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The Stingy News Quarterly (Q2/2010)
New @ StingyInvestor Dividend investing "By sticking to companies that have the means to pay high dividend yields, you not only get the added bonus of a regular paycheque from your portfolio (now electronically deposited in your investing account), but studies show that you'll likely enjoy a higher rate of return over the long run than the market typically provides." Value investing flip books "The flip book helps to highlight a core problem for investors. Namely, the urge to swap out of a good strategy during periods of underperformance which happen frequently and can last for several years. So, be warned. Oh, and also have a little fun with the flip books." Dividend growers "Only a handful of stocks in the S&P/TSX 60 sport good five-year dividend growth records. Even fewer pay dividends that are well supported by earnings. I'll highlight four that pass both tests, and also happen to trade at modest price-to-earnings ratios." Stingy Investor Tip Sheet Patient ETF A look into Vito Maida's portfolio The Best of Stingy Links Stingy Links: Academia Asymmetric information based on work? "Using a novel dataset covering all individual investors' stock market transactions in Norway over a 10-year period, we analyze whether individual investors have a preference for professionally close stocks, and whether they make an excess return on such investments. After excluding own-company and previous employer stock, investors hold on average 11 % of their portfolio in stocks within their two-digit industry of employment. Given the poor hedging properties of professionally close stocks, one would expect such investments to be associated with asymmetric information and abnormally high returns. In contrast, all our estimates of abnormal returns are negative, in many cases statistically significant. Overconfidence seems the most likely explanation for why individuals excessively trade in professionally close stocks." Measuring investor sentiment "We investigate a proxy for monthly shifts between bond funds and equity funds in the USA: aggregate net exchanges of equity funds. This measure (which is negatively related to changes in VIX) is positively contemporaneously correlated with aggregate stock market excess returns: One standard deviation of net exchanges is related to 1.95% of market excess return. Our main new finding is that 85% (all) of the contemporaneous relation is reversed within four (ten) months. The effect is stronger in smaller stocks and in growth stocks. These findings support the notion of "noise" in aggregate market prices induced by investor sentiment." Stingy Links: Accounting Capital can't be measured "Bank capital cannot be measured. Think about that until you really get it. 'Large complex financial institutions' report leverage ratios and 'tier one' capital and all kinds of aromatic stuff. But those numbers are meaningless. For any large complex financial institution levered at the House-proposed limit of 15x, a reasonable confidence interval surrounding its estimate of bank capital would be greater than 100% of the reported value. In English, we cannot distinguish 'well capitalized' from insolvent banks, even in good times, and regardless of their formal statements." Stingy Links: Behaviour Nudges gone wrong "But this starts to sound an awful lot like fine-tuned social engineering, which gets us away from the original vision of simple nudges making a better world. And it starts to sound exactly like the type of heavy-handed governing that Republicans may be quietly rebelling against by turning up their thermostats." [Spot the questionable math for extra fun.] The new paternalism "Real people are susceptible to cognitive biases that can lead to poor decisions. It's only natural to want to help them make better choices. But no one is immune to bias. Not social scientists, and certainly not policymakers. In translating behavioral science into policy, we may be led astray by the very same cognitive defects we wish to correct. New paternalist policies, and indeed the intellectual framework of new paternalism itself, create a serious risk of slippery slopes toward ever more intrusive paternalism." His own worst enemy "Terrance Odean, a finance professor at the University of California, Berkeley's Haas School of Business, has spent his career studying a very specific type of investor: the one who is overconfident, shortsighted and far more likely to snap up a stock at the worst possible moment than to make the kind of contrarian bet that pays off in the long run. Odean's specialty, in other words, is the average investor." Creativity: a crime of passion "Creativity seems to be the "buzz word" of the 2000s. Society values it, companies need it, and employers want it. Or do they? What society claims to want and what is actually rewarded in practice are two different things. We claim to want innovation, but are innovation and creativity actually encouraged, or even allowed in most environments? What types of creative behaviors are rewarded by society, and what types are punished?" Green from envy "However, if our actions are based not on absolute wealth but relative wealth - an envy-based economy - the market would need no risk premium. Falkenstein developed the empirical case for this in his January, 2010, paper 'Risk and Return in General: Theory and Evidence.' But other researchers have pointed to similar envy-indicating results, including Cornell economist Robert Frank, whose research showed that most people would choose to live in a world where they made $100K and their peers made $85K, over a one in which they made $110K and their peers made $200K." Metric mania "In the realm of public policy, we live in an age of numbers. To hold teachers accountable, we examine their students' test scores. To