Thursday, December 31, 2009

Bookkeeping: Cutting Some Index Longs as S&P Breaks 1120

I have no idea what to make of a late day selloff after two weeks of a market with no volume but just to be safe, I am cutting some of the index long exposure since the S&P fell below 1120.  Trying to assess anything in a nearly empty market is impossible.  Why the market is even open past 1 pm today is beyond me.  Don't tell me they put us back in the "box" to end the year.

The calls will be completely sold as well as good chunks of the two levered ETFs.

We'll get back to it next week year, when actual humans return to institutional desks.

BusinessWeek: China Property Bubble May Lead to US Style Real Estate Slump

First, let me say that the term "bubble" could be the most overused term of 2009.  We now are calling anything excessive a bubble; it's become stale.  Of course some things are developing bubbles, but not every asset class as some would have you believe.  Second, much of what I am reading about China today reminds me of the things I was reading in the US in 2005-2006.  With the caveat that knowing what information to believe out of China, and how accurate it all is - is many times harder.  That said, just as one could of raised the red flag in the US property market in 2006 (when it really struck me what was happening), you'd of been "wrong" to be worried for almost 2 more years.  In fact, you missed much of the party as the last part of a parabolic move is usually the strongest.  [Aug 13, 2009: WSJ - In China, Land Prices Fan Bubble Fears] [July 28, 2009: - China Warns Banks Over Asset Bubbles]

While China has a huge surplus to pay for its sins, versus America who deficit spends to solve everything, I am still keeping an eye out for the damage that surely will occur from the massive loan expansion in China in 1st half 2009.  [Feb 16 2009: Is China Pulling an Alan Greenspan?] Just as Greenspan's solutions in the early part of the decade were lauded, just as Bernanke's solutions of today are lauded, so are China's solutions from early 2009.  Which essentially was the largest banking expansion relative to GDP in recorded history.  Can anyone say massive misallocation of resources?  [Nov 13, 2009: Ordos - China's Empty City] [Jun 29, 2009: China Business News - $170B of Bank Loans Funneled into Stock Market]  But for now, the world lives awash in a world of liquidity and the damage from these solutions is festering under the surface.  When the music stops - we just never know.  We simply have to remember to always dance near the emergency exit..... and stay as far away as possible from that mind altering Kool Aid.

But to give the Chinese credit, at least they realize they are blowing bubbles [July 28, 2009: - China Warns Banks Over Asset Bubbles], unlike our central banker (Person of the Year) who claims it's difficult to even see a bubble.... 

Via BusinessWeek:  [click to enlarge graphic to the right]
  • Li Nan has real estate fever. A 27- year-old steel trader at China Minmetals, a state-owned commodities company, Li lives with his parents in a cramped 700- square-foot apartment in west Beijing.  Li originally planned to buy his own place when he got married, but after watching Beijing real estate prices soar, he has been spending all his free time searching for an apartment. If he finds the right place -- preferably a two-bedroom in the historic Dongcheng quarter, near the city center -- he hopes to buy immediately. Act now, he figures, or live with Mom and Dad forever. In the last 12 months such apartments have doubled or tripled in price, to about $400 per square foot.
  • Millions of Chinese are pursuing property with a zeal once typical of house-happy Americans. Some Chinese are plunking down wads of cash for homes. Others are taking out mortgages at record levels. Developers are snapping up land for luxury high- rises and villas, and the banks are eagerly funding them.
  • Some local officials are even building towns from scratch in the desert, certain that demand won’t flag.
  • And if families can swing it, they buy two apartments: one to live in, one to flip when prices jump further. (hello, Miami, Las Vegas, and Phoenix - circa 2006!)
  • In Shanghai, prices for high-end real estate were up 54% through September, to $500 per square foot. In November alone, housing prices in 70 major cities rose 5.7%, while housing starts nationwide rose a staggering 194%.
  • The real estate rush is fueling fears of a bubble that could burst later in 2010, devastating homeowners, banks, developers, stock markets, and local governments. "Once the bubble pops, our economic growth will stop," warns Yi Xianrong, a researcher at the Chinese Academy of Social Sciences' Finance Research Center. On Dec. 27, China Premier Wen Jiabao told news agency Xinhua that "property prices have risen too quickly." He pledged a crackdown on speculators.
  • Despite parallels with other bubble markets, the China bubble is not quite so easy to understand. In some places, demand for upper middle class housing is so hot it can't be satisfied. In others, speculators keep driving up prices for land, luxury apartments, and villas even though local rents are actually dropping because tenants are scarce. What's clear is that the bubble is inflating at the rich end, while little low-cost housing gets built for middle and low-income Chinese.
  • In Beijing's Chaoyang district—which represents a third of all residential property deals in the capital—homes now sell for an average of nearly $300 per square foot. That means a typical 1,000-sq.-ft. apartment costs about 80 times the average annual income of the city's residents. Koyo Ozeki, an analyst at U.S. investment manager Pimco, estimates that only 10% of residential sales in China are for the mass market. Developers find the margins in high-end housing much fatter than returns from building ordinary homes.
  • How did this bubble get going? Low interest rates, official encouragement of bank lending, and then Beijing's half-trillion-dollar stimulus plan all made funds readily available. (sounds vaguely familiar - where I have heard of these policies before?) City and provincial governments have been gladly cooperating with developers:
  • Economists estimate that half of all local government revenue comes from selling state-owned land. Chinese consumers, fearing inflation will return and outstrip the tiny interest they earn on their savings, have pursued property ever more aggressively.
So back in 2007 when the blog had a small audience, and Chinese stocks were the biggest fad (think fall 2007), I wrote some pieces on how many Chinese companies were taking their cash and speculating in the stock market.  Hence much of their "profits" were from stock speculating, rather than operations.  It's just 2 years later and we're already on the same path - only this time, it's not just stocks - its' property baby.
  • Companies in the chemical, steel, textile, and shoe industries have started up property divisions too: The chance of a quick return is much higher than in their primary business. "When you sit down with a table of businessmen, the story is usually how they got lucky from a piece of land," says Andy Xie, an independent economist who once worked in Hong Kong as Morgan Stanley's (MS) top Asia analyst. "No one talks about their factories making money these days."
I am sure this will end well...
  • The central government now faces two dangers. One is the anger of ordinary Chinese. In a recent survey by the People's Bank of China, two-thirds of respondents said real estate prices were too high. A serial drama with the ironic name The Romance of Housing, featuring the travails of families unable to afford apartments, was one of the most popular shows on Beijing Television until broadcasting authorities pulled it off the airwaves in November.
  • The second danger is that Beijing will try, and fail, to let the air out of the bubble. Pulling off a soft landing means slowly calming the markets, stabilizing prices, and building more affordable housing. To discourage speculation, the State Council, China's cabinet, is extending, from two years to five, the period during which a tax is levied on the resale of apartments. Tighter rules on mortgages may follow. Beijing also plans to build apartments for 15 million poor families.
  • The government is reluctant to crack down too hard because construction, steel, cement, furniture, and other sectors are directly tied to growth in real estate; in November, for example, retail sales of furniture and construction materials jumped more than 40%.
Deja vu.
  • The worst scenario is that the central authorities let the party go on too long, then suddenly ramp up interest rates to stop the inflationary spiral. Without cheap credit, developers won't be able to refinance their loans, consumers will no longer take out mortgages, local banks' property portfolios will sour, and industrial companies that relied on real estate for a chunk of profits will suffer. It's not encouraging that the Chinese have been ham-handed about stopping previous real estate frenzies. In the 1990s the government brutally ended a bubble in Shanghai and Beijing by cutting off credit to developers and hiking rates sharply. The measures worked, but property prices plunged and economic growth slowed.
  • Analysts are divided over the probabilities of such a crash, but even real estate executives are getting nervous. Wang Shi, chairman of top developer Vanke, has warned repeatedly in recent weeks about the risk of a bubble. In his most recent comments he expressed fear that the bubble might spread far beyond Beijing, Shanghai, and Shenzhen.
  • One difficulty in handicapping the likelihood of a nasty pullback is the opacity of the data. As long as property prices stay high, the balance sheets of the developers look strong. (again... this should sound strikingly familiar for Americans) And no one knows for sure how much of the more than $1.3 trillion in last year's bank loans funded real estate ventures. Analysts figure a substantial portion of that sum went into property, much of it indirectly. Banks often lend to state-owned companies for industrial purposes. But the state companies can then divert the funds to their own real estate businesses—or relend the money to an outside developer.
  • For now, the party continues.
As speculators, as long as those wonderful Chinese economic reports keep coming in overnight, our job is to clap like seals, buy stocks in a very earnest manner, and whistle as we saunter past that graveyard. 

