Monday, July 31, 2006

Sarbanes-Oxley reform

A July 31 Financial Times article focuses on one politician's drive to reform the Sarbanes-Oxley legislation. Tom Feeney, a congressman in Washington D.C., says that certain provisions of SOX impose significant time and cost burdens on companies forced to comply.

This, he has learned, is hampering our ability to attract public corporations to our capital markets. From FT's article, "Advocate of SOX reform points to capital markets leak":

Mr Feeney's beef includes the usual criticisms of SOX: that its most burdensome provisions - enshrined in section 404 - are adding unnecessarily to companies' auditing costs and that it is tying up too much executive time.

But he warns it has also led to an "outsourcing of America's 100-year lead in capital formation" as companies shun US stock markets and seek listings in London and Hong Kong instead.

"Last year, while I was on a listening tour of bankers associations and the Chicago [derivatives] exchanges, the evidence was starting to come out in dribs and drabs. Now there's a sort of fire hydrant of evidence that we have a huge leak in our capital markets," the Republican congressman says.

He casts himself in the role of "an American economic Paul Revere" with his warnings. "The British are coming," he says, using the words of the hero of the war of independence. "And by the way, so is Luxembourg coming, and Hong Kong, Shanghai and a dozen other markets. I think it has already started being bad for America."

For an earlier look at the rise of foreign listings and stirrings against SOX legislation, please see, "Exchange Fever".

Ethanol: Is It Viable

Here's something in the alternative energy category. An article entitled, "Ethanol: Is It Viable", examines the pros and cons of ethanol production and the outlook for the ethanol industry. Contributed to Financialsense.com by Salman Anwar.

For more on the subjects of ethanol and sustainable energy, you may also want to take a look at Robert Rapier's R-Squared blog. There you will find some interesting discussion about the merits and demerits of grain ethanol as a renewable energy source.

Rapier recently challenged Vinod Khosla, a well known venture capitalist and ethanol backer, to support his claims that ethanol production would lead the U.S. to energy independence. In a post entitled, "Vinod Khosla Debunked", Rapier outlined his objections to many of the statements made by Khosla and his fellow ethanol supporters.

In fact, he found Khosla's claims about ethanol's potential and the lobbying efforts of "Big Oil" to be so objectionable, that he issued a challenge to Mr. Khosla for a written debate on these issues. Khosla contacted him, saying he would agree to discuss the matter by phone, and the resulting discussion is summarized in "A Conversation with Vinod Khosla".

Very interesting turn of events. Rapier's post gives us an inside look at the economics behind these energy schemes and the political side of the ethanol debate.

Sunday, July 30, 2006

Margin of Safety

Value investors: the August 7 issue of BusinessWeek contains an article on Seth Klarman's "out-of-print investing classic", Margin of Safety. The article is entitled, "The $700 Used book".

The book, published in 1991 but never revised or reprinted, now carries quite a premium in the used-book market. At the time of publication, copies at Amazon.com were offered from $700 up to $2,500. Currently, it seems the bid has been upped at the lower end of the scale; the cheapest copy on offer at Amazon lists for $1,285.95.

What's all the hype about? I'm not sure since I've never read the book. But Klarman's reputation as a successful investor has solidified over time, thanks to his Baupost Group's cumulative return, since inception, of 6,133% after fees.

Here's a link to one reader's notes on Margin of Safety, for those who'd like a preview.

A growing number of investors and investing enthusiasts seem to be flocking to the wisdom found in Klarman's book. According to BusinessWeek's article, "University libraries report it as one of their most wait-listed titles as well as one most claimed as lost".

I guess that means that anyone buying an ex-libris copy of Margin of Safety should check to make sure that the seller isn't supplying you with a book marked "lost" from a library's collection. If anyone else has read a copy of it, feel free to give us a report.

Related posts:

1. Seth Klarman: Margin of Safety (pdf).

2. Seth Klarman: Lessons of 2008.

Saturday, July 29, 2006

Staying connected

Cool little tip I got from the ETR e-letter. People who travel with a laptop will find this especially useful, if they don't have this information already. Suzanne Richardson offers up a web service you can use to find wireless hotspots in your area. For more info, see Suzanne's tip on JiWire.com and similar services at earlytorise.com (scroll down to "It's Good to Know: Staying Connected").

Friday, July 28, 2006

$100 oil sure bet, Rogers says

Well the full title of this Bloomberg article is actually, "$100 Oil Sure Bet, Rogers Says; Merrill Lynch Demurs" (Updated PDF file).

See - fair and balanced. They got both sides of it. Me, I'm just a yellow journalist. It's sensationalism that the people want! Just kidding, I think we have enough of that already.

Anyway, Jim Rogers is down in Singapore, taking in the feel of Asia's leading cities as he prepares to sell his New York townhome and find a new place to hang his hat. Guess they tracked him down and got his 2 cents on oil while he was down there. So have a look!

Thursday, July 27, 2006

You know what, I'm impressed

This young guy named Mike Price has a blog called Value Investing, and a Few Cigar Butts that you might want to check out. This kid is barely old enough to drive, but is already wading comfortably in the stream of Graham & Dodd investing.