improve medical care, we quantify the effectiveness of different treatments. There is much to be said for such efforts, which are often backed by cutting-edge reformers. But do wehold an outsize belief in our ability to gauge complex phenomena, measure outcomes and come up with compelling numerical evidence? A well-known quotation usually attributed to Einstein is 'Not everything that can be counted counts, and not everything that counts can be counted.' I'd amend it to a less eloquent, more prosaic statement: Unless we know how things are counted, we don't know if it's wise to count on the numbers." Do bonuses create cheaters? "The common practice of granting bonuses to people who hit a certain target is supposed to boost their productivity. Turns out, it may be encouraging them to cheat, according to a new paper by University of Guelph and Ryerson University researchers." The disposition effect "Benjamin Graham once said, "An investor's chief problem, even his worst enemy, is likely to be himself." This is nowhere more true than when it comes to deciding to buy or sell a stock. We have an uncanny ability to buy stocks that are poor investments and sell stocks that are good investments. In essence, we buy high and sell low. In general, investors tend to shoot themselves in the foot - because they follow their instincts." Something's wrong but you'll never know "Knowing what you don't know? Is this supposedly the hallmark of an intelligent person? ... That's absolutely right. It's knowing that there are things you don't know that you don't know. Donald Rumsfeld gave this speech about 'unknown unknowns.' It goes something like this: 'There are things we know we know about terrorism. There are things we know we don't know. And there are things that are unknown unknowns. We don't know that we don't know.' He got a lot of grief for that. And I thought, 'That's the smartest and most modest thing I've heard in a year.'" Risks hide in plain sight "The good news: By presenting a simplified emphasis on fees, the researchers tripled the number of investors who favored the lowest-cost funds. The bad news: That tripling brought the proportion up only to 9% from 3%. "We still ended up with a 91% failure rate," says Prof. Laibson. Encouraged to focus on fees, investors nevertheless fixated on - and chased - past performance." Stingy Links: Bonds The bond return puzzle "High Yield bonds highlight the most fundamental problem in finance: that risk is not positively related to expected returns, and this fact is not empirically obvious. This strikes at the heart of finance, because 'risk' is a rationalization for many things, but after 50 years, remains like dark matter, a convenient assumption for an empirical 'anomaly'." Stingy Links: Brokers Overoptimistic for a generation "For the past quarter century, equity analysts' earnings-growth estimates have been almost 100% too high." Stingy Links: Buffett Live Buffett Blog "Part of the mystique of the meeting derives from the fact that Buffett doesn.t allow the event to be recorded, so the Wall Street Journal will blog the meeting in real time. It.s almost as good as being there." Stingy Links: Derivatives The city that got swapped "A decade ago, the mayor of Saint-Etienne, France, hit on a novel way to help pay for urban renewal: currency and interest rate swaps. He was a hero for a while. Then came the crash. Now he's the ex-mayor of a town facing financial disaster " Stingy Links: Dividends They're clipping your dividends "Come next January the favorable 15% rate on dividends will expire, making them subject to taxation as "ordinary income." At the same time the maximum rate is kicking up from 35% to 39.6%. The third thing that will happen in 2011 is the resurrection of a rule that ostensibly limits deductions but for the majority of taxpayers is nothing but a boost in their tax bracket. This rule adds 1.2 percentage points to your rate. In 2013 comes a fourth tax increase: a 3.8% surtax on investment income. Add it up. Dividends that used to be taxed at 15% are set to be taxed at 44.6%." Dividends reign as market pours "But layered against the dourness, earnings have been strong, cash positions are growing and interest rates are extremely low, making other investments look relatively more attractive than bonds and cash." Stingy Links: Dorfman Pummeled stocks for contrarian investors "The rude market of the past month has knocked many stocks down to attractive levels. Investors who are brave -- and have a time horizon of one year or longer -- can find worthwhile bargains among them." Stingy Links: Economics Naive Keynesianism "One of the most frequently cited statements in economics is John Maynard Keynes' observation that 'Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist.' For decades after those words were written, and extending even to the present time, Keynes was that influential defunct economist." Tyler Cowen on prizes "Tyler Cowen is a professor of economics and director of the Mercatus Center at George Mason University. He writes for MarginalRevolution.com" Stingy Links: Fun Betting on the bad guys "When I heard that BP was destroying a big portion of Earth, with no serious discussion of cutting their dividend, I had two thoughts: 1) I hate them, and 2) This would be an excellent time to buy their stock. And so I did. Although I should have waited a week. People ask me how it feels to take the side of moral bankruptcy. Answer: Pretty good! Thanks for asking. How's it feel to be a disgruntled victim?" The running of the stockbrokers "Europe, 2010, a tradition is born..." Stingy Links: Government Is Illinois the new California? "Like California, Illinois hasn't balanced a budget in nearly a decade, and instead uses gimmicks and borrowing to close gaps. Like California, Illinois regularly issues bonds to pay for current government