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The Stingy News Quarterly (Q4/2011)
New @ StingyInvestor Teaching the professors how to pick good funds "Imagine standing at a podium in a lecture hall and being questioned by 100 professors for two hours. It.s the stuff of student nightmares. But that.s exactly where I found myself when I recently addressed a bevy of professors from the University of Toronto on financial matters." It's all in the index you choose "Canadian and U.S. stock markets get equal treatment on the evening news but it.s easy to forget just how different they really are. Investors, though, have had the distinction pressed upon them this year, as the S&P/TSX 60 has slid 14.5 per cent, while the Dow Jones industrial average (DJIA) has risen 6.8 per cent in Canadian dollar terms. To see what.s going on, you have to look under the hood. Once you do, the gaps between the two indexes loom large." Stingy Investor Tip Sheet Stingy Stock December Update The updated list of Stingy Stocks including some Canadian candidates. Graham Net Net December Update Canadian and U.S. stocks that pass Graham's Net Net test. The Best of Stingy Links Stingy Links: Academia Advice and Investor Portfolio Performance "This paper investigates whether financial advisers add value to individual investors. portfolio decisions by comparing portfolios of advised and self-directed (execution-only) Dutch individual investors. The results indicate significant differences in characteristics and portfolios between these investor groups, but no evidence of differences in risk-adjusted performance. The findings indicate that portfolios of advised investors are better diversified and carry significantly less idiosyncratic risk. In addition, evidence from an analysis of investors who switch to advice taking indicates that these findings (at least in part) reflect the effect of advisory intervention." Stingy Links: Behaviour Stories make me nervous "I was told to come here and tell you all stories, but what I'd like to do is instead tell you why I'm suspicious of stories, why stories make me nervous. In fact, the more inspired a story makes me feel, very often the more nervous I get. So the best stories are often the trickiest ones." Bill Miller had a great run. But did his investors? "The fund made 16.44% a year in gains and reinvested dividends during that period, but the average investor made only 11.34%. Miller's average investor actually underperformed the S&P (which returned 11.51% annually during his streak), even though his fund way outperformed the index. ... Interestingly, the presumably non-starstruck investors in Vanguard's plain-vanilla S&P 500 index fund (VFINX), which I also asked Morningstar to analyze, fell into the same trap. During Miller's 15-year hot streak, the index fund returned 11.41% -- but its average investor made only 7.96%." I was wrong, and so are you "The new results invalidated our original result: under the right circumstances, conservatives and libertarians were as likely as anyone on the left to give wrong answers to economic questions. The proper inference from our work is not that one group is more enlightened, or less. It.s that .myside bias..the tendency to judge a statement according to how conveniently it fits with one.s settled position.is pervasive among all of America.s political groups. The bias is seen in the data, and in my actions." How a Financial Pro Lost His House "Everywhere I looked, people were being rewarded for buying as much house as they could possibly afford, and then some. There was this excitement in the air, almost like static. I started to think that if I didn.t buy a house right then, I would never be able to afford one. At moments during our house hunt, I felt in my gut that something wasn.t right. We.d go to open houses for $400,000 homes and see lines of couples in their late 20s . younger than we were . waiting to get inside. I kept wondering where all the money was coming from. How did all these people make so much? But prices just kept rising, and when people kept buying, that made it seem safer. I knew from my work as a financial adviser that following the crowd could be costly. But like everyone else, I felt safer in a crowd." Bias, blindness and how we think "In the market, of course, belief in one.s superiority has significant consequences. Leaders of large businesses sometimes make huge bets in expensive mergers and acquisitions, acting on the mistaken belief that they can manage the assets of another company better than its current owners do. The stock market commonly responds by downgrading the value of the acquiring firm, because experience has shown that such efforts fail more often than they succeed." The science of irrationality "Here's a simple arithmetic question: 'A bat and ball cost $1.10. The bat costs $1 more than the ball. How much does the ball cost?' The vast majority of people respond quickly and confidently, insisting the ball costs 10 cents. This answer is both incredibly obvious and utterly wrong. (The correct answer is five cents for the ball and $1.05 for the bat.) What's most impressive is that education doesn't really help more than 50% of students at Harvard, Princeton and the Massachusetts Institute of Technology routinely give the incorrect answer." Why envy dominates greed "Economists agree that no reasonable