"Nothing to see here". ;)

WSJ - Best Stock Mutual Fund of the Decade: CGM Focus (CGMFX)


I have not posted about investing maven Ken Heebner in quite a while; in fact until a reader asked me a question about him in one of the comments yesterday I had not looked at the portfolio holdings of CGM Focus (CGMFX) - his flagship find - in many months.  Looking at his current holdings (well as of 9/30/09 at least) he is back to his old ways finally - super concentrated (only 21 positions) with  68% allocation in his top 10 holdings, and18% allocation to his top 2 holdings: Goldman Sachs (GS) and Ford (F).  There only appears to be one short, Research in Motion (RIMM) - which I assume has not worked out of late unless he sold out before the last explosive move up post earnings.   While I have not kept up with him, he is brought on CNBC each Fed announcement day and from the videos I've watched he is super bullish both in the short and intermediate terms. The position lists supports that with "all in" bets on financials, 2 copper plays (copper in the old days, before hedge funds and China purchases, controlled the movement - used to be a signal on the economy), Fedex (FDX), and then some of the names every growth mutual fund manager has as their core holdings - Apple (AAPL), Google (GOOG), Mastercard (MA) [or Visa (V)], and (BIDU).   The one that shocked me was AIG (AIG) - although it's only a 1% allocation... it seems everyone believes the US government will eventually try to revive every living zombie company in America.

Long time readers will know, Heebner obliterated the market with a 70% gain in 2007 and was off to a roaring start in 2008 - like us, hiding out in commodities for the first half of the year - before the infamous Fortune Cover curse hit.  [May 28, 2008: Ken Heebner - America's Hottest Investor] Ok, there is no Fortune cover curse - but it sure seemed like it.  From that May 2008 article forward, it's been rough sledding.  [Jul 14, 2009: Bloomberg - Ken Heebner Slumps for 2nd Year]  He seemed to struggle with picking a theme as he was not his normal concentrated self much of the past 1.5 years, and the changing nature of the "student body left market" (everything goes up, or everything goes down) probably was something to adjust to [May 6, 2008: Ken Heebner's Trading for CGM Focus Tripled in 2008]  So it has been a trying year, with the fund up only 12% YTD, but it looks with the current heavy bets, Heebner is back in the saddle and comfortable. 

 That said, people don't suddenly turn from genius to dummy - the markets of the past few years have been extraordinary, and we still will be keeping an eye on what "Bigfoot" is doing.  His foray into Ford has been a great one & despite the recent disasters, his 5 year annualized return is still over 8%, and 10 year 18%.  It just has not been quite pleasant for those who jumped in mid 2008 forward - or according to Morningstar... for almost anyone since people were buying at the wrong time, and selling at the wrong time!

 The Wall Street Journal lists CGM Focus (CGMFX) as the stock mutual fund of the decade.
  •  Meet the decade's best-performing U.S. diversified stock mutual fund: Ken Heebner's $3.7 billion CGM Focus Fund, which rose more than 18% annually through Tuesday and outpaced its closest rival by more than three percentage points.
Sounds great - but only if you stuck with him through thick and thin.  The volatile nature of such a concentrated portfolio that he typically holds, tends to push out people at the worst times and does the same in terms of attracting people at the peak periods.
  • Too bad investors weren't around to enjoy much of those gains. The typical CGM Focus shareholder lost 11% annually in the 10 years ending Nov. 30, according to investment research firm Morningstar Inc. 
I don't know the exact machinations of Morningstar's measurement, I am sure much of it has to do with inflows and outflows - but even if it's accurate within 5% it's quite amazing.
  • These investor returns, also known as dollar-weighted returns, incorporate the effect of cash flowing in and out of the fund as shareholders buy and sell. Investor returns can be lower than mutual-fund total returns because shareholders often buy a fund after it has had a strong run and sell as it hits bottom. 
  • At the close of a dismal decade for stocks, the CGM Focus results show how even strategies that work well don't always pay off for investors. The fund, a highly concentrated portfolio typically holding fewer than 25 large-company stocks, offers "a really potent investment style, but it's really hard for investors to use well," says Christopher Davis, senior fund analyst at Morningstar.
  • The gap between CGM Focus's 10-year investor returns and total returns is among the worst of any fund tracked by Morningstar. The fund's hot-and-cold performance likely widened that gap. The fund surged 80% in 2007. Investors poured $2.6 billion into CGM Focus the following year, only to see the fund sink 48%. Investors then yanked more than $750 million from the fund in the first eleven months of 2009, though it is up about 11% for the year through Tuesday.
  • "A huge amount of money came in right when the performance of the fund was at a peak," says Mr. Heebner, the fund's manager since its 1997 launch. "I don't know what to say about that. We don't have any control over what investors do."
  • As for Mr. Heebner, though the stock market had a huge rebound this year, he says, "for individual companies, there's a lot of potential not yet realized."

Technical Note for Internet Explorer Users

I received 2 emails yesterday from readers - on top of a few I received perhaps 2 months ago from readers who receive the website posts each night via email.  They had encountered a situation where graphs were sitting "over" the text in their email.

From discussions with previous readers with this issue - everyone who encounters this has been using Internet Explorer.  That said, everyone who uses Internet Explorer as their browser does not encounter the issue - it only seems to be a situation for a handful of people.  If you happen to experiencing the same situation I would like to offer you a gift for the new year.

---> Switch over to Mozilla Firefox as your browser. (link here

I made the switch many years ago and never looked back - it's faster, it's better, it generally has specific functionality about a year or two earlier then Microsoft's browser... and of course when given a chance between 2 equals, I always like to give the small guy a chance.  In this case the small guy is better, as the added bonus.  You can import all your bookmarks when you first download Firefox and you will have a much happier experience.  Every 5-6 months something does not show up correctly in Firefox and I need to open up Internet Explorer, and I quickly am reminded why I switched!

So this email "picture over text" thing does not seem to be occuring with anyone who uses Firefox, Apple's Safari, or even Google Chrome... it's just some subset of Internet Explorer readers.  Worse case scenario - if you are married to IE - I suppose you will need to come to the actual website to read those specific posts where this issue occurs.


Back to your regularly scheduled programming... I read yesterday that the NYSE has not traded in a range of 70 points or less for 6 consecutive days since November 1996!  Looks like we are working on day 7!

Combined with the 6 weeks prior to these past two where the S&P500 was stuck in a range of 2%, and it's really been a thrilling quarter. :)

For some entertainment, head over to my online buddy "The Reformed Broker" who asked a collection of financial "talent" what they learned in 2009.  It's an entertaining list.

Bloomberg: Ethiopian Farms Lure Investor Funds as Workers Live in Poverty

I've mentioned in the past that my top "slow money" investment in a quickly overcrowding planet [Jun 20, 2008: World Population to Hit 7 Billion by 2012] would be arable farmland.   [Jun 18, 2008: The Ultimate Shortage --> Water] I've noted that in all these pieces...

  1. [Jan 21, 2008: Food... Food... Food]
  2. [Feb 1, 2008: Starting Position in Powershares DB Agriculture Fund]
  3. [Jun 5, 2008: NYTimes: Food is Gold, So Billions Invested in Farming]
  4. [Jun 14, 2008: Bloomberg: Farmland Reaps Bonanza for TIAA]
... and I've heard Jim Rogers over the past year and a half tout a similar theme - i.e. in a few decades it will be the farmers driving Ferraris, rather than financial engineers.  Although I suspect the exception will be the financial oligarchy of the US which will somehow create instruments of financial destruction to drive the prices up.

