Sunday, December 31, 2006

Happy New Year!

Happy New Year from Finance Trends! (Cheers, darling - allright...)

Financial markets: the year in review

The year is out and almost everything has ended on an up note, at least as far as the financial markets are concerned.

We've seen a year of big-time deals, new financial products launched, consolidation across all sectors and locales, rising global stock markets, and record prices for art and auctionable goods. The operative phrase in 2006 was "global liquidity", and a clutch of articles (including some of our own) chronicled this wave of liquidity and the markets that floated higher on its rising tide.

With that in mind, I want to relay one more observation now that the year is done and the final results are in. I'm sure many of you have noticed that almost all share markets were higher this year. Looking over the past few issues of Barron's and the year-ending tables in the Financial Times global indexes confirms this trend. There seemed to be hardly any down performers on the year among share indexes tracked.

In fact the only areas that ended the year on the down note seem to be Japanese small-cap and, in local currencies, Istanbul's IMKB index and the Bangkok SET index (which is up 6.08% in US Dollar terms according to the Dow Jones Global Indexes table published in Barron's).

Also, off the top of my head, I'd guess that most of the Middle Eastern and Gulf share markets are down on the year and a quick look at AMEInfo confirms this.

Interestingly, one of the big percentage gainers on the year was the Caracas General index, up 156 percent in local currency terms according to Barron's foreign stock indices table. Is this outsized gain a reflection of investor optimism or is it a sign of Venezuela's weak currency and inflation?

Given the background of a synchronized rise in share markets, commodities, art, and the number and size of merger and buyout deals, we are left with the question of what the new year will bring. Hey, don't ask me (and if I did know, would I share this information? Well, maybe... but only with you)!

So, let me leave you with the cautionary stance expressed recently by Dr. Marc Faber, as well as his current outlook for 2007.

Until then, have a Happy New Year!

Friday, December 29, 2006

Going public in Ameri-, er, London.

A couple of stories from the Financial Times highlight the recently amplified trends of foreign companies delisting from American stock exchanges and choosing to go public in London.

In "Easier to check out - but a US listing is still a trap", FT reporter Robert Bruce compares US listings to a roach motel - "They check in, but they don't check out". Ouch. However, he does go on to report that the SEC is trying to make it easier for companies to delist from American exchanges. See the article for more.

More in the vein of "New York's loss is London's gain", as Joanna Chung reports on Europe's revived ranking in the global listings business. From, "Flurry in London sets bullish tone":

Europe held on to a significant slice of the global market for company listings this year - helped by a flurry of companies from emerging markets that chose to raise capital in London.

Companies raised $91bn in Europe, accounting for about 38 per cent of the funds raised through flotations worldwide, up slightly from last year and marking the highest share since 2000 when the figure was 45 per cent of the market.

Will the NYSE hedge themselves from this fallout (or possibly even gain business) through their nearly-completed buyout of Euronext NV?

Wednesday, December 27, 2006

Gold company mergers reach new heights

Mergers and acquisitions in the gold mining industry have surged, with more deals done in the past year than at any other time in recent memory. Bloomberg reports:

Dec. 27 (Bloomberg) -- Gold-company acquisitions this year surged to the highest level in at least a decade, and the industry may continue its buying spree in 2007 as producers struggle to find new deposits.

Goldcorp Inc.'s $8.5 billion acquisition of Glamis Gold Ltd. was the biggest of 357 deals valued at a total of $24.3 billion this year, data compiled by Bloomberg shows. That eclipsed the $16.2 billion spent last year on 341 transactions, including Barrick Gold Corp.'s $10 billion purchase of Placer Dome Inc.

Producers are rushing to boost supply because mines are being depleted faster than new reserves are being found, and a six-year rally in gold prices is providing cash to buy assets. The number of discoveries of at least 2.5 million ounces has declined for eight straight years, according to Metals Economics Group in Halifax, Nova Scotia.

``The driving force behind the M&A is that you have difficulty finding new gold mines,'' said Graham Birch, who helps manage $27 billion at BlackRock Investment Management in London. ``It's all about trying to get access to reserves.''

This news confirms the long-held view of money-manager and financial writer Jim Puplava, who had predicted a trend towards increased consolidation in the gold mining industry for precisely the reasons stated above. To quote from Jim's 2003 article, "Pac-Man, Clicks & Bricks":

As a result of the size of annual gold production and the short mine life of the large producers, these companies are faced with a significant dilemma. The only way these companies are going to maintain size is to substantially increase their exploration budgets to find or buy new ore deposits. In addition to acquiring new deposits, companies will also face issues of finding low cost deposits. Finding new deposits is one thing, but finding a deposit that is profitable to mine will be the other problem.

For more on this, see Puplava's, "The Perfect Option" and, "The Perfect Option, Part 2".