risk metric predicts returns within or between any asset class, but always suggest that just implies risk, like fine wine, is very subtle. This is because we know there is a risk premium, because given our conception of utility (increasing at a decreasing rate), there must be a risk premium. Like telling the Journal of Marxist Studies that 'class' is not the best lens to view behavior, telling economists that self interest is primarily envy, not consumption, is simply too dismissive of the foundations they find so compelling to their calling all that human capital is tied to mastery of work that may not work, but at least currently there's hope that another tweak might turn these highly rigorous models into seminal, important work." Stingy Links: Bonds No money for sauerkraut "Germany failed to get bids for 35 percent of the 10-year bonds offered for sale today, propelling borrowing costs in Europe higher and the euro lower on concern the region.s debt crisis is driving away investors." Stingy Links: Books The real genius of Steve Jobs "One of the great puzzles of the industrial revolution is why it began in England. Why not France, or Germany? Many reasons have been offered. Britain had plentiful supplies of coal, for instance. It had a good patent system in place. It had relatively high labor costs, which encouraged the search for labor-saving innovations. In an article published earlier this year, however, the economists Ralf Meisenzahl and Joel Mokyr focus on a different explanation: the role of Britain.s human-capital advantage.in particular, on a group they call .tweakers.. They believe that Britain dominated the industrial revolution because it had a far larger population of skilled engineers and artisans than its competitors: resourceful and creative men who took the signature inventions of the industrial age and tweaked them.refined and perfected them, and made them work." Stingy Links: Brokers What Bay Street doesn't want you to hear "A substantial number of do-it-yourself investors are paying for financial advice they are not getting and never will. That's what can happen when you buy mutual funds from an online broker. While you typically pay nothing to buy and sell your funds, the cost of owning them can be identical to what is paid by investors who have advisers. There's almost a conspiracy of silence on this matter in the investment industry and it results from the fact that the status quo serves brokers and fund companies quite well." Stingy Links: Christmas What I Like About Scrooge "In this whole world, there is nobody more generous than the miser.the man who could deplete the world's resources but chooses not to. The only difference between miserliness and philanthropy is that the philanthropist serves a favored few while the miser spreads his largess far and wide." Thoughts on Ebenezer Scrooge "The story goes that Charles Dickens was visiting Edinburgh to give a public reading of his work in 1842, and spent some time looking around the Canongate church graveyard. He saw one grave that made him shudder. The name on the grave was Ebenezer Lennox Scroggie--mean man.' According to Peter Clark, a British political economist who seems the starting point for this story, Dickens misread the inscription. It actually said 'Meal man,' because Scroggie was a corn merchant." Escaping the well-lit prison "The focus on gifts is something we.re all supposed to feel vaguely guilty about, according to certain grim people with very strong views about the Evils of our Commercialized, Materialist Society. In lieu of presents these people give things like certified carbon offsets and donations in your name to International A.N.S.W.E.R. Their kids get seaweed gummy kits and .Peace in Our Time. cooperative board games from the Catalog of Socially Responsible Gifts, and exact revenge by growing up to become arbitrageurs. On the other end of the spectrum are the market ideologues. These are the folks who write earnest monographs on how everybody has the wrong idea about Ebeneezer Scrooge, who was really a thrifty capitalist hero. Their idea of a neat Christmas present is something like a .Who Is John Galt?. doormat.except there isn.t one, because John Galt was nobody.s doormat, dammit, so instead you get a book on Basel bank-capital requirements and a bookmark in the shape of Ludwig von! Mises. Which is not to say that either group is wrong, mind you.merely that, like the madman in Chesterton.s .Orthodoxy,. they are .trapped in the well-lit prison of one idea...sharpened to one painful point.. You want to say to them, look: If British and German soldiers could sing carols together at Ypres in WWI, then the rest of us are entitled to give politics a break for one lousy day. Here, have some peppermint bark." In Defense of Scrooge "It's Christmas again, time to celebrate the transformation of Ebenezer Scrooge. You know the ritual: boo the curmudgeon initially encountered in Charles Dickens's A Christmas Carol, then cheer the sweetie pie he becomes in the end. It's too bad no one notices that the curmudgeon had a point - quite a few points, in fact." A Christmas Carol "Marley was dead: to begin with. There is no doubt whatever about that. The register of his burial was signed by the clergyman, the clerk, the undertaker, and the chief mourner. Scrooge signed it: and Scrooge.s name was good upon .Change, for