Friday, June 29, 2007

Features of the week

We've got some interesting market and business related features to share with you, so let's launch right into our "Features of the week" without further ado. Enjoy!

1. Insider trading is all the rage these days, and between coverage of this trend, the reappearance of LBOs in the form of "private equity", and the scheduled return of Gordon Gekko, it almost feels like the late 1980's all over again.

This clip on "the new insider trading" from Bloomberg TV brings us up to date and takes us back, all at the same time.

2. China's mainland stock market, trading at 45 times earnings, is being fed by a herd mentality according to some observers.

An excellent piece from Bloomberg that illustrates the universal appeal of attaining wealth and autonomy through trading, while at the same time showing the "risky shift" behavior of crowds during a time of speculative boom.

3. Super-rich extend their lead over the merely affluent. According to FT, assets of ultra-high net worth individuals expanded by 16.8 percent, compared to the 6.4 percent growth in wealth experienced by the entry-level rich.

A study by Merrill Lynch and Cap Gemini chalks up the outsized increase to a greater zest for risk taking on the part of the very rich. Probably, they also have better access to lucrative investment vehicles and more options to choose from.

4. U.S. Supreme Court to hear Guantanamo prisoners appeals.

5. Resource nationalism continues as Hugo Chavez and Venezuela move to take control of oil producing assets in the Orinoco oil belt. Meanwhile, the oil majors tread a pragmatic path.

6. Investment Postcards hosts an economic and investment roundtable featuring Martin Barnes, John Mauldin, David Fuller, Barry Ritholtz, and Prieur du Plessis.

7. Bargains don't come wrapped with a bow, says investor Arne Alsin.

8. The Financial Philosopher relates the subprime lending fiasco to a cycle of greed.

9. John Gapper reviews the new book, Richistan, and finds a land of Bentleys, butlers, and blandness.

10. Forging Sustainable Profits With a Green Company. An excellent interview with Patagonia founder Yvon Chouinard from SFO Magazine.

11. David Morgan of the Silver-Investor website tells us what's happening with gold and silver prices in this radio interview with the Korelin Economics Report.

12. Author Dan Pink speaks with Econtalk about his book, A Whole New Mind: Why Right-Brainers Will Rule the Future.

That's it. Have a great weekend, everyone, and enjoy!

Wednesday, June 27, 2007

Global exchange consolidation

A quick update on the ongoing trend towards financial exchange consolidation worldwide.

We've talked a lot about exchange mergers and proposed buyout deals in the past; at times it seemed as though we might need one of those keiretsu-style entity-relationship diagrams to keep all the alliances and takeover approaches straight.

NYSE, Euronext, LSE, Nasdaq, Tokyo Stock Exchange, CME, CBOT, ICE, and NYMEX. These are just some of the larger firms that got this ball rolling, and we don't know when or where it will stop. All we know is that we probably won't reach the endpoint of this trend until the exchanges decide they've grown weary of their new, "go global or go home", mantra.

So in the meantime, we update this little web of consolidation with the latest news of a deal between the London Stock Exchange (LSE) and Borsa Italiana.

Nasdaq is not happy about the deal, as it had sought to acquire the LSE for itself, a strategy that seems ever more unlikely as time goes by.

Hell, even NYSE Euronext tried to get in on the action, "by offering a deal valued at €1.8bn to €2.0bn", which was rejected by Borsa Italiana. The Borsa people have been more inclined to favor a deal from LSE, which offers them notable representation among the board of a combined entity.

And just when you thought it was safe to go back in the water, the FT looks to the possibility of increased consolidation among Asian exchanges.

Stay tuned.

Tuesday, June 26, 2007

Hans F. Sennholz, 1922-2007

We are saddened to hear that Hans Sennholz died on Saturday, June 23, 2007. He was a wonderful writer and economist, and a lifelong advocate for liberty and truth. Our condolences to his family and friends.

For more on Sennholz's life and work, please see recent tributes from Joseph Salerno, Peter J. Boettke, and Lew Rockwell at Mises.org. See also, Sennholz's 2004 speech, "Finding My Way".

You can also find links to his articles and work at Mises.org, and at Sennholz.com.

And finally, posts mentioning Hans Sennholz and his work.

Read, learn, and pass it on.

Monday, June 25, 2007

Readings on inflation

Having spent much of the last week keeping up with the news and all manner of market-related interviews and features, I've decided to take a slightly different tack over the next few days.

I'll still be posting a bit, but I'll also be spending some time catching up on some book reading, specifically on the topics of inflation and past hyperinflationary periods. This reading will form the basis of some upcoming posts/articles I plan to write.

First, will be an essay on the true definition of inflation. What is inflation? What is its cause? Why do so many of us have an insufficient understanding of this monetary phenomenon? What can we do to protect ourselves from the ravages of inflation, and what can be done to prevent it in the first place? These are all questions I hope to answer and examine further.

Second, an article on the lessons of past inflationary & hyperinflationary periods, as shown through the work of Max Shapiro, author of The Penniless Billionaires, and others.

This article will shine a spotlight on some of great inflationary periods, from the time of the Roman Empire up to the present day.

Readers will come to know the main argument presented in Shapiro's Billionaires: that inflation is not an accidental, mysterious phenomenon, but an excessive increase in the supply of money and credit that can bring about economic ruin for many and increased prosperity for a few.

