Investing Curiouscatblog

Category: Economics

  • Central Bank Intervention Unprecedented in scale and Scope

    Central bank intervention … unprecedented in scale and scope by Brad Setser

    The Fed though is in the process of a very large change in the composition of its balance sheet, as it will temporarily be holding Agencies as an asset against its liabilities rather than Treasuries. It hasn’t formally bought the Agencies though, only allowed banks and broker dealers with Agencies and certain private mortgage-backed securities on hand to use them as collateral to borrow (temporarily) the Fed’s existing Treasuries.
    …
    As around $900b, the fed’s balance sheet is something like 6-7% of US GDP. With $1600b in foreign assets, the PBoC’s external balance sheet alone is more like 50% of China’s GDP.
    …
    But with Martin Wolf now arguing that scenarios with more than a trillion in credit market losses cannot be ruled out – even more unprecedented central bank — and government — action cannot be entirely ruled out. The scale of the “great unwind” has been stunning. The pace of change in the policy debate only slightly less so.

    Related: Fed takes leap towards the unthinkable – Goldman Sachs Rakes In Profit in Credit Crisis – Misuse of Statistics: Mania in Financial Markets – Why do we Have a Federal Reserve Board?

  • Beating the Market

    For those that don’t find picking stocks fun it is nice to know that just investing in indexes is likely the best option for almost everyone. I have much of my retirement assets invested in index funds. I still think I can beat the market (though the results of the last few months have not been kind) but the amount I invest in individual stocks is not a huge percentage of my portfolio. I still like Google, for example, and in fact might well be buying more this week (it is down over 10% since I added to my position a couple weeks ago). Can You Beat the Market? It’s a $100 Billion Question

    In 2006, the last year for which he has comprehensive data, this total came to $99.2 billion. Assuming that it grew in 2007 at the average rate of the last two decades, the amount for last year was more than $100 billion. Such a total is noteworthy for its sheer size and its growth over the years – in 1980, for example, the comparable total was just $7 billion, according to Professor French.
    …
    From 1986 to 2006, according to his calculations, the proportion of the aggregate market cap that is invested in index funds more than doubled, to 17.9 percent. As a result, the negative-sum game played by active investors has grown ever more negative.

    The bottom line is this: The best course for the average investor is to buy and hold an index fund for the long term. Even if you think you have compelling reasons to believe a particular trade could beat the market, the odds are still probably against you.

    Interesting. I am surprised by the rapid increase in the total expense of trying to beat the market. I guess all those wall street bonuses add up. In my opinion the article does not provide adequate support the claims made, but I think overall the claim are sensible (based on numerous studies of results). The odds of beating the market yourself are very low. And the odds of paying the right people to beat the market for you are likely not worth the cost (in the market today).

    Related: Advice from Warren Buffett – Stop Picking Stocks? – 12 Stocks for 10 Years Update – Feb 2008

  • Bill Gates: Capitalism in the 21st Century

    Bill Gates Issues Call For Kinder Capitalism:

    Free enterprise has been good to Bill Gates. But today, the Microsoft Corp. chairman will call for a revision of capitalism. In a speech at the World Economic Forum in Davos, Switzerland, the software tycoon plans to call for a “creative capitalism” that uses market forces to address poor-country needs that he feels are being ignored. “We have to find a way to make the aspects of capitalism that serve wealthier people serve poorer people as well,”
    …
    Among the fixes he plans to call for: Companies should create businesses that focus on building products and services for the poor. “Such a system would have a twin mission: making profits and also improving lives for those who don’t fully benefit from market forces,” he plans to say.

    Related: Appropriate Technology – Using Capitalism to Make the World Better – Data Visualization Example (Hans Rosling) – Design for the Unwealthiest 90 Percent

  • Most Vacant New Homes Since Records Kept (1973)

    Vacant Homes in U.S. Climb to Most Since 1970s With Ghost Towns

    Almost 200,000 newly constructed single-family homes are sitting empty in the U.S., the most since Commerce Department statistics began in 1973.
    …
    About 370,000 new homes are for sale because people who initially contracted to buy them backed out, according to estimates in a Feb. 15 report from analysts at New York-based CreditSights Inc. An additional 216,000 homes are under construction, according to Commerce Department data.

    In January 1973, the number of finished new homes for sale was 97,000, when the U.S. population was about 212 million, according to the U.S. Census Bureau. In December 2007, 197,000 completed homes were on the market and in January 2008 there were 195,000. The current population is 303.5 million.

    Home prices may fall at least 8 percent nationwide and by as much as 26 percent from the third quarter of 2007 before hitting bottom, according to a Feb. 13 report from New York- based Deutsche Bank AG analyst Karen Weaver, the firm’s global head of securitization research.
    …
    “The builders are looking for ways to accelerate sales and get inventory moving,”

    The news certainly continues to be quite bad on the home front.