operations. But unlike California, Illinois has some of the country's least-funded public employee pension plans." Do politicians cause downsizing? "This paper provides a new empirical approach for identifying the impact of government spending on the private sector. Using changes in congressional committee chairmanship as a source of exogenous variation in state-level federal expenditures, we find that fiscal spending shocks appear to significantly dampen corporate sector investment activity. Specifically, we find statistically and economically significant evidence that firms respond to government spending shocks by: i.) reducing investments in new capital, ii.) reducing investments in R&D, and iii.) paying out more to shareholders in the face of this reduced investment opportunity set. Further, we find that when the spending shocks reverse (through a relinquishing of chairmanship), most all of these behaviors reverse. Finally, we also find some evidence that firms scale back their employment, and experience a decline in sales growth." GM's phony bailout payback "In short, GM is using government money to pay back government money to get more government money. And at a 2 percent lower interest rate at that." Coal crackdown "The EPA has set new limits on water pollution caused by coal mining, only days after President Obama angered environmentalists by opening up huge swaths of coastline to offshore drilling. The drilling story received louder coverage, but the mining announcement should have a far larger impact on America's energy future." No money for you "Entrepreneurs who want to put principles before profits - even after their companies go public - may soon have the legal cover to do just that. On Apr. 13, Maryland Governor Martin O'Malley signed a law creating legal entities known as "benefit corporations" and giving them greater protection from shareholder lawsuits. California and Vermont have similar bills in the works and legislators in at least three other states, including New York, are considering them. While many entrepreneurs applaud the measures, corporate governance experts worry about the rights of shareholders." The millionaire cop "So when you hear that government workers now make, on average, 30% more than private sector workers, you are not getting the full story. Government workers make more than twice as much as private sector workers, on average, when you include the net present value of their pensions." Poof, there goes the pension "Gov. David A. Paterson and legislative leaders have tentatively agreed to allow the state and municipalities to borrow nearly $6 billion to help them make their required annual payments to the state pension fund. And, in classic budgetary sleight-of-hand, they will borrow the money to make the payments to the pension fund - from the same pension fund." [Note the 8% return assumption for extra chuckles.] The beholden state "How public employees became members of the elite class in a declining California offers a cautionary tale to the rest of the country, where the same process is happening in slower motion." Payback time "Many states are acknowledging this year that they have promised pensions they cannot afford and are cutting once-sacrosanct benefits, to appease taxpayers and attack budget deficits." The ethanol trap "The most disgusting aspect of the blowout in the Gulf of Mexico isn't the video images of oil-soaked birds or the incessant blather from pundits about what BP or the Obama administration should be doing to stem the flow of oil. Instead, it's the ugly spectacle of the corn-ethanol scammers doing all they can to capitalize on the disaster so that they can justify an expansion of the longest-running robbery of taxpayers in U.S. history." Nudge this "In the Weekly Standard, Andrew Ferguson notes the paradox of behavioral economics, that proving people are often irrational then begs the question as to why we think some subset of intellectuals or regulators are more rational" Stingy Links: Graham Benjamin Graham's S.F. speach "Here is the original typewritten text of a speech Benjamin Graham gave in San Francisco one week before John F. Kennedy was assassinated. In this brilliant presentation, Graham explores how an investor should go about determining whether the market is overvalued, how to tell what asset allocation is right for you, and how to pick stocks wisely. This speech is a rare opportunity to see the workings of Graham's mind in the raw." Stingy Links: Grant Grant vs Rosenberg "Terrific debate on whether US Treasuries are overvalued between James Grant and David Rosenberg" Stingy Links: Hallett Do your homework "The average mutual fund investor pays about 2 per cent annually in management fees, operating expenses and taxes. The average investor in TSX-traded ETFs pays closer to 0.4 per cent a year. The average potential cost savings, then, are about 1.6 per cent per annum. But this is only available to do-it-yourself (DIY) investors. Otherwise, investors who need professional advice have to pay for it either through higher product fees or fees paid to an adviser in addition to ETF expenses. The 2 per cent average mutual fund fee generally includes compensation for advisers, whereas ETF fees do not include the cost of obtaining advice. So-called fee-based or fee-only advisers charge a fee equal to 1 per cent to 1.4 per cent of your portfolio value. Add that to ETF fees and taxes and you've got total annual fees of 1.5 per cent to 1.9 per cent annually. Wave goodbye to that fee advantage." Stingy Links: Health The velluvial matrix "The truth is that the volume and complexity of the knowledge that we need to master has grown exponentially beyond our capacity as individuals." U.S. kickbacks in doctors' conflicts "In the U.S. in 2010, the average price of a primary artificial hip was $7,200, more than four times the $1,600 in Germany, says Melissa Hussey, a senior analyst on the orthopedic team at Millennium Research Group, based in Toronto. In Germany and other countries, she says, sales representatives have restricted access to surgeons. 