By discussing some of the main ideas presented in Shapiro's book, I hope to give readers a more profound understanding of the true nature of inflation, and an interest in debating some of the author's conclusions.

I've also considered including a few footnotes for additional reading recommendations at the end of each article. If any of you would like to recommend an article or book that was especially helpful in understanding inflation from a classical, or "Austrian" perspective, please drop us a note in the comments section, or via email.

Thanks.

Friday, June 22, 2007

Features of the week

What a week it's been.

Subprime mortgages and collateralized debt obligations made waves on Wall Street as two Bear Stearns hedge funds collapse under the weight of their subprime-heavy CDOs. Meanwhile, the financial community worries that banks, pension funds, and hedge funds owning these instruments will have to write down the value of their holdings, spurring fears of a broader fallout from the ongoing subprime deterioration.

Violence rocked the Middle East as a sort of civil war rages on in Gaza between Palestinian factions Fatah and Hamas. Meanwhile, a suicide truck bombing of a Baghdad mosque has left many dead and injured as the survivors wonders who is to blame for the divisive attacks.

Plus, Blackstone goes public (slightly ahead of schedule) and proceeds to surpass its $31 offering price by 13% during the first day of trading.

Read on for news of all these issues and more, as we list our features of the week.

1. Blackstone Group cashes out of its private-firm status as it lists on the NYSE for its first day of public trading. Forbes asks if buying into Blackstone now means "buying high", or near the peak of a private equity cycle.

2. Private equity firms will continue to go public, despite recent concerns over changes in tax laws which currently favor them. See, "Private equity IPOs unfazed by tax man".

3. Bear Stearns attempts to bail out one its money-losing hedge funds as worries over subprime lending and the opaque nature of the CDO market come to public attention.

4. Jim Rogers talks to Maria Bartiromo about China and commodities in this recent CNBC interview clip, courtesy of Tangibulls.com

5. Marc Faber says, "sell your Warhols and buy dollars", in a recent FT commentary. See also, Marc's recent contribution to AME Info, "Old violins are playing the last waltz".

6. Warren Buffett in a recent conversation with Charlie Rose at the recently revamped Charlie Rose website.

7. Divide and conquer: as suicide bombings in Iraq continue to take their deadly toll, Iraqis are left to wonder who is sowing the seeds of strife.

8. Rethinking crop biofuels. Plus, FT's Doug Cameron examines ethanol subsidies in the US.

9. The Economist uncovers, "The truth about recycling".

10. "China bulldozes its urban heritage". An FT Weekend report.

11. Bloomberg takes a look at the modern methods of insider trading.

12. Wilbur Ross talks about debt creation, corporate defaults, and "risk-ignored rate of return" in a recent Bloomberg interview.

13. Value investor Mohnish Pabrai recently joined Bloomberg TV in the studio to talk about his investment philosophy and the merits of investing in Berkshire Hathaway.

14. "Music & Life". Alan Watts relates music to life's "journey" in this animated clip produced by Trey Parker and Matt Stone. Thanks, Wayne!

Have a great weekend, everybody.

Thursday, June 21, 2007

Bear Stearns' subprime shock

Bear Stearns shocks, Saigon shakes, and Hanoi rocks.

The markets are shuddering over the collapse of two Bear Stearns-run hedge funds which were heavily exposed to the subprime-laden collateralized debt obligations (CDO) market.

Now bankers fear the possibility of a domino effect collapse in the hedge fund world should panic level pricing of CDOs show these rather opaque instruments to be overvalued.

Here's more on that from Bloomberg.com:

The Merrill Lynch & Co.'s threat to sell $800 million of mortgage securities seized from Bear Stearns Cos. hedge funds is sending shudders across Wall Street.


A sale would give banks, brokerages and investors the one thing they want to avoid: a real price on the bonds in the fund that could serve as a benchmark. The securities are known as collateralized debt obligations, which exceed $1 trillion and comprise the fastest-growing part of the bond market.

Because there is little trading in the securities, prices may not reflect the highest rate of mortgage delinquencies in 13 years. An auction that confirms concerns that CDOs are overvalued may spark a chain reaction of writedowns that causes billions of dollars in losses for everyone from hedge funds to pension funds to foreign banks. Bear Stearns, the second-biggest mortgage bond underwriter, also is the biggest broker to hedge funds.

``More than a Bear Stearns issue, it's an industry issue,'' said Brad Hintz, an analyst at Sanford C. Bernstein & Co. in New York. Hintz was chief financial officer of Lehman Brothers Holdings Inc., the largest mortgage underwriter, for three years before becoming an analyst in 2001. ``How many other hedge funds are holding similar, illiquid, esoteric securities? What are their true prices? What will happen if more blow up?''

We'll have more on this tomorrow in our "Features of the week" post, so stay tuned.

For now, see Bloomberg Markets' recent cover story on the CDO market highlighted in last week's "Features" post.

You can also check out our recent post, "Asset backs, subprime: shades of 1990?".

Tuesday, June 19, 2007

Asia: hot market or frenzy?

More debate on whether or not we're seeing a bubble in the Asian share markets.


Today we'll hear commentary from Jon Sundt of Altegris Investments; his recent take, "Asia: hot market or frenzy?", is lifted from John Mauldin's "Outside The Box" e-letter.

