Friday, October 31, 2008

This blog endores Obama for President

Thankfully, this election has offered up one of the better pairs of candidates in some time. The debate, has mostly centred on issues; but still, we all could have done with a little less "Joe the Plumber" palaver, and a little more discussion of some of the very serious issues facing the US - perhaps the most serious litany of issues since the Great Depression and subsequent World War (or maybe more serious).

What is somewhat alarming is that neither candidate has had the fortitude to really begin to talk directly with voters about some of the seemingly unfavorable choices Americans must make in the next few years. All of them involve a move away from personal consumption and, in many cases, extravagance, to choices affecting affecting long-term future and prosperity. Never an easy talk at any time, but one that has to be started sometime - and sometime soon.

These choices involve beginning to slay the national debt time-bomb, the health-care crisis, the future style and cost of US interventionism, educational reform, climate change initiatives that must occur, and Social Security reform. Oh, and did I forget to mention managing the current economic crisis?

In short, there's no shortage of issues upon which the next president could prove himself to be one of the most remarkable presidents in the history of the union (or prove himself a poser at a critical time in history).

And while I have a soft spot for any tough-fighting (and effective) maverick like John McCain, I just can't get past his choice of Sarah Palin as running mate. In the end, her simple lack of knowledge about important worldly things - things a president has to have a handle on from Day One on the job - shows that this was more a choice designed to help McCain win, than thinking about what was best for the country. And now, more than ever maybe, we need a president who`s thinking about what`s best for the whole country.

On the other side of the presidential coin, we have Obama. He`s a man of obvious charm, but more importantly, intellect. That he`s been able to draw a wider and wider constellation of talented individuals towards him, like former Fed Chairman Paul Volker, and former Secretary of State Colin Powell, shows that they believe he`s got what it takes to do the job.

In my view, he`s been able to draw people together, rather than divide them, and this will be a much needed talent in the years to come.

Whether he does or will of course, depends upon many things, including getting elected.

Whether you agree with my choice or not, democracy, an exceptionally unusual privilege demands some hard choices on your part: participation.

Wikipedia: John McCain
Wikipedia: Barack Obama

Platform: John McCain
Platform: Barack Obama

Please feel free to add your comments - however, please keep it civil, and use your frontal lobes, rather than the lizard portion of your brains.

Monday, October 27, 2008

Investing Requires Flexibility to Take Advantage of Conditions

I wasn't sure whether to title this as "Investing requires flexibility", "Rush to liquidity won't necessarily improve investing results", or "US dollar strength won't last".

And that's because, currently, all three are tied together. Nearly every currency in the world has been pounded against the US dollar recently, as there's been a rush towards that currency. Now I can't say that I fully understand all of the reasons for that, but even currencies that should theoretically be strong have been caught in the backwash over the past few months. If you take a look at this currency chart, you can see that virtually every currency therein is down - and in many cases down very significantly - against the USD over the past three months.

So as bad as your short term investments might have done during this turmoil, if they were effectively denominated in other than USD, those ones probably did worse.

Furthermore, during this rush to liquidity (i.e. large cap US stocks, cash and equivalents) has left a lot of other quality investments (but which are less liquid) looking as roadside kill. However, for longer term investors who have too much of their portfolio dominated by USD products, this now presents some wonderful opportunities - perhaps opportunities you missed a couple of years ago.

For some, this might mean moving away from quality US stocks, to other developed country quality stocks. For others, this might mean finally buying the appropriate level of emerging economy stocks (or ETFs). Still others might use this opportunity to position themselves in quality small company stocks.

Whatever or however you decide to approach this opportunity, be aware of two factors: the pounded down overseas relative stock values won`t last - and neither will the current USD strength. Take this bear market opportunity to position your portfolio to look great five to ten years out. Be flexible.


The Confused Capitalist

Wednesday, October 22, 2008

Wow - Value Village is here

Not too long ago, my daughter dragged me out with a friend of hers (me being the driver, of course) on an avant-garde shopping trip, which meant, that we had to troll all the cheapie thrift stores - Value Village, Sally-Ann, and so on.

