pay in full." Debt crisis is worse than you think "An honest assessment of the country.s projected revenue and expenses over the next generation would show a reality different from the apocalyptic visions conjured by both Democrats and Republicans during the debt-ceiling debate. It would be much worse." Stingy Links: Dividends Dividends: collect, reinvest, repeat "The market storm of the past few months has produced a bright side: dividend yields are on the rise." Stingy Links: Economics Stagflation-Plus "If you are not a critic of neoclassical economics, particularly after the 2008 crash, you aren.t thinking. The models did not consider the the effects of a big buildup in debt across the economy. They were debt-neutral, which was a big mistake." Opportunity cost "And if you drive a typical car more than a mile out of your way for each penny you save on the per-gallon price, it doesn't matter how worthless your time is to you - the gas to get there and back costs more than you save." Stingy Links: Fun The case against summer "The logical argument contra summertime should be four words long: middle-age men in shorts. Q.E.D. Alas, shorts are being worn year-round by us graying porkers with legs as ugly as stump fences.if stump fences had hairy varicose veins. But there are plenty of other things wrong with summer, starting with the fact that it comes at the wrong time of year." How to tax the rich "Whenever I feel as if I'm on a path toward certain doom, which happens every time I pay attention to the news, I like to imagine that some lonely genius will come up with a clever solution to save the world. Imagination is a wonderful thing. I don't have much control over the big realities, such as the economy, but I'm an expert at programming my own delusions. I make no apology for that. A well-crafted delusion can be a delicious guilty pleasure. And best of all, it's totally free. As a public service, today I will teach you how to wrap yourself in a warm blanket of imagined solutions for the government's fiscal dilemma." The heady thrill of having nothing to do "My period of greatest creative output was during my corporate years, when every meeting felt like a play date with coma patients. I would sit in long meetings, pretending to pay attention while writing computer code in my mind and imagining the anatomically inspired nicknames I would assign to my boss after I won the lottery. Years later, when 'Dilbert' was in thousands of newspapers, people often asked me if I ever imagined being so lucky. I usually said no, because that's the answer people expected. The truth is that I imagined every bit of good fortune that has come my way. But in my imagination I also invented a belt that would allow me to fly and had special permission from Congress to urinate like a bird wherever I wanted. I wake up every morning disappointed that I have to wear pants and walk." Stingy Links: Funds A free checkup for low-cost investors "Here.s some free advice for you. If you.re interested in building a portfolio with low-cost mutual funds, you can sometimes get ongoing investment advice at no extra charge. Wondering how much you should invest in stocks and bonds, or how much global diversification you should have? This is exactly the kind of free advice that is available when you buy funds directly from Leith Wheeler Investment Counsel, Matco Financial, Mawer Investment Management, Phillips, Hager and North and Steadyhand Investment Funds." Who got the margin call? "The market is not puking. Some prime broker is puking the stocks held by one or more very large hedge funds. So lets play the game: guess who got the margin call!" Hedge-fund performance and liquidity risk "This paper demonstrates that liquidity risk as measured by the covariation of fund returns with unexpected changes in aggregate liquidity is an important predictor of hedge-fund performance. The results show that funds that significantly load on liquidity risk subsequently outperform low-loading funds by about 6.5% annually, on average, over the period 1994-2009, while negative performance is observed during liquidity crises. The returns are independent of share restriction, pointing to a possible imbalance between the liquidity a fund offers its investors and the liquidity of its underlying positions. Liquidity risk seems to account for a substantial part of hedge-fund performance. The results suggest several practical implications for risk management and manager selection." Index-beaters "Among the index-beaters, Mawer Canadian Equity, which is run by Jim Hall of Mawer Investment Management Inc., led the way with a 7.1-per-cent gain. Mr. Hall has been cautious on commodity stocks, a stance that helped his fund gain 8.5 per cent for the first six months of this year. A common thread among many of the outperformers was low fees, with most charging well below 2 per cent." Fund facts risk and suitability get thumbs-down "A new regulatory initiative . i.e. Mutual Fund Point of Sale . was launched this year in an attempt to better inform investors about the investment funds in which they invest. The key feature of this Point of Sale initiative was to provide an investor-friendly 2-4 page document