As I argued in an April, 2006 article entitled, "Recent Gold Action", demand for gold has strengthened over the past few years and new sources of supply will not be easily produced at the drop of a hat. Here's the response made to critics who, in the face of rising demand, thought $600 gold was a sign of "a bubble":

Not only is investment demand up in North America, it is profoundly evident in Asia and the Middle East. The people of India and China have traditionally been buyers of gold, in the form of jewelry and as a store of savings. Their purchases will only increase over time, as their economies continue to develop and prosperity levels rise among the masses. Middle Eastern demand is pronounced as ever, with the Gulf economies prospering from a recent oil boom and the resulting flood of new money. An ongoing repatriation of funds previously held abroad, and the establishment of the Dubai Gold Exchange, have no doubt also encouraged gold purchases. Meanwhile, a sizeable increase in Gulf central bank holdings of US dollar reserves have led some to consider diversifying out of the dollar and increasing the region's central bank gold reserves as Russia, Argentina and China have done.

There will not be an easily mineable influx of supply to meet this demand. Gold mining companies face a dwindling resource base and rising costs in extracting gold from the ground. Consider the environmental hurdles and permitting difficulties associated with bringing on new mines in many jurisdictions, along with the increasing push for nationalization of "strategic resources" in Latin American countries, and it becomes a little unclear as to where all this gold will be found.

Gold mining companies will continue to engage in what Jim Puplava referred to as the "Pac-Man strategy". In other words, eat or be eaten.

Tuesday, December 26, 2006

News items

Some of the day's top news items.

"Nigerian Pipeline Explosion Kills at Least 200" - Bloomberg.

"Saddam Hussein to Be Hanged Within 30 Days After Appeal Denied" - Bloomberg.

"Three Groups Prepare for Battle in Somalia" - AP/Guardian.

"Longetivity gene keeps mind sharp" - BBC News.

"Founder of Wikipedia plans search engine to rival Google" - Times Online. Added commentary on this topic from the gang at Slashdot.

Sunday, December 24, 2006

Merry Christmas and Happy Holidays!

For your viewing pleasure, "A Charlie Brown Christmas". Enjoy!

Friday, December 22, 2006

Fiat money and credit

Being an essay on the nature of fiat money and credit...

Okay: some items I wanted to share with you about our modern financial economy.

A few insights into how fiat money and central banking systems make the modern world go 'round. I thought this might make for good background reading on a subject that is rarely broached in mainstream media and daily public conversation.

It will also help us understand the greater forces at work in our modern, "hot money"-driven financial markets. Especially given the focus we've put on this week's events in Thailand and the emerging markets arena.

What is driving the rising tide of global liquidity that is fueling all the fast-paced investment flows and speculation? What is it about this environment that's driving deal-making and acquisitiveness to such great heights?

I spoke briefly with Dr. Marc Faber by email this week and I asked him about what had happened in the Thailand stock market.

The panic in that market (as reflected in a one day 15 percent drop in the SET index) had been set off by the announcement of capital controls on foreign share investments. Following these announcements, investment money raced for the exits as soon as the markets opened, but rebounded somewhat the next day as decisions relating to foreign share investment were quickly overturned.

I asked Dr. Faber if the credibility of the Thailand market and its policy makers had been seriously damaged by these events. Here is his response:

Sure, credibility has been shattered. But the real problem is that financial markets (excess liquidity) have outgrown the real economy and so can do things damaging to the stability of real economy. As an example: borrow yen at 1.5% and invest in Thai bills at 6%....

This is the point he made to me, and I had to stop for a minute and reflect. I was aware of the argument that he made, but I realized that this larger issue had been greatly overlooked in the coverage of this event (and other similar events).

Where was all this excess liquidity coming from? How did this flood of money and credit find its way to these varied arenas? Were market participants and outside observers missing the significance of these broader issues?

For those of us not involved in the stewardship and transfer of vast sums, we can still look to our own pockets and tabletops to see how these trends are affecting us.

Another symptom of excess liquidity or money dwarfing the real economy is that nickels and pennies can no longer be exported....

Yes, that's right! As many of you have probably heard/read, the export and melting of small change has been banned now that the value of base metals contained therein exceeds the monetary face value of the coins.

Of course, there is also the ongoing inflation that is always with us. Slowly but surely (except in times of hyperinflation when the process unfolds at a rapid pace), this phenomenon devalues the currency we hold and save. Not to mention the dislocations in economies that this process brings with it.

I asked Dr. Faber how this could continue to go on. With all we've described here, is this situation sustainable? How would it all end? His response:

Surely it will not end well in terms of social implications.

As he has mentioned before, the dislocation of the financial economy from the real economy has fostered great imbalances and a growing disparity of wealth. There are bound to be serious widespread social implications arising out of this situation.

So what can we do about all this? At the very least, we should learn and prepare for these events. It is quite possible that we are dealing with trends that will shape our world in myriad ways in the not too distant future. I don't know whether or not we can change the course that we're on, but we should certainly inform ourselves about where we stand.

With that in mind, may I suggest the following essays as a useful starting point on these issues.

Background on "hot money" flows and a discussion of Thailand's recent policy moves in, "Thailand's Rash 'Lock Up' Move", by George Friedman of Stratfor (via John Mauldin's "Outside The Box" e-letter).

