Chris Lau - Seeking Alpha

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Thursday, July 30, 2009

Notes on Blogging and on Michael Lewis

Michael Lewis is a columnist for Bloomberg News. I heard about him through other investors a few months ago. He is the author of ''Liar's Poker,'' ''Moneyball'' and ''The Blind Side.'' Incidentally, the latter book will soon be a major motion picture.

Over the past few weeks, there were many rumors spread about the blogosphere and possibly mainstream media. Although the validity of blogs must always be questioned and verified (including my own...by you the reader), Lewis comments on the following rumors:

Rumour No. 1: ''Goldman Sachs controls the US government.''

Rumour No. 2: ''When the US government bailed out AIG, and paid off its gambling debts, it saved not AIG but Goldman Sachs.''

Rumour No. 3: ''As the US government will eat the losses if Goldman Sachs goes bust, Goldman Sachs shouldn't be allowed to keep making these massive financial bets. At the very least the $US11.4 billion Goldman Sachs already has set aside for employees in 2009 - $US386,429 a head, just for the first six months - is unfair, as the US taxpayer has borne so much of the risk of the wagers that generated the profits.''

... Open this link for the full article. It is a worthwhile read.

Here is an interview of Michael Lewis talking about the bank crisis.

http://fora.tv/2009/06/01/Michael_Lewis_The_End_of_Wall_Street#fullprogram

To get a break from investment finance, skip over to:

04.Lack of Professionalism as a Father: Poop in the Pool and
05.Advice for Future Parents

Those sections are absolutely hysterical!

Wednesday, July 29, 2009

Overconfidence

Malcolm Gladwell wrote an excellent piece about overconfidence in The New Yorker. I bring this to my own attention as well as yours for a number of reasons. It was my experience that one of the ways to produce good research, after obtaining the facts that matter, is thinking objectively.

Separating one's own emotion in analyzing a stock is a requirement. In trading, this same lack of emotion is required. At some point in time, you make consistently profitable trades. Confidence sets in. Overconfidence might set in too. Gladwell's article puts overconfidence into perspective:
Most people are inclined to use moral terms to describe overconfidence—terms like “arrogance” or “hubris.” But psychologists tend to regard overconfidence as a state as much as a trait. The British at Gallipoli were victims of a situation that promoted overconfidence. Langer didn’t say that it was only arrogant gamblers who upped their bets in the presence of the schnook. She argues that this is what competition does to all of us; because ability makes a difference in competitions of skill, we make the mistake of thinking that it must also make a difference in competitions of pure chance. Other studies have reached similar conclusions. As novices, we don’t trust our judgment. Then we have some success, and begin to feel a little surer of ourselves. Finally, we get to the top of our game and succumb to the trap of thinking that there’s nothing we can’t master. As we get older and more experienced, we overestimate the accuracy of our judgments, especially when the task before us is difficult and when we’re involved with something of great personal importance.

Monday, July 27, 2009

Weekend Thoughts

Close attention needs to be given to China and its economy. To achieve this, I bring the attention to John Mauldin's Weekend Thoughts.

This will explain in greater detail why the U.S. dollar is maintaining its value (it was thought that printing over $700B+ would cause its currency to collapse...

...let it just be summarized as interwoven entanglement from globalization); how "growth" in China is possible; impact on commodity prices.

In this note, I defer to Zero Hedge's notes on Mauldin's newsletter accessible on the link below. ZeroHedge did a good job summarizing key points investors need to be aware of:

http://zerohedge.blogspot.com/2009/07/some-weekend-thoughts-by-john-mauldin.html

Friday, July 24, 2009

A Backwards World

The sentiment in the market is reaching levels of optimism that needs to be viewed with risk adversity in mind. A general pros and con list would be a good way to determine, at a fundamental level, the reasons behind the market rise, and the risk factors that still exist to undermine it.