called Fund Facts summarizing each fund.s most important information. The idea was based on the observation that only a tiny minority of investors ever read a fund.s simplified prospectus (i.e. the document that lays out all of a fund.s details). There was no shortage of opinions on this Point of Sale initiative . a collaboration of various financial regulators . while it was in the planning stages. (Including one from yours truly.) But now the first stream of Fund Facts documents have been rolled out and a central repository has been set up at www.fundfacts.com to house some documents. Unfortunately, Fund Facts continues to suffer weaknesses in the two most important areas for investors and their fi! nancial advisors." Stingy Links: Government Dodger mania "The result has been a vicious circle: because tax evasion is so common, people trust the system less, which makes them less willing to pay taxes. And, because so many don.t chip in, the government has had to raise taxes on those who do. That only increases the incentive to cheat, since there tends to be a correlation between higher tax rates and higher rates of tax evasion." It's the elderly "If leadership is the capacity to take people where they need to go . whether or not they realize it or want it . then we.ve had almost no leadership in these weeks of frustrating and maddening debate over the budget and debt ceiling. There.s been an unspoken consensus among President Obama, congressional Democrats and Republicans not to discuss the central issue underlying the standoff. We.ve heard lots about .compromise. or its absence. We.ve had dueling budgets with differing mixes of spending cuts and tax increases. But we.ve heard almost nothing of the main problem that makes the budget so intractable. It.s the elderly, stupid." American idiots "What the hell is going on? Standard and Poor's, the bond-rating agency, downgrades the U.S., and the world trembles. The markets here go nuts on the first trading day after the downgrade, losing $1 trillion in value. European Union finance chiefs are playing Whac-a-Mole with members' debt problems. And England . England was literally burning." Wrong number "The cast-iron nature of this pensions guarantee ought, you might think, to be reflected in pension accounting. But states are allowed a more generous accounting treatment than private-sector employers. They can discount their liabilities on the basis of the assumed rate of return (8% is standard) on the assets in their pension funds. Companies have to use the (lower) yield on an AA-rated corporate bond. So the present value of a state.s liabilities is lower than it would be if private-sector rules applied, even though the rights of public-sector workers are greater." Is social security a Ponzi scheme? "Social Security is structured from the point of view of the recipients as if it were an ordinary retirement plan: what you get out depends on what you put in. So it does not look like a redistributionist scheme. In practice it has turned out to be strongly redistributionist, but only because of its Ponzi game aspect, in which each generation takes more out than it put in. Well, the Ponzi game will soon be over, thanks to changing demographics, so that the typical recipient henceforth will get only about as much as he or she put in (and today.s young may well get less than they put in)." I've got all the clarity I need "And then when you have a company like Boeing, you're talking about one of the iconic US companies gets sued by the federal government. If that doesn't get your attention, nothing will. They get sued for investing $2 billion in South Carolina. Last time I saw South Carolina was a part of the United States of America and you get sued for that." The forgotten man "With equities down sharply, many people are wondering if Uncle Ben and Uncle Sam will once again intervene and turn on the money spigot to prop up equities. Well, before the possible onset of QE3, it's time to consider who's paying for QE2 and all the other intervention strategies to date." A Ponzi scheme that should be fixed "You can force young people into Social Security, but if there just aren.t enough young people in existence to support current beneficiaries, the system will collapse anyway. When Social Security began making monthly distributions in 1940, there were 160 workers for every senior receiving benefits. In 1950, there were 16.5 today, three in 20 years, there will be but two. Now, the average senior receives in Social Security about a third of what the average worker makes. Applying that ratio retroactively, this means that in 1940, the average worker had to pay only 0.2 percent of his salary to sustain the older folks of his time in 1950, 2 percent today, 11 percent in 20 years, 17 percent. This is a staggering sum, considering that it is in addition to all the other taxes he pays to sustain other functions of government, such as Medicare, whose costs are exploding." Debt, downgrades, and inflation "Whether we are watching rioting in Greece, the US debt-ceiling showdown, or even the City of Toronto simply trying to reduce the number of libraries they offer, the issues in each case are exactly the