This brief essay reveals that Asian market performance is a tale of two cities. Charts showing the relentless upward movement of leading market averages over the past several years are contrasted with a chart tracking investment returns in the MSCI AC Asia Pacific Price Index.


This second chart shows that Asian markets were extremely volatile over a twenty year period. In fact, during this period, there were several times when your investment dollars would have been cut in half.

This leads Sundt to conclude that the Asian share markets are extremely complex, and that intrepid investors would probably be better served by talented active managers able to navigate these waters.

While he goes on to say that index investing may clearly be right for some, it's clear his interests lie with addressing the wealthier, "sophisticated" investors who might gravitate towards the alternative investment offerings of firms like Altegris.

In any case, check out the article for an interesting, yet brief, discussion of what to expect when investing in the Asian stock markets.

Thai junta orders Thaksin to return

Here it comes, though we've not yet come full circle on this unfolding political drama.

Thailand's ex-prime minister, Thaksin Shinawatra, has been ordered to return to Thailand by the military government that threw him out of power. Thaksin must return by the end of the month or face charges of concealing financial assets.

Here's more from the New York Times:

Thitinan Pongsudhirak, director of the Institute of Security and International Studies at Chulalongkorn University, was very skeptical that Mr. Thaksin would return and said that the true aim of the junta was probably to discredit Mr. Thaksin in the eyes of his supporters.

“This will be used as a tool to convince Thaksin’s foot soldiers that, ‘Look, he is a bad guy,’” Mr. Thitinan said.

Over the past three weeks the junta has sought to dismantle Mr. Thaksin’s political empire and loosen the former tycoon’s control over his wealth. His party was dissolved, and he and more than 100 allies were banned from politics for five years. More than $1.6 billion that Mr. Thaksin and his family hold in Thai bank accounts was frozen.

Mr. Thaksin’s allies have promised to stage weekly protests against the junta and are seeking to form another political party.

It certainly seems there is a drive to discredit Thaksin (at the very least), as Thaksin's supporters gather to call for the resignation of the ruling coup leaders and for elections "to be held immediately".

Thaksin seems to have maintained his base of support among the country's rural poor, and the possibility of his eventual return to power has always remained open. It's too soon to imagine something like this happening now though, as he would seem to be in great danger upon returning, despite recent assurances that he will not be detained.


More on Thailand's economic and political outlook from Asia Sentinel and Bloomberg. See also, our past discussions of Thailand's economic and social future.

Monday, June 18, 2007

Protectionism & currency manipulation

Monday's talk on Bloomberg News seems to center around a possible breakdown in the structuring of global trade agreements, plus accusations of currency manipulation among trading partners. Let's see what we've got.

First headline:
"Beggar-Thy-Neighbor Protectionism Looms After Doha Trade Talks".

Bloomberg reports that the latest round of global trade talks may be faltering, and that discussions among WTO negotiators could be the last of their kind. The effects of globalization and technology may have rendered multilateral trade deals obsolete, although past benefits of such deals were substantial.

The flagging momentum for multilateral trade deals in part reflects the success of earlier negotiations. After eight previous rounds of global agreements, developed countries have lowered tariffs to an average 4 percent from 40 percent, and more than half the world's trade is now duty-free.

Multilateral accords may also be made irrelevant by globalization, as technology cuts obstacles to trade in computing, banking and the media with less government involvement.


Although these factors have allowed for continued growth in global trade, market strategists are still worried about looming signs of protectionism.


Meanwhile, protectionist sentiment in the U.S. and elsewhere is killing lawmakers' appetite for big new multinational accords as voters and politicians blame competition from emerging economies for the loss of thousands of manufacturing jobs.


Protectionism ``is likely to become an increasing concern for the market in the months ahead,'' says Jens Nordvig, an economist at Goldman Sachs Group Inc. in New York.


A poll for NBC News and the Wall Street Journal in March found only 28 percent of Americans viewed free trade deals as beneficial, compared with 46 percent who said they were harmful. When the same question was asked in December 1999, 39 percent were positive about free trade, 30 percent negative.

The article goes on to recite claims from the US and Europe that China is unfairly supporting its exporters by maintaining an undervalued currency. This, as the now-familiar refrain suggests, gives the Chinese an unfair advantage in trade. What to make of these claims?

Caroline Baum takes up the subject of currency manipulation in her recent editorial, "China Isn't a Manipulator, U.S. Congress Is".


She notes that while the U.S. Treasury had officially avoided labeling the Chinese currency manipulators, members of Congress are far more willing to publicly level charges while voicing support for all manner of (protectionist) trade legislation.


Here's Caroline's take:


Critics of China's currency-management policy claim the yuan is undervalued by as much as 40 percent, giving the country's exports a competitive advantage.

You never hear much about the disadvantages, about China paying artificially inflated prices for the capital goods and intermediate materials it imports. It overpays for vast amounts of raw materials, everything from oil to copper to steel.

At the same time, do American consumers want to pay 40 percent more for underwear and other low-end apparel from China? (China's lost market share would be other emerging countries' gain, but it would still mean higher import prices for Americans.)

And in case you'd like to get another perspective on these issues (without having to do a bit of additional reading), listen to Jim Puplava's comments in the "Big Picture" segment (part 2, at the 26:30 mark) of the Financial Sense Newshour's June 2, 2007 broadcast. Transcript is available.