A very commonsense and plain-English view of how rampant money creation affects us in our daily lives. "The Mischief of Cheap Money", by Adrian Ash.

An excellent overview on the life of Milton Friedman, with an uncompromising critique of Friedman's theories regarding issuance of money and credit. "Milton Friedman, 1912-2006", by Hans F. Sennholz.

And an interesting bit of economic history. "The Saga of John Law and Richard Cantillon", by Sean Corrigan.

Thursday, December 21, 2006

An interesting view of Russia

Here's an article from Bloomberg that I wanted to include. Some of you may have read this piece on Russia yesterday, but for those who missed it and would like to get a glimpse of what's going on behind the stage curtains, have a look.

See: "Russian Killings Signal Start of Presidential Election Campaign".

Lots of interesting stuff coming out now in the Western press concerning present day Russia.

Earlier in the week, Wall St. Journal ran a front page article on one of the men behind the scenes, Vladimir Surkov, who helped organize Putin's rise to power.

Also, I notice the latest issue of The Economist features a cover depicting Vladimir Putin as a 1930s gangster, and brandishing a gasoline pump nozzle made to look like a Tommy gun. The caption reads, "Don't Mess With Russia".

What will happen in the coming years? I'm almost afraid to ask.

Wednesday, December 20, 2006

Thailand, emerging market shares rebound

Thailand's SET Index hasn't completely retraced its losses following yesterday's 15 percent plunge, but we did see something of a rebound in stock prices in Bangkok and emerging markets across the world.

As Bloomberg.com reports in, "Emerging-Market Stocks Gain; Thailand Rescinds Capital Control":

Emerging-market stocks rallied from the biggest drop in three months after Asian nations said they won't impose capital controls, less than 24 hours after Thailand's failed bid to limit foreign investment.

Thailand's SET Index jumped 11 percent in Bangkok after the government exempted equity from restrictions that had sent the benchmark on its biggest slide in 16 years yesterday, wiping out $23 billion in market value. Stocks in South Africa, South Korea, Malaysia and Russia rose, helping push the Morgan Stanley Capital International Emerging Markets Index, which tracks 25 markets, 1.3 percent higher.

Central banks in Malaysia, the Philippines and Indonesia responded to the rout in Thailand by saying they wouldn't use capital restrictions to control their currencies. That helped restore confidence after Thailand rescinded its rule.

``It's positive for emerging markets because it shows governments in this asset class are now quick to change unpopular decisions,'' said Matthias Siller, who helps oversee $6 billion in global emerging-market assets at Baring Investment Service in London. ``That wouldn't have been the case 10 years ago.''

So, some investors are heartened by the knowledge that other nations in the region and the emerging markets category might take this latest incident as a cautionary example. The message to policy makers: don't make hasty decisions that affect foreign investment and be quick to correct any such mistakes.

But for others, Thailand's sudden imposition of currency controls on foreign investors, and its subsequent action to reverse some of those measures, leaves a poor impression.

The policy reversal, a day after the new rules were announced, damages the credibility of Thailand's three-month-old government, led by former army chief Surayud Chulanont. International investors had increased stock purchases since a Sept. 19 coup ended seven months of political turmoil that disrupted government spending and dented consumer confidence.

``It makes investors doubt these people can manage the country,'' said Jorry Noeddekaer, who helps manage $1.4 billion of Asian stocks at New Star Asset Management Ltd. ``It would take a lot of good moves to rebuild credibility.''

Still, others are seeing the confusion as a good longer term buying opportunity in the months ahead. Some of the investors quoted in the Bloomberg articles above seem to think the rout could be forgotton in just that time frame.

Update: Investor Mark Mobius is largely unfazed by the recent turn of events in Thailand.

This will come as little surprise to those who recall his reaction to last September's coup; he was quoted then in a Bloomberg article saying such events were not unprecedented and that he would indeed be a buyer at depressed levels.

Here is Mobius in a recent interview appearance with Bloomberg TV, calling Thailand's share market "enticing". He also notes that while this latest situation has scared off many investors, it has not disuaded him from holding his investments.

Mark also echoes the view that this latest incident is something that could be forgotten in time, provided the same mistakes are not repeated by the government and central bank.

Tuesday, December 19, 2006

Thai stock market to snap back?

Currency controls on foreign investment led to a rout in Thailand's stock market Tuesday. Now that impositions on foreign stock investors have quickly been withdrawn, the market is expected to go higher. Bloomberg reports:

Thailand scrapped currency controls on international stock investors one day after their imposition by the central bank prompted the biggest stock market plunge in 16 years.

The government lifted a requirement that banks lock up 30 percent of new foreign-currency deposits for a year for funds earmarked for stocks, Finance Minister Pridiyathorn Devakula said in Bangkok. The rule, intended to slow a 16 percent gain in the Thai currency this year that threatened exports and economic growth, sparked investor selling that wiped out $23 billion of market value in Thai stocks.

