Being bearish seems wrong

November 9, 2014 Leave a comment

I’m not going to write too much trying to convince or prove things in this post, but just summarise what I think.

With all the bad news around ISIS, Ukraine/Russia and assumptions about the Fed reversing its interest rate stance, to how oil, gold and currencies are reacting, equity markets should be tanking, but they are not. Instead, it looks very bullish.

Ebola and any other reason was behind markets falling 10-12% recently but alas they rebounded soon after, and to new highs. Geez, it looks bullish.

Bears were recently rejoicing again with many still calling for bubbles and crashes but got caught being short again. Yep, it still looks bullish.

But, don’t back up the truck as any rise in these equity markets won’t be rooted from a base of cheap valuations but it’ll be based on capital flows, momentum and on those who have missed out and need to catch up.

This market could rise sharply for a couple more years and the S&P 500 may not get close to testing 1,800 in that period.

So there!

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My Current Take On The Market

October 11, 2014 Leave a comment

I am often asked, “Whaddya think of the market?”

It’s a question that irks me somewhat, because its an short & easy question for someone to ask, but the answer can be long and complicated. “The market” is a large beast and answering this question can be challenging.

But here I go;

What I think of the market is……

The party started at 7pm (at 2009’s index low). Many of us (including myself) didn’t arrive until 8.30pm, as we didn’t want to get there too early, not knowing whether others would arrive, so until then we kept our cash in the bank.

Into the evening, more people turned up to the party and we’re having fun, as the wine is tasting good (we’re making some from our investments) and we are starting to see a few more of our friends show up.

Currently, the clock is near midnight. Many of the desirable girls & boys have already been asked for a dance (the cheap stocks have been bought) but we’re still feeling more confident about our chances and abilities (as we reflect on having a couple years of good returns) and we’re getting a little tipsy.

The party hasn’t finished but we are not sure if it’s going to last until 1am, 3am or 4am.

At this stage, due to overconfidence (feeling drunk), desperation (to get involved in the festivities) or a desire to simply show-off, is when crazy things can happen.

Displaying some of these traits may involve doing cartwheels or handstands, ambitious dance moves, courting the wrong person or inappropriate behaviour.

We think equities remains the best asset class to invest in, when comparing them to real estate, bonds & cash.

But from here on, the actions of markets, securities and many people, is less likely to be based on fundamental sensibility and logic.

It can become euphoric, so just be careful how much you expose yourself.

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A Dozen Things I’ve Learned from Peter Thiel

July 23, 2014 Leave a comment

A great post from Tren Griffin, who writes one of my favourite blogs

trengriffin's avatar25iq

1. “Great companies do three things. First, they create value. Second, they are lasting or permanent in a meaningful way. Finally, they capture at least some of the value they create.”   “More important than being the first mover is the last mover. You have to be durable.”  “The most critical thing for every startup is to be doing one thing uniquely well, better than anybody else in the world.” This set of statements in my view is about what Michael Porter calls “sustainable competitive advantage” (AKA, moats). Yes, you must create new value to be a great company. But unless you capture some of that value as producer surplus in a sustainable way, the only beneficiary is the customer. One of the best explanations of this value capture point is in Charlie Munger’s fantastic Worldly Wisdom essay:  “there are all kinds of wonderful new inventions that…

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Bitcoin – Not A Passing Fad

July 20, 2014 Leave a comment

I love how crypto coins are making governments nervous.

Personally I’m not a user of it, but I can understand its allure to the nonconformists, to those who like to be considered as “early adopters” and those who just don’t want to be traced.

Bitcoin proponents are looking for ways to have their virtual currency legitimised (in terms of acceptance) but at the same time, government will want to regulate it based around protecting the consumer but the real reason will be so that they can tax it.

Ya Gotta Know How To Tax ‘Em

Government knows how to tax petrol (gasoline), cigarettes, ownership of land, income, sales of goods and capital gains realised on the sale of assets.

This is why I think Electric Vehicles (EV’s) don’t stand a chance of real success. Government support of EV’s is a mere sideshow to appease the “Green Lobby” and until government learns how to tax the electricity trickle from the powerpoint in your garage, then EV’s won’t become too popular. Interestingly,  New Jersey, Colorado, Texas, Arizona, and Virginia have all prohibited Tesla from selling cars in their states, mainly because that their direct internet selling model pisses off the incumbent dealership model ( see an older post from 2013, http://wp.me/p1d84Y-mr ) but it probably didn’t help when a couple Tesla’s were bought using Bitcoin.

