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Sat, 26 Jul 2008 11:40:42 GMT

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Friday, January 04, 2008

Fri, 04 Jan 2008 20:58:59 GMT

Since mid ’06, informed observers and market participants have fretted about recession, particularly in light of relentless fed tightening and an evident housing bubble.

Separate from the subprime and subsequent credit crisis, since mid ’07, transports, a leading indicator, have experienced in clear and frightening slowdown.

Today, economic numbers, specifically the uptick in December unemployment, all but confirmed that which is already knew and the market, which had even as late as 3Q07, defied all odds and soared to record highs, finished the first/abbreviated trading week down, effectively losing ’07 gains for the S&P. The insatiable American consumer, as this disappointing retail season seems to suggest, is finally tapped out.

With slowdown and inflation fears, one can’t but help be in a quandary with visions of stagflation running rampant.

It’s worth revisiting, however, a normative perspective. Of course an economic slowdown is in no one’s interests (except maybe for bankruptcy lawyers/advisors and wily investors). Prosperity does not cure all, but it does alleviate much suffering, providing meaningful work, food for families and resources for other human endeavors (charity, the arts, basic scientific research, etc).

That said, the business cycle is a normal and healthy part of society – the undulations of economic activity ultimately serve to provide more stable long-term prosperity through periods of investment, consumption and weaning. It is no different than other cycles (water, nitrogen, carbon, psychological). I’m sure that even sunny SoCal residents can agree than perfect weather every day isn’t all it’s cut out to be – warm and sunny every day will get you to drought sooner or later.

What’s the point? First, the housing bubble (which arguably was simply a transfer of excess from the tech bubble to another asset class) should never have occurred. While homeownership is unequivocally the American dream (and a good one), a distinction must be made between a ‘dream’ and an inalienable right. It is as much injustice to make/receive improper loans as it is to deny them. For example, with my meager salary, I have no business buying a Park Ave penthouse, even if some buffoon loan officer is willing to lend it. Likewise, NINJA (no income/job/asset) applicants have no business buying a modest house (what’s wrong with renting?). Should we strife to increase the income level, wealth and well being of all? Absolutely! But even then, we ought not live beyond our means (or encourage others to do so), yet we have and the bill is finally coming due.

Second, the government absolutely is facing a moral hazard as it explores bailouts for the millions of families that [dare I say it] foolishly took out loans that they could not afford (informed or not). Likewise, central banks such as the Fed are faced with a mirror situation in their determination to bail out lenders. Repeated, unprecedented injections of liquidity have not resolved the credit crisis, and maybe that’s a good thing in the long term (but man is it going to hurt in the short term). It should bother us that talking heads are pounding the table on easing – it’s not their job to sustain asset prices… and even if it were, they can’t! And what happened to inflation concerns?

Finally, living in the richest country in the history of human civilization should provide us with some measure of comfort. A) it’s not that bad, B) each one of us will be okay even if it were (basic needs will be met) and C) life goes on.

freebie - The Case for Inflation (draft)

Tue, 11 Dec 2007 14:40:20 GMT

I believe that inflation is here to stay, rationale as follows.

Monetary policy:

- The Fed is in a tough spot and is forced to keep rates low. Despite a rational decision to weight ‘non-core’ inflation more heavily, there will remain political/lobby pressure to continue easing in the midst of the ongoing credit crisis. The deep pockets for which a bail out would help are far more influential than voices calling for a wiser, long term monetary policy.

- The Fed can ‘afford’ to let inflation run a bit because of the acceleration in the credit squeeze, and because food (15% CPI)/energy is still a relatively small percentage of total American consumer spend (not the case elsewhere). Increasing recession risk will force the Fed’s hand, regardless of whether it is viewed that current recession fears are inflation, credit or business cycle based

Tight commodity supplies are driven by record demand [from secular shifts], despite record production:

- Agriculture inventories remain low despite a record 15 year fair weather run and record yield improvements (better GMOs, technology, science) from all producing countries except for Australia. For wheat, inventories were so tight that 1% drop in supply lead to a doubling of price; once bad weather hits or there's a crop failure, prices will skyrocket again

- Mining consolidation demonstrates that its still too costly (capital and time) to develop greenfield projects! This is extremely bearish for supply growth and provides support for sustained pricing

- Backwardation assumes the world will be flooded w/cheap supply of metal, not realistic if you look at demand vs greenfield/mine expansions

- US Farm/Biofuel policy promotes

Rising income = more and better food:

- 80% of the world population lives on less than $3,000/year, incremental growth will be allocated to improved diet ahead of everything else

- Meat consumption still has a long way to reach parity (kg/person/year):

o NA: 125

o Developed world: 85

o LatAm: 62

o China: 50

o World: 40

o Asia: 30

o Africa: 17

Investor/management psychology:

- Investment managers will increasingly view commodity stocks as inflation hedges, driving multiples for miners/oil majors (where previous capital appreciation was earnings driven). We will likely see new money into the names (as volatility and inflation spike), and consolidation has decreased the investable universe.