I've read a few of Mike's posts and I'm impressed. He already seems to have a very solid command of sizing up publicly traded companies by their fundamentals and valuation. I think I might end up learning a few things about fundamental analysis from reading his site!

Wednesday, July 26, 2006

DealBreaker Interview with Andy Kessler

Andy Kessler, author of Running Money, is interviewed by Carolyn Okomo of DealBreaker.com about his new book, The End of Medicine. The concept behind Kessler's new book is that rapidly advancing technologies will soon change the face of medical care.

I'll let them tell the rest. Read, "DealBreaker Interview: Andy Kessler".

Kicking the Carbon Habit

Saw a reprint yesterday of an Op-ed written by William Sweet, in which he called for greater use of nuclear power in bridging our energy needs.

Sweet is the author of a new book entitled, Kicking the Carbon Habit: Global Warming and the Case for Renewable Energy and Nuclear Energy. Only a couple of reviews up on Amazon so far, but they are quite positive.

It seems plain that this will be an interesting & well thought out book, especially given the fact that the author has married the cause of renewable energy with a call for reexamination of nuclear energy. Another book that I'll have to have a look at.

Interesting sidenote: while typing out the first sentence in this post, I noticed that the song I happened to be grooving to was OMD's "Electricity". Here are the lyrics to that song.

Trading tips from Jesse Livermore

I like Investment U for their brief profiles of some of history's greatest thinkers and investors. Today, we link to an essay on one of the great figures in trading lore, Jesse Livermore.

Read on for, "Five Timeless Rules of Investing Learned From Jesse Livermore".

If you don't know who Jesse Livermore is, that's okay; they've included a nice little summary intro on his life and his trials as a speculator.

Also, if you have an interest in trading or market history, I would highly recommend reading Reminiscences of a Stock Operator, if you haven't already.

Tuesday, July 25, 2006

Martin Weiss on T-bills

Well, Martin Weiss of Weiss Research has a whole big picture scenario to go along with his recommendation to invest in Treasury bills, and that's interesting enough, so far as needing a reason for why you should put your money in them. But I'm more interested in his information on how to best take advantage of Treasury bill returns.

Dr. Weiss, editor of the Safe Money Report and the Money and Markets e-letter, feels that Treasury-only money market funds are the best way to own Treasury bills. Read about the advantages of owning T-bills through these vehicles, and get a list of his recommended favorites by clicking on "The Next Big Wave". Scroll down to the section on T-Bills, you'll see the advantages highlighted in red.

We'll use this as a starting point for talking about shorter term interest-earning vehicles. If anyone has some info they'd like to share on personal finance matters, please chime in. We'll add more info and make it into a little discussion piece on savings instruments. Thanks!

Monday, July 24, 2006

Hong Kong & the brave new world

John Mauldin's weekly E-letter, dated June 22, 2006 and entitled, "Goldilocks or Micawber?", brings us the recent thoughts of the GaveKal research team. What interests me about this latest missive is the section that is found under the heading, "Honk Kong Adapts to the Brave New World".

The authors begin their topic with a brief discussion of Hong Kong's recent tax debate. They believe that by looking to move towards a consumption tax model, Hong Kong's government is demonstrating its ability to think and adapt to new economic realities. The GaveKal team then outlines a future in which individuals and companies migrate towards low-tax/efficient service jurisdictions that will compete for their "business".

As an increasing number of companies move to the 'platform-company' model, or as people leave the big companies to work for themselves or smaller entities, it is likely that the top talent will want to work (or at least be taxed!), in low tax environments.

This economic reality should lead to a structural decline in tax receipts in the countries which do not adjust to this new model. In the new world towards which we are rapidly moving, income taxes will becoming increasingly voluntary and governments will have to get their pound of flesh through property and consumption taxes instead.

This is good news. Over time, it should lead to more efficient (i.e., downsized) governments all over the Western World. The platform company business model should end up killing off the Welfare State.

Reading this, I am reminded of some of the arguments presented in The Sovereign Individual, by Davidson and Rees-Mogg. The competitive government scenario, imagined by both sets of authors, seems to contradict the prevailing trend towards international unification on all fronts (common currencies, legal and political framework, armies or "peacekeeping forces", etc.). Or maybe these types of jurisdictions are encouraged to create their niche, given a world of oversized, tyrannical government.

It would be nice if this proved to be a triumph of the optimists. More than that, it may be essential to ensure any meaningful existence of liberty.

Sunday, July 23, 2006

New book on commodities

There's a new book on commodities out called, Commodities Rising, by Jeffrey Christian, Managing Director of the CPM Group.

Judging by Mr. Christian's recent interview with Financial Sense Newshour, it seems we'll get a more sober and detailed assessment of what to expect from commodities investing. The author takes the stance that most of the information being offered today regarding commodities is misleading or simplistic, and that investors need to be aware of that fact.

We should become more selective in our approach, says Christian, and not just attempt to buy a basket of commodities for a longer-term holding period. This, he feels, will turn out to be a losing strategy. This is rather contrary to the approach espoused by Jim Rogers, and this may be due to differences in the way they view the commodity cycles.