same ..." India says no to $80 toilet paper "Ordinary conversations over chai in India are now about markets and focus on the contrast between private success and public failure. While the private sector provides cutting-edge services and products to the world, the roads outside are potholed, electricity is patchy and water supply erratic. The difference between the two worlds is accountability: In private life, if you don't work, you don't eat in public life, jobs are effectively for life. Indians believe that they are rising despite the state and are often heard to say that 'India grows at night, when the government sleeps.'" The ugly truth "Based on past behavior of fiscal policy makers, businesses understandably regard the debt ceiling agreement and the political outcome of negotiations between Congress and the president with the suspicion akin to how the British humorist P.G. Wodehouse regarded his aunts: .It is no use telling me there are bad aunts and good aunts,. he wrote. .At the core they are all alike. Sooner or later, out pops the cloven hoof.. It will be devilishly difficult for businesses to commit to adding significantly to their head count or to meaningful capital expansion in the United States until clarity is achieved on the particulars of how Congress will bend the curve of deficit and debt expansion and the .cloven hooves. are revealed. No amount of monetary accommodation can substitute for that needed clarity. In fact, it can only make it worse if business comes to suspect that the central bank is laying the groundwork for eventually inflating our way out of our fiscal predicament rather than! staying above the political fray . thus creating another tranche of uncertainty." Stingy Links: Hallett Bond market signaling recession? Should we care? "It.s certainly possible that the current decline will tip over into official bear market territory. But that shouldn.t be surprising since bear markets have historically been clustered. More importantly, a bad economic environment does not equate to a bad investment environment. An economy that looks to be in its darkest days often gives birth to terrific investment opportunities. While we haven.t seen widespread indiscriminate selling of stocks . as in 2008 - many great opportunities have emerged. When hunting for investment opportunities, portfolio manager Geoff MacDonald is happy to invest in businesses even if their growth prospects are low or moderate. The key, he says, is not paying for the growth. And there are many quality businesses today that are growing . and should continue to grow . but are priced for zero or negative growth." How rising rates may affect bonds "While many have been calling for the end of the bond bull market and the damage that awaits bond-heavy investors, I have rarely seen any quantification of the potential losses that bond investors could suffer. So, I ran some simple calculations." Invest like a minimalist "A .minimalist. lifestyle usually refers to living only with the basics. The less .stuff. you have, the less you have to worry about day-to-day and the happier you will be, say proponents. Perhaps you can.t part with your new smart phone, your second car or the notion of home ownership. But I am convinced that adopting minimalist-like investing style would set most investors on the path of greater happiness and prosperity." Stingy Links: History Trust issues "Hartwick College didn.t really mean to annihilate the U.S. economy. A small liberal-arts school in the Catskills, Hartwick is the kind of sleepy institution that local worthies were in the habit of founding back in the 1790s it counts a former ambassador to Belize among its more prominent alumni, and placidly reclines in its berth as the number-174-ranked liberal-arts college in the country. But along with charming buildings and a spring-fed lake, the college once possessed a rather more unusual feature: a slumbering giant of compound interest." How debt has defined human history "Since 1971, when the U.S. abandoned the gold standard, and the world has been moving to a system of virtual credit money, we have been entering a new period of history. But it.s not entirely unprecedented. In fact, contrary to popular belief, credit has been the predominant form of money in world history." A second great depression, or worse? "According to the National Bureau of Economic Research, falling from peak to trough in each cycle took 11 months between 1945 and 2009 but twice that length of time between 1854 and 1919. The longest decline on record, according to this methodology, was not during the 1930s but rather from October 1873 to March 1879, more than five years of economic decline." The Nixon shock "Burns was replaced by Jimmy Carter in 1978. The following year, with inflation rocketing toward 15 percent, Burns delivered a keynote speech, .The Anguish of Central Banking,. in which he argued that central bankers around the world were failing because elected leaders were unwilling to risk displeasing constituents. The new Fed chief, Volcker, did tame inflation unlike Burns, he had the fortitude to subject the country to a brutal recession. But the dilemma faced by Burns.how to withstand