anything he chose to put his hand to. Old Marley was as dead as a door-nail. Mind! I don.t mean to say that I know, of my own knowledge, what there is particularly dead about a door-nail. I might have been inclined, myself, to regard a coffin-nail as the deadest piece of ironmongery in the trade. But the wisdom of our ancestors is in the simile and my unhallowed hands shall not disturb it, or the Country.s done for. You will therefore permit me to repeat, emphatically, that Marley was as dead as a door-nail." Do not buy dad a tie "Christmas is not the most wonderful time of the year for economists. The holiday spirit is puzzlingly difficult to model: It plays havoc with the notion of rational utility-maximization. There.s so much waste! Price-insensitive travelers pack airports beyond capacity on Dec. 24 only to leave planes empty on Christmas Day. Even worse are the gifts, which represent an abandonment of our efficient system of monetary exchange in favor of a semi-barbaric form of bartering. Still, even the most rational and Scroogey of economists must concede that gift-giving is clearly here to stay. What.s needed is a bit of advice: What can economics tell us about efficient gifting so that your loved ones get the most bang for your buck?" Stingy Links: Crime Grandparents scam "Last week my 83-year old mother almost became a victim of the .grandparent scam.. She picked up the phone and the caller said he was her grandson. When she asked if it was Charles, my son, the caller said yes. Mom sometimes has trouble hearing on the telephone, but she said it sounded just like him. As we later found out, he gave her the classic story. He said he had an accident with a rental car in Montreal and was in jail. He said needed $4,000 wired via Western Union to his court-appointed lawyer to be released and provided a name. The caller asked my mother not to call either my husband or I as we would be too upset. ..." Scammers no match for sense of humour "Rob received a call from .Jim. in India. Jim launched into his spiel: Rob.s Windows operating system was infected. Rob told Jim he has no windows. Jim insisted that he did. Rob deadpanned that his computer had no windows.nor doors." Stingy Links: Debt Peak credit "We.ve heard about .peak oil.. We.ve heard about other resources, and how production will decline over time. But what of credit?" Growth in the age of deleveraging "Accumulating the mountain of debt now weighing on advanced economies has been the work of a generation. Across G-7 countries, total non-financial debt has doubled since 1980 to 300 per cent of GDP. Global public debt to global GDP is almost at 80 per cent, equivalent to levels that have historically been associated with widespread sovereign defaults." Lessons from Canada's 'basket case' moment "Finance officials bit their nails and nervously watched the clock. There were 30 minutes left in a bond auction aimed at funding the deficit and there was not a single bid. Sounds like today's Italy or Greece? No, this was Canada in 1994." Stingy Links: Dividends Dogs bite back "The Dogs of the Dow are running strong this year. The decades-old strategy, which calls for buying the 10 highest-yielding shares among the 30 Dow Jones Industrial Average members at the end of each year, has returned 5.5% this year through Wednesday, versus a 0.4% decline for the broader Dow." Stingy Links: Economics Economics has met the enemy it's economics "What is today known as economics arose out of two larger intellectual traditions that have since been largely abandoned. One is political economy, which is based on the simple idea that economic outcomes are often determined largely by political factors (as well as vice versa). But when political-economy courses first started appearing in Canadian universities in the 1870s, it was still viewed as a small offshoot of a far more important topic: moral philosophy. In The Wealth of Nations (1776), Adam Smith famously argued that the pursuit of enlightened self-interest by individuals and companies could benefit society as a whole. His notion of the market's .invisible hand. laid the groundwork for much of modern neoclassical and neo-liberal, laissez-faire economics. But unlike today's free marketers, Smith didn't believe that the morality of the market was appropriate for society at large. Honesty, discipline, thrift and co-operation, not consumption and unbridled self-interest! , were the keys to happiness and social cohesion. Smith's vision was a capitalist economy in a society governed by non-capitalist morality." Stingy Links: Economy More 2011 charts "What is it about graphs and economics? In a discipline where facts are murky and certainty is elusive, graphs offer a bright light of information and a small confidence that the world can be summed up between two axes." 2011 in charts "We asked economists, economic policymakers and investors for their favorite charts of 2011. Here.s what they gave us." Stingy Links: Government Smoke Screening "As you stand in endless lines this holiday season, here.s a comforting thought: all those security measures accomplish nothing, at enormous cost. That.s the conclusion of Charles C. Mann, who put the T.S.A. to the test with the help of one of America.s top security experts." Congress: Trading stock on inside information? "The next national election is now less than a year