It's also interesting to note that both parties might be doing a bit of low-key selling: Rogers with his index approach to commodity investing (representing his Rogers Commodity Index) and Christian with his information-based approach (CPM Group). In any case, I think there is something to be learned here, and I look forward to viewing the book.

Saturday, July 22, 2006

Free software... and libertarianism?

Interesting subject match, I know. I saw this post entitled, "Free software, the hacker community and libertarianism?" highlighted at Technorati, so I went clicked on the link to have a look. An interesting post from what looks to be an interesting site (with a humorous name: "Homeland Stupidity").

I don't know much about free software or open source debate, but I was interested to see how these subjects were tied in to the notions of liberty. They've taken an issue that is closely followed by a relatively small audience, and made it relevant to a wider base by associating their cause with a larger issue: freedom.

“When people don’t value their freedom, they will lose it,” he said. “When people don’t value their freedom, they won’t defend it. And to value their freedom they have to know about it.”

Anyone who values liberty can relate to that.

Friday, July 21, 2006

Energy, astrology, and getting defensive.

I'd like to suggest, in addition to listening to this week's Financial Sense Newshour broadcast, that readers give a listen to the third hour of the July 15 broadcast.

You'll hear an entertaining and informative discussion on the topics of oil dependancy, astrology (with astrological forecaster Arch Crawford), and getting defensive with your investments. Do check it out!

New profits in old mines

Mining investors and mine guys might find this piece from The Australian interesting. It's called, "New profits in old mines" and it talks about miners developing old, existing mines rather than exploring for new ones. Quote from the article:

many of our companies are going back to old prospects and old mines, and find it easier to revive them by drilling deeper and wider than getting bogged down by the long lead times involved in finding and developing new discoveries.

In other words, brownfield is cheaper than greenfield and it sure helps a lot to have files of old drilling records to get you started.

Check it out!

Stagflation threat looms (over Bush and Blair)

Stagflation seems to be a hot topic lately. I guess everyone's looking around and seeing a return to the 1970s, or at least a lot of people are starting to draw parallels between that decade and the present.

An article in The Australian looks at the economic situation in the US and argues that a coming stagflation will spell trouble for President Bush and his ally, Tony Blair (thanks again for the sweater, mate). From, "Honeymoon's over for Bush and Blair as stagflation threat looms":

In the past three years the US has been enjoying an unusual combination of low inflation and rapid growth. This happy combination cannot continue much longer.

In the months ahead, either inflation will continue to accelerate or economic growth will have to slow abruptly, to the point where unemployment starts rising and businesses start going bankrupt.

US voters could soon get a taste of higher inflation and higher unemployment, bringing back memories of "stagflation", a simultaneous attack of stagnation and inflation, an ugly buzzword that has hardly been heard for 15 years.

Oh, interesting to note that the author is not exactly buying into the US' inflation reporting either. See this tidbit:

Inflation, far from being confined to a few rogue sectors such as energy and housing, is spreading rapidly through the US economy.

Indeed, the Fed's own calculations show that more than half the goods and services in the typical American's basket have risen by more than 3.5 per cent in the past 12 months. On the definition of prices used in Britain and Europe (which includes fuel but excludes housing), inflation in the US is now running at a truly alarming 4.8 per cent.

The Fed could, of course, keep changing its definition of core inflation. By removing from the consumption basket any item that is going up, a central bank can always prove that inflation remains under control.

So whaddya think?

Thursday, July 20, 2006

Stocks for the long haul?

There's an excellent article up on Financialsense.com entitled, "Second Verse, Same As the First". Written by Doug Wakefield and Ben Hill, the piece examines the "buy and hold" mantra that has dominated public thinking regarding the stock market.

The fantastic hypothetical returns that were dangled in front of investors to illustrate the advantage of purchasing stocks and index/mutual funds were misleading, to say the least.

Ibbotson studies and books such as Dow 36,000 sought to convince investors that wealth could be attained through a disciplined program of buying and holding stocks over long time horizons. Only problem is that they seemed to have glossed over a few important points, namely: investors who are not as risk-averse as the models suggest, survivorship bias in the constructed indexes, effects of inflation on investments, etc.

I think the authors did a great job of addressing some of the ridiculous assumptions underlying scenarios that purported to show how much investors could have made with a buy-and-hold approach. Give the aritcle a look, and while you're at it, have a look at this similarly themed piece from 1997 entitled, "Beware of the investment pundits".

Further analysis of the Ibbotson studies and return projections can be found in this 2005 article, "Waiting for Average", by Ed Easterling. Great info for anyone who's been indundated with "stocks for the long term" hype.

Wednesday, July 19, 2006

Big Coal

A review of Jeff Goodell's new book, Big Coal: The Dirty Secret Behind America's Energy Future.

For more info (from the environmentalist perspective), see David Roberts' interview with Goodell in the Gristmill blog.

Tuesday, July 18, 2006

End of the global economic boom?

