Archive for January, 2008

Decoupling the Myth

January 22, 2008

Monday 21st January 2008 saw big falls in stock prices but rather like February 2007 there is no clear consensus view as to why.

Ambac was the big story, the fear of $2.4 trillion being uninsured and/or unhedged with the monolines saw heavy falls in banking. Yet, the greatest movement was from the miners. The two biggest fallers in the FTSE-100 were the two largest miners, Rio Tinto and BHP Billiton. There was some company specific news: BHP lining up 7 (seven!) banks to tie-up a deal with Rio but other miners also fell sharply. Even Xstrata fell despite concrete talk of Brazilian’s Vale looking to make a bid.

Miners fell so much thanks to the macro sentiment. Japan saw the largest fall from an established market due to fears of an all-out US recession. Of the emerging markets India got the greatest hammering. The idea of “decoupling”, that resource stocks and far-eastern companies would do okay in a US downturn with the Chinese and Indian markets continuing healthy expansion, seems to be on life-support.

While many in the media, especially the left-leaning media (aka BBC/Guardian) have positively lapped up the decoupling hypothesis it has little basis in reality.

Paul Kedrosky makes the point that you could (and I would) argue:

“when it comes to the importance of the U.S. to global GDP, darn little has changed”

The strenghening influence of BRIC countries is, perhaps, a very long-term trend. Yet that hypothetical trend is of no use when the US is still well within its long-term norm of % of world GDP.


We’re all doomed!

January 22, 2008

“If you expect to be a net saver during the next 5 years, should you hope for a higher or lower stock market during that period? Many investors get this one wrong. Even though they are going to be net buyers of stocks for many years to come, they are elated when stock prices rise and depressed when they fall. This reaction makes no sense. Only those who will be sellers of equities in the near future should be happy at seeing stocks rise. Prospective purchasers should much prefer sinking prices.”

Warren Buffett, chairman’s letter to Berkshire Hathaway shareholders, 1997.

The Framing of Political Arguments

January 16, 2008

The usual terminology of political language is stupid. What is ‘left’ and what is ‘right’? Why should Hitler be ‘right’ and Stalin, his temporary friend, be ‘left’? Who is ‘reactionary’ and who is ‘progressive’? Reaction against an unwise policy is not to be condemned. And progress towards chaos is not to be commended. Nothing should find acceptance just because it is new, radical, and fashionable. ‘Orthodoxy’ is not an evil if the doctrine on which the ‘orthodox’ stand is sound. Who is anti-labor, those who want to lower labor to the Russian level, or those who want for labor the capitalistic standard of the United States? Who is ‘nationalist,’ those who want to bring their nation under the heel of the Nazis, or those who want to preserve its independence?

Ludwig von Mises in  Interventionism, An Economic Analysis (1940).

Moolah and Awe

January 8, 2008

The G-Econ research project is devoted to developing a geophysically based data set on economic activity for the world.

Mumbo Jumbo Economics

January 6, 2008

Someone over at the MSE savings board posted this:

and said

This rather long item was recently e-mailed to me. It makes thoughtful reading

I tried to respond but the item was taken down, presumably as it was considered spam, before I could post my riposte. So here it is:

I’m worried about your view that this article “makes thoughtful reading” since I found it mind numbing drivel! Some counterpoints:

That iPods and Xboxes are assembled in China, thanks to decent infrastructure and low labour costs, is irrelevant. All the meaningful technology is US owned and created (well, there is some Scottish stuff in the iPod).

The US fiscal deficit is lower as a % of GDP than many first world economies including the UK and Japan. Demographic changes are a problem for everyone – especially the Chinese with their (now abandoned) one child per family laws. The US will have problems with social security but it’ll be worse in Europe, simply because there are more socialist policies!

Trade deficits: if traders in other countries are going to give US companies and consumers more goods and services for less money why should America be bothered? Its amazing how this mindset is so entrenched. Click here for a good read about this mindset.

US Treasuries: if China wants to lend to the US government at a low single digit rate how is this a bad thing for America? Given the ridiculously low yields in the secondary market its obvious that US treasuries are in great demand at the moment. This demand has been spurred by problems with Asset Backed Securities and Collateralised Debt Obligations. These financial products were concocted in the first place because of the need for “safe” income streams. You could argue governments are to blame for the credit crunch because they didn’t supply enough debt to placate financial institution demand!

If the conspiracy theorists were right and China wanted to sell their US debt who are they going to sell it too? Why would China want to lose money by unleashing this supply onto the market all of a sudden?The $30 trillion pension fund industry would love China to dump their $1.4tn of stock so they could get a slightly higher yield!

Solar power and wind power arguments, well, the Japanese and Germans are pretty good at engineering and manufacturing, big whoopee.

This article is very much in-tune with the protectionist vibe engulfing America at the moment. Its the biggest worry on Wall Street – that politicians will put up trade barriers to “protect” American jobs once the presidency changes. The China scare is no different to the worries over Japan in the late ’80s.