the demands of the public for limitless monetary expansion.did not go away. We see it now in the troubles of nations from Greece to Ireland to the U.S. And the anguish that Burns felt is Ben Bernanke.s unfortunate inheritance." Stingy Links: Indexing Too much of a good thing "The number of ETFs has swelled to 2,747. Within equities, there are ETFs based on small-cap companies, value shares, individual industries and every conceivable combination of countries and regions. In bonds, there are ETFs linked to government, corporate and high-yield debt and paper of varying maturities. Some ETFs are based on commodity indices and property markets, others are designed to appeal to the environmentally conscious or to devout Muslims. There are leveraged ETFs which offer a geared return on a given index, inverse ETFs which aim to go down when a benchmark goes up (and vice versa) and, inevitably, leveraged inverse ETFs. For some, this is a worrying trend, with echoes of the subprime housing crisis, in which financial innovation went out of control. That crisis, too, had its origins in invention with a benign aim: the packaging of mortgages for use as securities for bonds was intended to reduce borrowing costs and disperse risk. Eventually, however, that sim! ple idea transmuted into complex collateralised debt obligations and lower lending standards." If you pay peanuts for ETFs ... "Having crunched the numbers, Chris Flood over at FTfm points out that ETF providers may be generating profit margins that are more than four times higher than the traditional mutual funds industry . even despite the products being marketed as .low cost.." Stingy Links: Law New generation of cross-border income trusts "In December 2010, Eagle Energy Trust closed its initial public offering (IPO) of trust units in Canada, resulting in the first of a new generation of cross-border income trusts to access the Canadian capital markets. Since then, Parallel Energy Trust completed its IPO in April 2011 and Argent Energy Trust has recently filed a preliminary prospectus for a proposed IPO. Each of these new trusts owns or will acquire an underlying energy business carried on in the U.S. However, and as discussed in further detail below, there is generally no restriction on other types of U.S. businesses being owned by these income trusts. The suitability of a particular business for these trusts will largely turn on the results of economic modelling based on anticipated deductions in computing U.S. income (i.e., deductions for interest, depreciation, depletion, etc.)" Stingy Links: Management Is he economically rational? "I think of it as training to understand managements . see if they act like owners maximizing long-term profits, or as workers aiming to maximize their pay packets. You will earn more with companies that think like owners." Tales of when legends leave "The founder of a successful corporation steps down. Then what? At Ford Motor Co. and Walt Disney Co., long periods of stagnation or decline, followed by renewal. At Wal-Mart Stores Inc., continued success for a time, then new challenges. Now it is Apple Inc.'s turn, following Steve Jobs's resignation as CEO on Wednesday." Why McDonald's wins "Employees and analysts say he's guided by a zeal for satisfying customers, even if it comes at the expense of his own ideas and preferences. A few years ago the company did extensive testing on new coffee-cup lids and rolled out a version that consumers liked -- and that Skinner, who happens to drink a lot of coffee, really didn't. Rather than overrule the masses, Skinner came up with his own solution: He keeps a stash of the old lids on hand." Stingy Links: Markets The ultimate asset bubble "Gold bought for investment accounted for 38 percent of total demand in 2010, compared with about 4 percent a decade before, the World Gold Council estimates. Holdings in gold- backed ETPs are equal to more than nine years of U.S. mine production. The SPDR Gold Trust, the biggest bullion ETP, exceeded the market capitalization of the SPDR S&P 500 ETF Trust in August, beating what had been the industry.s largest exchange-traded fund since 1993." Headwinds for U.S. equity markets "Despite theoretical ambiguities, U.S. equity values have been closely related to demographic trends in the past half century. There has been a tight correlation between population dependency ratios, such as the M/O ratio, and the P/E ratio of the U.S. stock market. In the context of the impending retirement of baby boomers over the next two decades, this correlation portends poorly for equity values. Moreover, the demographic changes related to the retirement of the baby boom generation are well known. This suggests that market participants may anticipate that equities will perform poorly in the future, an expectation that can potentially depress current stock prices." A better buyback strategy "It appears that stocks that had low returns following their previous buyback, but a high completion rate, see amazing returns following their next buyback." Mr. Innovation and his buddy, Mr. Great Idea "Imagine you have $500,000 to feed, shelter and clothe your family for the next 30 years. You need to invest this