Sunday, June 17, 2007

Global equities shrug off bond sales

"Global equities shrug off global bond sales". That's the news from Financial Times' weekend edition. Here's market coverage from FT.com:

Global equities shrugged off the rout in government bonds this week, with markets on both sides of the Atlantic closing on Friday near records.


Leading indices on Wall Street were near lifetime peaks, while European and UK stocks closed at their highest level since 2000. Equities were under heavy selling pressure earlier in the week as the yield on the 10-year US Treasury bond struck a five-year high at 5.33 per cent amid concerns that strong US economic growth would rule out interest rate cuts by the Federal Reserve this year.

European government bonds have also been trading at five-year peaks recently on expectations that eurozone rates could be raised by more than expected.

But sentiment turned round sharply on Wednesday as investors felt that the bond market sell-off had been overdone. Benign
US inflation data on Friday further improved investors’ mood, with core inflation in May coming in at 0.1 per cent, against an expected 0.2 per cent. This helped yields stabilise.

On Wall Street, the S&P 500 index closed up 1.7 per cent on the week, and the Dow Jones Industrial Average up 1.6 per cent. In London, the FTSE 100 rose 3.5 per cent over the five-day period to finish within 200 points of its all-time high late in 1999.


For more on recent comments from the European Central Bank, read on at the link above.
Happy Father's Day, everyone.

Friday, June 15, 2007

Features of the week

We've got a lot of information to share in this Friday's edition of our "Features of the week".

And while I'm definitely a proponent of being selective when it comes to information, I do hope you'll all take some time to check out these article features which cover a number of different, and fascinating, topics. Having said that, enjoy!

1. "Good Companies, Bad Karma". A Q&A discussion with marketing guru Jagdish Seth.

2. "Freedom, not climate, is at risk". An FT comment by Vaclav Klaus.

3. The cost of gasoline around the world. Excellent graph and analysis from The Oil Drum.

4. There's a downside to Alberta's oil boom and it comes in the form of soaring rents and shortages in education, recreational opportunities, and medical services.

5. Building cities in the desert sand. Prince Fahd bin Sultan and construction mogul Bahaa Hariri hope to build megacities in Saudi Arabia where desert now stands.

Will their long term plans be hampered by the onset of peak oil and higher energy prices?

6. Is there a bubble in the Chinese stock market? Are valuations in India too high? Will a market plunge in China spread to other Asian stock markets or is the speculative mania confined to the Chinese mainland?

These, and other important questions, are hashed out by noted investors such as, Mark Mobius, Jim Rogers, and Marc Faber, in "Chinese Checkers".

7. Political turmoil creates a buying opportunity in Thailand.

8. A Motley Fool interview with value investor Mohnish Pabrai. Parts one and two of "Pabrai's Perspectives on Investing". Thanks to David Hui Lau for sharing these links.

9. The Financial Philosopher wonders if financial blogs are making the markets more efficient.

10. John Rubino interviews Bill Laggner and Kevin Duffy of Bearing Fund LP, and the talk turns to "value traps" in the market.

11. Richard Russell remembers when a dime bought a loaf of bread, but then, "I'm an old-timer...".

12. Doug Wakefield and Ben Hill discuss debt, the economy, and the outlook for the markets as seen through the viewpoints of two fictitious investors in, "Ed 'N' Earl".

Further to the points made in the Wakefield/Hill article about the Great Depression, some reference links courtesy of the Mises Institute:

*America's Great Depression, by Murray N. Rothbard.
*Banking And The Business Cycle (PDF), by C.A. Phillips, T.F. MacManus, and R.W. Nelson.

13. "Toxic Debt: The Poison In Your Pension". Bloomberg Markets reports that banks are selling the riskiest part of collateralized debt obligations (CDOs) to public pension funds. You know what they say, "Caveat Emptor".

14. Newsweek reports on a $3 gadget that provides safe drinking water. Hat tip to The Kirk Report for this article.

15. Fintag and friends worry about an upcoming June correction and the possibility of a fall crash. Are they jivin'?

16. NYMEX explores a sale as the CME sweetens its offer for the hotly pursued CBOT.

17. Americans are less happy today than 30 years ago, according to an Italian study.

18. Whitney Tilson shares some not-to-be-missed tips for value investors.

19. Edward Chancellor takes an imaginary look back at Blackstone Group's tenure as a publicly traded company. Hat tip to Abnormal Returns.

That's all, friends! Enjoy your weekend.

Thursday, June 14, 2007

You know there's a bubble when...

Here's a fun piece from Bloomberg columnist Mark Gilbert which takes its cue from Jeremy Grantham's recent remarks about the world's "first truly global bubble".

In, "Champagne Cheaper Than Vinegar = Bubble", Gilbert lists his seven signs that the world has gone bubblicious and completely off its rocker. The world of contemporary art provides us with one prime example:

Skullduggery?

Take a life-sized platinum skull that looks eerily like Hedge-Fund Guy. Stud it with 8,601 diamonds weighing 1,106.18 carats. Give it a snappy title such as ``For the Love of God'' and, as long as your name is Damien Hirst, you have a recipe for turning $20 million of materials into a $100 million windfall.

