Notes on George Soros, Rosenberg on CNBC

The Mighty U.S. Dollar No Longer?
In the U.S., the S&P 500 is now trading over 60% higher from the bottom reached in March. For we Canadians, this return looks more impressive than it really is: the U.S. dollar fell 20% against the Canadian dollar in that time. Similarly, the U.S. currency is weak against the Yen- and the Euro. A massive U.S. dollar "carry trade" may be in the works, or maybe not.

It remains to be seen.

Rosenberg vs. CNBC

What's Next for Stocks

Michael Pettis is a professor at Peking University’s Guanghua School of Management, where he specializes in Chinese financial markets, and a Senior Associate at the Carnegie Endowment for International Peace.

So, what business does this blog or any individual have, in taking advice or developing/validating a theme for an investment portfolio?

China is a driving force in influencing currency levels and commodity prices. The important point made by Pettis is marked with a bold font.

I spend a lot of time talking to large hedge funds and institutional investors – with at least three or four one-on-one meetings a week – on China and market conditions. It worries me that recently I have heard investors say many times, generally very sophisticated investors, that we are clearly in a bubble and the best strategy is to ride it out as long as we can. This has almost become one of the mantras of sophisticated investors – the less sophisticated, I guess, assuming that the crisis is safely behind us.

It worries me because of course we can’t all collectively ride the bubble and bail out before everyone else does. I wonder if this means that an awful lot of the big funds can be expected to rush to the doors at the same time when things turn bleak. If so, of course, that means we are likely to see both the upside and the downside market risks increase. Several of my fund management friends have insisted the problem has to do with the nature of hedge fund compensation. Most of the hedge funds were hurt pretty badly in the financial crisis, but a very large number of them were very pleasantly surprised by how quickly they’ve been able to make back a substantial share of their losses.

This means that recovering the high-water mark, which many thought would take years, has suddenly become a lot easier, and many expect that if the markets go on as they have been doing for another year or so they’ll be back in business (that is, able to charge performance fees once again). This may create a natural, albeit dangerous, incentive to take big risks on the likelihood of a rapid recovery.

Source: http://mpettis.com/2009/10/chinese-railways-and-speculating-pig-farmers/

Arts and Science: Ying and Yang

Below is an interview Schmidt in regards to its decision to purchase You Tube. Schmidt is, of course, the CEO of Google.

Finance is as much a science as it is an art. Assigning a dollar value to a privately owned company is an art, in that this value is subjective and relies heavily on the optimism or pessimism at the time, a value to a forecast of worth, and a value of what the company is worth in terms of what it can do for and with its buyer.

In this case You Tube's buyer was Google:

Baskin: What methodology did you use to come up with that number?

John P. Mancini, an attorney working for Google, objects.

Schmidt: My judgment.

Baskin: Was it based on cash flow analysis? Comparable companies? What were you using as the basis for your judgment?

Mancini objects.

Schmidt: It's just my judgment. I've been doing this a long time.

Baskin: So you orally communicated to your board during the course of the board meeting that you thought a more correct valuation for YouTube was $600 million to $700 million; is that what you said, sir?

Mancini objects to characterization of the testimony.

Schmidt: Again, to help you along, I believe that they were worth $600 million to $700 million.

Baskin: And am I correct that you were asking your board to approve an acquisition price of $1.65 billion; correct?

Schmidt: I did.

Mancini objects.

Baskin: I'm not very good at math, but I think that would be $1 billion or so more than you thought the company was, in fact, worth.

Mancini objects.

Schmidt: That is correct.

Later...

Baskin: Can you tell us what reasoning you explained?

Schmidt: Sure, this is a company with very little revenue, growing quickly with user adoption, growing much faster than Google Video, which was the product that Google had. And they had indicated to us that they would be sold, and we believed that there would be a competing offer--because of who Google was--paying much more than they were worth. In the deal dynamics, the price, remember, is not set by my judgment or by financial model or discounted cash flow. It's set by what people are willing to pay. And we ultimately concluded that $1.65 billion included a premium for moving quickly and making sure that we could participate in the user success in YouTube.