So let's be blunt... the "smart money" is already accumulating land, in many far flung places well ahead of the curve.  Already forgotten, was parallel to the hedge fund mania in oil prices - so was massive speculation by the investment banks and hedgies in foodstuffs - helping to accelerate food prices ever upward in 2008 right along with crude.  While asleep at the wheel regulators in the oil market is one thing, allowing these massive price bubbles to occur in food has far wider global implications.  But as the speculators tell us - they are just creating liquidity of course.

  1. [Jun 29, 2008: NYTimes - Hording Nations Drive Food Prices Ever Higher]
  2. [Apr 14, 2008: WSJ - Food Inflation, Riots Spark Worries for World Leaders]
  3. [Mar 31, 2008: Reuters - Tensions Rise as World Faces Short Rations]
  4. [Feb 13, 2008: As Asia Food Prices Bite, Analysts Warn of Worse to Come]

I will expect these same groups to be 'creating liquidity' in similar patterns many times in the year to come - as actual shortages in foodstuffs combined with easy money from central banks, and captured regulators - allow for a free for all. I will expect to be returning to this subject many time in the coming decade.

As for the farmland situation itself, in the summer we highlighted a fascinating piece in The Economist [Jun 2, 2009: The Economist - Outsourcing's 3rd Wave - Buying Farmland Abroad]

Rich food importers are acquiring vast tracts of poor countries' farmland. Is this beneficial foreign investment or neocolonialism?

Supporters of such deals argue they provide new seeds, techniques and money for agriculture, the basis of poor countries’ economies, which has suffered from disastrous underinvestment for decades.

Opponents call the projects “land grabs”, claim the farms will be insulated from host countries and argue that poor farmers will be pushed off land they have farmed for generations.

In total, says the International Food Policy Research Institute (IFPRI), a think-tank in Washington, DC, between 15m and 20m hectares of farmland in poor countries have been subject to transactions or talks involving foreigners since 2006. That is the size of France’s agricultural land and a fifth of all the farmland of the European Union.
What is happening, argues Richard Ferguson, an analyst for Nomura Securities, is outsourcing’s third great wave, following that of manufacturing in the 1980s and information technology in the 1990s.

It will be interesting to see, if in the long run, those who worked their own land for generations but suddently have become "employees" truly benefit in the long run.  Common sense would say in this world of exploitation - the answer will be no.  Hopefully I am wrong.

Via Bloomberg:
  • Until last year, people in the Ethiopian settlement of Elliah earned a living by farming their land and fishing. Now, they are employees.  Dozens of women and children pack dirt into bags for palm seedlings along the banks of the Baro River, seedlings whose oil will be exported to India and China. They work for Bangalore- based Karuturi Global Ltd., which is leasing 300,000 hectares (741,000 acres) of local land, an area larger than Luxembourg.
  • The jobs pay less than the World Bank’s $1.25-per-day poverty threshold, even as the project has the potential to enrich international investors with annual earnings that the company expects to exceed $100 million by 2013.  (bingo)
  • My business is the third wave of outsourcing,” Sai Ramakrishna Karuturi, the 44-year-old managing director of Karuturi Global, said at the company’s dusty office in the western town of Gambella. “Everyone is investing in China for manufacturing; everyone is investing in India for services. Everybody needs to invest in Africa for food.”
And here comes yet another wave of global institutional investments...
  • Emergent Asset Management Ltd.’s African Agricultural Land Fund opened last year. On Nov. 23, Moscow-based Pharos Financial Advisors Ltd. and Dubai-based Miro Asset Management Ltd. announced the creation of a $350 million private equity fund to invest in agriculture in developing countries.
  • African agricultural land is cheap relative to similar land elsewhere; it is probably the last frontier,” said Paul Christie, marketing director at Emergent Asset Management in London. The hedge fund manager has farm holdings in South Africa, Mozambique and Zimbabwe.  “I am amazed it has taken this long for people to realize the opportunities of investing in African agriculture,” Christie said.
  • Monsoon Capital of Bethesda, Maryland, and Boston-based Sandstone Capital are among the shareholders of Karuturi Global, Karuturi said. The company is also the world’s largest producer of roses, with flower farms in India, Kenya and Ethiopia.
As long as you avoid war, the economics are compelling - especially when you don't have to pay people even to the global poverty line.
  • One advantage to starting a plantation 50 kilometers (31 miles) from the border with war-torn Southern Sudan and a four- day drive to the nearest port: The land is free. Under the agreement with Ethiopia’s government, Karuturi pays no rent for the land for the first six years. After that, it will pay 15 birr (U.S. $1.18) per hectare per year for the next 84 years.  (100 year lease? Nice - accounting for inflation $1.18 in 2084 should be akin to a few pennies)
  • Land of similar quality in Malaysia and Indonesia would cost about $350 per hectare per year, and tracts of that size aren’t available in Karuturi Global’s native India, Karuturi said.  Labor costs of less than $50 a month per worker and duty- free treaties with China and India also attracted Karuturi Global, he said.

  • “This strategy will build up capitalism,” he said in an interview in Gambella. “The message I want to convey is there is room for any investor. We have very fertile land, there is good labor here, we can support them.”
Be careful what you wish for...."capitalism" as practiced of late seems to have a funny way of creating a global race to the bottom for labor, while of course working out great for the "capital".
  • Workers in Elliah say they weren’t consulted on the deal to lease land around the village, and that not much of the money is trickling down.
  • At a Karuturi site 20 kilometers from Elliah, more than a dozen tractors clear newly burned savannah for a corn crop to be planted in June. Omeud Obank, 50, guards the site 24 hours a day, six days a week.  Obank said it isn’t enough to adequately feed and clothe his family.  “These Indians do not have any humanity,” he said, speaking of his employers. “Just because we are poor it doesn’t make us less human.”
  • Obang Moe, a 13-year-old who earns 10 birr per day working part-time in a nursery with 105,000 palm seedlings, calls her work “a tough job.” While the cash income supplements her family’s income from their corn plot, she said that many days they still only have enough food for one meal
  • The fact that the project is based on a wage level below the World Bank’s poverty limit is “quite remarkable,” said Lorenzo Cotula, a researcher with the London-based IIED.   (indeed, "capitalism" at work; to make us feel better about it let us engage in the dogma that these people had no future without outside investors... certainly farming their own land for their own benefit was a curse.  Gladly they have been relieved and can now prosper.  Mmmm... I feel better already)  
  • Large-scale export-oriented plantations may keep farmers from accessing productive resources in countries such as Ethiopia, where 13.7 million people depend on foreign food aid.
  • “We keep saying the big problem is, you need investment in African agriculture; well here are a load of guys who for whatever reason want to invest,” David Hallam, deputy director of the FAO’s trade and markets division, said in an interview in Rome. “So the question is, is it possible to sort of steer it toward forms of investment that are going to be beneficial?” (in a dog eat dog world, I think the answer is already very obvious)
  • Buntin Buli, a 21-year-old supervisor at the nursery who earns 600 birr a month, said he hopes Karuturi will use some of its earnings to improve working conditions and provide housing and food. “Otherwise we would have been better off working on our own lands,” (let us only hope, Mr or Ms Buli is not holding his or her breath)
[Jun 23, 2008: India Falling Below Potential in Farming]

Wednesday, December 30, 2009

Bookkeeping: Beginning Starter Stake in Telestone Technologies (TSTC)

I keep waiting for some meaningful correction in Telestone Technologies (TSTC) and it just is not happening.  Each time the stock hits any sort of support, it immediately rockets up - and I grind my teeth watching it.  Therefore, with the drop the past 2 sessions, including nearly 5% today I am going to begin a starter stake of 0.9% exposure in the $19.70s to at least have some skin in the game.  Much like some other issues I have added of late I am hoping it falls so I can add more at cheaper prices, hence I would not mind losing money on this first tranche.  The 10 day moving average is just under $19 (rising quickly) and the 20 day is $17.50 - I'll likely add at both levels if the opportunity is offered.

My computer is acting up with charts - but I will add the chart later in the day.  If things were working I'd be showing you a 2 month chart where the stock has not even penetrated below the 10 day moving average since early November here.