``You have to get the price right, or it will come back into the market,'' Hirst told Bloomberg News reporter Linda Sandler. ``A lot of people buy things and flip them.''

You know there's a bubble when artists are trying to set their prices so high that there won't be a secondary market for their work.

Enjoy the article! And for more on the chutzpah of Hirst and other signs of our frothy times, search the blog.

PPI rises on fuel & metals costs

Better find a way to rig that Producer Price Index as well. Oh wait, you mean we have a "core" rate for the PPI too?

Bloomberg reports:

Prices paid to U.S. producers rose more than forecast in May, reflecting a fourth consecutive jump in fuel costs that threatens a broader pickup in inflation.


The 0.9 percent increase followed a 0.7 percent rise in April, the Labor Department said today in Washington. So-called core prices, which exclude fuel and food costs, rose 0.2 percent.


The report underscores Federal Reserve concerns that inflation won't moderate as forecast, economists said. Growing demand from overseas has pushed up prices for raw materials such as fuel and metals, giving businesses reason to try to pass on higher costs to customers.


No problem, mon. Just exclude food and energy like we do with "core" CPI and everything will be "irie".

Now if only we could convince people that metals prices are just a bit too volatile to include in the price index...

Wednesday, June 13, 2007

Asset backs, subprime: shades of 1990?

Will the U.S. subprime mortgage lending debacle go down in financial history alongside such notorious washouts as the 1990 junk bond fiasco?

This is the question I asked myself recently while reading through some old articles that detailed the speculative excesses of the high-yield investment markets of the 1980s and early 1990s.

This was a period in which leading investment banks were riding high on the backs of a bull market in stocks, increased activity in the bond markets, a wave of (often junk-financed) LBO deals, and the development of new structured finance instruments, such as the collateralized mortgage obligation (CMO), forerunner to the many forms of collateralized debt obligations (CDOs) that would follow in its wake. It was a time to take risks in the hopes of getting rich.

But the inevitable fallout in the junk bond market came, taking down high profile players such as Drexel Burnham Lambert and leaving institutional investors with what were reported to be enormous losses in the process (however, it has been argued that media reports vastly over attributed the losses suffered by Savings & Loan institutions to their junk bond investments).

Will problems arising out of subprime lending take a similar toll?

Back in March, there was a constant flurry of argument whether or not subprime's problems would spread throughout the financial system. And for good reason: according to data from Standard & Poors, subprime and Alt-A mortage-backed securities accounted for much of the assets backing CDOs issued in 2006.

Here's what the Financial Times said in a March 27 report on the rise of mortgage-backed CDOs:


Structurers of collateralised debt obligations (CDOs) - vehicles used to repackage portfolios of other debt - have been among the biggest buyers of bonds backed by pools of subprime mortgages in recent years, in turn issuing securities with a range of different credit ratings to investors around the world.

The recent woes of the subprime mortgage market have therefore caused ripples of concern beyond traditional mortgage investment circles about where the risks lie. Some estimates put the value wiped off CDOs in this space at up to $23bn. "The question is: 'Who owns all this securitised paper?'," says Douglas Peta, market strategist at J&W Seligman & Co. If these subprime holdings are concentrated among investors such as pension funds or insurers, "another segment of the market will face a problem".

Issuance of cash CDOs grew to $486bn last year, up from $212bn in 2005, according to industry publication Creditflux. The biggest category of deals, at 44 per cent, consisted of CDOs backed by asset-backed securities such as those backed by subprime mortgages.

According to CDO data from rating agency Standard & Poor's, subprime and the slightly less risky Alt-A mortgage-backed securities (MBS) accounted for 55 per cent of the assets underlying these CDOs last year.


So far, we have yet to see the wide-scale catastrophes predicted by many observers, but that doesn't suggest that the subprime bust hasn't claimed more than a few victims. Latest among them are some of the larger U.S. and British financial institutions, including Bear Sterns, Lehman Brothers (who, despite taking a hit from subprime, still managed to report record earnings), and HSBC.

Fresh signs of the continuing turmoil in the US subprime mortgage market emerged yesterday. Woes in the sector dented Lehman Brothers' still record quarterly earnings, while Countrywide Financial - the biggest US mortgage lender - revealed a doubling in foreclosures over the past year.


A spike in late payments and defaults by borrowers with weak credit has triggered the bankruptcy or closure of dozens of subprime lenders following a period of aggressive lending, particularly last year as the housing market slowed.

Subprime problems have also dented results at big institutions including HSBC, the British-based bank, and GMAC, the finance arm of General Motors in which a private equity group led by Cerberus bought a 51 per cent stake last year.

The article goes on to note that, "
subprime problems have also fed through into the markets for securities backed by mortgage loans and derivatives based on them."

And of course, there is the damage done to shares of homebuilders and mortgage lenders affected by the crisis, some of whom have gone bankrupt as a result of their unscrupulous lending practices. In fact it was the insatiable demand for higher-yielding debt instruments backed by home mortgages that helped fuel the tide of undisciplined lending.


This high tolerance for risk in the quest for yield was also evident during the 1980s. As noted in Fortune's 1990 piece on Drexel Burnham Lambert's decline, an increased appetite for deals was driving junk bond king Michael Milken to overreach:


By 1987, however, Milken yielded to the temptation to milk his genius and began underwriting companies that were less creditworthy than earlier ones had been. A source close to Milken admits: ''Quantity became more important than quality. If Drexel couldn't market the security, they bought it for their own accounts rather than not do the deal.''