Pros for supporting the S&P 500 near 1,000:
  1. Companies beat profit expectations. Examples: Ford
  2. US Housing figures improved for 3 months in a row
  3. Some Banks are reporting strong earnings e.g. Goldman Sachs
  4. Demand improved e.g. Family Department Stores - FDO, automobile, housing
  5. Rising unemployment is not relevant because it is a "lagging" economic indicator (meaning it will keep rising even after the economy improves)
Cons (counter-arguments):
  1. Companies beating profit expectations did so by cutting costs. This "organic" growth is a temporary phenomenon and illustrates the overall economy is still contracting
  2. Improving housing figures driven by low mortgage rates. Are rates going to stay low? (Rising rates hurt market but would signal a recovery is underway)
  3. Some of GS profits are driven by profiting between the spread between government money and interest rates
  4. Demand driven by food stamps (FDO), tax credits (housing, auto)
  5. Rising unemployment is actually a coincident indicator because this recession is driven by problem of credit.
Moving on, I turn to John Mauldin's latest newsletter. In it, Mauldin is discusses his view on the government transparency in exposing its end game. In short, he references past materials illustrating reasons why this should not be done. Specifically, his view on increasing rates is described below:

The US Federal Reserve has moved faster but already seems to think the job is done. "Quantitative tightening" has begun. Its balance sheet has contracted by almost $200bn (£122bn) from the peak. The M2 money supply has stagnated since January. The Fed is talking of "exit strategies".

Is this a replay of mid-2008 when the Fed lost its nerve, bristling over criticism that it had cut rates too low (then 2pc)? Remember what happened. Fed hawks in Dallas, St Louis, and Atlanta talked of rate rises. That had consequences. Markets tightened in anticipation, and arguably triggered the collapse of Lehman Brothers, AIG, Fannie and Freddie that autumn.

Source: http://www.investorsinsight.com/blogs/john_mauldins_outside_the_box/default.aspx

General Comments: Is it too soon to talk about raising interest rates? I would think so. Mortgage rates would rise too soon, and the excess over-leveraged debt still in the market will cost more to finance.

In his July 17th newsletter, Mauldin comments about bank earnings and the associated write-offs:

Banks that are reporting so far this quarter seem to be saying that the write-offs will start to level off in about two quarters, although banking expert Chris Whalen says that the level may stay higher than we think for longer than we think. There are a lot of assets to write off, and they are just now getting to the commercial real estate problems. This is going to take time.
Disclosure: I have been expecting (and calling for) a correction in Commercial Real estate in the U.S. It hasn't happened yet. See SRS.

One more important point to summarize is global leverage ratios. Again, the key points are extracted. We need to get our heads around the importance of monitoring figures that matter, even though stock prices are nice to watch:
  • Tangible common equity is all the rage, and that is what the recent "stress tests" measured, as opposed to tier 1 capital, which includes preferred stock (which would basically be the blue portion.) TCE only includes common shares.
TCE for:
  • U.S. - mid-40s (leverage is 12:1)
  • U.K. - ~ 55 (leverage is 40:1)
  • Eurozone - ~55 (leverage is now 35:1)
Comment: It is for this reason that U.S. debt/treasury offers the best of the worst. See TLT.

Thursday, July 16, 2009

Bank - TARP - Failure #1 - CIT Group Inc.

As reported by Bloomberg here, CIT stands to be the first rescued bank (December 2008) that will now fail. This bank failure will cost U.S. taxpayers $2.33B.

The possible impact on the economy will be small businesses. They may go bankrupt because they are unable to draw line of credit to fund its daily business, even though they run a healthy business.

If CIT is allowed to fail, this marks the first quiet admission from the government that TARP is not a source for infinite funding. With Goldman Sachs and JP Morgan looking healthy these days, at least in the short-term, the financial sector won't collapse like everyone once thought it would and that the bigger will survive if not thrive.

My bearish call and concerns in option ARM (cheap mortgages that reset to higher rates) and commercial real estate debt still stands. Its concern may be ignored for now. After all, betting against the market when the tide against you is not a good idea.

Monday, July 13, 2009

Free iPhone Application Download - Free Real-time Stock Quotes

I am one of the regular users in kaChing Inc.'s virtual trading site which I found via Facebook. In that one-year period, kaChing launched a stand-alone site, linked with MySpace, soft-launched on Yahoo, and it now has an application built on the iPhone platform.

This is significant.