- Inflation is a positive feedback loop, partially a self-fulfilling prophecy. One example of this playing out is that a generation of just-in-time managers (trumpeted in MBA programs since early ‘80s) will realize the value of stockpiling, exacerbated existing demand pressures and tying up working capital (which will actually represent an intelligent use of cash in an appreciating asset) – the urge to hoard will be evident on balance sheets (and positively in earnings, though not ‘clean’ earnings, ex. XOM in ’79 had 35% of earnings from inventory gains).

- Most commodities futures charts remain in backwardation, signaling investor and consumer doubt over high commodity prices. As inflation fears increase, we will see curves move towards contango – resulting in rapid revaluation of commodity equities (multiples and earnings estimates will rise)

o FCX is the only mining major in the S&P and Newmont the only gold miner

- Evidence that the Street still doesn’t believe in sustained metals/food prices – Inco/Fal, 2 of the 3 largest copper producers and public for ages, were sold to CVRD and Xstrata at (in hindsight) absurdly low multiples; if the street believed in inflation, they would’ve stayed public

Ways to play:

- Primary beneficiaries will continue to be miners, ag stocks (fertilizer, equip and seeds/chem), and limited oil/gas names.

- Everything we’ve seen indicates that farmer expenditures are proportionately tied to cash receipts, which are at record highs and unlikely to fall precipitously.

- Need to focus on miners w/unhedged reserves rather than fixating on current earnings, otherwise may face same issue as oil majors

- BMO’s Basic Points indicates that we’ve seen a phenomenal run in the past 5 years of these names, and the next 5 years may turn out even better, albeit with increased volatility and uncertainty across all securities

Google/Open Handset Alliance

Mon, 05 Nov 2007 19:36:23 GMT

In a widely speculated move, Google and 33 industry partners finally announced an alliance for a fully integrated software stack for devices – all open source. Not exactly the gphone that people had been hoping for, and while the technicals may bore most (it is very much developer focused), I think the potential significance of this announcement continues to be severely under appreciated.

In the US, it seems we all have a love/hate relationship with our cellphones. Rightly so; they are central to the telecom revolution that has radically altered the way we do life – to the point where we feel naked without them. Yet we also hate our phones in a visceral, vehement way that only the closest of loved ones could elicit. I blame this on a horrendous business model that stifles innovation and creates onerous and expensive user experiences. Thank you FCC and greedy carriers.

Android, the new open platform, is a brilliant way for software developers, search engines, content producers, second rate handset providers and subscale carriers to stick it to the Man.
It’s certainly possible that the status quo will not change. Look no further than the linux revolution - windows still commands ~90% of the [client system] market. But oh the possibilities!

What will it look like? Who knows! That’s precisely the beauty of it; this is the type of platform that catalyzes innovation, innovation that is inherently unpredictable but wonderfully beneficial.

Facebook’s decision to open it’s guts to developers is a prime the example of how said innovation manifests itself – who knew there would be such rabid demand for vampire applications, digital plant presents and super poking? Yeah, Google’s OpenSocial can be bigger, though I personally have no desire to sign up for another online account.

Back to the phones, either way, consumers win big. Go Google!

Monday, November 05, 2007

Mon, 05 Nov 2007 19:01:31 GMT

Farewell to American hegemony?

Of the largest public companies in the world today (market caps greater than $300bn), 4 of the 7 are Chinese (Exxon, GE and Microsoft make up the balance). One may argue normatively that this reality of rich valuations is not in line with fundamentals, citing a small investable universe and a Chinese regulatory environment that forbids short sales and prohibits fund flows out of the country. But if you factor in what appears to be an undervalued yuan, let’s just call it a wash. For what it’s worth, I would have a hard time investing in most public Chinese company as a value play – multiples don’t leave much margin of error.