away and congressmen and senators are expending much of their time and their energy raising the millions of dollars in campaign funds they'll need just to hold onto a job that pays $174,000 a year. Few of them are doing it for the salary and all of them will say they are doing it to serve the public. But there are other benefits: Power, prestige, and the opportunity to become a Washington insider with access to information and connections that no one else has, in an environment of privilege where rules that govern the rest of the country, don't always apply to them. When Nancy Pelosi, John Boehner, and other lawmakers wouldn't answer Steve Kroft's questions, he headed to Washington to get some answers about their stock trades. Most former congressmen and senators manage to leave Washington - if they ever leave Washington - with more money in their pockets than they had when they arrived, and as you are about to see, the big! gest challenge is often avoiding temptation." Unintended consequences: nanny state edition "Today and tomorrow mark the last days that put-upon parents can satiate their youngsters by simply throwing down $2.18 for a Happy Meal toy. But, thanks to the new law taking effect on Dec. 1, this is no longer permitted. Now, in order to have the privilege of making a 10-cent charitable donation in exchange for the toy, you must buy the Happy Meal. Hilariously, it appears Mar et al., in their desire to keep McDonald's from selling grease and fat to kids with the lure of a toy have now actually incentivized the purchase of that grease and fat -- when, beforehand, a put-upon parent could get out cheaper and healthier with just the damn toy." Capitol gains "It.s also possible that congressional insiders could have simply stopped reporting potentially dubious transactions once they knew people were paying attention. According to Ziobrowski, the forms still aren.t audited, and they.re woefully inadequate.for example, Eggers and Hainmueller say there.s no clear method for reporting short-selling, one of the major ways to profit from inside information." How to kill an economy "Venezuelan President Hugo Chavez.s move to expand price controls this week sparked panic purchases by consumers, leading to shortages of everything from coffee to toilet paper." A model for Ontario "California has long been among America.s most extensive taxers and regulators of business. But at the same time, the state had assets that seemed to offset its economic disincentives: a famously sunny climate, a world-class public university system that produced a talented local workforce, sturdy infrastructure that often made doing business easier, and a history of innovative companies. No more. As California has transformed into a relentlessly antibusiness state, those redeeming characteristics haven.t been enough to keep firms from leaving. Relocation experts say that the number of companies exiting the state for greener pastures has exploded. In surveys, executives regularly call California one of the country.s most toxic business environments and one of the least likely places to open or expand a new company. Many firms still headquartered in California have forsaken expansion there." Stingy Links: Graham What Graham thought of IBM "The word that Warren Buffett has bought 5.4% of International Business Machines came as a surprise to most of his followers, as Buffett has long scorned investments in technology. Buffett.s mentor, the great value investor Benjamin Graham, had a long history with IBM." Stingy Links: Hallett BMO set Monthly Income distribution bar too high "With nearly 1/3 of distributions having been taken in cash since 2008, sustainability is a legitimate concern generally and a big concern for any investor relying on this fund.s fat payout to pay living expenses. BMO insists the payout is sustainable, an assertion they base on the fund.s net inflows. Indeed, while the fund has spent its last two full fiscal years in net redemptions, reinvested distributions have generally kept more money flowing into the fund than leaving. The only exception so far was 2008, when the fund saw net redemptions of $436 million including reinvested distributions. But this speaks only to the mechanics of where the money comes from. When I mention .sustainability. in this context, I.m speaking to the fund.s potential to support the payout with a sufficiently high total return. And on that basis, there are good reasons to continue questioning its sustainability." Mutual fund critics missing the big picture "Every time markets bleed red, mutual fund investors and the media become much more price-sensitive. So it.s no surprise that print media have featured a barrage of anti-fee articles. Interestingly, Canada.s two national papers have united in a recent Investors Group bash-fest. I agree with the broad message, which is to keep an eye on fees. Since fees are pretty transparent and easy to understand, they get most of the attention when trying to explain poor investor performance. But the media and the industry would do investors more good by identifying and trying to remove the handful of barriers to satisfying long-term performance." Leveraging + High Payout Funds = Unhappy Ending "The final chapter to the series of articles I.ve written this year on high-payout investments funds features leveraging. Over the past few