'These items are ridiculously expensive, and a lot of the monies in that bucket are to keep the surgeon tied to that product,' Rodine says. He figures about half the price charged for devices can be traced to funds companies pour into persuading doctors to pick their goods." Stingy Links: Indexing iShares ETFs becoming more expensive "BlackRock Asset Management is sending a notice to unitholders of iShares exchange traded funds that, effective July 1, 2010, the management expense ratio of a long list of iShares Funds are increasing by 0.01% to 0.03%" ETFs running off in all directions "I sympathize with marketers, who need new features to differentiate themselves from competitors. My fear is that like many 20-year-olds who are out trying new things for the first time, they will make mistakes, maybe write off a few cars, maybe worse. In this case, though, this 20-year-old will be using your money." ETF clutter "For starters, when investors are looking for "simple and transparent," ETFs are no longer the default. There still are many clean, easy-to-understand ETFs to be had, but they're harder to find among the proliferation of new products. Indeed, ETFs no longer take a back seat to closed-end funds or mutual funds when it comes to complexity, opaqueness and fine print." Stingy Links: Law Great moments in financial regulation "We should be skeptical about expecting a regulator to make accurate, one-size-fits-all judgments about the merit of specific financial products. For example, before 1996, certain initial public offerings of stocks were subject to merit review in certain states, where the state decided if a security is a "bad" investment and thus not appropriate to be offered to its citizens. In fact, this is exactly what happened to Apple Computer when it first went public in 1980. Massachusetts prohibited the offering of Apple shares because they were "too risky," and Apple did not even bother to offer its shares in Illinois due to strict state laws on new issues. What if federal bureaucrats had had the power to impose their judgment on a "risky" financial product (such as an IPO) on a nationwide scale, or every state followed Massachusetts' lead? Would Apple have become the successful company that it is today?" Stingy Links: Management What motivates us "This lively RSA Animate, adapted from Dan Pink's talk at the RSA, illustrates the hidden truths behind what really motivates us at home and in the workplace." The story BCG offered me $16,000 not to tell "I got the feeling that our clients were simply trying to mimic successful businesses, and that as consultants, our earnings came from having the luck of being included in an elaborate cargo-cult ritual." How much should we pay executives? "Our results led us to conclude that financial rewards are often a two-edged sword. They motivate people to work well, but when these financial rewards get very large they can be- come counterproductive and actually hurt performance. If our tests mimic the real world, then higher bonuses may not only cost employers more, but also hinder executives in working to the best of their abilities." Silencing the whistleblowers "Amid the frenzy of the nation's mortgage boom, the back-of-the-hand treatment that Parmer describes wasn't out of the ordinary. Parmer was one of a small band of in-house gumshoes at various financial institutions who uncovered evidence of corruption in the mortgage business - including made-up addresses, pyramid schemes, and organized criminal rings - and tried to warn their employers that this wave of fraud threatened consumers as well as the stability of the financial system. Instead of heeding their warnings, they say, company officials ignored them, harassed them, demoted them, or fired them." Why Amish businesses don't fail "Want to find America's most successful entrepreneurs? Skip Silicon Valley and Manhattan; head to the rural Amish enclaves. Amish businesses have an eye-popping 95% success rate at staying open at least five years, according to author Erik Wesner's new book, Success Made Simple: An Inside Look at Why Amish Businesses Thrive." Stingy Links: Markets Levin vs. Wall Street "No one on any side of this debate appreciates the casino analogy, but I think it's still the most useful way to think about this question: when you place a bet on the Super Bowl, the casino is taking the other side of that bet. In many cases, it'll balance the bets it makes on both sides of the trade, so that it's exposed to no risk and it collects the certain profit from the spread. Regardless, though, any individual bettor knows that if he wins, the casino loses, and vice versa. That is, he knows the casino is on the other side of the trade. Levin seems to be saying that this means there's a conflict of interest between the casino and the bettor, and that it's illegitimate for the casino to take the bet. But there's no conflict, because everyone knows what the deal is. And as long as the bet's honest, and as long as the price is fair, the casino is doing right by the customer, because the customer is getting exactly what he wants: a chance to speculate." Shocked sleuths discover shorts "It's important to remember that with so many people in the world, just calling a historical event is not sufficient because there are always people predicting massive failure or success to any policy. The key is whether they right for the right reasons, as in Schiff's case, or right for the wrong reasons, as in Roubini or Taleb's cases." Don't lose faith in markets "One claim is that trading activity like this makes people "lose faith" in the market. Don't lose faith in