Dr. Marc Faber addresses this topic in a recent MoneyWeek article entitled, "Why an inflationary bust is inevitable".

Here Faber discusses the role that liquidity played in creating this boom, and the idea that slowing this liquidity growth may bring about further declines in asset markets.

Aside from the Middle East, it is apparent that liquidity conditions around the world, while still expansionary, are less expansionary than in the 1999–2005 time frame.

Now, whenever central banks create excess liquidity, symptoms of inflation will show up somewhere. Sometimes wages and consumer prices will react the most to expansionary monetary policies (for example, the 1960s and 1970s), but in today’s world where, given the low wages in China and India, an almost unlimited labour arbitrage can take place, easy monetary policies drive asset prices such as homes, commodities, equities, art, and so on, higher, while wages and consumer prices rise only with a lengthy time lag (once commodity prices begin to be passed on in the prices of finished manufactured goods).

Therefore, it should come as no surprise that, when liquidity growth is slowing down, asset prices begin to cave in first.

I'm looking on and Faber admits to shifting his views a bit, at least with respect to the scenarios he has outlined in recent writings. This will require a careful read:

But, as I have repeatedly pointed out, it usually pays to listen to the market. And in this respect, we should take rather seriously the sharp break in equity and commodity prices, as well as in some of the emerging market currencies, that we experienced in the second half of May. The break may prove to be only of very brief duration with new highs to follow, but the impulsive nature of the break suggests differently — at least for now.

Naturally, investors will immediately ask why stocks and commodities should sell off when we are in the midst of a global synchronised economic expansion, when corporate profits are still expanding. The point is that, precisely because we are in a global boom, liquidity is likely to become tighter for a while and that, as just outlined, in such an environment equities and other asset prices are vulnerable until liquidity conditions improve once again.

But don't go by my selective quoting; to appreciate the full range of Faber's reasoning, make sure to read the full article for yourself.

Monday, July 17, 2006

The Inflation Tax

Ron Paul on "The Inflation Tax":

All government spending represents a tax. The inflation tax, while largely ignored, hurts middle-class and low-income Americans the most. Simply put, printing money to pay for federal spending dilutes the value of the dollar, which causes higher prices for goods and services. Inflation may be an indirect tax, but it is very real- the individuals who suffer most from cost of living increases certainly pay a "tax."

The erosion of purchasing power and ensuing increase in the cost of living is a recurring theme in Ron Paul's speeches on inflation. And why not? These phenomena must have accompanied every inflation known to man. Representative Paul is attempting to make clear, to his constituents and the politicians who should be representing their constituents, that inflation acts as a hidden tax. Slowly but surely, even a "properly managed" fiat currency will lose its "value" (read: purchasing power) over time.

In fact, you could make the case that inflation represents a form of double taxation. You are paying higher prices for goods and services, while at the same time experiencing a decline in your standard of living. People take on more work and increasing amounts of debt just so they can maintain their lifestyles and an outward appearance of prosperity. Mothers leave their children to enter the workforce, hoping to achieve financial stability by adding a second income to the household. Still, we find ourselves deeper in debt than our parents' generation, consoled though we may be by the appearance of luxury items that surround us.

The average person is running in place on a treadmill that leads to nowhere.

As the inflation progresses, the quality of goods and services becomes watered down. Many of the goods we buy today are engineered for obselescence, and even the simplest products have a relatively short shelf life (ever heard the complaints about Wal Mart hammers?). Do you feel wealthier because you are able to afford a dozen crappy hammers?

Please do not be fooled by the BLS' assertion that substituting hamburger for steak represents a comparable trade off of purchased goods. While it might play in the broadcast studio, it won't wash here.

For more on the redefining of inflation, see "The Core Rate" by Jim Puplava.

Notes on the Middle East

I hope that this material will provide an informative overview on the current fighting in the region. Read and draw your own conclusions; I've never been much of an expert on war in the Middle East.

From Bloomberg, "Bush Counting on Israel to Quash Influence of Islamic Militants". An overview of the battle between Israel and Lebanon-based militant group, Hezbollah.

And John Mauldin has included commentary from Stratfor's George Friedman in his "Thoughts from the Frontline" letter. I'll include the link here.

Saturday, July 15, 2006

Putin, Bush talk democracy

President Bush and Russian President Vladimir Putin addressed the subject of democratic reform in Russia today, while meeting ahead of the G8 summit in St. Petersburg.

Bloomberg's article, "Putin Tells Bush Russia Doesn't Need a Democracy Like Iraq's", conveyed a sense of verbal sparring between the two leaders during their press conference Saturday.

``I talked about my desire to promote institutional change in parts of the world like Iraq where there's a free press and free religion,'' Bush told a news conference with Putin after their talks. ``I told him that a lot of people in our country would hope that Russia would do the same thing.''

``We certainly would not want to have the same kind of democracy as they have in Iraq, I will tell you quite honestly,'' Putin shot back.

``Just wait,'' retorted Bush.

An article from the Houston Chronicle's website, "Remarks by Bush, Putin at news conference", gave the discussion a friendlier, more collegial air. The text is transcribed by the White House, so take that for what it's worth.