years, I have been contacted by several individual investors and financial advisors about strategies they.ve been proposed or have seen in use involving borrowing to invest in funds that pay out fat monthly distributions. Every inquiry I received described a troubling and strikingly similar plan. Each case involved an investor setting up a line of credit secured by available home equity. The proceeds from the line of credit would be used to invest in one or more T-series or other funds paying out large monthly distributions. Then, the investor would take the distributions in cash . mostly made up of return of capital - either for personal spending or to put toward the investment loan. After some undefined period of time, the expectation is that the remaining investments (i.e. net of cash distributions) would be sufficient to wipe out the! loan balance, with hopefully something extra to add some jingle to the investor.s jeans." Want lower fund fees? Vote with your wallet. "Finance Minister Jim Flaherty has asked the Senate National Finance Committee to examine why prices of many retail goods continue to be higher than in the U.S. while the Canadian dollar has been at (or near) par with the U.S. dollar for a year or more. Just over a week ago, FAIR Canada called on Flaherty to add mutual fund management expense ratios to that list of retail goods. I have a great deal of respect for FAIR. Given that investor advocacy isn.t a high-paying job - it pays nothing, sometimes less - FAIR is a much-needed organization. But I think their request and fee comparison miss the mark." Stingy Links: Health How doctors die "Years ago, Charlie, a highly respected orthopedist and a mentor of mine, found a lump in his stomach. He had a surgeon explore the area, and the diagnosis was pancreatic cancer. This surgeon was one of the best in the country. He had even invented a new procedure for this exact cancer that could triple a patient.s five-year-survival odds.from 5 percent to 15 percent.albeit with a poor quality of life. Charlie was uninterested. He went home the next day, closed his practice, and never set foot in a hospital again. He focused on spending time with family and feeling as good as possible. Several months later, he died at home. He got no chemotherapy, radiation, or surgical treatment. Medicare didn.t spend much on him. It.s not a frequent topic of discussion, but doctors die, too. And they don.t die like the rest of us. What.s unusual about them is not how much treatment they get compared to most Americans, but how little. For all the time they spend fending off the deaths of ot! hers, they tend to be fairly serene when faced with death themselves. They know exactly what is going to happen, they know the choices, and they generally have access to any sort of medical care they could want. But they go gently." Stingy Links: History The Long Shadow of German Hyperinflation "The Germans' strict opposition to the monetary financing of governments isn't just petty legalism -- it's a bedrock principle, based in history, which was purposefully built into EU treaties and Bundesbank policies. It's worth revisiting why the memory of hyperinflation has seared itself into the minds of many Germans, and how it's shaping their thinking and the future of the euro itself." Control rights and wrongs "Banks are special. That has long been recognised in the design of their ownership, governance and regulation. This special status can have strange consequences. The historical distribution of risks and returns in banking is one. For a century, both risks and returns have been high. But while the risks have typically been borne by wider society, the returns have been harvested by bank shareholders and managers. The experience of the past two decades illustrates well this imbalance. In 1989, the CEOs of the seven largest banks in the United States earned on average $2.8 million. That was almost 100 times the median US household income. By 2007, at the height of the boom, CEO compensation among the largest US banks had risen almost tenfold to $26 million. That was over 500 times the median US household income. Those are high returns by any measure. But so, subsequently, have been the risks. The fall in the share prices of global banks means they are scarcely different in real ! terms today than in the early 1990s. And it is not just investors licking their wounds. So too is the global economy." Stingy Links: Markets Curbing short sales "The New York Fed did a quick study this fall after markets plunged in August when Standard and Poor.s decided to downgrade the credit of the United States government. That study, by Hamid Mehran, a Fed economist, and two finance professors from Notre Dame, Robert Battalio and Paul Schultz, also looked at the impact of the 2008 bans on short sales of financial stocks, which were imposed in many countries at the height of the financial crisis. They concluded that there was no evidence that stocks then being sold by short-sellers did worse in August than did shares of other companies, and in fact a little evidence that they did better. That would seem to indicate that short-selling did not play a major role in the market turmoil." Building the 3-D shelter "Unlike .the market,. we believe inflation will be a factor in the next decade or two because of the game-changing effects of deficits, debts, and