the market - lose faith in market orders!" The momentum echo "The 12-Month Echo factor does significantly better than either the 12-month or 6-month factor. And it blows a 3-month return factor out of the water. The table indicates the data at the back-end of an intermediate momentum factor is more important to returns than the near-term data." When markets go wrong "The most recent example of markets going wrong was the American housing boom which prompted both ordinary homebuyers and financial institutions to become overexposed to property prices. When the market collapsed attention focused on the shorts - those betting against subprime securities and bank shares' But subprime securities were indeed over-valued and some banks were in effect insolvent. Short-sellers simply accelerated the alignment of prices with reality. It was 'long-buying' in previous years that was the problem. Markets were unfair - unfairly optimistic. Alas, if governments keep punishing short-sellers during busts, as Nicolas Sarkozy of France and Angela Merkel of Germany want to do, there will be fewer shorts around to temper the next boom. You can bet you won't hear leaders complaining about speculators if there is another bubble in equities or property." Its worst ideas "People, pundits and politicians looking for financial-crisis culprits should turn their sights to the professors who bear so much responsibility for it. To borrow a phrase from professor Burton Malkiel, a random walk down Wall Street reveals that some of its biggest disasters have come from ideas hatched in the ivory tower." Complexity in financial systems "We can probably all agree that modern day financial systems are complex, but what that actually means isn't something that everyone agrees on. Typically, though, a system characterised by complexity isn't something that anyone's designed - it emerges, it adapts spontaneously and it produces stunningly unexpected outcomes when no one's expecting them. Which, let's face it, sounds a lot like modern finance. The problem is that many economists are focusing on how they manage this system when, in reality, it's impossible to do so. It's like trying to contain swine flu using a butterfly net." Go for the jugular "The collapse of Greece's economy, and its domino effect on Spain, Portugal, and other countries in the euro currency zone, is in many ways a replay of an earlier financial crisis--the break-up of the continent's Exchange Rate Mechanism in 1992. Then, as now, Europe's policymakers showed little patience with--or understanding of--markets. Then, as now, Germany often seemed contemptuous of the less competitive economies on the periphery of Europe." Equity premium an artifact? "Before the twentieth century, stocks were in many ways an immature financial instrument; they should have carried a premium, because they were risky. As the twentieth century wore on, they matured--thanks in part to the New Deal era reforms that toughened up on disclosure and market rules for buying and selling shares in public companies. But the generation who lived through the Great Depression still thought of the stock market as speculative." Pref's musings "I suspect that there will be a certain amount of evidence that stop-loss orders will be implicated to at least some degree. Stop loss orders are the most idiotic order type known to man (if you're willing to sell something at $45, why the hell aren't you selling at $50? It makes no sense!) but have immense popularity." Collapse of complex business models "In such systems, there is no way to make things a little bit simpler - the whole edifice becomes a huge, interlocking system not readily amenable to change. Tainter doesn't regard the sudden decoherence of these societies as either a tragedy or a mistake - '[U]nder a situation of declining marginal returns collapse may be the most appropriate response', to use his pitiless phrase. Furthermore, even when moderate adjustments could be made, they tend to be resisted, because any simplification discomfits elites. When the value of complexity turns negative, a society plagued by an inability to react remains as complex as ever, right up to the moment where it becomes suddenly and dramatically simpler, which is to say right up to the moment of collapse. Collapse is simply the last remaining method of simplification." Don't let your sons grow up to be scientists "The Real Science Gap: It's not insufficient schooling or a shortage of scientists. It's a lack of job opportunities. Americans need the reasonable hope that spending their youth preparing to do science will provide a satisfactory career." Stingy Links: Media April ROB I'd like to thank The Globe and Mail for providing a free digital version of their ROB magazine. Now I don't have to pay for the paper copy anymore. Get it before the newspaper files for bankruptcy . . . Stingy Links: Montier The dangers of DCF "Theoretically, discounted cash flow (DCF) is the correct way of valuing an asset. However, as Yogi Berra noted, 'In theory there is no difference between theory and practice. In practice there is.' The implementation of a DCF is riddled with problems. First off, we can't forecast, which kind of puts the kibosh on the whole exercise. Even if we choose to ignore this inconvenient truth, problems with the discount rate still make a mockery of the whole idea of DCF. No wonder DCF has such a poor reputation. The good news is that several alternatives exist. We explore three that avoid forecasting altogether" Break free "I argue that policy portfolios and various successors (such as risk parity and life-cycle/glide-path funds) are deeply fl awed from an investment perspective. In particular, two common failings they share are a mismeasurement of risk and an indifference to valuation. I conclude that a strategic asset allocation that alters the asset mix