``The surprising speed and responsiveness of this policy reversal should help forestall a deep and lasting impairment of Bank of Thailand credibility,'' Michael Kurtz, a strategist at Bear Stearns Asia Ltd. in Hong Kong, wrote in a note to clients. ``We expect Thai equities on Wednesday to undo a large portion of Tuesday's decline.''

Thailand's government exempted stocks from the central bank rule that international investors must pay a 10 percent penalty unless they keep funds in the country for a year. The policy reversal illustrates Thailand's dependence on foreign investment and the degree to which investors resent restrictions on their investment decisions.

More on the market drop and how the measures would affect foreign investors:

The rules would have limited international investors to using 70 percent of their funds to buy Thai stocks. The requirements stay in effect on other investments, including bonds and property, Pridiyathorn said.

The currency controls triggered declines in other emerging stock markets by highlighting the risks of investing in developing economies.

Thailand in 1997 untied the baht from a U.S. dollar peg, triggering currency collapses in South Korea and Indonesia and leaving much of Asia in a financial crisis that required an international bailout.

Thailand's SET Index tumbled 15 percent to its lowest since Oct. 29, 2004. The index sank 108.41 to 622.14. Morgan Stanley Capital International's Emerging Markets Index fell 1.6 percent to 881.01 as of 4:07 p.m. in London.

The Financial Times added an element of colorful narrative with their report, focusing in on the reaction of shaken government officials and the laments of their opponents.

Thailand was forced on Tuesday to reverse plans to impose a 10 per cent withholding tax on short-term foreign equity investment, after the imposition of draconian capital controls sent the stock market plunging 15 per cent, and wiped around Bt773bn ($22bn) from the market’s capitalisation.

The dramatic about-face came at about 8pm local time, after Pridiyathorn Devakula, the finance minister, held crisis talks with central bank and stock market officials on the massive, and apparently unanticipated, equity sell-off, the largest one-day fall in the market since the Asian financial crisis of 1997.

On television, an obviously rattled Mr Pridiyathorn – who had expressed strong support for the central bank’s restrictions throughout the day – declared that the withholding tax would not be applied to money brought into Thailand for equity investment.

However, he said the central bank withholding tax will remain on capital inflows used for the short-term purchase of debt, which the central bank believes is the primary asset held by the currency speculators blamed for the rapid appreciation of the Thai baht.

And further down the page...

Korn Chatikavanij, deputy leader of the Democrat party and a former investment banker, said central bank officials – pre-occupied with trying to battle the currency speculators they blame for the baht’s rapid rise – had apparently failed to recognise the impact of measures that he described as “gross overkill”.

“They just didn’t understand the markets,” he said. “This exposes a weakness in the technocrat dominated government. They were more dependent on theory, and less sensitive to how the real world, and real markets, operate.”

Thailand’s move had initially raised fears that other Asian central banks might try similar tactics to slow the strengthening of their own currencies against the dollar, but analysts said the subsequent Thai market havoc would likely deter any imitators.

Now let's see what happens.

Monday, December 18, 2006

China increases crude oil imports

"China to import 140 mil tons of crude oil" reads the headline of a recent China View article.

BEIJING, Dec. 16 (Xinhua) -- China's crude oil imports are expected to reach 140 million tons in 2006, up 10.2 percent on last year, according to the Ministry of Commerce (MOC).

Liang Shuhe, deputy director with the Foreign Trade Department of the MOC, said that China's demand for crude oil would total about 290 million tons this year, of which 48 percent were imports.

According to Liang, China's total output of crude oil is expected to reach 183 million tons in 2006, with 7.40 million tons for exports.

Liang said the fast growth of the economy has forced China to depend more and more on imports because of the limited domestic production, predicting that the steady increase in imports was likely to continue.

Statistics from the MOC show that China's crude oil imports increased by 14.1 percent in the first ten months of this year to reach 120 million tons.

The Chinese government removed tariffs on oil imports in November and opened its domestic oil market to foreign companies in December to cut the cost of oil imports.

I found this piece, posted to a recent article link roundup at The Oil Drum, noteworthy for two reasons.

First, it confirms the conviction, held among energy watchers and global/economic strategists alike, that America is now in direct competition with China for scarce natural resources. Hydrocarbon energy resources being chief among them.

Second, I was struck by the date of the article, December 16, 2006. It seemed to be a year to the day since I had written up an interview with mining consultant Dave Feickert which broached that very subject.

Mr. Feickert's message to readers was that despite a recent string of horrible coal mining accidents, China would have to continue relying on coal to meet their energy needs or increase their purchases of oil and gas from abroad. Thus, Western auto drivers would be indirectly impacted by the safety issues afllicting China's coal mining industry.

Here is an excerpt from that interview, dated December 16, 2005:

So for now, you see mainly a continuation of heavy coal use? You’ve made the point that any shortfalls in coal supply could result in China increasing their purchases of oil and gas from various sources around the globe. Please discuss this point.

China will have to rely on coal, or it will have to buy much more oil and gas off the world market. The effect on the global price is already apparent, with China making up around half of increased global oil demand, something few expected.