demographics. Combined these three .Ds. could produce hurricane force headwinds to developed world growth and tailwinds to bursts of rising prices as debt levels are manipulated down to more manageable levels." King of the mountain "What about the future? In the next six months, the deflation from late 2008 will shortly drop out of our three-year rates. CPI is up by 7% over the past 30 months, which works out to 2.3% per year. If we add our 2% adjustment to create more of an applesto- apples comparison with history, .true. inflation is above 4% and the .true. real interest rate is very low, around .2%. At these levels, the normal Shiller P/E ratio would be 13 times our 10-year average earnings, which takes us below 800 on the S&P 500 Index." Mandelbrot beats economics on markets "Over the past 15 years or so, physicists have demonstrated this in mathematical studies of market volatility. Inspired by work of the mathematician Benoit Mandelbrot in the 1960s, these scientists have used enormous sets of historical data -- hundreds of millions of minute-by-minute prices stretching over more than a decade, and daily and monthly prices over half a century -- to show that large market movements, up or down, follow a single mathematical pattern. Larger movements of, say, 10 percent to 15 percent, are less likely than movements of 3 percent to 5 percent. And the probability of a movement decreases in simple inverse proportion to the cube of its size: If moves of 5 percent or more have a certain likelihood, then moves of 10 percent or more are 8 (2 cubed) times less likely, and moves of 20 percent or more are in turn 8 times even less likely. But they still occur with some regularity. This pattern, it turns out, can be seen in markets for stocks, foreign excha! nge and futures around the world." Stingy Links: Momentum What happened to momentum? "The total return to Momentum was impressive for many decades. It's a simple strategy, basically going long past winners and short the losers, hoping they continue to win and lose. Interestingly, the past returns should go only up to the prior month, because there's slight mean-reversion at the one-month horizon, so most people use the returns from months t-12 through t-1. This highlights the non-fractal nature of stock returns, in that there's momentum in the data from 3-18 months, but mean-reversion at the shorter and longer frequencies." Stingy Links: Pensions The half-a-trillion hole "However US local government funds continue to use the assumed rate of return to discount their liabilities, even as 8% looks more and more chimerical. I have struggled to convince readers of the madness of this approach, so I will try to channel Warren Buffett (in spite of having one-tenth of his brains and one-thousandth of his intellectual credibility). If a promise to make a series of future payments isn't a debt, what is it? If a debt shouldn't be recorded on the balance sheet at cost, how should it be recorded?" A trillion here, $500 billion there "In 2009 Joshua Rauh of the Kellogg School of Management at Northwestern University and Robert Novy-Marx, then at the University of Chicago.s Booth School of Business, estimated that the deficit of American state and local-government pension plans was $3.1 trillion. Mr Rauh reckons that the deficit is now $4.4 trillion. In other words, a cool $1.3 trillion has been added in two years." The Little State With The Big Mess "In most places, as in Rhode Island, the big issue is pensions. By conventional measures, state and local pensions nationwide now face a combined shortfall of about $3 trillion. Officials argue that, by their accounting, the total is far less. But with pensions, hope often triumphs over experience. Until this year, Rhode Island calculated its pension numbers by assuming that its various funds would post an average annual return on their investments of 8.25 percent the real number for the last decade is about 2.4 percent." Stingy Links: Pricing Friday.s deals may not be the best "Professor Etzioni, who teaches computer science at the University of Washington, has directed his considerable intellect at the American ritual of shopping for bargains on Black Friday. After examining billions of prices of consumer electronics, he has decided to spend the busiest shopping day of the year scuba-diving in Bali." Stingy Links: Real Estate House of horrors "Based on the average of the two measures, home prices are overvalued by about 25% or more in Australia, Belgium, Canada, France, New Zealand, Britain, the Netherlands, Spain and Sweden (see table). Indeed, in the first four of those countries housing looks more overvalued than it was in America at the peak of its bubble." Real estate never goes down ... "In real terms, the National index is back to Q3 1999 levels, the Composite 20 index is back to July 2000, and the CoreLogic index back to June 2000. In real terms, all appreciation in the last decade is gone." [Or to some time in 1988 by my eye.] Rising from the ruins "The economic landscape is unquestionably littered with the wreckage of the crash. Home prices languish near post-bubble lows, over 30% below peak. The plunge in prices has left nearly a quarter of all mortgage borrowers owing more than the value of their homes nearly 10m are seriously delinquent on their loans or in foreclosure. The hardest-hit markets