Source: http://news.cnet.com/8301-31001_​3-10360384-261.html

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Crossing...the...Finish Line (Memo to Followers)

Dear Followers:

KaChing is scheduled to launch trade mirroring in under two weeks. However, this portfolio is likely to be delayed in qualifying for mirroring on launch day. Crossing...the...Finish Line of the race will need to wait.

These are the following reasons:

1. Under-performance against the s&p (largest loss was in commercial real estate) over an 8 month period.

2. Lack of sticking to a stated strategy.

3. Maintaining an above-average cash level provided superior safety but sacrificed on potential gains.

My portfolio IQ score is 126. To qualify, a score of 140 is required. It is close to the finish line, but it not close enough.

Investing is not a race. Investing is about (1) not losing assets and (2) beating the market over a very long period of time.

To Beginners:
There are a number of followers who are new to investing. These beginners are smartly learning about the stock market instead of being a sucker (a sucker is born every minute, but clearly "kaChingers" are not one of them).

My advice to Beginner followers:
* Open an IB (Interactive brokers) account and have a balance of at least $5,000-$10,000.

To Interested Investors:
Mirror more than one qualified kaChing "signature investors." This will give you the portfolio diversification.

Tip: Be sure to review the "analytics" first for investors you intend to "mirror." After all, the IQ number will only tell you risk-adjusted return, investment management focus, and ability to write stock research. Since the cost of transactions on Interactive Brokers is low, buy your own stocks too.

As for investors interested in mirroring my portfolio, the game plan stays the same. When the IQ score reaches 140 some time after the official launch day, mirroring my portfolio will be possible.

Below is the game plan. The approach that will be taken in managing the portfolio will be as follows:

1. Risk for holdings will continue to be assessed well before its potential gains (margin of safety).

2. Continue to build portfolio based on identified macro themes playing out.

3. Maintain Hedge strategy to reduce losses.

4. Be a rabbit. Let favorite stocks reach entry price. Don't chase wins. After all, gains are only as good as price paid.

5. Stick to stated a strategy and become an expert that field. It is the only way hard work may be translated to attaining superior knowledge in that field.

6. Invest in companies for which superior insight and knowledge in them may be attained.

...
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The Sure Thing

Speculating vs Investing

"When I was a kid, my dad used to joke about the habitual gambler who finally heard about a race with only one horse in it. He bet the rent money on it, but he lost when the horse jumped over the fence and ran away. There is no sure thing, only better and worse bets."

- Howard Marks

Is characterizing the current state of the economy an act of speculation?

One mainstream media-driven phrase that is cropping up with unusual regularity is "the new normal." How normal is it for the U.S. stock markets to be up 60% this year since March, whilst the U.S. shed 2.5 million jobs? In Rosenberg's newsletter, Rosenberg describes this phenomenon as jobless prosperity. He goes further to ask who is actually doing all the buying:

FT quotes data from TrimTabs showing that only $2.5 billion in net inflows has gone into U.S. equity funds and ETF’s since the March lows. Inflows into bond funds have been ten times as strong. We know that corporate insiders have been net sellers of size. And the buying power from short-covering subsided months ago.

The answer, and this validated by the FT on page 16 of yesterday’s edition, are the hedge funds. And once they begin to see signs that a V-shaped recovery is about as real as Santa or the tooth fairy, watch out.

If hedge funds are characterizing what is going to happen next in the market, then hedge funds are speculating. Any act that attempts to forecast or predict what will happen is both dangerious and risky. After all, we now know how a "can't fail" one-horse race may still lead to losses.

If the markets continue adjust on the downside this month to account for actual unemployment figures, look for the tide to wash out companies with weak balance sheets. "Simply" invest in companies that are able to produce steady or rising profit margins not achieved through one-time cost cuts.

How? Bring your two warriors.

As Leo Tolstoy said, "The two most powerful warriors are patience and time."

On a personal note, 660 kaChing users following my online virtual portfolio are probably wondering what steps will be taken next. The portfolio activity reflects an IQ score that is 30/200 points from qualifying (140 points) to be mirrored by interested investors.

The strategy continues to be:

• Don't lose money
• Exploit significant spreads between the intrinsic value and current market value of companies

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