Unpredicted, except by a few energy analysts was also the lack of supply, which has been critically restricted by the complacency that sets in during periods of low prices, the poor judgements made by the US and the UK in Iraq, the restrictions on foreign investment in the Middle East and the fact that the oil and gas reserve base has been steadily moving eastwards anyway, as Western (mainly US, UK) oil depletes and Mexican fields matures. Hurricanes do not help either; nor do refinery explosions, as at BP’s major US facility recently.

On its current economic growth trajectory, China is expected to overtake the US as the biggest world energy consumer sometime after 2025 and also the biggest emitter of carbon dioxide (CO2), the main Greenhouse gas. Accordingly, it has been hunting for diversified energy supplies around the world, with its well-trained diplomats engaging in discussions globally. This, of course, has been different from the US, Japan or Europe, where economic power, vested in large energy companies has helped out. However, as has been seen in the case of Shell, their energy reserve bases are dwindling or they are over-stated.

Interesting to note that coal use presently accounts for 70 percent of China's energy supply, and demand for coal is expected to increase by over 8 percent in 2007.

That last bit of information comes from a Bloomberg News article on a recent hot IPO: China Coal Energy, which recently raised $1.69 billion in an oversubscribed share offering. It seems that both coal and oil are enjoying increased demand in China.

Friday, December 15, 2006

Marc Faber sees "investment mania"

Investor and financial writer Marc Faber speaks with Bloomberg about the state of the world economy and the investment outlook going forward.

Marc says asset prices have been going up due to easy money policies worldwide. He also feels that any further liquidity expansion from the U.S. will result in a continued increase in asset prices against a backdrop of continuing dollar weakness.

As Faber points out, the S&P 500 has marched higher this year (up 13 percent in dollar terms), but is up only 2 percent in terms of Euros. In other words, "the strength in the S&P has been offset by dollar weakness".

He sees relative value in the stock markets of Asia, giving specific mention to Thailand (where the currency has strengthened against the dollar) and underperformer Japan.

While Faber says he is currently taking advantage of the opportunity to sell assets, he feels that anyone who remains bullish should focus on Asian equity markets.

Wednesday, December 13, 2006

Derivatives watch

A couple of interesting recent developments in the derivatives market. Here's the scoop.

Yesterday, the Financial Times reported on a new credit derivatives platform that would allow market participants to obtain prices for derivatives contracts more quickly and efficiently.

From, "New process for credit derivatives":

A new process for trading portfolios of credit derivatives via electronic auction has been tested by banks and a leading hedge fund in recent days – a development that could provide another important cog in the infrastructure for this fast-growing market.

The new system, dubbed Q-Wixx, allows investors, such as hedge funds, to execute dozens of trades in credit derivatives with different dealers in a matter of minutes rather than relying on bilateral trading deals, which tend to take several hours.

The article goes on to say that the platform could be extended to include other products in the future. A companion piece, "Q-Wixx" shrinks the world" notes that such an advancement could further the trend of derivatives products being standardized and commoditized.

Also in FT, Tony Jackson noted yesterday that a new form of "irrational exuberance" has taken over the debt and derivatives market.

To say the debt markets have gone crazy is to miss the point. I suspect the great majority of sensible investors would agree, whatever they say in public. But that does not stop them piling into super-risky assets such as payment in kind bonds (PIKs) or the new form of derivative known as the constant proportion debt obligation (CPDO).

For all I know, that may be sensible - provided the madness lasts long enough for the fleet of foot to take their profits.

The problem, as he sees it, is that the signposts of mania are far less transparent in this arena than they were in the stock market of the 1990s. See the article for more.

And finally, Bloomberg reports that exchange-traded derivatives could offer an alternative in a market currently sown up by the banks.

Morgan Stanley, Deutsche Bank AG and Goldman Sachs Group Inc. risk losing their hammerlock on the most lucrative financial market when exchanges begin offering credit derivatives next year.

Paris-based Euronext NV, which is being bought by NYSE Group Inc., plans to create contracts based on credit-default swaps, making them cheaper to trade and easier to understand than the derivatives sold by banks. Credit-default swaps, used to speculate on credit quality, also top the product list for Chicago Mercantile Exchange Holdings Inc., the largest U.S. futures market, the Chicago Board Options Exchange and Frankfurt- based Eurex AG.

At stake are profits from the fastest growing financial market as exchanges list credit-default swaps alongside stocks, currencies and gold. Deutsche Bank says it earned at least $3 billion from credit derivatives in the first half of this year, about a third of total revenue from financial markets.

Hope this has helped you stay up to date on these trends.

Tuesday, December 12, 2006

Mr. Rogers says...

From Bloomberg.com: video of Jim Rogers addressing a London audience on the topic of China's future growth and rise to power.

Also, Jim gives his outlook on the dollar, stocks and bonds, and commodities.

Quote from Rogers at the opening of this video clip:

"The single best word of advice I can give you is to teach your children and grandchildren Chinese (Mandarin). It's going to be the most important language in their lifetime".

Wow. Be sure to watch this clip.

