Trying to hear what's not being said
August 20, 2012 Leave a comment
The continued rise in nationalism – Chinese citizens protesting about Japan’s territorial claims over some distant islands.
South African police shoot and kill striking workers at platinum mine.
Russian could curb wheat exports due to expected weak crop harvest.
Australian Government 10 year bond is now yielding more than RBA’s cash rate. Yield Curve is back to normal.
ASX 200 and Shanghai Composite looking like creating their lows for 2012. IF they find their low now, then expect U.S. to find its base around October.
There is no debt crisis until interest rates start rising. Forget whether rates are cut 25bps, what would happen if interest rates double.
Currency markets lead equities, while I believe what credit tells me over equity.
Thai & Indonesia posting good growth numbers.
Rice supplies are tightening.
Sugar looks oversold on short-term basis.
Rubber is trading at 3 year lows.
August 15, 2012 Leave a comment
Today, the RBA’s cash target and overnight rate is 3.50% compared to the yield on the Australian 10 year government bond of 3.33%.
The yield curve remains inverted. If the RBA cuts rates another 25 basis points to “un-invert” the curve, they risk a weakening of the AUD (which should be desired in order to make Australian exports competitive) as global capital will earn less on their carry trade and perhaps sending a signal that the economy actually needs a larger kick of stimulation that what was thought.
When I combine our observations in the credit markets, the analysis is suggesting (which is being confirmed with action seen Asian equity markets) that the short-term trends in the AUD and the ASX 200 are shifting into weakness.
It is worthy to note that the yield curve is close to being normal again.
At this stage, I view this short-term correction as an opportunity to accumulate selected Australian equities. I feel that the Aussie equities index (together with Shanghai) will see it’s low for 2012, a couple months earlier than the yearly lows that I anticipate to occur in the U.S. which surrounds the November period.
August 14, 2012 Leave a comment
Online technology business models aren’t the same.
Facebook allows people to open an account and create content. They are relying on the kindness of strangers. As users, we are not customers of Facebook for we don’t pay anything. Advertisers choose to pay.
While Zynga relies on another company’s business model, or at least for a majority of its revenue. They don’t need any of your kindness. They are selling a product, where you pay money to acquire or use something.
I wonder if other businesses such as Groupon could also fall into the same category?
July 15, 2012 1 Comment
Stockbrokers are complaining that it’s tough out there. Trading volumes are low and apparently, it’s difficult to make a living. Rather than focus on the behavioural signals that such apathy may signal a “floor” in the equities market, I would rather highlight the flaw in the broking pricing model.
What if the brokers were focused on finding investment ideas and giving their clients advice? They could then charge a fee for their advice, irrespective the amount of money that they have traditionally relied on moving around in order to generate commissions.
I recall moments when I would ask colleagues “how’s business”. Their response was often based on the amount of commission written that particular day. Their success or happiness was based on how many “tickets” they have written or more to the point, the amount of money that they turned over.
Furthermore, the attractiveness of an IPO or a product depended on the amount of commission being credited to them for selling it to their clients.
And should you manage to convince a client to buy IPO stock and then sell the stock on its first day of trade and use the proceeds to “switch” into a “better” idea, then brokers would have had a good day.
Just like other businesses that are suffering from lower revenues, perhaps they need to adapt to their environment. After all, broking firms do have their own analysts who could probably help them with their own business strategy.
Separately, these pricing models do not make stockbroking firms look like attractive investment propositions. A business that is reliant on money flows amongst a sea of commoditised research product is an example of being a price-taker.
Price is always questioned in the absence of value.
July 14, 2012 Leave a comment
The corporate strategy involving the manipulation of capital structures, balance sheets, income statements over the past few years could be summarised as hiding the ugly stuff and parading the pretty stuff.
Over this time, many companies have seen revenues remain flat while their earnings, or at least their earnings per share (EPS) have miraciously increased. Whether it has been firing employees, reducing costs or buying back shares, stock prices have recovered from 2008 lows as a result of this window dressing.
Nevertheless, company CEO’s are still under pressure.
Commonly, it is believed that corporations are holding large amounts of cash but seldom do I hear discussion about what is the company’s “net debt” position. A company can hold $2 billion of cash on its balance sheet but it has $4 billion debt outstanding, I’m not that impressed.
Thorough balance sheet analysis needs to also include any corporate debt that been issued recently albeit, at all-time low interest rates. The cost of that money may not be onerous, but there is still a liability.
The bomb that is endlessly swept under the carpet remains corporate pension liabilities. More importantly, the greater and obvious risk is to the employees of a company which is proving them with the “gift” of carrying an underfunded pension whilst the knock-on effect would affect the broader economy.
CEO’s are under pressure.
Their next act is to embark on ego boosting, chest beating, Mergers and Acquisitions.
In a world of little growth, they will opt to buy revenue and growth. Rather than reduce their liabilities, they will use their balance sheet cash and cheap financing to dress up the pig.
What often follows is a decline in shareholder value.
July 8, 2012 Leave a comment
Investor and Money Manager, Seth Klarman said in a 2009 interview…..
It’s so easy for one’s investment process to break down — and process is everything in investment firms.
And today, many firms have a broken process. When investors worry about what a client will think rather than what they themselves think, the process is bad. When an investor is worried about their firm’s viability, about constant redemptions, about avoiding loss to the exclusion of finding a legitimate opportunity, the process will fail.
When one’s time orientation becomes absurdly short-term, the process is compromised. When tempers flare, when recriminations abound, when second-guessing proliferates, the process cannot work properly. When investors worry about the good of the firm or its publicly-traded share price rather than the long-term best interest of the clients, the process is corrupted.
When the process is broken, you can’t invest well. It’s hard enough to invest well when the process is good. So it’s crucial to have a sound process that will enable you to perform this difficult task with intellectual honesty, rigour, creativity and integrity.
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