EDIT - chart loaded

Now if I were a less transparent fund you would see TSTC listed in my quarter end/year end holdings in a few months and say "that Mark! What a genius!  Great pick!" as I, like many other mutual fund managers, would be adding great performing stocks to my portfolio in the closing days of the year to showcase my "skillz".  But since investors are going to have a very good idea of what I am doing within weeks of when I do it, I can't play the "window dressing" game.  Therefore here I am buying it with 1 session left in the year, for reasons clearly stated above ;)

We discussed this company a few weeks ago, and since then I've looked at it more and feel comfortable with the company and it's main issue (massive DSO).  This is far and away the smallest stock we own at a $200M market capitalization.

Telestone provides Local Access Network Solutions, products and engineering integration to telecom carriers. In terms of 2G technologies, Telestone is a main supplier in wireless access coverage infrastructure building for the GSM and CDMA network base on its RFPA technologies primarily in the PRC. The products; repeaters, line-amplifiers, antennas and radio accessories are all based on RFPA technologies.

After intensive research on the demands of carriers in 3G technologies, based on its strong R&D capabilities in both wireless and Fiber-Optics, Telestone has invented its WFDS unification local access network solution and products which are highly welcomed by all telecom carriers and property owners. Telestone also provides services that include project design, project manufacturing, installation, maintenance and after-sales services. Telestone currently has approximately 1,200 employees.

Long Telestone Technologies in fund; no personal position

Bookkeeping: Adding Back to Index Longs

I've just added back the index longs we released yesterday (TNA/BGU ETFs) over S&P 1129, here in the 1123s.   The original purchases were a week ago Friday in the 1125 area hoping for the beginning of a breakout but we have very little of that.   Effectively I cut out 1/3rd of the very large exposure we put on a week ago Friday, yesterday - and today put back slightly less than that 1/3rd.

I also released the January 113 SPY calls - sold half yesterday for a nice profit, and half today for a nice loss - moving the duration out to February (SPYBI), same strike price.  While the January calls still have 3 weeks to expiration the volatility in this market is so low, it is sapping away the premium and I like these calls for quick movements more than anything.  Since the "break out" has thus far been a "flame out" the usefulness of the calls has been poor.

Unless S&P 1120 breaks, I remain a belligerent bull ;)  Bigger picture it feels like quicksand out there and I don't think our NAV has budged from where it was 8 weeks ago.  While it has gone up or down a few % in that span all we've done is make some brokers rich with transactions while finding ourselves in the same spot.  We briefly touched $18.00 NAV (80% gain for the year) around noon yesterday when S&P breached 1129 but have given that all back and remain stuck at $17.83.  So unless the "premarket futures buyers" give us a gift tomorrow on the last trading day of the year, we appear destined to close out the year in the upper 70%s.  I guess there is also an outside chance we gap down tomorrow morning, but of late the probability of that occuring is about 15%.

Returning setting to snooze....

The Economist: America - a Ponzi Scheme that Works

Notwithstanding the fact that even the much respect magazine, The Economist, now implies America as a Ponzi scheme (a troubling development), let's see an opposite view to this morning's take by Eric Sprott

In this article, the magazine argues that the key ingrediant for long term success of any Ponzi - that is "new investors" - is the key reason the U.S. can keep the balls juggling for a very long time.  (Investors = Immigrants, in this case)  One might take issue with this thesis as many policies of the past decade, along with the associated future costs (higher taxes in the future without associated "benefits" many Western European socialist countries may offer) might make the US less appealing of a destination.  Not to mention the dearth of job opportunities outside of the public and pseudo public (healthcare, education) sectors.  [Sep 21, 2009: USA Today - More of the World's Talented Workers Opt to Leave USA] [Dec 23 2009: WSJ - With US Opportunities Dim, Expats Return Home]  But it's good food for thought and one should always look at both sides of the story, as circumstances in 5-10 years could be different than today.

  • Joshua Lee sits on a sofa and explains why he likes living in America. He grew up poor: his father was a day labourer. He did his military service on an American base in Seoul, where he polished his English and learned to like hot dogs. He moved to America in 1990, when he was 27, to study theology in Kentucky. He painted houses to support himself.
  • He met his wife, a Korean-American, and moved to northern Virginia, home to a hefty cluster of Korean-Americans. Eventually, he found a job writing for a Korean-language newspaper about Korean-American issues.
  • When he arrived, Mr Lee was astonished by how rich nearly everyone was. He recalls his first dinner with Americans: the huge bowls and immense portions. He was startled to see lights left on in empty rooms. He is still impressed: “The roads are so wide, the cars so big, the houses so large—everything is abundant,” he says.
  • Yet this is not why he came, and it is not why he stayed and became a citizen. For Mr Lee, America is a land that offers “the chance to be whatever you want to be”. More prosaically, it is a place where nearly any immigrant can find a niche.
  • ....he never liked the way his neighbours in Korea stuck their noses into each other’s business. Everyone knew how you were doing in school. You could not get a good job without connections. There was constant social pressure not to lose face. When Mr Lee went back to visit, he remembers slipping into the old straitjacket. He wanted to pop out to the corner shop, but realised he would have to put on a smart shirt and trousers, despite the intense humidity. What would the neighbours think if they saw him in shorts and flip-flops? In America, no one cares.  In Korea, he says, to express an unusual opinion is to court isolation. In America, you can say what you think.

A nation of immigrants:
  • Because America is so big and diverse, immigrants have an incredible array of choices. The proportion of Americans who are foreign-born, at 13%, is higher than the rich-country average of 8.4%. In absolute terms, the gulf is much wider. America’s foreign-born population of 38m is nearly four times larger than those of Russia or Germany, the nearest contenders. It dwarfs the number of migrants in Japan (below 2m) or China (under 1m). The recession has dramatically slowed the influx of immigrants and prompted quite a few to move back to Mexico. But the economy will eventually recover and the influx will resume.
  • Nearly all Americans are descended from people who came from somewhere else in the past couple of centuries. And the variety of countries from which immigrants come—roughly all of them, and usually in significant numbers—is unmatched. No matter where an immigrant hails from, he can find a cluster of his ethnic kin somewhere in America.
  • In a European country, if you want Korean food and a particular denomination of Korean church, you might find it in the capital but you will struggle in the suburbs. In America, it is easier to find just the niche you want: Polish or Vietnamese, metropolitan or exurban, gay or straight, Episcopalian or Muslim, or any combination of the above.
  • People move for a variety of reasons. Alejandro Mayorkas, the head of the United States Citizenship and Immigration Services, cites two. People come to America, he says, either because they yearn for freedom or because they are fleeing something. That something could be a civil war, or it could be a culture that irks them.
50 states, 50 rules:
  • America has 50 states with 50 sets of laws.  In America, people with unusual hobbies are generally left alone. And power is so devolved that you can more or less choose which rules you want to live under.
  • If you like low taxes and the death penalty, try Texas. For good public schools and subsidised cycle paths, try Portland, Oregon. Even within states, the rules vary widely. Bath County, Kentucky is dry. Next-door Bourbon County, as the name implies, is not. Nearby Montgomery County is in between: a “moist” county where the sale of alcohol is banned except in one city. Liberal foreign students let it all hang out at Berkeley; those from traditional backgrounds may prefer a campus where there is no peer pressure to drink or fornicate, such as Brigham Young in Utah.

While I agree with the premise below what it does not point out is as manufacturing leaves the US much of the R&D has recently left to go with it; especially in lower cost locales teeming with engineering talent (Chindia):
  • Migration matters. Economic growth depends on productivity, and the most productive people are often the most mobile.
  • A quarter of America’s engineering and technology firms founded between 1995 and 2005 had an immigrant founder, according to Vivek Wadhwa of Harvard Law School. (something those declaring we need to "keep out immigrants" should consider)
  • A quarter of international patent applications filed from America were the work of foreign nationals.
  • And such measures ignore the children of immigrants. Jeff Bezos, the founder of Amazon, is the stepson of a man who fled Cuba at the age of 15 and arrived without even a high-school diploma.
Once again, we come to the point of global competition for talent.  America has rich legacy advantages - but we seem content to slowly but surely throw them away.  In the world I foresee, borders will continue to mean less and less, and the talent will move to where the opportunity is.  Already we can read reports of young Americans leaving for Asia since job opportunites are lacking here - a short term situation or long term trend?  One of the questions of our era.
  • Richard Florida, the author of such books as “The Flight of the Creative Class” and “Who’s Your City?”, argues that countries and regions and cities are engaged in a global battle for talent. The most creative people can live more or less where they want. They tend to pick places that offer not only material comfort but also the stimulation of being surrounded by other creative types.  