I think the most complete description of the Bush/Putin meeting and news conference I've seen comes from the CBS News site. Their article, "Bush Blocks Russian WTO Bid", includes a description of the exchange between Putin and Bush over democracy and Iraq, and gives an overview of the agreements reached ahead of the G8 meeting. Video clips are included.

Friday, July 14, 2006

Rosneft raises $10.4 billion

As reported in the International Herald Tribune:

The oil company Rosneft said Friday that its initial public offering had raised $10.4 billion, but a court challenge in Britain from Yukos, a Russian rival, threatened to delay its market debut.

Rosneft said the IPO, priced at $7.55 a share, gave Russia's third-biggest oil company a market capitalization of $79.8 billion, exceeding that of Lukoil, the biggest producer. It said the capitalization could rise to $80.2 billion including an overallotment in the offering.

The court challenge from Yukos will seek to postpone Rosneft's listing on the London Stock Exchange, where Rosneft is set to make its trading debut on July 19. For more on that story, see this Moneycontrol India article.

Investors are shying away from the deal, as Rosneft's IPO seems fail on two counts: 1) it is very richly priced and, 2) it is shrouded in controversy due to the means by which it acquired its main asset, Yugansk. For more on this side of the story, see Reuters' article, "Rosneft's IPO too expensive and risky, say funds".

Skype protocol hacked

A Chinese company has apparently cracked the code behind Skype's VoIP calling service. From ZDNet's article, "Has Skype Been Cracked?":

Skype's model of being a communications island could be under threat, if reports that its voice and instant messaging client has been successfully reverse engineered are true.

According to Charlie Paglee, the chief executive of a Chinese-American Internet telephony (VoIP) company called Vozin Communications, engineers from a small Chinese startup have managed to crack Skype's protocol.

Writing on his VoIPWiki blog on Thursday, Paglee claimed he had been made aware of the development when a member of the team successfully called him on his Skype account from another VoIP client.

The article goes on to say that the introduction of a Skype clone could disrupt future revenues from ad based services. Skype was bought out last year by Ebay, who hoped to incorporate the novel communications service into their online auction/commerce business.

Thursday, July 13, 2006

Managing inflation expectations

Jim Puplava discusses the purposeful jawboning of the Fed's "Open Mouth Committee" in a segment from the June 1 Financial Sense Newshour broadcast. What is the purpose behind this non-stop barrage of talk and signaling to the markets? Jim shares his view:

I think what you saw happen and this was the Open Mouth Committee that you saw throughout the month of May, and parts of June, that scared the bloomers off everybody was inflationary expectations started to increase. The last thing you want as a Federal Reserve is for those inflationary expectations to take hold because then what you have is your money velocity starts to increase. People start buying and spending their cash faster because buy now because the price is going to go up.

That was what they were trying to control with the Open Mouth Committee and they were successful. They brought some of those inflationary expectations down, and that’s why they were so active.

The need to manage inflationary expectations is paramount among central bankers; they must keep up the appearance of "inflation fighters", thereby distracting the public from the true causes of inflation. In a fiat money system, in which currencies are backed by nothing of real value, the currency is held up by government dictat and public faith. When faith in money erodes, the purchasing power of that currency erodes with it. This happens gradually over time and sometimes culminates in a rapid depreciation of monetary value known as hyperinflation.

Many commentators today confuse the cause of inflation (expanding supply of money and credit) with its frequent effect: a rise in prices of goods, services, or assets. A similar confusion exists regarding the true nature of deflation (a contracting supply of money or credit).

The classical definitions of inflation and deflation have been subject to change over time and this is reflected in the current debate. The following quote is taken from an article by Tim Picks entitled, "Understanding Inflation and Deflation".

the definition of inflation has changed over time and is now accepted to mean something very different from its original definition. Dictionaries only reflect what is currently popular, so such definitions should not be blindly accepted.

Originally, inflation meant an increase in the supply of money and credit. Then it morphed into: a rise in the general level of prices caused by an increase in the supply of money and credit. And now it has come to mean the CPI (Consumer Price Index).

This had caused much confusion. It can also lead to flawed analysis and some very bad policy decisions. In my opinion, the currently accepted definition of inflation is full of assumptions, fallacious reasoning, and faulty conclusions.

Now add Jim Puplava's interpretation of inflation as a monetary phenomenon. From a past article entitled, "Good and Bad Inflation":

When a government or central bank creates additional money through fiat means, it creates inflation. The real definition of inflation is an increase in the supply of money beyond any increase in specie. 1

By its very definition, it attributes the real cause of inflation to its root source which is expansion of the supply of money and credit through artificial means. Its real cause is an act of fraudulent intervention into the financial and economic system distorting values, investments, and in the process, the distribution pattern of wealth and income within the economy.

So as you can see, we have two market participants/commentators who do not accept the popular application of the word inflation. The term has been misdefined, and in the process its true meaning has been obscured. Just some food for thought, so keep your ears peeled the next time you hear someone bandying those terms about.

Wednesday, July 12, 2006

America's savings hoax exposed.