based upon the opportunity set offered by Mr. Market makes far more sense from an investment perspective. (In modern parlance, this translates as a benchmark-free, real return focus.)" Stingy Links: Real Estate The homeownership gap "Recent years have seen a sharp rise in the number of negative equity homeowners - those who owe more on their mortgages than their houses are worth. These homeowners are included in the offi cial homeownership rate computed by the Census Bureau, but the savings they must amass to retain their home or purchase a new home are daunting. Recognizing that these homeowners are likely to convert to renters over time, the authors of this analysis calculate an 'effective' rate of homeownership that excludes negative equity households. They argue that the effective rate - 5.6 percentage points below the official rate - may be a useful guide to the future path of the official rate." The return of housing "That brought a dramatic change in the first quarter of 2010. "All of a sudden," says Castleman, "demand stabilized at around 60,000 units a quarter, and stayed there." To be sure, that's an extremely low number. Castleman estimates that in a normal economy, around twice that many units should be selling. But housing starts, by the end of 2009, had dropped to an astounding 30,000 a quarter, an extraordinary one-fourth of what the market normally requires. "Now builders are seeing, for the first time in years, that they don't have enough houses either finished or under construction to meet demand," says Castleman. Result: In Metrostudy's markets, housing starts spiked by 44% in the first quarter of 2010, versus the same period last year." Don't bet the farm on the housing "The question now is whether a strong case has been built for a new bull market since the home-price turning point in May 2009. Though there is no way to be precise, I don.t believe it has." Why house value won't rise "Like any other well-functioning industry, the construction industry experiences technological improvements and increased efficiency. In the computer industry, technology has meant that affordable laptops have computing power that would have been exorbitantly expensive in 1980. As a result, no one ever buys a computer thinking that it will rise in value. The real cost of building a home declined by about 3 percent in both the 1980s and the 1990s. In principle, declining construction costs could also lead homes to become more affordable year after year." How Texas escaped the real estate crisis "If there's one thing that Congress can do to help protect borrowers from the worst lending excesses that fueled the mortgage and financial crises, it's to follow the Lone Star State's lead and put the brakes on "cash-out" refinancing and home-equity lending." Stingy Links: Stocks Short First Solar "A technology, to be a really great investment, must do two things. It must change part of the world in a useful way - a big part of the world is better of course - but you can be surprisingly profitable in small niches. And it must keep the competition out. " Stingy Links: Taxes Fun tax facts "Centuries ago, when the Papal State dominated Tuscany, these rulers imposed an extremely high tax on salt. As a form of protest, Tuscan bakers began to make their bread without salt. Gradually, the taste for bread made entirely without salt became widespread, and to this day, Tuscan bread is salt less" Stingy Links: Value Investing Gross profitability as a predictor "Controlling for gross profitability dramatically improves the performance of value strategies, especially among large, liquid stocks. A value-weighted portfolio that is long (short) the extreme high gross profit-to-assets, high book-to-market (low gross profit-to-assets, low book-to-market) produced by a double sort on the two ratios generates an average monthly excess return of 1.16%" Winters lecture "David J. Winters, the managing director of Wintergreen Advisers, LLC talks to UWO class" Graham and Doddsville spring 2010 "This issue features an interview with Glenn Greenberg, founder and portfolio manager at Brave Warrior Capital. Mr. Greenberg outlines his high concentration, low turnover investment approach, with a focus on growing, high quality companies that also offer attractive and defensible free cash flow yields." Mohnish Pabrai interview "'All man's miseries stem from his inability to sit in a room alone and do nothing.' And all I'd like to do to adapt Pascal is, 'All investment managers' miseries stem from the inability to sit alone in a room and do nothing.'" Stingy Links: Value Inveting Meeting notes "The Inoculated Investor has a series of handy notes from the Berkshire, Markel, Wesco and VIC meetings" Stingy Links: Whitman Third Avenue Value Q2 2010 "It is difficult to function as a value investor unless the value analyst has a firm grasp of economic reality. It is equally difficult to promulgate intelligent financial regulations unless the sponsors of the regulation have a firm grasp of economic reality. Neither the general public, nor legislators and Obama administration officials, seem to have much of a grasp of economic reality, at least when it comes to dealing with troubled financial institutions." Stingy Links: World Greek wealth and taxes "In the wealthy, northern suburbs of this city, where summer temperatures often hit the high 90s, just 324 residents checked the box on their tax returns admitting that they owned pools. So tax investigators studied satellite photos of the area - a sprawling collection of expensive villas tucked behind tall gates - and came back with a decidedly different number: 16,974 pools. " Red tape hamstrings Greek growth "Critics say a sprawling civil service has tried to secure its own survival through an opaque patchwork of fees, taxes and red tape. The European Commission estimates the