The virtual trading site is already approaching 400,000 registered users. Now that the site is accessible on the iPhone, I believe that the site will attract a new audience of modern users who are keen to maximize their use of mobile applications.

This is a win-win.

Having more users will increase the knowledge base of the virtual community, foster new and insightful trading and investing ideas, and randomly draw in ordinary people who are just learning about investing.

There are over 10,000 applications written for the iPhone, and over 1 billion applications have been downloaded or purchased since Apple's application store launch. The numbers appear mind-boggling when one forecasts the potential number of downloads for this new kaChing application for the next 12 months.

Here is a list of some of the key features:
  • Free real time quotes backed by top rated stock research from kaChing's investors to give you the stories behind the stocks
  • Shake the iPhone to get investing ideas mined from the top performing portfolios
  • Connect existing kaChing portfolio (or start a new one) on the iPhone
  • Follow favorite investors in real time
Here is the official announcement and a link to the free download:
http://www.kaching.com/kaching#iphone_app

Screen Shots:

1. Get Investing Ideas

2. View Portfolios

3. Get Stock Quotes and Opinions
Disclosure: on Opinion only. kaChing.com is privately owned and backed by well-known venture capitalists. However, if I could invest in this company, I would! In the meantime, I'll take the next best thing: becoming a better investor through my involvement in and the support from this virtual community. Get updates of these blog entries via twitter at http://twitter.com/chrispycrunch

Wednesday, July 08, 2009

Soros, Kaynes and ...Beauty Contestants

Soros on Market Instability



I found this video originally posted by Ritholz here:
http://www.ritholtz.com/blog/2009/07/video-o-rama-roller-coaster-ride-into-the-long-weekend/

Soros is a brilliant macro investor. In the video, he describes China as being the main beneficiary of the aftermath of the market crash in 2008.

He also expresses his view that markets do not tend towards equilibrium (i.e. efficient market hypothesis is incorrect). This is contributing to market instability. Market instability runs contrary to the Graham/Dodd's approach of valuing a security using discounted earnings power. It is for this reason that Hedge funds do not use this, because stock prices don't work solely on earnings growth.

I liked this line (from Keynes) describing the above point: beauty in a beauty contest is judged not on how beautiful a person actually is, but on what others all perceive on who is the most beautiful.

By that logic, must hedge fund managers be, metaphorically speaking, beauty contestant judges? In the environment of market instability, I would say so.

Monday, July 06, 2009

Robert Shiller: How Animal Spirits Drive the Economy



In this video, Robert Shiller (Yale Professor) discusses the global home price bubble. This is in context to his new book, Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism. Video originally blogged by CalculatedRisk.com.

Here are my high-lights (if you don't want to watch the entire 2-hour video):
  • View the 44-45 minute mark, Brad DeLong discusses the P/E Ratio (10-year average). Note that this measure is used by Buffett and Dodd extensively in assessing the valuation of securities. When the earnings target keeps changing, this proves to be a challenge for individual Securities Analysts.
  • View Chapter #19. This is Jeff Madrick's commentary on "Efficient Market Hypothesis."
  • View Chapter #28. Comments on the automobile and bank bailouts make a lot a sense.
To paraphrase on Chapter #28, Jeff Madrick thinks the government should spend more time obtaining more information on the problem, be more critical on the assumptions (that the auto/banks have "hit bottom") and be looking more closely at the financial books of these companies.

Disclosure
: Long Ford.

Friday, July 03, 2009

Seth Klarman: Why Most Investment Managers Have It Backwards

If you don't follow him, Seth Klarman is the founder and president of the Boston-based Baupost Group. He is a true "value investor." I originally found this post from Jack McHugh (The Big Picture site).

In brief, Klarman talks about the problems of rewarding fund managers for short-term performance. This form of compensation is especially prevalant in the mutual fund industry.

Here is the link:

http://www.advisorperspectives.com/newsletters09/pdfs/Seth_Klarman-Why_Most_Investment_Managers_Have_It_Backwards.pdf

Key Points:

Performance is almost universally evaluated using short-term results – managers are compared using quarterly, monthly, or even daily returns, creating extreme short-term pressures. “Managers who do well in the short term are rewarded with more assets,” he said. “Those who do not do well in the short term often don’t survive to see the long term.”