Battle Is Just Beginning

U.S. tax authorities have classified Bitcoin as property, which the “crypto industry” doesn’t like.

The Aust. Taxation Office is now trying to figure out taxation guidelines surrounding Bitcoin and other crypto currencies.

An Aussie tax partner has said that under Aust. GST laws, Bitcoin wouldn’t be classified as money as it is not backed by a government. That must be annoying for the government.

Nervousness exists because Bitcoin and other crypto currencies have become a money supply which is not controlled by the state in its currently acceptable fiat format.

It cuts out the middle man!

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Mark Cuban blog post “pressed”

May 21, 2014 Leave a comment

An extract from a Mark Cuban blog dated August 2010.

I have focused on the part about the cost and scarcity of capital rather than the bit about the stock market being for idiots.

 

“Capital found its way to where people/funds thought they were smarter than the rest. Some people thought they understood the tech markets better than others. Some thought they understood retail better, etc.  The belief that an individual/fund had an advantage  drove where capital was allocated.  People posted good performance or identified macro opportunities and put their own and others money to work.  Others saw the success and followed.  Like the saying goes “first there were the innovators, then the imitators, then the idiots”.    Fortunately for market participants over much of the history of the stock market, if you were  the innovator that was  smarter and faster than the other guys, you could make money on the long and / or short side of the market before the imitators and then the idiots flooded the market.

The door was open to opportunity in the past simply because capital was relatively expensive. It was expensive to raise, it was expensive to borrow.  High cost of capital creates scarcity of capital.  The more expensive the scarcer. The scarcer the capital, the more untapped opportunities just waiting for innovators to exploit and the longer it took the imitators and idiots to chase the same opportunities and close them. Which is why you found funds and smart people posting great returns over a long period of time.”

Full blog post is found on the link below

The Stock Market is still for Suckers and why you should put your money in the bank.

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Howard Marks discussing data & information

May 16, 2014 Leave a comment

The following quotes and text features investor, Mr Howard Marks, which has been extracted from an article I read in Friday’s May 16, 2014, Australian Financial Review. The story was titled “Day of reckoning for shares ‘inevitable” by James Eyers.

 

“With a deluge of information sloshing around the financial markets each day, Mr Marks suggests savvy investors must extract themselves from the 24-hour news cycle and not conflate the gathering of data with the gaining of wisdom.

“It is very important to recognise that data is not information, and information is not knowledge, and knowledge is not wisdom”.

“Wisdom consists of deriving the significance of data. You have to step back and say, ‘My goal is not to have as much data as I can, but to figure out which data is important and then get it, and then go away to the mountain top and figure out what it all means.’

I would pursue wisdom, not data.”

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Alaska Might Be Next ?

April 27, 2014 Leave a comment

It’s quite simple.

Starting a war is generally good for the economy of the aggressor. Just think of how World War II mobilised the American economy. Putin needs a war to keep his people occupied and distracted from their ailing economy. Putin and his government have talked of a “New Russia”. I think it’ll be Russia who decides whether to start a war, not the United States.

What is more complicated to understand is how and when countries go to war when you consider their debt position, electoral cycle, policies and the effect on their economies.

Sanctions:

I’m not sure that sanctions will work on a country with a relatively large population, land mass and economy (or in Russia’s case, possessing vast commodity resources). Funnily, I find it interesting that the United States government is much more involved in the Russia, Ukrainian & Crimea story that it was or has been in the Syrian civil war.

Oil & Gas Prices Will Rise:

If America places heavy sanctions on Russia, the price of oil will go up. If Europe is not happy with Russia’s territorial expansion, then the price of gas will rise too.

The U.S. Dollar Will Rise:

Money is leaving Russia and it won’t be converted into Euros, especially with it trading around the 1.38 mark. You may see the Swiss Franc and British Pound rise, but Billions of Rubles will be converted into US Dollars by global money managers. A rising USD will disrupt the currently sweetened competitive position of U.S. products in the global markets. War with Russia won’t help an indebted United States especially given that they have been financing military exercises for the past 12 years.

Please Consider The Neighbours:

Picking a war on Russia will somehow involve China, North Korea & Iran. This will test the various Asian Pacific relationships that the U.S. has been nurturing. Indirectly, it will involve Venezuela too, who will add to the pressure on the oil price. Russia will have little trouble financing a war.

Russia may be pursuing an old imperial model of domination by land acquisition.

As investors, we need to understand the effect on various assets and which ones to own if a scenario of war develops, ’cause China may not choose to buy anymore U.S. government debt and even elect to sell its current holdings.