Calling all Buffettheads

For anyone who missed the recent CNBC special on Warren Buffett and would like to check it out, you'll be pleased to know that it's been added to YouTube. You may now watch and drink in his celebrated glory.

I would describe the coverage as fawning, but that seems to be par for the course at this point. So enjoy!

Warren Buffett: The Billionaire Next Door.

Thanks to VC Confidential for the heads up on that one, missed it the first time around.

Update: I would also recommend the Charlie Rose special, "Warren Buffett: The Man", which can be seen at Google Video and is excellent.

Also in this series, "Warren Buffett: The Business", and "Warren Buffett: The Gift". Enjoy.

Monday, December 11, 2006

A shift to urban living

Readers, you've probably seen many recent articles outlining the global shift towards urban development and settlement. Well, here's one more for you that's worth checking out.

Worthwhile because it examines the problems of our modern cities at a time when planners are envisioning the next wave of of mega and "hyper" cities.

Allister Doyle reports for Reuters:

With the world poised to enter an urban age when more people will live in cities than in the countryside, Josiah Tobiko sees no need to move from his cow dung-covered hut in rural Kenya.

"You can choose city life with televisions and mobile phones but I prefer living here," said Tobiko, a Maasai teacher who lives in a settlement of 125 cattle and goat herders with no electricity or piped water at the foot of Mount Kilimanjaro.

Tobiko, 35, moved into a new one-storey home this year -- made of tree branches tied with sisal and coated with about six inches (15 cms) of cow dung and mud.

Here in Amboseli, lions and elephants are residents' most pressing concerns, not road accidents or muggers.

"People go and live in the towns but most come back because they feel there's no culture there," Tobiko said.

"No culture" in cities and towns. Talk about turning the conventional wisdom of the developed world on its head. I love it! And as many of the Reuters companion articles will show, city living is not all it's cracked up to be.

Slum living, crime, and rampant development that stamps out the local flavor of city centers and neighborhoods make modern urban areas less liveable and far more culturally sterile. But see for yourself, and have your own say.

Saturday, December 09, 2006

The Jukebox

Rock and roll, kids.

Towers of London - "How Rude She Was".

Rockaway - "Somebody's Watching Me".

The Cure - "In Between Days".

Wire - "Heartbeat".

My Chemical Romance - "Honey, This Mirror Isn't Big Enough For the Two Of Us".

Friday, December 08, 2006

Speculation gets even loonier!

So says Bill Fleckenstein of Fleckenstein Capital and "Contrarian Chronicles" fame. What's eating Bill anyway? Can't he just like, "go with the flow, man", relax and enjoy the ride?

It seems that Fleckenstein recently had an opportunity to unwind and get away from all the day-to-day noise of the market, thereby granting him a little added perspecitve on the shape of things to come.

Did he come back refreshed, relaxed, and ready to get with the program? Hell, no! In fact, Fleckenstein is even more convinced that the mania mindset is firmly entrenched among the speculating public and has spread out among a number of different areas.

It is truly remarkable how reminiscent the current mindset is of the 1998-2000 stock mania, when every week would see hundreds of upward price-target revisions. Having said that, in my opinion the current psychology amongst so-called professionals is even loonier.

In the previous mania, the bulk of the madness was concentrated in technology concepts, especially Internet-oriented ideas, where a company that boasted a handful of eyeballs viewing its Web site could be worth tens of billions. Today, the insanity is spread out in various different places.

Fleckenstein goes on to cite the current LBO/private-equity deal wave and a willingness to lend large sums of money to asset-poor hedge funds as being part and parcel of the current frothy environment.

He also suspects that a greater part of the mania reveals itself in the form of newly engineered financial instruments.

The latest specimen? A leveraged-up version of the CDO (collateralized debt obligation) known as the CPDO (constant proportion debt obligation).

Without going into all the details, this new product supposedly allows for people to get their money back (plus a bit of interest), if its architects are adept at selling more and more premium in the form of credit default insurance (swaps) as the prices go against them. If you think this sounds like a drunken version of portfolio insurance, you would be right.

What's behind all this madness?

See Bill's article, "Speculation gets even loonier!", for the answer to that question.

Thursday, December 07, 2006

Dealbreaker goes to Connecticut

I must have missed this article the first time they put it up at Dealbreaker.com, but I certainly got a kick out of it yesterday when they reposted it.

Reporter Bess Levin is forced to make the morning commute into Greenwich, CT on assignment. Was there a story waiting to be uncovered or is this just penance for a greater crime?

One morning, a few weeks back (let's say 4), I inadvertently placed a scotch on the rocks meant for DealBreaker publisher Elizabeth Spiers on DealBreaker editor John Carney's desk.

John, who takes his scotch neat, flew off the handle and decided that the only punishment harsh enough, and befitting the crime, would be to send me on assignment to...CONNECTICUT. "The Metro-North train leaves Grand Central Station at SEVEN-THIRTY A.M. Make sure you're there early," he said, his voice booming.

And what did we learn from this little adventure commute? See, "Pardon Me, But Might I Suggest Greenwich?" to get the whole scoop.