are ghost neighbourhoods, filled with dilapidated properties. Housing markets are far from healthy. Yet current pessimism seems overdone. A turnaround in sales, prices and construction may be closer than many imagine." Stingy Links: Stocks RIM.s stock falls below book value "Research In Motion.s stock fell below its book value for the first time in nine years, a signal investors consider the BlackBerry maker to be worth less than the net value of its property, patents and other assets." Stingy Links: Taxes Why taxing the rich won.t help "It.s tempting to look to our millionaires and demand they pay more in taxes, but the same inconvenient truth applies. When you add up all the money made by all the people who earn more than $1 million a year, it amounts to around $700 billion. But since the millionaires already pay close to $200 billion in taxes, the government would have to increase rates to nearly 100 percent . which is about the worst idea ever . for it to have any real impact." A Short History of the Income Tax "The other pernicious consequence of the separate corporate and personal income taxes has been a field day for demagogues and the misguided to claim that the rich are not paying their 'fair share.' Warren Buffett recently claimed that he had paid only $6.9 million in taxes last year. But Berkshire Hathaway, of which Mr. Buffett owns 30%, paid $5.6 billion in corporate income taxes. Were Berkshire Hathaway a Subchapter S corporation and exempt from corporate income taxes, Mr. Buffett's personal tax bill would have been 231 times higher, at $1.6 billion. Just as in the late 19th century, the tax code is now hopelessly arbitrary and unfair. It requires a complete overhaul." Tax math "Let.s consider two key areas of the tax code, where .first-stage thinking. allows Buffett to conclude that he.s paying a lower tax rate than his secretary. Once we view the picture from the proper perspective and engage in .second-stage thinking,. you.ll see that Buffett.s effective tax rate is much higher than it seems." More corporate tax won.t help "A tax rate is one thing. Tax collected is another. Indeed, in Canada progressives like to point out that there.s no need for corporate income tax cuts, since the rates in the U.S. are much higher. But no one pays the posted rate in the U.S." Art donation scheme raises questions "The biggest and longest-running financial fiascos in Canada have been 'donate low, deduct high' charitable donation tax-credit schemes. These schemes are all variations on the same theme: The donor purchases something for 'x' dollars and then donates it for 'x plus y' dollars, generating a tax credit that exceeds the original out-of-pocket costs. One of the most outrageous was the art-donation scheme. The participant would, for example, buy a piece of art for $10,000, get it appraised for $30,000, and then donate it to a university or hospital. The donor would receive a tax credit equal to 43.7 per cent of the appraised value, or $13,110, which was $3,110 more than his original cost. Problem is, Canada Revenue Agency has consistently rejected such schemes. To date, it has disallowed a stunning $4.5 billion in donations claimed by more than 130,000 Canadian taxpayers on account of these dodgy deals." U.S. taxman to go easy "Americans living in Canada who.ve neglected to pay their U.S. taxes are getting a big break from Uncle Sam. The U.S. Internal Revenue Service is poised to waive potentially massive penalties for Americans who agree to come clean and don.t owe any taxes, The Globe and Mail has learned." Stingy Links: Thrift A new page at Canadian MoneySaver "Mr. Hodson said he likes the current roster of MoneySaver writers, a mix of self-taught experts and advisers and other investment industry people who contribute free of charge. Something else he likes is the longstanding MoneySaver policy of not taking advertising from the financial industry. That kind of independence can be costly in terms of forgone revenue, but Mr. Hodson.s Sprott years have left him financially secure enough not to worry about it." The truth about wealth "A study by Jonathan A. Parker and Annette Vissing-Jorgensen of Northwestern University found that the beta of the top 1% nearly quadrupled between 1982 and 2007 to 2.39. The top 0.01% had a beta of 3.96, making even the riskiest tech stocks look safe by comparison. Economists and wealth managers say the betas of the rich have likely soared even higher in recent months as markets gyrated sharply." Stingy Links: Value Investing Charlie Rose interviews Seth Klarman "Award-winning journalist Charlie Rose interviews Seth Klarman, co-chair of the Facing History and Ourselves Board of Trustees, about his deep commitment to the work of Facing History and his thoughts on philanthropic and financial investment." Buying a dollar for fifty cents "What makes the stock of particular interest to a value investor is the fact that management reports the value of the investment portfolio every quarter and, as of Oct. 31, the investments and cash were valued at $1.15 a share. So, you are effectively buying an actively managed resource portfolio at 50 cents on the dollar." 