This used to be the situation among cities in America - trying to create an atmosphere to attract this type of person (Austin, Bay Area/San Francisco, Boston).  Now I believe it will turn into a global competition.  Can Shanghai or Sao Paulo offer all these things today?  Perhaps not - but in 5, 10 years?  [Nov 13, 2009: Sao Paolo, Mumbai, Shanghai to Join New York, London, Paris as World's Dominant Cities by 2025]  What about Hong Kong?  Seoul?  Perhaps already.
  • This makes life more fun. It also fosters technological progress. When clever people cluster, they can bounce ideas off each other. This is why rents are so high in Manhattan. Robert Lucas, a Nobel economics laureate, argues that the clustering of talent is the primary driver of economic growth.  
  • So a country’s economic prospects depend in large measure on whether it is a place where people want to be. Desirable destinations draw talented and industrious migrants. Less desirable ones suffer a brain drain. Desirability is tricky to measure, however.

The Economist believes that America will remain at the top in this competition... an interesting take actually as it cites religious networks as a hidden ace.
  • People cannot vote freely with their feet. No rich country allows unlimited immigration, and the rules vary a lot, so it is impossible to know which country is the most attractive to the largest number of people. But there are reasons to believe that America ranks at or near the top.  
  • Mr Florida and Irene Tinagli of Carnegie Mellon University compiled a “Global Creativity Index”, which tries to capture countries’ ability to harness talent for “innovation...and long-run prosperity”. The index combines measures of talent, technology and tolerance. America comes fourth, behind Sweden, Japan and Finland.
  • You could quarrel with the methodology. America comes top on certain measures, such as patents per head and college degrees, but it is deemed less tolerant than other countries in the top ten. This is because the index rewards “modern, secular” values and penalises Americans for being religious and nationalistic.
  • Michael Fix of the Migration Policy Institute, a think-tank, observes that religion has a strong effect on who comes to America.  Churches create networks. Migrants typically go where they already know people, and often make contact through a church.
  • It is also a mistake to rate Americans as less tolerant because they are nationalistic. Americans may have an annoyingly high opinion of their country, but theirs is an inclusive nationalism. Most believe that anyone can become American. Almost nobody in Japan thinks that anyone can become Japanese.

Will tough economic times, and the associated anti-immigration political dogma hurt America's ability to attract talent?  Once more, The Economist argues "no".
  • Not everyone thinks that immigration makes America stronger. Most of the Republicans who ran for president in 2008 promised a tough line on the illegal sort. Tom Tancredo, the angriest of them, describes America’s porous borders as a “mortal danger”, though he is the grandson of immigrants from Italy. Pat Buchanan, another former presidential candidate, wrote a book subtitled: “The Third World Invasion and Conquest of America”.
  • Some fear that open borders make it easier for terrorists to sneak in. Others worry that immigrants overload schools and hospitals, or drag down the wages of the native-born. Environmentalists fret that immigration drives population growth, which aggravates urban sprawl, pollution and global warming.
  • The argument that stirs the hottest passions, however, is cultural. The late Samuel Huntington, a Harvard academic, argued that Hispanic immigrants, because they are so numerous, will not assimilate. Rather, they threaten to “divide the United States into two peoples, two cultures and two languages” and “[reject] the Anglo-Protestant values that built the American dream”.
  • Mark Krikorian, the author of “The New Case Against Immigration: Both Legal and Illegal”, points out that modern immigrants can call home every day. This, he says, means they are less likely to give up their old ties and become American. He complains that the American elite no longer thinks American culture is worth preserving, and therefore no longer insists that immigrants imbibe it. He also predicts that mass immigration from poor countries is incompatible with the welfare state—too many newcomers will bankrupt it.
  • Nearly all this gloom is misplaced. It is possible that unskilled immigrants hurt the wages of unskilled locals. George Borjas, a Harvard economist, estimates that native workers’ wages decline by 3% or 4% for every 10% increase in immigrants with similar skills. But others, such as David Card of the University of California, Berkeley, have found little or no impact. Gianmarco Ottaviano of the University of Bologna and Giovanni Peri of the University of California, Davis, find that nearly 90% of native-born American workers actually enjoy higher wages because of immigration. Many immigrants bring new skills and ideas, spend money, pay taxes and employ natives.
  • In America it is hard for an able-bodied adult male to do anything more than subsist on welfare. So immigrants work, which means they are seldom much of a drain on the public purse, and they have no choice but to assimilate. People who work together need to get on with each other, so they generally do.
  • Because immigrants have to work, America does not have ghettos full of permanently jobless and alienated young immigrants, as in France, for example. This is perhaps why, although America has a high murder rate—three times that of Britain—its immigrants rarely riot. They are too busy earning a living. (interesting points)
  • Some of America’s talk-show hosts are quite vicious, but no openly xenophobic politician can attract the kind of support that France’s Jean-Marie Le Pen did in 2002, or that Austria’s Jörg Haider did before he got drunk and killed himself in a car crash. Political rhetoric in America is often heated but almost never leads to violence.

  • America is a uniquely attractive place to live: a lifestyle superpower. But it cannot afford to be complacent, for three reasons.
  • First, other places, such as Australia, Canada and parts of Western Europe, have started to compete for footloose talent.
  • Second, rising powers such as India and China are hanging on to more of their home-grown brains. There is even a sizeable reverse brain drain, as people of Indian or Chinese origin return to their homes. But neither India nor China attracts many completely foreign migrants who wish to “become” Indian or Chinese.  
  • Third, since September 11th 2001 the American immigration process has become more security-conscious, which is to say, slower and more humiliating. Even applicants with jobs lined up can wait years for their papers. Many grow discouraged and either stay at home or try their luck somewhere less fortress-like.
  • The stakes are high. Immigration keeps America young, strong and growing. “The populations of Europe, Russia and Japan are declining, and those of China and India are levelling off. The United States alone among great powers will be increasing its share of world population over time,” predicts Michael Lind of the New America Foundation, a think-tank.
  • By 2050, there could be 500m Americans; by 2100, a billion. (I am not sure how Earth would support 500M or 1 billion Americans consider 300M use 25% of all it's resources!) That means America could remain the pre-eminent nation for longer than many people expect.
  • Relying on the import of money, workers, and brains,” writes Mr Lind, America is “a Ponzi scheme that works.”
Thoughts on this very interesting piece, are very welcome.

Gold (GLD), Silver (SLV), US Dollar - all Hovering Below Resistance Areas

Last week, and coming into this week we said the story in gold/silver v the US dollar would be a key marker.  Thus far we have no resolution and with so little energy / volume in the markets - one should not expect any more clarity until the new year.

Let's check in on the updated charts.  First the US dollar (again, this chart is delayed by 1 day but the Dollar Index is currently just over $78, so a bit higher than yesterday's close).  Recall we sold our UUP (dollar ETF) options (bought just before Thanksgiving) on that first run into the 200 day moving average to lock in just under 30% gains; which in retrospect was the perfect play.  As we said then, we are more than happy to rebuy our long dollar exposure but this time around we want to see the dollar index clear resistance - in this case the 200 day moving average (i.e. over $78.50) - this looks like it could happen. 

[click to enlarge]

Next gold*, and silver* which we said last week were "dead cat bouncing" (apparently a term the gold bugs on Seeking Alpha took great exception to!).  But as you can clearly see, after the first big selloff, the cursory oversold bounce took place - right into resistance (20, 50 day moving averages) - and then a new selloff has begun.