Rather than sit in the car alone, I thought I'd take a look through the store while the two shopping mavens trolled the aisles, I was justly rewarded at the Sally-Ann when I found what appeared to be a brand-new pair of smooth leather Hush Puppies - normally a moderate to expensive shoe. They happened to fit me nicely too.

The price? $4.99. Checking the shoe on-line now at the Hush Puppy store, I think this is a $140 shoe. Brand new. Of course I bought them!

The stock market is like that now - given that I don't intend to draw down my stock account for at least 20 years, things look just great right now. I'm trying to get my hands on every stinking cent I can right now to push into the market.

Is everything rosy right now? No. Are we on the cusp of the Next Great Depression? I don't think that either. Given that, I think about my stock purchase of today - trying to look ten years out. And all I can think is BARGAIN, BARGAIN, BARGAIN

Don't think so? How about Chevron (CVX) at a 6.2 PE ratio and a 4.2% yield. How's that purchase going to look in ten years? How about Microsoft at 11.6 PE and 2.4% yield - wow, a meaningful yield from the most dominant software company in the world. Ten years out shouldn't this purchase look good too?

How about one of the drug makers - Glaxo Smith Kline (GSK), at a 12.5 PE and 6% yield? Is the pharmaceutical world falling apart? I don't think so, and that's why I own some.

How about Kinder Morgan Energy Partners (KM) - they supply oil and gas through their pipeline systems. Are people going to stop heating their houses? Yet it sports a 11.8P E and an 8.1% yield. How would that purchase look ten years out?

And how about some of the emerging market vehicles - I own one of the Wisdom Tree ETFs, the WisdomTree Emerging Markets SmallCap Dividend Fund (DGS). It sports a PE of just 5.8 on the index, and the fund itself traded yesterday at an 18% discount its NAV, meaning the effective PE is below 5. It also has a dividend yield of 8.6%, and the long term growth rate of the net income growth is estimated at 13% per annum. Let's see, an effective PE of under 5, and a growth rate of 13%?


Now where in the heck can I get my hands on more cash?

Disclosure: Long GSK, DGS.


Monday, October 13, 2008

The immediate crisis is passing ... what the future must look like ...

Yes, the immediate crisis is now in the process of passing, with all the extraordinary measures taken to assure the financial system remains liquid. There will still be, perhaps, moments of further high-wire acts over the next 12-24 months, but these now appear less likely to take down the entire financial system, given the exceptional world-wide commitment to blitzkrieg measures as necessary.

I think that, given the unbelievable bungling by companies, CEOs , and boards in the banking and insurance sectors, a round of applause is due to central banks, and governments, world-wide in managing the crisis. This isn't the same as saying that they took measures to prevent the crisis from arising but, once it was upon us, took appropriate measures to make sure this didn't become "The Great Depression, II".

Given the enormous failure of systemic corporate foresight and governance on an individualized corporate basis, governments must now take steps to regulate systemic strength and redundancy into both the banking and insurance sectors. The government must also reform obscene and excessive-risk-encouraging executive pay schemes, since boards have clearly failed to perform their duties to protect shareholders in particular and, as a group, their actions have endangered society in particular.

Here's some quick thoughts on what some of this regulation can and should look like (by the way, corporate boards, take some notes in case this doesn't get legislated, as it's still solid corporate practice: good and prudent governance, if you will):

Never again allow the total disconnect between the lender and borrower to occur, by mandating that any pools of capital moved "off balance sheet" (i.e. sold to hapless investors), have some significant portion retained by the originating institution. Whether that amount is 15%, 25% or 50% should be thought about carefully, with the two competing objectives of robustness of system, and efficiency of capital, duly and thoughtfully considered.