money to protect your family against inflation. Now, imagine Mr. Innovation shows up on your doorstep and says, .I have a business to sell you and the price I put on it is $500,000.. You reply, .As it turns out, I have that sum to invest, so tell me about your business.. He responds: .All you need to know is that a bunch of PhDs have analyzed the business.s historical share-price movements. Based on their super-computer algorithms, they believe its price will be higher in three months. time. So give me your money.. Would you do it? My guess is no. Would it surprise you to hear that billions of dollars change hands on the stock market every day based on this approach?" Banning market orders goes mainstream "Traders Magazing writes about how more brokers are talking about altering market orders so that they automatically get converted to a limit order (with a price a few % away from the inside market) by the receiving broker. As the article notes, this results in some risk to the broker: if they put a price cap on an order that then doesn.t get filled. It.s also noted that this risk is small and well worth the protection from large errors." The $25,000 cow "What I have in mind is some sort of scheme whereby the government would restrict the supply of opinion in magazines and newspapers to some fixed number of column inches per year, with a view to propping up.er, stabilizing.salaries at a target rate. Naturally I am sensitive to the concerns of magazine readers, not to mention magazine owners, but I don.t imagine it would raise the cover price of magazines by more than about 200 per cent or so. No? Foolish? Extortionary? Outrageous? Then allow me to introduce you to the world of supply management: an actual policy pursued by the governments of Canada and the provinces for the past 40 years. Only I.m not talking about comparative fripperies like magazines (we have our own indefensible support programs, though not, ahem, on the same scale). I.m talking about basic foodstuffs, the kind the typical Canadian family eats every day: dairy products (milk, cheese and butter), eggs, and poultry (chicken and turkey), whose prices are mai! ntained, by means of a strict regime of production quotas, at two and three times their market levels." Idiots at work: high prices only edition "France, Spain, Italy and Belgium will impose bans on short-selling from today to stabilize markets after European banks including Societe Generale SA hit their lowest level since the credit crisis." Stingy Links: Momentum A contrarian case for following the herd "Price momentum has succeeded in the face of a couple of intuitive objections. One is that buying winners inherently conflicts with a contrarian philosophy that is deeply ingrained within many successful investors. The second is that the simplicity of analysis needed to build a portfolio is troubling to adherents of the belief that markets are at least reasonably efficient. While the skeptics may lurk in the shadows when the strategy is successful, they are eager to speak up when momentum fails. And it is hard for the practitioners of a momentum strategy to launch a vigorous defense while looking foolish for having recently lost money with a portfolio of stocks bought simply on the basis of having recently gone up." Stingy Links: Pensions Depleted pension fund rattles Rhode Island "The city, just north of Providence, is small and poor, but over the years it has promised police officers and firefighters retirement benefits like those offered in big, rich states like California and New York. These uniformed workers can retire after just 20 years of service, receive free health care in retirement, and qualify for full disability pensions when only partly disabled. Just over one square mile, Central Falls has a tightly packed population, filled mostly with immigrant families, that struggles on a median household income of less than $33,520 a year, according to the Census Bureau.s 2005-9 American Community Survey. The typical single-family house, after a recent revaluation, is worth about $130,000. It is hard to see how anyone thought such an impoverished tax base could come up with an additional $80 million for retirement benefits. If the city were contributing the recommended amount to the plan each year, it would take 57 percent of local property tax re! venue." Get ready to pay billions for hydro pensions "Defenders of these very generous pensions always claim that these employees contribute their fair share into the pension plans, and so deserve them. As taxpayers, we would normally think a 50-50 split of contributions would be fair, with employees contributing 50% and taxpayers matching it. But over the past five years alone, taxpayers have pumped $1.3-billion into the plan, while employees have contributed only $368-million. Not so fair and sure to create serious pension tensions when taxpayers find out what is really happening in these pension Ponzi schemes." Stingy Links: Real Estate How long can home prices keep rising? "I can.t tell you when the housing correction will come. But I can tell you that when it arrives it will be correlated with other bad news. And it.s the second correlation that worries