Imagine if China sold a lot of their Treasuries thus placing pressure on bond prices, which would send U.S. interest rates higher. Consider this in tandem with a rising U.S. Dollar and coupled with rising oil prices. Now that would be interesting.

As a closing tidbit, the U.S. acquired Alaska in 1867 for $7.2 million which is equivalent to 2 cents per acre. Alaska has no naval base and has barely 20,000 U.S. military personnel.

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More Immigration = Lower Wages = Being Competitive

April 1, 2014 1 Comment

It should be simple to understand.

When the labour market is tight, the price of that labour rises.

Australia along with other countries such as Norway, Netherlands and Switzerland all have low unemployment rates. They also have some of the highest average annual wages and minimum wages amongst OECD member countries.

Tight workplace capacity (whether that means offices, factories or other facilities) and a unionised workforce can also add to the cost of labour.

When people earn more, the prices of other products can afford to rise too, simply because rising disposable income means there is more demand for the staples and non-discetionary items.

But today, Australian business operators are complaining that the cost of paying staff is becoming a heavy burden and nationally, we do understand that high wages are making us uncompetitive. They are asking the government for help.

Government doesn’t control the price of labour, so they can’t actually manipulate this price directly. What is confusing furthermore, is that businesses are happy to benefit from the positives of a free market economy, yet they are not willing to accept the cost that comes from such capitalism.

What needs to be done? What help can government provide ?

I would like your comments too.

If  the labour market is tight, then open it up. Allow more immigration. Australia is so large we can easily fit 100 million people here. Make the labour market more competitive and its price will fall. More people will also send the cost of other products down. If there are more consumers, then supply will meet the demand and price equilibrium will weave its magic.

Government needs to take a stronger line on unions and labour contract employment reform. Employees need to be convinced that the statute law passed which governs our land will be steadfastly upheld. The honouring of these laws doesn’t really require the oversight nor lobbying of a union because the “checks and balances” of democracy, its electoral constituents and the Westminster parliamentary system already exist.

I think its time we spoke truthfully about why the cost of labour is high. The headline unemployment rate isn’t the only things that matters, although government seems to think this is the major topic that will keep them elected.

The United States, Spain, Italy & Korea all have higher unemployment rates, noticeably lower wages, export more product (in dollar value), comparatively similar sized GDP per capita and much larger populations.

 

 

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The surprising truth about what motivates us – video

March 10, 2014 3 Comments

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Abnormal Dividend Payments Aren’t Good

February 17, 2014 Leave a comment

The dominant conversation that prospective clients are having with me is about their desire to earn a higher yield on their money.

I’m talking yield in terms of income.

A couple years ago they were earning 6% on their Australian Dollar cash held in the bank but now they are earning 2.7% and so the chase for yield begins, mainly via sub-standard, riskier assets in order to satisfy their single, blinding and qualifying criteria of income yield.

Surely, I must have written about that particular angle previously.

But the current trend amongst listed companies who are holding excess cash or re-generating pre-crisis levels of free cash flow – is to return cash to their shareholders.

We know that over the past couple years companies have “returned cash” by re-purchasing company shares. Appropriately, they have also re-financed debt at cheaper rates. This has also improved their “earnings per share” data which the stock market and analysts have loved.

Today’s trend is to return cash by increasing the company’s dividends at larger increments than in the past. Some companies are even making interim (or extraordinary) dividends in addition to their normal payment schedule.

Is this corporate board room’s new “increasing the share price” strategy? Raise your dividends abnormally, so those who are chasing yield will buy your shares and thus send your share price higher.

This also serves management handsomely, especially if they have share price performance linked remuneration (options, bonuses etc.), but I think this is also exhibits management’s laziness for their lack of ability to find ideas on how to use their company’s money to grow the business.

Company management would be quick to suggest that “this is in the best interest of shareholders”.

I don’t like this strategy, whether it’s from a corporate or an investing perspective.Historically, I have seen this occur before.

Today, the company appeases the market by handing out the cash and Tomorrow, it needs cash again; which is when they either issue new shares (which dilutes existing holders) or borrow money (often at interest rates higher than a couple years ago) which usually equates to a higher gearing ratio in their balance sheet.

One of our investing themes is to look for companies that are retaining their earnings. Our preference is to keep the money in the balance sheet and then deploy that capital to grow the business.

All this talk of corporate activists demanding cash being returned and balance sheets being lazy – blah, blah, blah.

I’d rather see the excess money left in the company’s bank accounts instead of leaving. If the board and management can’t develop a strategy on how to use that money appropriately, then they should be leaving, not the company’s money.

I think this is better for shareholders.

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