Until proven otherwise, the precious metal charts strike me as not bullish, and I could see more downside developing from here. Silver is actually back to recent lows so it is either about to form a "double bottom" from which it will begin a new run back up, or break to new intermediate lows - my guess would be the latter.  I will stick with my comments from last week until the charts prove me wrong:

I'd expect dead cat bounces in both metals perhaps next week (inversely, the dollar is due for a rest/consolidation at some point), but both have broken their 50 day moving averages, so until proven otherwise I'd expect them to pull back over the intermediate term, rebuild a new base, and then when the dollar weakens again, start a new move up. But that won't be a 2009 event. For now, time is money and the tide has turned. If you believe in the absolute correlation between the dollar and precious metals, this type of break down in the metals should bode well for the dollar in the near term as well

*for graphical purposes I am using the Gold (GLD) and Silver (SLV) ETFs rather than the actual metal pricing as they are good mirrors, and are updated with 20 minute delay on the charts.

Long [very small amounts] of Ultra Silver, Powershares DB Gold Double Long in fund; no personal position

The Perfect Technical Pullback

It is amazing how predictable things have become.  Yesterday we noted things were a bit overbought and we threw out some of our long index exposure over S&P 1029.  The futures had been up 6 sessions in a row, and we had gapped up each day.  Surely futures would be allowed to open down one of these days?

As we wrote:

I will take some long exposure off the table (on the index instruments) as we reach over S&P 1129. This is a "grind up", not "break out" type of move in the market. I expect any 'correction' to be mild - if it is allowed to happen - and to hold S&P 1120 as we outlined in the weekly summary.

And is if the market is guided by the magical hand, down we fell to S&P 1121s this morning (in perfect harmony); before we are lifted right back to S&P 1125.  Still no volume but the perfect technical pullback is complete and our march ever higher can now continue.

Frankly the "correction" (haha) was so quick I did not even have a chance to buy back the exposure I sold over 1129 below 1122 as I had hoped to do.  The S&P tagged 1121.93; I am obviously slowed by the holidays and a market that is putting me to sleep.  Oh well, it is now past 10 AM which means the regular market is done for the day, and we will just go into full High Frequency Trading mode where thousands of orders each second are traded back and forth among the same few thousand computers, with rebates collected by the millions for providing liquidity while no one is actually here trading but retail daytraders. 


p.s. yesterday's intraday NYSE range of 36 points was the smallest in nearly 3 years.  Volume was the lightest of any non holiday day of the year. HAL9000 wins.

Eric Sprott Calls for New Lows on S&P 500, Wonders if US Debt Scheme is Simply the Biggest Ponzi Ever


To call Eric Sprott a bear, would be a disservice to bears - he is at whatever the next level above bears is.  Sprott is a very successful hedge fund manager from Canada, who runs some $4 billion, and returned roughly 500% in the past decade - so he definitely has the investment kudos to back himself up.  He, much like I have proposed in countless posts, surmises much of what is going on is simply the biggest Ponzi scheme ever engineered.  As we saw with Bernie Madoff - even if true - a Ponzi can last for decades.  And we've never had one sponsored by an entity who does not really require outside investors to keep the charade going, but can print money endlessly (or let banks borrow at nearly free to buy US Treasuries).  So unlike most Ponzi's, which are exposed when at some point when not enough new money comes in to cover outflows (as is the very obvious case when looking at US finances) - the US version is one that only ends when faith in the government / central bank is lost. Hence, I expect the balls to be juggled for quite a long time as the current hero worship of the Fed is akin to Greenspan era a decade ago.

On a related note - the AP reports four times as many Ponzi's collapsed in 2009 as in 2008, for reasons we listed above.
  • Tens of thousands of investors, some of them losing their life's savings, watched more than $16.5 billion disappear like smoke in 2009, according to an Associated Press analysis of scams in all 50 states.  (keep in mind, Madoff's massive scam of $50B happened in 2008) In all, more than 150 Ponzi schemes collapsed in 2009, compared to about 40 in 2008.

Back to Mr. Sprott...unlike Marc Faber who believes any downward move in the S&P 500 will be met with an avalanche of new money printing from the Federal Reserve - Sprott believes the market will overwhelm the Fed and/or this new round of printing would strike at the credibility of the Fed (i.e. the loss of faith mentioned above)

Via Bloomberg:
  • The Standard & Poor’s 500 Index will collapse below its March lows as an expected rebound in economic growth fails to materialize, according to hedge fund manager Eric Sprott.
  • The Toronto-based money manager, whose Sprott Hedge Fund returned about 496 percent in the past nine years as the S&P 500 lost 32 percent in Canadian dollar terms, said the index’s 66 percent rally since March 9 reflects investors misinterpreting economic data. He’s predicting the gauge will fall 40 percent to below 676.53, the 12-year low reached on March 9.
  • We’re in a bear market that will last 15 or 20 years, and we’ve had nine of them,” Sprott, chief executive officer of Sprott Asset Management LP, which oversees C$4.3 billion ($4.09 billion), said in an interview Dec. 18.
  • Sprott said the Federal Reserve has kept bond yields and interest rates artificially low through its program to buy agency debt and mortgage-backed securities. The central bank expects the securities purchase program to finish by the end of March. Expiration of the program would reduce demand for fixed- income securities, forcing up bond yields and interest rates and hurting economic growth, Sprott said. (seeing how that plays out in 2010 will definitely be one of the most interesting development's of the year)
So here is his "turning point" - effectively his thesis is as the powers that be remove their crutches from the economy, some (not all - we have so many subsidization programs running at once) of the reality underneath will be exposed.   As more and more is exposed, it won't be pretty.  When the economy weakens again, all the King's Horses (and Men) will run to put Humpty Dumpty together again - and the world will see that the US cannot function anymore without permanent easy money.  [Jun 3, 2009: A Country that Cannot Function Without Easy Money] I'm paraphrasing of course ;)
  • Should the Fed renew the programs while the U.S. government continues to run record deficits, investors will lose faith in the U.S. currency, he said.
Again, as we've stressed many times, having the world's reserve currency is such an enormous advantage - it has allowed us to do things that no other country would dare to do - or be allowed to get away with.  But currency is all about faith.
  • If they announce another quantitative easing, trust me, the gold price will go up another 50 bucks that day,” he said. Sprott has been bullish in gold and gold stocks, which are used as a hedge against inflation, since at least 2001, when the precious metal was trading below $300 an ounce.
Conceptually I agree with Sprott; or he agrees with me - since I've been typing similar thoughts for many quarters.  The question is "when" - are we in Bernie Madoff year 6? or year 16?  Will our Titanic ship come in, in 2012? or 2022?  Will the rest of the world continue to smile and happily (or otherwise) fund our games of constant state and city bailouts via "stimulus", a now nearly half decade unlimited bailout of Fannie and Freddie (snuck in last week, on Christmas Eve), a complete repeat of the evils of FanFredron by FHA, constant government expansin while happy talk of "we need to take care of the deficit" rings hollow, entitlement programs that have no hope of being fixed - especially of the Medicare kind, et al?  It appears for now - yes.  One day it will be no... but who knows when that day is.  Until then we party like Romans ...
  • Sprott said gold is the only asset about which he remains positive in the short term. His C$1.42 billion Sprott Canadian Equity Fund -- which is up 23 percent in five months -- has 34 percent of its portfolio in mining stocks and another 39 percent in bullion as of Nov. 30.
  • He said though he has no target price for the metal he doesn’t think it has reached a ceiling after quadrupling over the past eight years.  “If you get into this thing where you’ve got to keep printing more and more and more, who knows about the price of gold?” he said. “It will be the new currency in due course.”

Via Reuters:
  • In his latest missive to investors (pdf link here), Eric Sprott asks if our Ponzi economy is at risk of collapse. In fiscal 2009, foreigners scooped up $698 billion of Treasuries while the Fed upped its holdings by $286 billion. But the public debt increased $1.9 trillion. So who bought all the rest? According to Treasury, “other investors” bought $510 billion, up from just $90 billion in 2008. With the Fed’s printing press turned off, the question for next year is whether “other investors” can buy more Treasuries than they did this year…

As we have seen so illustriously over the past year, all Ponzi schemes eventually fail under their own weight. The US debt scheme is no different. 2009 has been witness to spectacular government intervention in almost all levels of the economy. This support requires outside capital to facilitate, and relies heavily on the US government’s ability to raise money in the debt market. The fact that the Federal Reserve and US Treasury cannot identify the second largest buyer of treasury securities this year proves that the traditional buyers are not keeping pace with the US government’s deficit spending. It makes us wonder if it’s all just a Ponzi scheme.