This appetite for yield, and an increased willingness to structure deals/instruments of progressively lower quality, seem to be the features that most obviously define, and connect, the fallout periods of 1990 and 2007. Will subprime and Alt-A mortgage backed securities be known as the junk bonds of our day?

Postscript: While searching for more articles related to this theme, I came across the following piece by Chet Currier of Bloomberg News. Entitled, "Subprime woes akin to junk bond saga", the article makes a similar analogy regarding shakeouts in the junk bond and subprime mortgage markets, but argues for continued growth in the areas of subprime lending and mortgage securitization. Check it out.

Monday, June 11, 2007

Strong Market or Bubble, Part 2?

We're taking a deeper look at market valuations today, and helping us in that task are a few articles taken from the most recent Big Picture "linkfest". Thanks to Barry for posting and drawing our attention to them.

The first item we'll highlight is a Wall Street Journal article entitled, "Wealth Hazard: Guessing Low on Profit Growth".

In this piece, Justin Lahart takes a look at the earnings picture for U.S. stocks and finds that second-quarter earnings could benefit from strength in overseas businesses and continued share buybacks:

Companies in the S&P also bought back $110 billion of stock in the first quarter, Standard & Poor's estimates. That brought the total over the past four quarters to $442 billion -- enough to buy the bottom 100 companies in the S&P 500. Buybacks reduce the number of shares outstanding, lifting earnings per share.

Second-quarter S&P 500 earnings are expected to be up just 3.2%, but analysts might again be short of the mark. Strength overseas, dollar weakness and share buybacks are still potent forces -- as
International Business Machines demonstrated last week when it said it had spent $12.5 billion to repurchase shares. In a complex transaction, IBM used overseas earnings to finance the buyback at a low tax rate.

Lahart goes on to note that factors that have recently contributed to higher earnings, such as share buybacks, dollar weakness, and elevated profit margins, "tend to be highly cyclical".

While the market could continue to rally on the back of these trends, valuations in the S&P 500 are anything but cheap, as shown by Robert Shiller's analysis of average annual earnings over a 10 year period.

All in all, Lahart's piece seems to take a very balanced view of the U.S. market. The Journal doesn't want to douse the market's fire just yet, but they are reporting the skeptical view of what's happening with valuations.

On to the second article, in which Mark Hulbert asks, "Is It Just a Strong Market, or the Bubble, Part 2?".

Hulbert seems to be working from similar ground, as his article draws on some of the same arguments concerning valuations (and comment sources) as the Lahart piece. Hulbert adds to this discussion by examining some recent behavioral finance studies relating to investor sentiment and "bubble-causing behavior".

Tip: in the wake of a burst bubble, watch out for the consistently observed formation of "bubble echoes".

And in our third piece, Prieur du Plessis and his colleagues at Plexus Asset Management conduct their own study on S&P 500 valuations
(using data from Shiller and others) and find that the market is, "by historical standards, not in cheap territory", thereby signaling lukewarm returns ahead.

Finance Trends readers may have noted similar sentiments shared by me in recent posts & comments.

Friday, June 08, 2007

Features of the week

Lots to talk about in this Friday's edition of "Features of the week", especially in the subjects of oil, ethanol, and energy use. Plus, plenty of news besides, so kick back and enjoy.

1. "Another Inconvenient Truth". Puru Saxena feels global production declines in crude oil will result in significantly higher prices and the possibility of shortages and rationing.

2. Meanwhile, George Friedman of Stratfor discusses possible advancements in the field of cellulosic ethanol production and the potential likelihood of a resulting fall off in global oil demand.

3. Robert Rapier discusses, "High Gasoline Prices", in a two-part (one & two) article series.

4. "Energy in a Post-Peak World". A Simmons & Company International slideshow, presented by Matthew Simmons.

5. Bono doubts the sincerity of the G8's pledge for African aid.

6. Secret CIA jails hosted by Poland, Romania, says a Swiss politician's report. This coincides with the CIA secret prisoner trial starting in Italy.

7. Chicago is the "greatest trading city in the world" according to a Trader Monthly survey.

8. PIMCO's Bill Gross, recently turned bearish on bonds, is set to make a fine return in an area that recalls one of the better-known inflation hedges of the 1970's: investing in rare stamps.

9. Railroads are a recently hot investment, but allegations of price-fixing have recently been leveled at the industry by one industrial customer.

10. "A Conversation With an Unusual Man": Charles Davis interviews Ron Paul.

11. Jim Chanos of Kynikos Associates discusses short selling, hedge funds, and private equity with FT's View from the Top. Parts one & two of this interview.

12. Jim Rogers appears in a VPRO documentary, "De Calculerende Cowboy", to discuss his travels, the future of Europe, and his philosophy of investing.

13. Bill Gates gives the commencement speech at Harvard, his alma mater, and takes home an honorary degree. See also, Time Magazine's profile and interviews with Gates.

14. George Harrison talks with Dick Cavett in a 1971 interview. Parts one, two, three, and four.

Have a great weekend, everybody.

Thursday, June 07, 2007

Is the internet "killing our culture"?

The day is still young, but I don't know if I'll manage to come across anything so objectionable as the following piece before it's through.