"America's savings hoax exposed", is the title of Paul Farrell's warning to America's future retirees. In this MarketWatch piece, Farrell examines the slide in our national savings rate over the past few decades. What is behind this problematic trend and what does it mean for you, as a future/current retiree?

The crux of Farrell's argument is that America's savers and investors are kidding themselves when it comes to their retirement preparedness. They either have too little set aside to live comfortably or are fooling themselves into thinking that their investments will perform well enough to enhance their wealth.

Here Farrell makes the very important point about inflation's effect on savings and investments while quoting a Dalbar Research study on investor behavior:

These guys have surveyed actual performance of mutual fund investors for two decades: The average investor makes less than inflation, thanks to fees, expenses, trading costs and taxes, but doesn't know it or refuses to face the truth about how bad it is. Investors tend to focus on the deceptively optimistic "fund performance" statistics in the news.

The overarching theme in the article is that a policy of saving is discouraged by the status quo, which favors spending and consumption. The focus is on short term "growth", and I'd say that seems to be the preoccupation in this world of debt-based economies.

I wonder if anyone has any suggestions for getting around this savings problem? Warren Buffett always looked for investments that could return a certain percentage gain above the inflation rate. Some small (and big) savers and investors turn to precious metals for a good part of their savings as a means to prevent the wealth eroding effects of inflation. What can you do?

Monday, July 10, 2006

Oil sands development difficult, costly

Canada's oil sands projects are becoming increasingly problematic, thanks to escalating costs and growing environmental concerns. The recent boom that centers around this energy resource claims Fort McMurray as its home base, but as the Financial Times reports, this Alberta boom-town is experiencing growing pains. That's something the town seems to share with the local resource extraction projects.

Like the municipality, the oilsands industry is discovering the downside of a boom. Excitement over the spiralling oil price has given way to frustration over shortages of labour and equipment and soaring costs. The stampede has also driven up land prices for new oilsands projects.

The oil sands, or tar sands (depending on your point of view), have always been something of a difficult resource base to exploit. Extracting the heavy oil from thick mats of clay and sand is an energy intensive and land disrupting process. The tar sands deposits are actually mined open pit style or extracted by steam injection, a method which requires large amounts of water and energy.

Add the spectre of sizeable greenhouse gas emissions and it's easy to see that this activity will draw protests on multiple fronts. But even without outside protest, the companies involved in producing energy from the tar sands are encountering difficulties with higher than expected costs. These companies were probably not working from a base of overly-sunny expectations; everyone has known for quite some time that the tar sands projects were economical only during times of high crude oil prices.

What drove people to develop this resource was its sheer size and the prospect of extracting hydrocarbons in a politically stable, mining friendly environment. Alberta's tar sands are estimated to contain 175 billion barrels of oil (proven reserves) and this is where Western development has been concentrated. Venezuala's Orinoco oil belt is home to similarly sized "heavy oil" deposits, but does not meet the description of a politically stable area at this time. While some of the bigger players involved in the region are sticking it out, "new taxes and ownership measures" imposed by the Venezuelan government are unlikely to attract new investment and operations from foreign companies.

The tar sands projects have been kept aloft by high oil prices, but recent conditions have brought about some tightness and uncertainty in the industry. Shell Canada and Western Oil Sands issued a warning last week about cost pressures related to the expansion of their Athabasca projects, causing Western's share price to fall by 13% over the next two days. As this Resource Investor article points out, the "market chill" extended to most of the tar sands producers trading on the Toronto Stock Exchange.

Uranium fever + dangers of nuclear

Two articles taken from the news page of Caseyresearch.com. The first, "Lower grade uranium could hasten climate change pace", outlines studies which claim an eventual shift to lower grade uranium will void nuclear power's promise of reducing carbon dioxide emissions.

The second article is anchored firmly in the present, and highlights the resurgent boom in Uranium shares, due in large part to the renewed promise of nuclear's potential as low-emission energy source.

The current upsurge is also being driven by a string of merger and buyout deals among Uranium explorers and producers. See the full article here.

Sunday, July 09, 2006

America going green

An article from Newsweek at the MSNBC site focuses on America's growing environmental awareness. Check out, "Green America: Why Environmentalism Is Hot". I'm finding the info on environmentally focused buildings (such as the design for a new Bank of America tower) to be the most interesting part.

Saturday, July 08, 2006

Lay's death could set Skilling free

So says the headline of this Globeandmail.com article. From Barrie McKenna's story:

Kenneth Lay's sudden death could prove to be an unexpected legal bequest to Jeffrey Skilling, his co-defendant in the landmark Enron Corp. fraud case.

Mr. Skilling's legal team will almost certainly invoke Mr. Lay's demise to try to reverse his own fraud and conspiracy conviction or demand a retrial, legal experts said yesterday.

That's because Mr. Lay's death Wednesday of an apparent heart attack effectively voids the entire case against the Enron founder, including the guilty verdict. Mr. Skilling, the former Enron chief executive officer who is appealing his own conviction, could now argue that much of the evidence against him stems from a case that no longer exists, argued lawyer Jacob Frenkel, a former federal prosecutor and white collar crime specialist.