me." Too hefty to handle "Three years ago, just one out of every nine mortgage-holders borrowed more than 80% of the value of their homes. Today, it's one in six. These are verifiable facts whether they add up to a bubble, I can't say. But given the data and the terrible consequences of real estate bubbles, the Harper government could - at the very least - stop pumping air into the property market. And that means reining in the Canada Mortgage and Housing Corp., the vehicle through which you, dear taxpayer, have assumed the risks for these urban bidding wars and the jumbo mortgages they create." Rental complex "The belief that we.re not responsible adults until we own our home, whether or not we can afford it, has distorted and stigmatized the cheaper and safer alternative: renting." Misvalued Chinese land "In the little-known Chinese city of Loudi . which is home to 4m people . there is a 1.2bn yuan ($185m) leisure project currently being developed, money for which was raised through bonds guaranteed by land valued at $1.5m an acre. Those prices, says Bloomberg, are comparable to acreage values in one of Chicago.s plushest suburban neighbourhoods." Stingy Links: Stocks Mega Brands merits attention "To its great credit, management somehow kept the company going while negotiating a recapitalization in 2010, issuing an enormous amount of stock to get rid of most of its debt. Fairfax, Invesco Trimark and the founding Bertrand family participated in the new financing, as did other strong hands, who now own about half the stock." Mining the portfolio "Mining the portfolio, in essence, is taking information and news from current portfolio holdings, and using it, and the second order effects stemming from that information, to allocate capital in other investments." Bank of America "Still I am bullish on BofA at these prices. Very bullish. I think the politically driven finance bloggers (Yves Smith at Naked Capitalism) should be seen for their (I think justified) anti-bank agenda. Most of the rest are fitting their analysis around the stock price. There is an awful lot of stock-price doing the analysis here." A little yellow "I will also note that eMails such as the one I received are how the retail perspective transmits to institutional portfolios: I can assure you that in this kind of situation, with dramatic market movements and heavy media coverage, a lot of Portfolio Managers sell (sometimes against their better judgement, if they have any) simply so they won.t have to explain their holdings to their clients. The business is, in general, not about performance it.s about story telling." Stingy Links: Taxes There's no free lunch "It.s widely known in tax circles that only 50% of the cost of meals and entertainment, when incurred as a legitimate business expense, is tax-deductible. What.s not as well-known, however, is the rationale for this rule. A recent Tax Court decision deals with this rule and delves into the fascinating yet underappreciated world of statutory interpretation." A response to Buffett and Obama "Governments have an obligation to spend our tax money on programs that work. They fail at this fundamental task. Do we really need dozens of retraining programs with no measure of performance or results? Do we really need to spend money on solar panels, windmills and battery-operated cars when we have ample energy supplies in this country? Do we really need all the regulations that put an estimated $2 trillion burden on our economy by raising the price of things we buy? Do we really need subsidies for domestic sugar farmers and ethanol producers? Why do we require that public projects pay above-market labor costs? Why do we spend billions on trains that no one will ride? Why do we keep post offices open in places no one lives? Why do we subsidize small airports in communities close to larger ones? Why do we pay government workers above-market rates and outlandish benefits? Do we really need an energy department or an education department at all? Here's my message: Before yo! u 'ask' for more tax money from me and others, raise the $2.2 trillion you already collect each year more fairly and spend it more wisely. Then you'll need less of my money." Buffett misses mark "The United States needs to get out of its box of low growth. Current proposals for tax increases are the wrong medicine. Instead, a rate-reducing cum base-broadening tax reform would be more powerful by reducing the economic cost of taxation. Buffett pays too little tax, not because he.s so rich but because the U.S. tax system is so poor." Stingy Links: Value Investing A value investor's best friend in China "My experience with statistically cheap China-based investments has not always been positive. It dates back 20 years or more to the TSX-listed Noble China, which had the Chinese licence for Pabst Blue Ribbon, a particularly tasteless American beer. The whole episode ended in tears for the shareholders. So, I am not about to invest my life savings in American Lorain, but I think that Ben Graham would approve a modest exposure." Watsa sees dirty thirties pain ahead "The U.S. economy appears to be heading toward a lengthy period of deflation such as the one