administrative burden of Greece's bureaucracy - the value of work devoted to dealing with government-imposed administration - is equivalent to 7% of gross domestic product, twice the EU average." Malcolm Gladwell keynote address "Bestselling author Malcolm Gladwell (The Tipping Point, Outliers) addresses the Options Industry Conference." Paid not to marry "Sophia Constantinidou works as a teacher in a private school in Athens. She also has a more lucrative job: remaining unmarried. The 52-year-old gets 400 euros ($496) a month from the Greek government, part of her late mother's state pension. Under the current system, Constantinidou qualifies to receive the payment for life as the only surviving child of a deceased civil servant, provided she doesn't tie the knot." The difficult choices facing Europe "Pimco's chief executive Mohamed El-Erian considers the painful options facing policy makers now that the massive interventions already appear to be stalling" The arithmetic of bank solvency "All banks more or less anywhere get their finances entwined with the finances of the sovereign. No sovereign will (or in my opinion should) allow a mass run on banks but they can only stop such a run if their own credit is good. But this link between sovereign solvency and bank-system solvency means that bank funding costs at a minimum are bounded at the lower end by sovereign borrowing costs." The X PRIZE and Risk "Diamandis is on a mission to open space for all humanity, and he embraces the risk inherent to such an undertaking. "A true breakthrough requires tremendous levels of risk," says Diamandis. "It's really in the entrepreneurial sector that people are willing to risk their lives, risk their fortunes, their reputations, to do something they fundamentally believe they can do."" Easy money, hard truths "Are you worried that we are passing our debt on to future generations? Well, you need not worry. Before this recession it appeared that absent action, the government's long-term commitments would become a problem in a few decades. I believe the government response to the recession has created budgetary stress sufficient to bring about the crisis much sooner. Our generation - not our grandchildren's - will have to deal with the consequences." Canada key to trade "The Obama administration is looking to Canada to help realize its goal of doubling U.S. exports by 2015, but Canadian business leaders say that won't happen unless a number of trade irritants are dealt with first." The case for doom and gloom "Brenner's analysis of the current downturn can be boiled down to a fairly simple point: that the underlying cause of the current downturn lies in the 'real' economy of private goods and service production rather than in the financial sector, and that the current remedies - from government spending and tax cuts to financial regulation - will not lead to the kind of robust growth and employment that the United States enjoyed after World War II and fleetingly in the late 1990s. These remedies won't succeed because they won't get at what has caused the slowdown in the real economy: global overcapacity in tradeable goods production." Time to rebalance "America's economy will undergo one of its biggest transformations in decades. This macroeconomic shift from debt and consumption to saving and exports will bring microeconomic changes too: different lifestyles, and different jobs in different places. This special report will describe that transformation, and explain why it will be tricky." Shale gas "If gas stays above $4, a price that lets companies cover costs on existing wells, U.S. output could grow 20 percent to 65 billion cubic feet (1.8 billion cubic meters) a day from 2008 through 2030, says Peter Wells, director of U.K. research firm Neftex Petroleum Consultants Ltd. Shale gas production could quadruple to more than 20 billion cubic feet, he says." The strange survival of ink "The survival of newspapers is by no means guaranteed. They still face big structural obstacles: it remains unclear, for example, whether the young will pay for news in any form. But the recession brought out an impressive and unexpected ability to adapt. If newspapers can keep that up in better times, they may be able to contemplate more than mere survival." How will Greece get off the dole? "What the income figures fail to capture is the relative weakness of Greece's economic institutions. They are not remotely comparable to those of Germany and some of the other better-governed European Union nations, which is why the current crisis will prove so difficult to solve." A gambling man "Is it far-fetched to argue that having cast his main bets Mr Obama can now do nothing except await their result? Of course. He can, for a start, work harder to explain them. The president did not expect health reform to go down like this. Once it was passed, he predicted in the spring, Americans would wise up to the lies of the Republicans and see that 'nobody is pulling the plug on granny'. Now that spring has given way to summer, the White House has embarked on yet another campaign to hasten the voters. understanding. Mr Obama visited an old folks. centre in Maryland to spell out the excellence of the forthcoming changes. But voters, not being stupid, are not so sure. This is complex legislation whose full costs and benefits will take years to be seen. Another thing Mr Obama can do is double down: more stimulus, more troops, more controversial legislation in areas such as energy and immigration. But after the huge decisions he has already taken his stock of money, troops! and political capital is severely depleted. For the first term at least, what you see now is probably the bulk of what you are going to get, and success remains uncertain. Much more gripping than an oil spill." The coal age continues "One way to keep perspective amid all the