    Related: Housing Inventory Glut (August 2007) – Home Price Declines Exceeding 10% Seen for 20% of Housing Markets – Ever Larger Houses – Exurbs Hardest Hit in Recent Housing Slump

  • Warren Buffett’s Letter to Shareholders

    As usual, Warren Buffett’s letter to shareholders is packed with wisdom. Berkshire Hathaway 2007 Letter to Shareholders:

    We will soon purchase 60% of Marmon and will acquire virtually all of the balance within six years. Our initial outlay will be $4.5 billion, and the price of our later purchases will be based on a formula tied to earnings.
    …
    This deal was done in the way Jay would have liked. We arrived at a price using only Marmon’s financial statements, employing no advisors and engaging in no nit-picking. I knew that the business would be exactly as the Pritzkers represented, and they knew that we would close on the dot, however chaotic financial markets might be. During the past year, many large deals have been renegotiated or killed entirely. With the Pritzkers, as with Berkshire, a deal is a deal.
    …
    Charlie and I look for companies that have a) a business we understand; b) favorable long-term economics; c) able and trustworthy management; and d) a sensible price tag. We like to buy the whole business or, if management is our partner, at least 80%. When control-type purchases of quality aren’t available, though, we are also happy to simply buy small portions of great businesses by way of stock market purchases….

    A truly great business must have an enduring “moat” that protects excellent returns on invested capital. The dynamics of capitalism guarantee that competitors will repeatedly assault any business “castle” that is earning high returns. Therefore a formidable barrier such as a company’s being the lowcost producer (GEICO, Costco) or possessing a powerful world-wide brand (Coca-Cola, Gillette, American Express) is essential for sustained success. Business history is filled with “Roman Candles,” companies whose moats proved illusory and were soon crossed.
    …
    Susan came to Borsheims 25 years ago as a $4-an-hour saleswoman. Though she lacked a managerial background, I did not hesitate to make her CEO in 1994. She’s smart, she loves the business, and she loves her associates. That beats having an MBA degree any time. (An aside: Charlie and I are not big fans of resumes. Instead, we focus on brains, passion and integrity.
    …
    I should emphasize that we do not measure the progress of our investments by what their market prices do during any given year. Rather, we evaluate their performance by the two methods we apply to the businesses we own. The first test is improvement in earnings, with our making due allowance for industry conditions. The second test, more subjective, is whether their “moats” – a metaphor for the superiorities they possess that make life difficult for their competitors – have widened during the year.
    …
    You will recall that in our catastrophe insurance business, we are always ready to trade increased volatility in reported earnings in the short run for greater gains in net worth in the long run.
    …
    The U.S. dollar weakened further in 2007 against major currencies, and it’s no mystery why: Americans like buying products made elsewhere more than the rest of the world likes buying products made in the U.S. Inevitably, that causes America to ship about $2 billion of IOUs and assets daily to the rest of the world. And over time, that puts pressure on the dollar.
    …
    What is no puzzle, however, is why CEOs opt for a high investment assumption: It lets them report higher earnings. And if they are wrong, as I believe they are, the chickens won’t come home to roost until long after they retire.

    A must read for all investors.

    Related: Buffett Letter to Shareholders (from last year) – Live From Omaha (2007) – Overview of Warren Buffett

  • Kiva – Provide a Helping Hand

    Kiva is a great organization I have mentioned before (e.g. microfinancing for entrepreneurs). They let people to loan money directly to entrepreneurs around the world through their web site. Loan can be as small as $25. As the business produces income from the capital loaned the loan is paid back. Kiva is setup as a charity, so those making the loans do not make a profit. In actuality the capital is provided through a Kiva partner (intermediary) that often does change interest to the entrepreneur (many are non-profits themselves that use the interest to fund operating expenses – and I think some are for profit, though I may be wrong on that).

    I loaned an additional $300 to 6 entrepreneurs today and donated $50 to Kiva. The entrepreneurs I helped fund are located in: Togo, Dominican Republic, Senegal, Nicaragua, Bolivia and Uganda. One of the things Kiva does very well is take advantage of the internet to connect to these people. You can see short profiles and photos of them on my Kiva profile.

    I hope some of you readers will join and provide loans. If so I would love to add a link to your profile from the Curious Cat Kiva supporters page.

    Related: Using Capitalism to Make the World Better – Kiva: Internet based Microfinancing – Make the World Better

  • Great Advice from Warren Buffett

    Great advice from Warren Buffett. He spoke to students at UTexas at Austin business school and one of the students, Dang Le, posted notes of the discussion online. The internet is great.