Reuter's blogger Rolfe Winkler also proposes a similar theme in the accompying story

At the end of the day, flushing more debt through the system is the only lever policy-makers know how to pull. Lower interest rates, quantitative easing, deficit spending, it’s all the same. It’s all borrowing against future income. Each time we bump up against recession, we borrow a bit more to keep the economy going. With garden variety recessions, this can work. Everyone wants the good times to continue, so no one demands debts be paid back. Creditors accept more IOUs and economic “growth” continues apace. If it sounds like Bernie Madoff’s Ponzi scheme, that’s because it is.

Each time Bernie’s scam got a few too many investor withdrawals, he’d simply plug the hole by raising more investor cash. The guys at Fairfield Greenwich were making so much in fees, they were happy to funnel more his way. But at a certain point, Ponzis get too big. There simply aren’t enough new investors to pay off older ones. In the aggregate, the same is true for Western economies. Their debt loads are now so huge, they are simply unpayable.

Naturally, policy-makers sound just like Ponzi-schemers: Just give us a little more cash to get us through this rough patch and everything will be copacetic. Ben Bernkanke at the National Press Club alluded to the famous quote by St. Augustine: “Oh Lord, give me chastity, but do not give it yet.” President Obama convened his “fiscal responsibility” summit days after passing the stimulus bill and days before proposing huge increases in health care spending.

Bernanke says he’ll stop printing money to absorb debts, and he may for a time. But the American Ponzi has grown so large, the private credit system is, IMHO, no longer capable of generating sufficient debt finance to keep it going. So to avoid a debt deflationary depression the Fed will have to rev up its printing press again.

Japan has been wrestling with its own Ponzi collapse for 20 years, keeping it at bay with trillions of dollars worth of deficit spending and money printing.  Hasn’t worked for them and it won’t work for us.

But we're not Japan... ;)
This has little to do with the stock market ot today, because the same "solutions" that will eventually cause massive pain (think "solutions" of 2001-2003, leading to "prosperity" of 2003-2007), can kick the can for a long time. (Japan's been working this angle for 2 decades)  For all I know the market rallies for 12 more months, perhaps 36, perhaps 60 on our Alice in Wonderland journey where the real functioning economy need not support our debt obligations - but a few central planners can take care of all our ills.  But with many other large countries playing the same game of chicken, I think before the 60 months are up, foreshadowing of the eventual fate of America will be seen in nation's without the advantage of the reserve currency.  Too many countries are now following the American game plan, and their chickens shall come home to roost.  And so will begin an era of falling dominos that should make 2007-2009 look like a sideshow.

Tuesday, December 29, 2009

The 10 Worst Technology Predictions of All Time

We have yet another day, where almost all the action is in premarket or the first 15-30 minutes.  They just keep piling on, and I reiterate my call to only open the stock market for 30 minutes a day if this is all our market can offer.  That leaves us more time to help the US economy by shopping...

Since the market offers little of late outside of speculative daytrades, let us look at the lighter side.  Since we are in the annual "prediction season", below the WSJ lists some of the worst "technology" predictions of all time; some of these are classics!*   Pertinent to our situation.... as I try to think of what can lead the US out of this employment mess, aside from creating countless more government jobs or a new housing bubble - I am hoping some game changing technologies that are in someone's garage or a lab can be the next big driver.

*please note - some of these quotes are controversial i.e. claims they were never uttered or taken out of context :)

  • "Tis is the season for predictions, so "Information Age" bravely goes out on this limb: Most technology predictions for 2010 won't come true. The more we learn about how innovation happens, the less straight the lines of advance look.
  • (1) "Inventions have long since reached their limit, and I see no hope for further developments," said Roman engineer Julius Sextus Frontinus in 10 A.D.
  • This end-of-progress view has been echoed many times, including by Charles Duell, commissioner for the U.S. Patent Office, who in 1899 said, (2) "Everything that can be invented has already been invented."
  • Here are the rest of my Top 10 Worst Technology Predictions, which prove that when it comes to tech, optimism pays:
  • (3)  "The Americans have need of the telephone, but we do not. We have plenty of messenger boys," Sir William Preece, chief engineer at the British Post Office, 1878.
  • (4) "Who the hell wants to hear actors talk?" H.M. Warner, Warner Bros., 1927.
  • (5) "I think there is a world market for maybe five computers," Thomas Watson, chairman of IBM, 1943.  (apparently this one is highly disputed)
  • (6) "Television won't be able to hold on to any market it captures after the first six months. People will soon get tired of staring at a plywood box every night," Darryl Zanuck, 20th Century Fox, 1946.  (wow)
  • (7) "The world potential market for copying machines is 5,000 at most," IBM executives to the eventual founders of Xerox, 1959.
  • (8) "There is no reason anyone would want a computer in their home," Ken Olsen, founder of mainframe-producer Digital Equipment Corp., 1977.
  • (9) "No one will need more than 637 kb of memory for a personal computer—640K ought to be enough for anybody," Bill Gates, Microsoft, 1981. (claimed to be taken out of context, which I assume to be true - since it was probably correct at the time - p.s. anyone else have one of those snazzy Commodore 64s?)
  • (10) "Next Christmas the iPod will be dead, finished, gone, kaput," Sir Alan Sugar, British entrepreneur, 2005.

On a related note, in the 2nd half of the article science fiction writer (think 2001) and futurist Arthur C Clarke had some amazing predictions in a book from the late 70s.
  • In "The View from Serendip," published in 1977, Clarke predicted the Internet: "Immediate access in the home via simple computer-type keyboards, and TV displays, to all the world's great libraries . . . And items needed for permanent reference could be printed off as soon as located on a copying machine—or filed magnetically in the home storage system."
  • In the same book, he also forecast email and online news: "Facsimile services whereby letters, printed matter, etc. can be reproduced instantly. The physical delivery of mail and newspapers will thus be largely replaced by the orbital post office, and the orbital newspaper . "
Pretty neat.

NYT: Earth Friendly Elements, Mined Destructively

This is an interesting story on "rare earth" elements; something I've begun digging into of late, as a potential investment theme - since these items will go into many of the current "green technologies".  Unlike most "commodities" which China is the world's largest vacuum (importing like mad), this niche is an area China has an abundance.  That said, the irony of this piece in terms of environmental impact - is overwhelming. 

[click to enlarge]