Beltway cogitation over how to keep a climate component in an energy bill is to pay attention to the global coal industry. Coal is the prime factor determining the pace of growth in emissions of heat-trapping carbon dioxide as human populations and appetites crest in the next few decades. And regardless of what happens in the United States, the industry's leaders see nothing but bright prospects ahead. We're still stuck on the coal rung of Loren Eiseley's heat ladder." The party's over "So will ours be the Chinese century? Probably not. China has just about reached high tide, and will soon begin a long painful process of falling back." The fog of war "Robert S. Mcnamera's own words about everything from world war 2, JFK, Vietnam and the Tonkin bay incident, the cold war and the Cuba crises. A must see." The very bad luck of the Irish "With the European Central Bank announcing that it has bought more than $20 billion of mostly high-risk euro zone government debt in one week, its new strategy is crystal clear: We will take the risk from bank balance sheets and give it to the central bank, and we expect Portugal-Ireland-Italy-Greece-Spain to cut fiscal spending sharply and pull themselves out of this mess through austerity. But the bank's head, Jean-Claude Trichet, faces a potential major issue: the task assigned to the profligate nations could be impossible. Some of these nations may be stuck in a downward debt spiral that makes greater economic decline ever more likely." Rogoff criticizes debt strategies "Despite the headwinds of poor jobs growth and a troubled housing market, the U.S. will avoid a double dip recession, according to Kenneth Rogoff, the Thomas D. Cabot Professor of Public Policy, Harvard University." The Goldilocks recovery "Strict financial regulation and a new commodity boom have turned 'boring' Canada into an economic star." The future of public debt "Since the start of the financial crisis, industrial country public debt levels have increased dramatically. And they are set to continue rising for the foreseeable future. A number of countries face the prospect of large and rising future costs related to the ageing of their populations. In this paper, we examine what current fiscal policy and expected future age-related spending imply for the path of debt/GDP ratios over the next several decades. Our projections of public debt ratios lead us to conclude that the path pursued by fiscal authorities in a number of industrial countries is unsustainable. Drastic measures are necessary to check the rapid growth of current and future liabilities of governments and reduce their adverse consequences for long-term growth and monetary stability." James Chanos interview "James Chanos, President, Kynikos Associates. He is the man who predicted the Enron downfall and now predicting a housing bubble in China," Europe finds the old rules still apply "A recurring theme of my academic research with Carmen Reinhart is that 'graduation' from emerging market status is a long, painful process that can take 75 years or more to complete. Twenty years without, say, a sovereign debt crisis is significant, but hardly enough definitively to declare a country a 'graduate'. Greece resolved its last sovereign default only in the mid-1960s and Portugal had an International Monetary Fund programme as recently as 1984. (Spain's modern history is much better, despite holding the record - more than 12 - for most independent sovereign default episodes.)" A breakthrough in China "For China's thousands of stainless steel producers, the combination of nickel and iron is hugely attractive. They pay NPI producers the same price (or slightly less) as they would pay traditional producers to get the nickel content they need to make stainless steel. They get a bonus of iron - another ingredient needed to make steel - for free." The $600 billion challenge "Bill Gates, Melinda Gates, and Warren Buffett are asking the nation's billionaires to pledge to give at least half their net worth to charity, in their lifetimes or at death. If their campaign succeeds, it could change the face of philanthropy." How to destroy an industry "Mr Chavez has often threatened Lorenzo Mendoza, Polar's billionaire chairman, with expropriation. But as the rotting food shows, his government is better at destroying the existing order than at creating a viable alternative. Some 70% of Venezuela's food is now imported, which generates ample opportunities for graft. Most of the farms and food companies the president has expropriated suffer from inflated payrolls, declining productivity and rampant inefficiency. His threats against Polar are rejected by a well-paid and loyal workforce. The company is one of the biggest remaining obstacles to the installation of Cuban-style communism in Venezuela. But to seize it now might well lose Mr Chavez the legislative election. As Venezuelans say 'love, with hunger, doesn't last.'" Stingy Links: Zweig So that's why "In other words, investors often go along with the crowd because - at the most basic biological level - conformity feels good. Moving in herds doesn't just give investors a sense of "safety in numbers." It also gives them pleasure. That may help explain why market sentiment can change so swiftly, why true contrarians are so hard to find and why investors care so much about the "consensus view" on Wall Street." When the Global Debt Shuffle Hits Home "The U.S. now has a heavier debt burden than several of the overleveraged countries that have been branded with the scornful nickname "the PIIGS." Portugal's debt, according to the IMF, is 85.9% of its GDP; Ireland's, 78.8%; Italy, 118.6%; Greece, 124.1%; Spain, 66.9%. Perhaps there should be a new acronym, with the U.S. added to Portugal, Ireland, Italy, Greece and Spain: "PIG IS U.S."" | ||||
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