Yearly Reminder

January 2, 2008

Don’t chase hot stocks unnecessarily. Investors with decades of experience, who know their stock picks inside out and upside down get burnt all the time.

The Sure Thing Almost Nobody Plays

Imagine you are entering a deluxe, well-appointed casino. Off the lavish entry foyer, there are two ample gambling wings, one hued in reds, the other in muted greens. The red wing looks enticing, but if I may insist, let’s first enter the less crowded green rooms to watch the action.

The atmosphere is unhurried, the blackjack tables are sparsely attended, and every player sits behind a mound of green and black chips. You think at first you’ve come to the wrong place. You see the ordinary table limits, the ordinary clothes, the ordinary games. But then how did these ordinary people get such piles of money?

Then it comes to you. They’re all winning. In fact, as you walk around the green wing, you hardly can find a losing player. You know, of course, that the average house take on table games is 5%, but as you count winning and losing hands, you realize these players are getting a better break. They seem to be gaining at a rate of 60% to 40%. You start fresh and take another count. The results are the same.

A pit boss appears at your shoulder.

“Excuse me,” you say, “but can this be right? The odds favor the players?”

“Yes, indeed. The odds in the green room usually run 60 to 40. It’s been that way since we opened.”

“But…most of the players must go away winners.”

“They sure do. At those odds, we calculate that 9,999 out of 10,000 make money. At our high-stakes tables in the back, they do even better, with winners running about 20,000 to 1. It’s a good thing we get so few players, or they’d break the house.”

Somewhat amazed, you thank him and shake your head. There’s no time to lose, you decide, but you’ll need more than the few dollars you have in your pocket. You hatch a plan to gather your life savings, come back to the casino, and win the bundle you’ve been dreaming of.

On your way out, you glance into the red wing. The action level is much, much higher. The room is crowded and fairly roars with excitement. Can it be even better here, you wonder? Curious, you go in. Players bet multiple table positions, wave frantically for change, entreat the gods for luck. You see few green and black chips, fewer winning players. The piles of chips in front of them are dwindling with each hand. In fact, the odds are worse than normal. Again, you start to count. Although the players continue to excitedly toss in their chips, the odds appear to be maybe 60 to 40 in favor of the house. Once more, your curiosity whetted, you walk over to a pit boss and ask her the odds at these tables.

She tells you what you suspected. They are 60 to 40 in favor of the casino. Warming up to the subject, she chuckles and says, “This room coins gold for the casino, the chances are 9,999 in 10,000 rounds that we wind up winners.” You don’t have to be a genius to see that this is obviously not the place you want to be.

You go home and get your stash. You return to the casino with your fistful of money, excited, eager for action, all the time figuring how you’ll do even better at the game. But then a strange thing happens. You walk into the red wing and start to play.

The first few paragraphs from David Dreman’s Contrarian Investment Strategies. Loan it from a library, borrow it from a friend, heck even spend cold cash on it if need be.

For the private investor the red wing is ever so tempting. Yet, is the positive sum game offered by the green wing, the ability to get rich slowly, so insufferable?

It’s The Sun wot measures it

January 2, 2008

How those journalistic oracles did in 2007, thanks to The Sun’s Ian King (via FT Alphaville):

Investor’s Chronicle UP 23.41%
Sunday Telegraph UP 14.67%
The Times UP 12.20%
Mail on Sunday UP 11.49%
Independent on Sunday UP 5.41%
The Sun DN 0.93%
Daily Telegraph DN 1.19%
Daily Express DN 1.33%
Daily Mail DN 2.60%
The Independent DN 5.04%
The Guardian DN 5.99%
Sunday Times DN 15.1%
The Observer DN 15.5%

Best tip of the year was Tanfield in the Investors Chronicle which rose by 151%. The biggest faller was Rank which was tipped by both the Daily Mail and the Guardian – it fell by 60 per cent.

Among the other clunkers – Oakdene Homes in the Mail (dn 41pc); RBS in the Mail, Times, Sunday Times, Independent and Telegraph (dn 33pc); Experian in the Indie (down 34pc); Debt Free Direct in the Guardian (dn 60pc); Libra Natural Resources in the Express (dn 61pc) and, to prove I’m not immune, Bellway dn 47pc in the Sun.

Biggest gainers were Concateno in the Mail on Sunday (up 85pc); ICI in the Mail (up 48pc); Gyrus in the Guardian (up 65pc) and Asos – tipped by both the Express and the Times and up 138pc. My best one on the Sun was Landore Resources…up 79pc.

Guess at 2008

January 2, 2008

Amused at the annual: “how will the FTSE-100 end the year” guessing game. It makes good newspaper copy but is of little use to anyone else. The FTSE-100 is not a good benchmark with its over-reliance on banking and resources.

Amongst the dozen or so analysts in the FT Money section last weekend they collectively made some good points: If it wasn’t for the miners then 2007 would have been awful, banking only needs to recover slightly to have the index humming, the value of sterling will have an affect on how the index does this year and the FTSE-100 is a global not local index.

This bloggers’ guess? year end 2008 = 7,049. Don’t bet on it.