Wednesday, December 06, 2006

Gates and Google lead insider stock sales

Bloomberg reports that last month's stock sales by corporate executives exceeded purchases by the widest margin since 1987.

Executives including Microsoft Corp.'s Bill Gates, Google Inc.'s Eric Schmidt and Kohl's Corp.'s William Kellogg in aggregate sold $63.18 of shares for every $1 they bought in November, an analysis by Bloomberg of data from the Washington Service showed. That's the highest since at least January 1987.

Insider selling and buying are no longer the straightforward indicators they were once taken for. You now have company spokesmen putting a PR slant on the buying/selling action of important officers and executives. Sales of shares by a company officer could be chalked up to "diversification" or something as innocuous as funding for a charitable trust.

Conversely, buying patterns of company shares can no longer be seen as a straightforward bet on a rise in the company stock. Oftentimes, the buying activity of company officers will be revealed as nothing more than a concerted effort to promote the stock and bull it higher.

Still, there is value in looking at insider transactions at an individual company if you know what to look for. Plus, insider trade data in the aggregate is still seen by some investors as a valuable tool.

The data has ``value for investors,'' said Wayne Reisner, who oversees $1.6 billion at Carret Asset Management in New York. ``It's people who are very familiar with their company and their stock, and they are making a statement.''

See the link to the above Bloomberg story for more.

Tuesday, December 05, 2006

Biofuels take their toll on environment

We've talked before about the environmental impact associated with biofuel production, an issue that tends to get glossed over in the rush to promote "renewable" energy sources.

An article that appeared in today's Wall St. Journal, "Alternative-energy boom roils Asian environments", examines the drawbacks of unsustainable palm oil production. An excerpt:

Investors are pouring billions of dollars into "renewable" energy sources such as ethanol, biodiesel and solar power that promise to reduce the world's reliance on petroleum. But exploiting these alternatives may produce unintended environmental and economic consequences -- fallout that could offset many of the expected benefits.

Here on the island of Borneo, a thick haze often encloses this city of 500,000 people. The cause: forest fires that have blazed across the island, some of which were set to clear land to produce palm oil -- a key ingredient in biodiesel, a clean-burning diesel fuel alternative.

Search this blog for more on information on this topic. Suggested search terms: "ethanol", "biofuel", "alternative energy".

Monday, December 04, 2006

Putin's Russia

I wanted to include an important article from csmonitor.com, entitled "Putin's Russia: better and worse".

Here's an excerpt:

Hearing Yevgeny Butovsky and Antonina Vallik describe the state of their nation, one would think they live in two different countries. In fact, they share a home.

"We are eating our future, and we are being too quiet about it," complains Mr. Butovsky, a successful private farm manager increasingly concerned by the autocratic political system built since President Vladimir Putin was elected in 2000.

But for his homemaker wife, Ms. Vallik, those years have yielded a rise in living standards that has enabled her to widen the scope of her passion - taking in homeless pets. "Any regime is OK for me," she says.

They're not the only ones having this discussion. The debate is rising in Russia, and around the world, over what kind of a state Putin has built, whether it's bearable for its population, and if it is safe to invest in, or be friends with. A recent spate of apparently political killings that some have blamed on the Kremlin - the victims include ex-KGB defector Alexander Litvinenko and investigative journalist Anna Politkovskaya - imparts urgency to these questions.

Have a look.

You may also be interested in a related article, "Kremlin intrigue feeds theories on poisoned-spy case", which asks, "Who was behind ex-KGB agent Alexander Litvinenko's highly public demise?".

Sunday, December 03, 2006

Sunday Evening Post

Good reading for a Sunday night. Here are some items you might enjoy.

From December 1 Financial Times article on Oakland A's GM Billy Beane, the number-crunching baseball manager who served as the focus of Michael Lewis' book, Moneyball.

Billy Beane is an unlikely speaker at an investment conference. The general manager of baseball’s Oakland Athletics looks, and speaks, like the professional athlete he once was – he is 6ft 4in tall, is still in excellent physical shape, boasts a healthy tan and speaks in relaxed tones.

But at T. Rowe Price’s annual investment symposium in Baltimore last month, he took top billing over an array of investment analysts and historians, and kept his audience – mostly of fund managers and their clients – rapt with attention.

Beane’s great contribution to baseball – he is quick to admit – has been to apply to it techniques that were first honed by investors on Wall Street. Now, to his evident enjoyment, Wall Street is interested by the lessons it can learn from the world of professional sports. Beane’s decisions on hiring players – and those of an increasing number of his competitors – are based on quantitative evaluation techniques, aimed at finding market mispricing. He freely admits that he has borrowed liberally from the techniques of value investing and arbitrage. To the extent that they work, people such as the fund managers at T.Rowe Price want to know about them.

We are still seeing a constant stream of news on the still-hot global art market. The weekend editions of both the Wall St. Journal and the Financial Times carried items devoted to the subject.