FT.com is hosting a Q&A with Andrew Keen, author of a new book entitled, The Cult of the Amateur: How Today's Internet is Killing Our Culture and Assaulting Our Economy (UK title).

An intro to the Q&A debate contains the following information:

Mr Keen does not believe in “the wisdom of the crowd”. Much of the content filling up YouTube, MySpace, and blogs is just an “an endless digital forest of mediocrity” which, unconstrained by professional standards or editorial filters, can alter public debate and manipulate public opinion.

Now, I am no believer in the recently fashionable thesis of "the wisdom of the crowd", but I have to take issue with the rest of that paragraph. And it's not because I feel impugned as a blogger contributing to the "endless digital forest of mediocrity" (sucks that the phrase, "vast wasteland", was already taken, right?).

As in any medium, there is a lot of crap content and you're just going to have to slog through it to find items of quality and interest. This we should know.

What I find ridiculous is Keen's allegiance to the professional gatekeepers and "editorial filters" that keep you and me (the public) safe from unprocessed (and therefore, false and unreliable) information.

Now I agree that there is probably a lot of false info and misinformation floating around on the internet. Unfortunately, the same is true for every other medium you can think of.

Are there no lies or offensive material to be found in books and magazines (think periodic p.c. outrage, banned material, and book burnings)? Have you never felt short shifted by a crummy newspaper or magazine article that failed to tell the truth?

How about those wonderful, hidden PR releases and "buy this!" pieces disguised as regular "content" rather than advertising? What about those reporters and editors you occasionally hear about, the ones who just plum forgot to inform you that their quotes and their "facts" on this story have been made up! I don't even want to mention tv and radio...

The point is that bias and even outright lies/misinformation will be found in just about every form of interpersonal communication and media that we use. The biases are part of who we are and the lies we broadcast through media are used to influence or control.

We know that governments and ruling elites everywhere (and throughout history) have been eager to exploit or control the means by which information is shared or broadcasted. That's why the first thing that coup leaders do when they overthrow the government is take control of the radio tower and TV stations. It's partly why governments are so eager to regulate TV and radio channels, and lately, even the internet.

In the internet age, given access to the proper tools, anyone can become a broadcaster or a pamphleteer. Information can be shared, discussed, and debated. This upsets the balance of power that Keen's gatekeepers, the parents, teachers, and politicians who should "responsibly manage the consumption and use of this media", have grown accustomed to.

I agree with Keen's observations that certain aspects of the internet and web 2.0 are likely to heighten narcissism in our society and further the spread of relativism. But the very tools that enable the growth and dispersion of these sentiments are likely to bring these features of our personality and our thinking into sharp relief.

People who sense that something is wrong in their society, or with their way of thinking, will begin to take a look at the world around them and the information they've received and they will question it. Then, for some, the search for truth and understanding will begin.

With a giant share of the world's storehouse of information already online, anyone can begin to learn with a click of the mouse and an internet connection. All one really needs is a bit of curiosity and the ability to read and think critically.

And in spite of what Andrew Keen might tell you, the internet will do no more to break down your critical reasoning faculties than watching TV, reading magazines, or attending school. Who knows, it might actually improve them.

Wednesday, June 06, 2007

Great American Savings Myth

Economist Paul Kasriel takes on the topics of savings and investment and the idea that America is sitting comfortably atop a golden nest egg in, "Gene Epstein's Great American Savings (sic) Myth".

Here's an excerpt:


In the cover article of the May 28 edition of
Barron’s (see The Great American Savings Myth) Gene Epstein, Barron’s economics editor, argues that household saving is being underestimated. Epstein’s argument centers principally on two issues – the growth in household net worth and the absence of spending on intangibles, such as research and development, from our official Gross Domestic Product (GDP)/saving statistics.

I offer a counterargument that increases in household net worth do not necessarily represent saving in an economic sense. I also present evidence showing that investment in human capital – higher education and research/development – has not shown any extraordinary growth since the official measures of household saving have been plummeting in recent years.

If households are so wealthy, why have they recently been on a borrowing spree? If the return on business capital is so great, why have businesses been buying back record amounts of their equities rather than using their profits to spend more on physical and intellectual capital?


Read on as Kasriel describes why the current picture of household savings would more accurately be characterized as one of dissavings, and makes a few other points besides.

Tuesday, June 05, 2007

Jim Rogers: The Calculating Cowboy

Speaking of Jim Rogers (see previous post), I thought I'd include this excellent video featuring the famed "adventure capitalist" that I found last night on the Dutch VPRO site, host to the fascinating Riverside Conversations series.



In, "De Calculerende Cowboy" ( "The Calculating Cowboy", if my web translation is correct), Rogers takes us on a tour of his stops through Europe and dispenses his investment philosophy and wisdom along the way. 

Take a ride with Jim in his trademark yellow, custom-built Mercedes SLK as he revisits his past and comments on developments in Europe near the turn of the millennium.

Great moments throughout, and the footage of Jim at a European investment panel is just hilarious. But don't take my word for it; see it for yourself. 

Viewing note: if you hear audio but don't see the accompanying video, try clicking the small little "x" box in the right hand scroll menu of VPRO's help screen.

Addendum to G8, globalization post

I just wanted to follow up briefly on a post made over the weekend concerning protests and violence at the latest G8 summit in Germany.