It is better to invest the way endowment funds are managed:

Klarman strives to avoid such counterproductive incentives, mostly by investing for clients – like endowments – with a long-term focus, and avoiding others – like funds-of-fund and unsophisticated investors – whose goals may be at odds with his own.

On Fear and Greed:
Having a long-term focus requires keeping the emotions of fear and greed in check. For most of the last 12 months, fear dominated greed, causing investors to flee to cash, despite its negative yields.
Side Comment: It continues to be quite a feat to have 540 members in my Intelligent Investing group on kaChing (a site that opens transparency in the industry with virtual portfolio mirroring management).

Be Focussed:

Narrowly focused managers, such as junk bond managers, he said, are often forced to be 100% invested, regardless of the risk/return profile of their investable universe. Such constraints eliminate the potential for contrarian thinking, which is critical to the success of value investors like Klarman.
Klarman's Comments on the Current Rally:

Klarman called the market rally that began in March “increasingly speculative” and driven by investors who “looked for and saw green shoots – or thought they did.” He questioned whether we can know if things are “stabilizing or pausing before they get worse.”

Recently, Klarman has spent a lot of time thinking about what a bear market rally would look like. He concluded that it would closely resemble the current rally – a bold move, fueled by speculation based on green shoots or similar wishful thinking, led by more speculative securities.

Predicting the Future?

“Value investors don’t know what will come next,” he said. “They must focus on the issue of price versus value and owning things because they are cheap.” The problem, he noted, is that undervalued stocks can remain cheap for a long time.

Inflation, however, is one outcome that Klarman clearly fears, and he has taken out “massive” portfolio protection through interest rate caps and swaptions, he said. He prefers these two hedging techniques because he pays a one-time premium and can tailor them to the maturities he wants to protect. If rates do go up, he can take the protection off.


What is Klarman Investing in NOW?
Klarman has moved portions of his portfolio into deeply discounted senior corporate and securitized mortgage debt, which he said offer very attractive returns relative to their risk.

Investors “overreacted” and sold off these securities, he said. Valuations were further depressed by legal uncertainties – in some cases, companies must go through bankruptcy before investors will earn satisfactory returns. The analytical complexity of evaluating securitized assets, each of which has unique characteristics, also contributed to their being underpriced.

[...]

Klarman sees fewer opportunities today – a “sudden dearth” that “makes us more than a little bit miserable,” he said. But he recognizes that “money is made when the crop is planted, not when it is harvested,” acknowledging that he expects a strong payoff from the repositioning of his portfolio last fall.


What Klarman is Asking:
The biggest question in Klarman’s mind concerns moral hazard, and whether the government has created “the mother of all moral hazards” by instilling a belief in investors’ minds that all crises can and will be solved by government actions. Such a belief, he fears, would skew every investment decision toward unnecessary risk taking.

Comments:
Klarman assesses the risk of higher inflation, higher taxes, and the loss in faith in the U.S. dollar. He says investors must determine the right multiple to pay "for companies that benefit from government backing and when government intervention will end. "

The mini-bubble now forming exists in sectors and companies being bailed out. This in turn expanded the price price multiples, since investors are willing to take on more risks. Klarman recognizes this, yet his deepest concern is on the area of moral hazards.

Get blog entry updates via twitter: http://twitter.com/chrispycrunch

Thursday, July 02, 2009

Neither Here Nor There

Below is a highlight posted by Matt Blackman on his blog. It is his opinion that there is no discernable trend or direction in the market right now.

We are currently in a technical trading territory – the fundamentals are weak and we are currently in a trading range. Stock prices have been so far driven by little more than hype and hope – hype by the government that the greatest series of bailouts in history will solve the crisis and hope by investors that earnings start improving soon to legitimize the recent rally.

Given that the S&P500 is back above both the 50 and 200-day moving averages means that the uptrend is technically still alive. However, it is probably not the time to be taking any sizable long or short trades until we get further confirmation one way or the other.

Source: http://tradesystemguru.com/content/blogcategory/34/68/