106-year-old stockbroker talks shop "Irving Kahn has been following the swings of the market since before the Great Depression...and he still does." Longleaf Q3 "I think the future of equities will be roughly the same as their past in particular, common-stock purchases will prove satisfactory when made at appropriate price levels. It may be objected that it is far too cursory and superficial a conclusion that it fails to take into account the new factors and problems that have entered the economic picture in recent years . especially those of ... the movement towards less consumption and zero growth. Perhaps I should add to my list the widespread public mistrust of Wall Street as a whole, engendered by its well-nigh scandalous behavior during recent years in the areas of ethics, financial practices of all sorts, and plain business sense." Stingy Links: World Wodehouse's lead pipe "Recent real side indicators and financial market movements indicate a striking dichotomy between improving economic indicators here at home and signs that financial markets and economies continue to sour on the other side of the Atlantic. Thus, just as we had come to see the light of an evolving domestic recovery, one senses Europe, and possibly the emerging economies, sneaking up behind us, Wodehousean-pipe in hand, poised to knock us off course." Is this really the end? "The chances of the euro zone being smashed apart have risen alarmingly, thanks to financial panic, a rapidly weakening economic outlook and pigheaded brinkmanship. The odds of a safe landing are dwindling fast." Chavez rolls back seizures "Venezuela.s President Hugo Chavez is enlisting Mexico.s Gruma SAB, French retailer Casino and other international companies to boost supplies of milk, corn flour and cement as shortages threaten to dent his bid for re-election in 2012." China's vanishing factory bosses "The reckoning began in June, when three factory bosses, confronted with debts they couldn't pay, disappeared without a trace. Spooked, the 'shadow banks' that had become the lenders of last resort - pawn shops, credit companies, in some cases loan sharks who pooled the wealth of individual investors - started calling in more debts. More than more 100 other laoban, as bosses are known in Chinese, fled or went into hiding. Some say the number on the run is twice that, and at least two Wenzhou laoban have jumped off tall buildings to their deaths." Irish see opportunity ".There.s a political problem for the government,. said Gavin Blessing, a bond analyst at Collins Stewart Plc in Dublin. .The Greeks, who are seen to be behaving badly, get rewarded, whereas the Irish, the top boys in the class, get nothing.." The euro deal "Even if the euro zone succeeds in avoiding CDS payouts, this could prove a Pyrrhic victory. If losing half the face value of a bond does not amount to a default, what does? Undermining the value of CDS insurance could deeply distort the market. If banks or other investors lose faith in their ability to hedge risks, they will be tempted to cut back on risk or demand higher yields. So, perversely, sparing a CDS payout on Greece could push up the borrowing costs of other countries." Bill Gates changes the world again "The results have been equally massive: 3.4 million lives saved from hepatitis B, which causes liver cancer, 1.2 million lives from measles, 560,000 from the Hib bacteria, 474,000 from whooping cough, 140,000 from yellow fever and 30,000 from polio. In the past year the new initiatives have prevented another 8,000 deaths from pneumonia and 1,000 from diarrhea." China local debts dwarf official data ".The real problem is the real estate market cannot fall, the price can.t go down,. he said. .If the property market really falls, the local government financing vehicle problems will really come out. Not only will they have problems, but the banks will have problems.. There are signs the market is already declining, with residential property prices falling in November from the previous month in 49 cities of the 70 measured, the worst performance this year. The cities of Guangzhou in the south and Wuhan in central China canceled land sales in the last three months. Tianjin, which isn.t among the cities piloting municipal bonds, was reliant on land sales for 41 percent of its income in 2009, according to China Index Academy, a Beijing real-estate research firm. That doesn.t bother Xu Hongzhi, the chief accountant for Tianjin Binhai Construction, which is building Yujiapu.s transport hub. He said that the company can pay its debts because the area.s economy is growing at 10 pe! rcent a year. .There is no risk,. he said." Why China won't conquer the world "Its young are incapable, its old are exhausted, and box-ticking bureaucrats make life hell. China, a superpower? First it needs to grow up" China's hard landing "Property construction became 'the most important sector in the universe,' in the words of UBS economist Jonathan Anderson. It directly accounts for about 13% of the economy, 20% if one includes related industries like concrete and steel. It also provided 40% of local government revenues through land sales. Worsening inflation forced the government to put on the brakes this year. As with most property busts, transactions dried up, followed by a free fall in prices. Land prices were down 60% year on year in September. Property developers are slashing prices of new homes to stave off bankruptcy." Michael Pettis talks China "A talk by China skeptic Michael Pettis" | ||||
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