We talked a bit about the emotions stirred up by the world's "globalization" agenda, and reactions to such policies worldwide. I thought I'd add a bit to that discussion here with something I read last night in a 2002 essay by investor Jim Rogers.

Here's what Jim had to say after returning home from his millennial trek across the globe:


Globalization, we are discovering, is a very tricky concept. In the best of all possible scenarios, it means everyone will drink Pepsi, watch the NBA, and drive a Ford. Not everyone wants that. More and more people are turning inward to their own tribe, their own ethnic group or religion. Global telecommunications, the Web, and fast travel appear to make the world a smaller place but sometimes it simply makes people more protective of their own lives and culture.

Words of a man who's seen it up close. And at the same time (and within the very same essay), he has also pointed out that protectionism and blocking one's self off from the world will only bring harm to a country and its people.

Maybe there is a right way to go about trading and interacting with other nations. A more natural system of trade and mutual benificence that is not dictated from on high by the politicians and their delegates. I don't know, but I think it's something to consider.

Scooter Libby sentenced to prison

White House aide Lewis "Scooter" Libby has been found guilty of perjury and obstruction of justice and sentenced to 30 months in prison for his efforts in stifling a CIA leak investigation.

More from BBC News:


A US judge has sentenced former key White House official Lewis "Scooter" Libby to 30 months in prison.

Libby was found guilty of obstruction of justice and perjury in March over the investigation into the unmasking of CIA officer Valerie Plame.

Libby was the former chief of staff to Vice-President Dick Cheney.

Nobody has ever been charged with the offence of leaking the name of Valerie Plame, whose husband had criticised the war in Iraq.

So Libby takes the fall. Will "Plamegate" ever reach the top of this administration? It looks as though the whole thing might fade out in the dying days of this presidential administration, much like the Iran-Contra scandal of Reagan's second term.

More on this from BBC in the background article, "Trial reveals White House secrets".

Monday, June 04, 2007

Which dollar index?

The Bear Mountain Bull tips us to a rather interesting Minyanville article that outlines the differences between the much-watched US Dollar Index and the Fed's trade-weighted dollar index.

Why does it matter which index you use? Because every picture tells a story (don't it), and these pictures each tell a different tale about the present and future course of the US dollar.

As Minyanville's Lance Lewis tells it, the US Dollar Index is heavily weighted towards the euro (the European currency accounts for 57% of the index weighting), and this construction distorts our view of how the US currency is trading against the currencies of its major trading partners.

While the US Dollar Index continues to defend its long-held support above the 78-80 area, the trade-weighted index shows another picture, one of a potential breakdown through very long-term support. In fact, a breakdown through the 200 month moving average did occur shortly after the article was published.

Why is the movement in the trade-weighted index so important to understand? Read Lewis' article to find out more about the movement of the dollar and its effect on inflation and the gold price.

For more news on the market's view of the various currency indexes, see these recent Bloomberg stories(1,2,3). Just to differentiate, I believe the index that Lewis has charted in his article is the Federal Reserve's "Nominal Broad Dollar Index", while those in the Bloomberg articles may refer to some of the Fed's other trade weighted indexes.

Sunday, June 03, 2007

G8 riots erupt in Germany.

"G8 riots erupt in Germany". This headline story is taken from the FT.com weekend edition.

Demonstrations against globalization have provided a near constant backdrop to world business and trade organization summits in recent years. It's still hard for me to understand what to make of all of this. Having never witnessed one of these stand-offs close up, I'm left with impressions gained through news reports.

There is a lot of anger being voiced over the perceived aims of globalization and the damage done to local environments, livelihoods, and cultures in the age of multinational corporate trade. It seems that the protests attract a lot of young people who feel disenfranchised and left without a voice or a vote on such matters.

Here's more on the anti-globablization movement from Wikipedia.

Friday, June 01, 2007

Features of the week

Welcome to our "features of the week", where we highlight some of the most interesting news stories and web features around. Grab a seat and enjoy!

1. Let's have a sit down: "Bancrofts to discuss Dow Jones offer with News Corp
".

2. USA Today reports that government accounting rules are hiding trillions in liabilities.

3. FT.com on the pros and cons of "Business oriented venture philanthropists".

4. Renaissance Capital CEO Stephen Jennings looks to Africa for future investment opportunities.

5. Peter Schiff talks to Bloomberg about what's fueling China's investment mania.

6. Fintag and FT on efforts to replicate hedge fund returns.

7. The Big Picture points us to a video interview with Bill Gates and Steve Jobs, together onstage in a rare joint appearance.

8. The Kirk Report tips us on a piece that highlights the wisdom of Charlie Munger.

9. Chongqing is western China's largest city, and is growing in size daily. IHT.com on China's push to develop its interior megacity, and "the greatest migration in history".

10. Slain critic of the current Russian regime,
Anna Politkovskaya, is treated by the government as "a nonperson".

11. The party is over. Economist on problems in Thailand.

12. Paul Atkins, a leading candidate to be the new head of the CFTC, is viewed as one of the more pro-business SEC officials and critical of over-regulation.

13. Place your bets. The Economist on a virtual stock market for uncovering media talent.

14. Fortune talks with Mohamed El-Erian, the head of Harvard's $30 billion endowment fund.

Have a great weekend.