    On diversification:

    If you are a professional and have confidence, then I would advocate lots of concentration. For everyone else, if it’s not your game, participate in total diversification. The economy will do fine over time. Make sure you don’t buy at the wrong price or the wrong time. That’s what most people should do, buy a cheap index fund and slowly dollar cost average into it.

    Great advice. Warren Buffett uses great concentration (little diversification) but you are not Warren Buffett.

    There are $10 billion mistakes of omission that no one knows about; they don’t show up in the accounting. In 1994 we paid $400 worth of Berkshire stock for a shoe company. The company is now worth 0, but the stock is worth $3.5 billion. So now, I’m happy to see Berkshire go down since it reduces the size of my mistake. In 1973 Tom Murphy offered us NBC for $35 million, but we turned it down. That was a huge mistake of omission.
    …
    Getting turned down by HBS [Harvard Business School] was one of the best things that could have happened to me, bad luck can turn out to be good.
    …
    We did an informal office survey by looking at the total tax footprint versus the total income. I earned 46 million and paid a tax rate of 17.5%. My rate was the lowest, the average was 33%, and my cleaning lady paid 40%. The system is tilted towards the rich. The Forbes 400 total net worth has gone from 220 billion to 1.54 trillion, an increase of 7-to-1. You see in legislature that there is lobbying carried on by the powerful over issues such as the estate tax and carried interest for private equity investments. We need to flatten income and payroll taxes, and those making under $30,000 shouldn’t be bothered.

    It is hard to beat reading Warren Buffet’s ideas on investing and economics.

    Related: Buffett on Taxes – The Berkshire Hathaway Meeting 2007 – Buffett’s 2006 Letter to Shareholders – Warren Buffett’s 2004 Annual Report – books on investing

  • A Bull on China

    I recently started reading A Bull in China: Investing Profitably in the World’s Greatest Market and am enjoying it.

    From the Curious Cat Management blog, Decemeber, 2004:

    Adventure Capitalist by Jim Rogers tracked his trip around the world by car. Previously he had documented his around the world motorcycle journey in Investment Biker. His views offer a worthwhile perspective that is often missed, in my opinion. That said I wouldn’t accept his views as the final truth they are valuable as one perspective to shed light on areas that are often overlooked.

    China Wakes, by Nicholas Kristof and Sheryl Wudunn documents their time as Journalists in China (1988-1993) and again offers valuable insight into China. Obviously even gaining an incredibly oversimplified view of China would take a great deal more than one, or even ten books. Still the authors provide viewpoints that I found added, in a small way, to a picture of what China, was, is and may become. I plan to read their book: Thunder from the East: Portrait of a Rising Asia.

    Related: Rodgers on the US and Chinese Economies – Chinese economy and investment articles

  • Predatory Lenders’ Partner in Crime

    Predatory Lenders’ Partner in Crime by Eliot Spitzer

    For 140 years, the OCC examined the books of national banks to make sure they were balanced, an important but uncontroversial function. But a few years ago, for the first time in its history, the OCC was used as a tool against consumers.

    In 2003, during the height of the predatory lending crisis, the OCC invoked a clause from the 1863 National Bank Act to issue formal opinions preempting all state predatory lending laws, thereby rendering them inoperative. The OCC also promulgated new rules that prevented states from enforcing any of their own consumer protection laws against national banks. The federal government’s actions were so egregious and so unprecedented that all 50 state attorneys general, and all 50 state banking superintendents, actively fought the new rules.

    But the unanimous opposition of the 50 states did not deter, or even slow, the Bush administration in its goal of protecting the banks. In fact, when my office opened an investigation of possible discrimination in mortgage lending by a number of banks, the OCC filed a federal lawsuit to stop the investigation.

    It is unfortunate when the federal government chooses to strip states of the ability to protect citizens.

    Related: Credit Freeze Stops Identity Theft Cold – Investor Protection Needed

  • International Health Care System Performance

    Data from the Commonwealth fund report, Toward Higher-Performance Health Systems: Adults’ Health Care Experiences in Seven Countries, 2007:

    Australia Canada Germany Netherlands New Zealand UK USA
    National health spending – Percent of GDP 9.5% 9.8% 10.7% 9.2% 9.0% 8.3% 16.0%
    Percent uninsured 0 0 <1 <2 0 0 16
    Last time you were sick or needed care, how quickly could you get an appointment to see a doctor?
        Same day 42 22 55 49 53 41 30
        Next day 20 14 10 21 22 17 19
        2-5 days 26 26 10 17 17 26 25
        6 or more days 10 30 20 5 4 12 20
    Overall health system views
        Only minor changes needed, system works well 24 26 20 42 26 26 16
        Fundamental changes needed 55 60 51 49 56 57 48
        Rebuild completely 18 12 28 9 17 15 34

    Related: Measuring the Health of Nations – USA Paying More for Health Care – Traveling for Health Care – resources for improvement health system performance