What’s striking about PetroChina’s record shattering trillion dollar valuation is not just that it is more than Exxon’s and GE’s combined, or nearly triple Microsoft’s, or the fact that it’s nearly the size of S. Korea and Canada’s GDP (sorry guys), but that Gazprom had only recently been at the top of the list for the first company to break the trillion dollar mark (to be fair, slapping Gazprom with the same PE as PetroChina’s would get you close, but that’s some real cheddar we’re talking about).

To answer the question - yes, but it would be hard to see any sort of doomsday scenario for American influence.

Tuesday, October 30, 2007

Tue, 30 Oct 2007 01:06:16 GMT

What’s possibly more depressing about our ‘me’ culture, is the explosion of said worldview in China. As James Mann observes, American policy towards China has long been predicated upon the assumption that economic success will necessarily lead to democracy in China. That is, we’re willing to maintain a close relationship with an overtly brutal regime with the hope that its rising middle class will assert democracy, human rights, transparency and justice for the rural/poor in order to ensure a stable and prosperous future. But Simon Elegant notes that the beneficiaries of the unprecedented wealth creation in China, her young middle class, generally doesn’t care for politics. Economic independence and the opportunity to pursue hedonistic ends, it appears, is too intoxicating – they’ve then no reason to challenge status quo.

Sociologists can point to the one-child policy, China’s newfound prominence, disregard of traditional values, horror stories of the Cultural Revolution and lack of religion as explanations for this phenomena; but all the same – there exists a genuine challenge for Western policymakers to engage China while not being complicit with their abuses (condemning would be asking too much).

Some numbers to chew on (not alarmist, more people is always better, but for effect): the under 30 crowd represents 200 million adults today, a number that is growing to 500 million in 2015 (EU’s got 494 million). This year, 37 million of those will travel internationally (more than the U.S. and Europe combined). Talk about headcount!

Is this not the classic definition of oppression, where the very policies set by the Communist regime, ultimately for self-preservation, are ones which stoke economic development (and hence placate the apolitical but potentially influential middle class with prosperity) at the expense of the rural peasant and environment?

We are already witnessing record numbers of demonstrations over the growing income disparity, healthcare and education gap between the middle class and poor. To be sure, the ruling party is aware and taking moderate steps – but even those fall woefully short. I truly hope my contemporaries in the motherland will realize that they can and should change before social unrest is manifest on too grand a scale.

Wednesday, October 10, 2007

Wed, 10 Oct 2007 20:59:21 GMT

today's thomas friedman oped offers an interesting insight into our web 2.0 generation.

cool to be informed and even passionate about issues, but unless it translates into real change (political, commercial, cultural), then it's all for naught.

friedman distills that generalization into a call for political engagement. he rightfully asserts that somehow, we've allowed our consciences to be assuaged via nominal participation, as though the appropriate response is some form of online support (emails, e-petitions and the ubiquitous facebook groups) or bracelet/ribbon wearing. he even knocks more hands on involvement such as overseas travel and volunteering.

though they're all incrementally progressive, noble even, they are not the end goal. after all, a healthy democratic society requires not only an informed and educated population, but an engaged and voting one as well.

for friedman, the ultimate solution is political. i guess that too is a commendable start, yet somehow still inadequate, if not outright moot as it doesn't address the deepest human need.

Wednesday, September 26, 2007

Wed, 26 Sep 2007 20:05:40 GMT

open mike on cnbc just caught maria bartiromo practicing ahmadinejad's name coming off a commercial break.

live tv rocks.

Wednesday, September 26, 2007

Wed, 26 Sep 2007 11:22:40 GMT

while world leaders deserve some measure of respect intrinsic to their titles and as a proxy for their countrymen, there is also an implicit, if not outright fiduciary, duty to exercise good and just stewardship.

as much as i desire grace and mercy, some behavior is simply unacceptable. and by that, of course, i have ahmadinejad in mind.

i have no gripe about his rhetoric on american hegemony, it certainly serves its purpose as a counterpoint and perhaps, though with twisted and nefarious intent, even a potential truth bearer.

however, the absurd and dangerous non-sequiturs that not only pepper, but are the backbone of his discourse should alarm all.

did anyone catch his remarks at the UN yesterday? of particular concern is his response to the iranian reporter about homosexuals in iran; it is a stark reminder that illogic and hate continue to assert reign, and that is something we should all be uneasy about.

Thursday, September 20, 2007

Thu, 20 Sep 2007 13:59:46 GMT

CAD:USD parity... what a world we live in

also, i saw a bright shooting star over manhattan tuesday night, 9ish.
awesome anachronism.