WSJ even included a "special advertising section" pullout devoted to new buyers; a cursory glance revealed article-styled content alongside of ads for art advisory services. FT's weekend edition came with a pullout section on "Collecting" that included articles on Phillips de Pury and the continuing strength at the high end of the contemporary art market.

But to me, the most interesting item was an article by Tom Mitchell entitled, "Asian art boom mirrored elsewhere as global rich get richer".

This is a great piece, one that captures the larger significance of the recent global art boom.

In a region where a Chinese bank looking to raise $22bn can attract half a trillion dollars in initial public offering of shares orders, $19.4m (£9.8m) does not seem that much for a piece of porcelain.

The price paid for an 18th century imperial Chinese "swallows" bowl at the Hong Kong auctions of Christie's this week - a world record for a Qing dynasty ceramic - is a reminder that Industrial and Commercial Bank of China's mega-IPO in October was just one facet of an investment craze sweeping Asia. "What's happening to us is symptomatic of what's happening to the world," says Edward Dolman, Christie's chief executive. "It's being driven by the extraordinary amounts of cash that are around. It's a great time to be selling art."

In other words, it is now apparent to some that money is cheap and easily created out of thin air. We have reached the point where many among the rich are willing to trade in piles of their paper money to secure ownership of real (and rare), tangible goods.

Case in point. I recently heard someone make the following argument: what's $80 million when you talk about owning a Pollack?

Also, loved the fact that Marc Faber's recent line about investment bank bonuses was used to illustrate the point that liquidity flows are being channeled into a very select group of pockets.

As newly rich members of the financial industry compete with newly minted moguls from across the globe for the best in artworks, real estate and other tangibles, prices at the high end will continue to rise.

Do check out the piece, if you haven't already.

Friday, December 01, 2006

Let's talk energy

Lots of good info to share in this post, thought I'd roll it all up in one place, so here goes.

(1) Solar power. If you're keeping an eye on the energy space, you may have heard a lot about the polysilicon shortage that's recently hit makers of solar panel equipment. If not, this passage from the FT article sums it up nicely:

Polysilicon, used to make silicon chips and photovoltaic (solar) cells, is in short supply because of the voracious demand of the booming semi-conductor industry and the rapidly expanding solar sector.

The latter has grown rapidly through large-scale government-backed solar programmes in Germany and Japan, and solar equipment now consumes about half the polysilicon produced.

Having limited knowledge of the solar world, I had to wonder if there was a ready to launch alternative to the conventional, polysilicon-dependant photovoltaic equipment. I also had to ask myself if maybe it was the subsidized, "large-scale government-backed solar programmes" that had aggravated the shortage in the first place.

This reliance on energy subsidies is a subject we touched on back in November, and it's an area in which I'm still seeking answers.

But back to the issue at hand: how will the industry keep up with demand for solar equipment in the face of this material shortage? I had heard a bit lately about another process taking off, with manufacturers producing thin-film solar equipment with copper and CIGS, rather than silicon.

Energy Conversion Devices, another maker of solar equipment, churns out rolls of photovoltaic ("PV") material, but does so in a process that uses relatively little silicon. The company and its founder, Stanford Ovshinsky were recently featured in a Wall St. Journal article.

Will these methods become economical enough to compete and adapt to the current generation of solar equipment in all its applications? So far the new processes seem to be geared for smaller consumer devices, but let's hope they get a leg up in the market for home electricity and drive solar forward.

(2) Lovins Q&A. Amory Lovins was recently interviewed in the Toronto Star. I'll have to read up on what he calls "micropower", which he sees as an acceptable alternative to nuclear power. Here's an excerpt from that interview:

THE STAR: And the other less risky competitors to nuclear?

LOVINS: The two competing sources that are easy to measure are collectively called micropower — not central plants, but more distributed capacity that's at or near the customers, or at least comes in more decentralized, diversified form. Micropower is providing now between one-sixth and over half of all electricity in 13 industrial countries. Denmark is the leader with about 53 per cent last year. You'll notice this does not count big hydro. If we don't count any hydro above 10 megawatts, then the added micropower capacity last year in the world was 41 gigawatts, compared to 3.7 gigawatts for all kinds of nuclear — none of which was a CANDU (technology)."

Lovins was also a recent guest on the Charlie Rose Show.

(3) Peak oil and natural gas. I will be reading Andrew McKillop's latest article, "Peak Oil to Peak Gas is a Short Ride" and looking for new information, as well as some points that might relate back to last summer's interview with Bill Powers.

(4) Sprott climate & energy report. Finally, I wanted to include a link to Sprott Asset Management's report on energy & climate change. I have yet to read past the executive summary, so this is something I'll be looking at over the weekend.

See: "Investment Implications of Abrupt Climactic Changes". (Opens as a PDF file.)

This should be an interesting read; I like a lot of what I've heard from the Sprott team in the past. They do a lot of work in resource and metals investing, and you can see their people on RobTV from time to time.

Also, I have to put some weight behind their findings. They are a clever bunch and are putting a lot of money to work based on their research. Be sure to check out as much of the report as you can, if you haven't already.