I am not exactly following the ins and outs of this Enron case, but I wonder if this kind of thing will add fuel to the fires of the recent "Ken is not dead" conspiracy theories. Ken Lay could become the next Elvis - "Yeah, I just saw him walking through the street in Gstaad".

Friday, July 07, 2006

The week in commodities

Just wanted to run down some recent interesting news concerning commodities and related investments. Here's what we've got:

Oil

Prices have been edging higher lately, back up towards the $75 mark. Frederic Lassare of Societe Generale says that with another hurricane season around the corner, oil prices are poised to set a new record. This, combined with global tensions/risks "will send crude through $80 a barrel toward our technical target of $83".

Meanwhile, Rosneft prepares for its upcoming IPO and recent reports claim the issue is now oversubscribed. India's state-run ONGC Videsh is considering a $3 billion investment in Rosneft, giving it a 4.5-5 percent stake, according to a recent report at India eNews.com.

Many of the leading oil & gas firms have been considering an investment in Rosneft, but it is the Asians who seem most eager to buy in, despite the risk. China and India are clearly trying to step up their efforts to lock in their "energy security" needs and secure what's left of the dwindling fossil-fuel resources worldwide.

Uranium

U308 Speculation. A uranium owning trust is looking to go public in London later this month, according to a recent report in the Financial Times. Nufcor Uranium plans to raise $120 million in a float on the AIM and buy physical uranium with some of the proceeds.

You can read more at the Guardian under the heading, "Going Nuclear". The article doesn't mention it, but there is already a similar uranium proxy listed on the Toronto Exchange. It's named Uranium Participation Corp. and trades under the symbol U.TO.

Agriculture and Biofuels

Also seen in the Financial Times: "Use of crops for fuel production helps trading volumes soar". Open interest in Dec 08 corn contract (CBOT) has increased from 409 at the start of the year to about 35,000 at present. A lot of people latching on to the crops as fuel story, first with sugar in Brazil and now corn here in America.

I'm not sure how long this enthusiasm will last however, as more people are waking up to the fact that corn-based ethanol is not all it's cracked up to be. From my understanding, corn ethanol production is an energy-losing process and an inefficient choice from an economic standpoint, as well.

While corn based ethanol is the politically appealing option at the moment (corn farmers and producers benefit, while Americans believe they are supporting farmers in the Midwest rather than oil-shieks in the Middle East), some believe that successful commercialization of cellulose ethanol would create a more efficient source of energy. Here's a recent look at the ethanol debate from WSJ.com.

Wednesday, July 05, 2006

Tell me how to spend that money

"Who polices America's philanthropists?". This is the question posed by Financial Times writer Holly Yeager in an article entitled, "Concern over scrutiny of do-it-all philanthropists".

Recent large-scale commitments to philanthropic institutions made by the likes of Warren Buffett have "raised concerns about governance and regulation and fuelled a sense that increased public accountability might be necessary."

Of course, government regulation! Why didn't we think of that before? You there, don't look glum. They've been nice enough to let you keep almost half of your money. Now it's time for you to smile and sit up straight as the helpful policy makers tell you how to staff your charitable organization and make sure you actually spend some of that dough.

Just in case you're not convinced, we've lined up some experts to tell you how it is. Listen up, Moneybags!

Pablo Eisenberg, a senior fellow at Georgetown University's public policy institute and former executive director of the Center for Community Change, a liberal advocacy group, said the gift should be seen in the context of President George W. Bush's administration, and its effort to reduce the role of the federal government.

"Because of the intense media coverage on this event, it may give the public a feeling that
philanthropy is the answer to future problems, that the government is less important, and that philanthropy can fill the holes in the social safety net being made by this administration," he said. "I think that would be unfortunate."

Rick Cohen, executive director of the National Center for Responsive Philanthropy, a liberal advocacy group, echoed that concern. "I hope they aren't unintentionally signalling a philanthropy-can-do-it-all approach," he said.

I guess he's signalling a belief in the "government-should-do-it-all approach". See, I added the hyphens, thereby encapsulating his viewpoint and denouncing it all at once. Two can play at that game.

Here's a shockingly out of date, laissez faire concept: you wanna make rules about how a charity should be run? Go out and make some money and start up an organization of your own!

When he made his announcement, Mr Buffett explained his confidence in the Gates Foundation's international public health efforts in simple terms. "I think Bill and Melinda Gates will do a better job managing the money than the federal government," he said.

Well, damned if they won't try to manage it for you.

Ken Lay dies.

Former Enron chairman Kenneth Lay has died suddenly of a heart attack, according to news reports. David Callaway's commentary on CBS Marketwatch contrasts the polished media response to the news with the off-the-cuff grousing of the internet set.

Reaction on television was swift and gracious, with most pundits focusing on the so-called Greek tragedy of a man who rose to the sun by creating a new type of corporate empire that would change the world, only to fall to earth as temptation and corruption destroyed his dream. Reaction on the MarketWatch message boards and in the blogosphere was swift and merciless, with readers focusing mostly on jokes and nasty comments about his death. See Frank Barnako blog.