Via NYT:
  • Some of the greenest technologies of the age, from electric cars to efficient light bulbs to very large wind turbines, are made possible by an unusual group of elements called rare earths. The world’s dependence on these substances is rising fast.
  • Just one problem: These elements come almost entirely from China, from some of the most environmentally damaging mines in the country, in an industry dominated by criminal gangs.  Western capitals have suddenly grown worried over China’s near monopoly, which gives it a potential stranglehold on technologies of the future.  In Washington, Congress is fretting about the United States military’s dependence on Chinese rare earths, and has just ordered a study of potential alternatives.
  • Here in Guyun Village, a small community in southeastern China fringed by lush bamboo groves and banana trees, the environmental damage can be seen in the red-brown scars of barren clay that run down narrow valleys and the dead lands below, where emerald rice fields once grew.  Miners scrape off the topsoil and shovel golden-flecked clay into dirt pits, using acids to extract the rare earths. The acids ultimately wash into streams and rivers, destroying rice paddies and fish farms and tainting water supplies.
  • “In many places, the mining is abused,” said Wang Caifeng, the top rare-earths industry regulator at the Ministry of Industry and Information Technology in China.  “This has caused great harm to the ecology and environment.”
  • There are 17 rare-earth elements — some of which, despite the name, are not particularly rare — but two heavy rare earths, dysprosium and terbium, are in especially short supply, mainly because they have emerged as the miracle ingredients of green energy products.
  • Tiny quantities of dysprosium can make magnets in electric motors lighter by 90 percent, while terbium can help cut the electricity usage of lights by 80 percent.
  • Dysprosium prices have climbed nearly sevenfold since 2003, to $53 a pound. Terbium prices quadrupled from 2003 to 2008, peaking at $407 a pound, before slumping in the global economic crisis to $205 a pound.  (which is why finding companies that specialize in these type of commodities could be a long term boon - unfortunately, they all appear to be in China)
  • China mines more than 99 percent of the world’s dysprosium and terbium. Most of China’s production comes from about 200 mines here in northern Guangdong and in neighboring Jiangxi Province.  Half the heavy rare earth mines have licenses and the other half are illegal, industry executives said. But even the legal mines, like the one where Mr. Zeng worked, often pose environmental hazards.
  • A close-knit group of mainland Chinese gangs with a capacity for murder dominates much of the mining and has ties to local officials, said Stephen G. Vickers, the former head of criminal intelligence for the Hong Kong police who is now the chief executive of International Risk, a global security company.
  • Western users of heavy rare earths say that they have no way of figuring out what proportion of the minerals they buy from China comes from responsibly operated mines. Licensed and illegal mines alike sell to itinerant traders. They buy the valuable material with sacks of cash, then sell it to processing centers in and around Guangzhou that separate the rare earths from each other.
  • China is also the world’s dominant producer of lighter rare earth elements, valuable to a wide range of industries. But these are in less short supply, and the mining is more regulated

As for the global marketplace?
  • The Ministry of Industry and Information Technology issued a draft plan last April to halt all exports of heavy rare earths, partly on environmental grounds and partly to force other countries to buy manufactured products from China. When the plan was reported on Sept. 1, Western governments and companies strongly objected and Ms. Wang announced on Sept. 3 that China would not halt exports and would revise its overall plan.
  • But the ministry subsequently cut the annual export quota for all rare earths by 12 percent, the fourth steep cut in as many years.
  • Congress responded to the Chinese moves by ordering the Defense Department to conduct a comprehensive review, by April 1, of the American military’s dependence on imported rare earths for devices like night-vision gear and rangefinders.

 Options outside of China have one minor issue:
  • According to the Baotou institute, heavy rare-earth deposits in the hills here will be exhausted in 15 years. Companies want to expand production outside China, but most rare-earth deposits, unlike those in southern China, are accompanied by radioactive uranium and thorium that complicate mining. 

So outside of US military, who are the biggest users?  "Green" initiatives - especially wind:
  • The biggest user of heavy rare earths in the years ahead could be large wind turbines, which need much lighter magnets for the five-ton generators at the top of ever-taller towers. Vestas, a Danish company that has become the world’s biggest wind turbine manufacturer, said that prototypes for its next generation used dysprosium, and that the company was studying the sustainability of the supply. Goldwind, the biggest Chinese turbine maker, has switched from conventional magnets to rare-earth magnets.
  • Executives in the $1.3 billion rare-earths mining industry say that less environmentally damaging mining is needed, given the importance of their product for green energy technologies. Developers hope to open mines in Canada, South Africa and Australia, but all are years from large-scale production and will produce sizable quantities of light rare earths. Their output of heavy rare earths will most likely be snapped up to meet rising demand from the wind turbine industry.
From an investment perspecitve, expect to hear of "rare earth" initiatives by miners in the months & years ahead, and giddy stock market speculators rushing in much like lemmings - notwithstanding the fact that any large scale production will take years to ramp up, much like a new potash mine.  Details should never get in the way of a good investment theme. ;)

NYT: Vietnam is Refining Its Role on the Global Stage

We've discussed Vietnam in a tangental manner in the past, mostly as a potential destination for corporate America once Chinese labor becomes too expensive [Feb 28, 2008: China Raising Minimum Wage] - but this is our first post completely focused on the subject.  Strangely, while far larger countries (and economies) do not yet have their own ETFs, Van Eck Global launched Market Vectors Vietnam (VNM) this summer - information here.  Thus far the performance has been uninspiring, partly due to a currency devaluation (5%) the country has done, to try to compete with China. [Dec 15, 2009: NYT - China's Economic Power Unsettles Neighbors]  Thus far the ETF has attracted about $80M in assets, so a not too shabby start.

Unlike Malaysia, Singapore, or Indonesia - I have yet to really dig into Vietnam to see if it's the proper time to invest, or what the core strengths are - but certainly it will be on our radar in the years to come.  Currently the GDP of the country is about $250 Billion, which puts it at par with Singapore.  That said, Vietnam has 86 million people while Singapore has 5 million.  Agriculture accounts for more than half of GDP; the US accounts for 20% of Vietnam's exports (Japan next at about 12.5%).

Via New York Times:
  • More than many countries, Vietnam has been buffeted by the ups and downs of globalization.  A relatively new player in the global economy, it benefited from a flood of Western capital and interest in the 1990s and early this decade, only to be devastated by the reverberations of the latest economic crisis in the United States, 7,500 miles away.
  • Vietnam’s strategy for competing in the global arena — and a relatively successful one until recently — had been to carve out niche markets where it could deliver, say, quality products like handicrafts or specialized clothing that China could not.
  • But all of Vietnam’s main export industries are heavily dependent on sales to the United States. In 2009, the United States was the biggest importer of Vietnamese goods, absorbing about a fifth of the country’s exports.
  • Furniture companies, to take one industry, have had a huge drop in orders after the rapid downward spiral in sales of new homes in the United States. “A lot of the smaller factories have had a very, very difficult time,” said Michael Gunther, a manager at Honai Furniture, a 900-employee company about 20 miles outside of Ho Chi Minh City that makes items as varied as bedroom dressers and parts for bows and arrows.
  • Vietnam’s economy grew 4.6 percent for the first nine months of 2009, compared with the same period in 2008, according to the World Bank, in part because of government stimulus measures. While a developed country like the United States would be happy with such growth, Vietnam in recent years had been able to sustain an average growth rate above 7 percent.
  • At the same time, the country has seen a strong retrenchment in exports. In the first 10 months of 2009, Vietnamese exports declined 13.8 percent compared with the period in 2008, the World Bank said.
  • Though that drop is less than declines in most other developing countries, it could make 2009 the first year with a decline in exports since the beginning of Vietnam’s economic reforms, the World Bank said.
  • The pullback is a significant growing pain for Vietnam, one of the world’s newer export economies. Compared with others in the region like Thailand and Malaysia, Vietnam is still an infant in its experiences with globalization.
  • For decades after the Vietnam War, the economy limped along, sustained largely by its agriculture. Until President Bill Clinton and the Senate lifted the United States trade embargo in 1994, Vietnam was a bit player in the export market. Even after that shift, it took years for the country’s manufacturing sector to be competitive, particularly given its location near more mature exporting countries like China.
  • In order to square off against China, many manufacturers try to rely on niche industries and specialties rather than competing solely on price or low labor costs.  Many factory owners say that labor costs make up about 20 to 30 percent of the cost of manufacturing (that low of a % is actually quite amazing when you think about it - and why global wage arbitrage will continue to hamper the middle class in Western countries for decades to come), so cutting workers, overtime or wages does not help much in response to lower demand. In addition, the shipping and transportation networks are much more robust in China, which can put Vietnam at a disadvantage.

  • As Vietnam’s tourism market grows, particularly attracting new golf resorts and vacationers from other nearby countries in Southeast Asia and elsewhere, furniture manufacturers like Sadaco are turning to supply such new resorts.
  • Corporate enterprise is still guided by the hands of the officially socialist government of Vietnam, a country where the hammer-and-sickle flag flies alongside the red Vietnamese flag at many government office buildings and where socialist motivational banners are a common sight at factories.
  • The Vietnamese government tried several measures to force factories to keep their employment levels up during the economic downturn, and it adopted a sizable fiscal stimulus package as well.
  • But many economic experts are optimistic that a global recovery will help the country regain its growth track.  “The government is learning through experience,” said V. Bruce J. Tolentino, chief economist at the Asia Foundation, a nonprofit group based in San Francisco. “They are pragmatic, and that pragmatism is serving them well.”

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