that struck Japan, and there is little policy-makers can do to prevent it, says one of Canada.s most accomplished investors. But it isn.t just the United States and Europe that Prem Watsa is worried about. The potential bursting of a property bubble in China has him even more concerned. And if Chinese demand for commodities dries up at the same time as U.S. consumers are shutting their wallets, then the global economy is in for a lengthy period of pain." The Indian who bailed out Bank of Ireland "When Bank of Ireland faced an imminent nationalization earlier this summer, a group of North American investors pumped in $1.6 billion to keep it out of the hands of the Irish government, in return for up to a 35% stake in the iconic commercial bank, whose roots date back to 1783. The lead investor in the deal was the Toronto-based Fairfax Financial Holdings Limited, led by Hyderabad-born Prem Watsa, who may be a virtual unknown in the country of his birth, but is fast building a reputation as an investment wizard in his adopted land and also within the global value investing community." Advice from Irving Kahn "At Columbia Business School, Kahn served as an assistant to economist Benjamin Graham, the value-investing guru whose principles of caution and defensive investing inspired a cadre of disciples that includes Warren Buffett. It.s an investment strategy born of the beating Graham had taken in '29, and Kahn adopted it as his own. .I stopped wasting time on what people claimed a stock was worth and started looking at the numbers,. he says. .This may surprise you, but there were a large number of valuable buys during the Depression.." Stingy Links: Whitman Whitman's Q3 2011 letter "Based, as always, upon a bottom-up, value oriented, approach to analysis, my view of what is happening in the U.S. economy seems to be quite different from the views held by politicians and academics. Third Avenue shareholders, hopefully, might gain insight from understanding my views about the economy and various economic entities, particularly with regard to the U.S. economy, the global economy and, most important to Third Avenue Management, the companies that must contend with both." Stingy Links: World Ireland recovers as Greece sinks "The country is meeting targets set for it by the EU, IMF and European Central Bank as Kenny.s government pushes austerity measures through parliament by controlling 113 seats in the 166- seat legislature. By contrast, Papandreou.s four-seat majority imperils the implementation of Greece.s bailout package. Chatzis, the plastic surgeon, said he moved to Ireland in 2000 in part because the Irish were similar to Greeks in that .they both like to talk and have fun.. The difference is .in Greece, the black economy thrives, many people avoid taxes, and you can get one price with a receipt and once price without,. he said. .Here, there is respect for the system. People will do what it takes.." Generation Fd "The UN.s first ever report on the state of childhood in the industrialized West made unpleasant reading for many of the world.s richest nations. But none found it quite so hard to swallow as the Brits, who, old jokes about English cooking aside, discovered that they were eating their own young." Fewer "At that rate, according to some back-of-the-envelope calculations by The Economist, it would take about 25 generations for Hong Kong.s female population to shrink from 3.75m to just one. Given that Hong Kong.s average age of childbearing is 31.4 years, it could expect to give birth to its last woman in the year 2798. (That is some time after its neighbour, Macau, which has a higher reproduction rate, but a much smaller population.) By the same unflinching logic, Japan, Germany,Russia, Italy and Spain will not see out the next millennium. Even China, which has a recorded history stretching back at least 3,700 years, has only about 1,500 years left.if present trends continued unbroken." It's the economy, dummkopf! "With Greece and Ireland in economic shreds, while Portugal, Spain, and perhaps even Italy head south, only one nation can save Europe from financial Armageddon: a highly reluctant Germany. The ironies.like the fact that bankers from D Once Greece goes. "The economic crisis in Greece is the most important thing to have happened in Europe since the Balkan wars. That isn.t because Greece is economically central to the European order: at barely 3 per cent of Eurozone GDP, the Greek economy could vanish without trace and scarcely be missed by anyone else. The dangers posed by the imminent Greek default are all to do with how it happens." Fear and loathing in the Eurozone "The problem, as Mundell anticipated, is that if the shocks to the system are not random and are specifically and continually related to one country the concept of currency union begins to fall apart. In particular, if specific countries are characterised by lack of price flexibility and rigid labor laws restricting wage adjustment in response to lack of competitiveness the only alternative is to transfer money from one region to another: and potentially to keep on doing it, till the voters squeak." | ||||
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