The Callaway commentary notes that "by going out on his own schedule, Lay managed to cheat government prosecutors of their biggest victory in the war on corporate fraud". He also reminds readers that however deserving a prison sentence may have been, Lay did not deserve to die. Similar sentiments were expressed by Washington Post columnist Andrew Cohen in "Lay Didn't Get Off Easy".

I think the whole thing just shows how successful the government and media were in laying off much of the fallout over the 2000-2002 market drop and struggling economy on a band of corporate criminals. These scandals always seem to surface as gloom and despair take over and the markets and economy work to find a bottom. The damage is done, but how much do we really know about all the things that encouraged those trangressions to take place?

Tuesday, July 04, 2006

Independence Day

I was looking for an example of writing that reflects my personal feeling about this day of commemoration. Something that encapsulates the true spirit of the American Revolution and the ideas of its grand figureheads and those who guided them. I believe I have found it in this essay from the Baltimore Sun, entitled "Celebrate the patriotism of dissent". A passage:

With the measured reason often necessary to balance Adams' passion, Jefferson instructed us that Independence Day is a day for celebratory reflection. It is a day not for chest-thumping martial ardor and jingoism, but for honoring and giving renewed life to the ideas that made the Declaration of Independence what it is: an "expression of the American mind," the philosophical foundation for our idealized way of life and a beacon for those everywhere who aspire to govern themselves democratically.

I hope everyone will take a moment today and read the full essay by Gregory D. Foster.

Monday, July 03, 2006

The case for commodities

A brief rundown of the commodity market in the wake of the recent correction. Commodity prices have shown some strong performance in the past week. Many individual commodities enjoyed notable gains last week, continuing the move off their recent lows.

Some of those gains were reversed on Monday, as base metals such as copper and zinc gave up some ground in a thin and volatile trading session. Nickel managed to close higher, as LME nickel inventories declined.

The Financial Times reported in their weekend edition (July 1/July 2) that the commodity sector had one of its "best first-half performances ever". So, is this outperformance the sign of a bubble, as we so frequently heard before and during the latest market correction, which hit commodities and many emerging markets worldwide?

Someone once famously remarked that we can only judge a bubble in hindsight. Assuming, for a moment, that we buy this line of reasoning, let us ask instead if the recent drop was a bull market-ending correction. Let's focus strictly on price action and take a quick look at how some of the commodities have withstood the recent market rout.

These figures are taken from the Financial Times weekend report previously mentioned. Results of trading that followed the report (and any resulting price changes) are unaccounted for.

IPE Brent Crude - up 26 percent year to date.

West Texas Intermediate crude - over 20 percent gain YTD.

Gold - up around 19 percent to date this year despite the recent $100+ drop from its peak.

Silver - up 25 percent so far this year despite correction from the $14 area.

Copper - "surged" 67 percent YTD.

Zinc - 71 percent increase in the first six months of the year.

Nickel - 58 percent gain so far this year.

This bit of information does not cover the commodity complex as a whole, but I think it serves as illustration of a simple fact: even the commodities singled out as objects of speculation are holding onto their gains in the wake of this recent market correction.

Leaving aside the larger issues of supply and demand, market psychology, and the fact that some commodity sectors have yet to enjoy their day in the sun, price action so far seems to indicate strength rather than weakness. Until the price action shows that an individual commodity, or commodities as a whole, start to weaken considerably or signal a change in trend, it would probably be premature to call an end to a bull market.

Of course, no commentary on the commodity bull market would be complete without the added news of Jim Rogers' continued bullishness. As FN Arena News reports, in a recent interview with Credit Suisse, Rogers maintained that the current bull market has a long way to go. Judging by the length of previous cycles, Rogers estimates that the current bull move in tangible assets won't peak until somewhere around 2014-2022.

We'll leave it there for now. Happy Independence Day to all readers and their families.

Sunday, July 02, 2006

Why Are Americans So Angry?

In his latest statement before the U.S. House of Representatives, Representative Ron Paul of Texas poses the question, "Why Are Americans So Angry?". In this essay, Paul attempts to pinpoint what's behind the widespread anger and frustration in our society, while offering his view of the problems we must face up to in order to turn things around.

Saturday, July 01, 2006

Wildlife flourishes in Korea's DMZ

I saw mention of this topic in Richard Russell's newsletter recently. The Demilitarized Zone that seperates North and South Korea is something of a treacherous no-man's-land, dotted with land mines and fenced in with barbed wire. But the largely uninhabited boundry within has become something of a nature preserve. From "War and Wildlife", by reporter Michael Casey:

Hundreds of bird species winter here, among them at least two endangered types of crane — white-naped and red-crowned. Fifty types of mammals live here, including the rare Asiatic black bear, Amur leopard and, some believe, the Siberian tiger, based on traces of footprints and droppings. More than 1,000 different plant species thrive.

Now the worry is that an eventual peace will bring about the end of a DMZ, and development will be introduced where nature now flourishes. Interesting.