The FDIC and similar institutions need to consider "100 year events" in pricing their deposit insurance, as secular increases or declines playing out over a couple of decades can hide fundamental flaws in this type of insurance pricing (i.e. the current scenario). The pricing needs to properly reflect the risk of the loan book of a particular institution - in other words, those playing in areas of the pool with no lifeguard, need to have appropriately steep insurance costs to discourage the most egregious type of risk-taking - or alternatively, to protect the general public when the inevitable failures occur. More highly levered institutions also need to pay higher premiums.

Anything that looks or smells like some sort of insurance scheme is appropriately reserved. This means that pretty much anything that is insurance against some other event, and involves a trade (swap) of potential event happenings, or pricings etc. It doesn't take a financial genius to recognize that things that are "insurance" aren't always called "insurance". Here's some keywords for regulators, boards and investors to think as insurance: "hedge", "swap", "obligation" (in certain contexts), "derivatives", and so on. No longer should these be allowed to be unreserved. They are all some type of insurance, and need appropriate regulation and reserving to recognize those risks.

Pay schemes:
Federally regulated industries need to have banned, outright, stock option grants. Options encourage excessive risk taking, without the offsetting consideration to downside risk. A winner take all mentality, if you will. This must be discouraged, as it produces unacceptable systemic risk.

In fact, had boards collectively produced proper and appropriate compensation schemes, I argue that much of these systemic excesses may never have happened. For further thoughts on executive pay reform, go here. (In fact, I'd now go one step further and say that the CEO should have to own stock equivalent to at least two years base pay during his entire tenure + eighteen months, as CEO).


The Confused Capitalist

Loss of capital

Here's something interesting that a lot of people don't often think about or realize ...

If the market drops a total of 50%, and you avoided the first 25% drop, and then invested, how much of your invested capital would you lose?

Answer in comments ...


The Confused Capitalist

Friday, October 10, 2008

Pension Plan to Members: Stop Calling, yes, we are looking to BUY stocks.

The 30,000 members of the B.C. public service recently received an email from the government's pension manager: Stop calling us - your pension is safe!

Furthermore, they stated, we are looking to buy stocks in this environment, in order to "normalize" our equities exposure (currently at 62% of investments).

Canada's much larger pension plan, the CPP, won't have to begin any capital drawdowns until 2019. As they put it ...

"We can also invest a higher proportion of the fund in areas such as private equity and venture capital that typically require several years to generate returns. Also, substantial annual inflows allow us to make investments with new cash rather than having to sell existing investments to fund new opportunities."

So I think we can assume that, in this environment, they are probably stock buyers too.

I guess "someone" must be selling stocks to those with truly long-term outlooks.

The pension plans are buying - what does that tell you?


The Confused Capitalist

Monday, October 06, 2008

Yes, it`s hard to buy when everyone else is selling: Did you think it would be different?

Random Roger did a posting last week about thinking contrarian, after large moves in the market. Obviously, perfect timing remains, as elusive as ever, yet the message is sound.

Although the world hasn't changed notably since August, the stock market acts like it has - witness the ginormous move of the S&P 500 today. In Canada, our major index dropped by 10% at one point.

Getting into the market, or rolling over double short ETFs at this point makes a lot more sense than buying more double-down exposure, as a rule of thumb. You need to think about that when idiots like Cramer are screaming to bail out of the market.


The Confused Capitalist

Saturday, October 04, 2008

Stock Market Investment Planning

The following provides links to the Market Tremors series, which is an examination of the factors you should consider when preparing a plan to invest in stocks.

It was written in September 2008, a period of extraordinary volatility, as the credit crisis unfolded as Congress considered whether to grant Treasury`s request for $700 Billion in authority to purchase distressed loans from the banking sector.

  1. Background
  2. Process
  3. Rationale
  4. Emotions
  5. Holdings
  6. Market Exposure

I will provide this as a permanent link on the right hand side of my blog, under the heading of `Learn-Useful Stuff`.

Note: If you're on a blog aggregator, you can visit The Confused Capitalist here (or here: for additional articles and exclusive content!

I hope you enjoyed the series and it proves useful in your investing.


The Confused Capitalist