Thursday, April 10, 2008

Reading the WSJ Cover-to-Cover

10 April 2008

After completing 7 reports and letters in my first 12 days at the Four Seasons Aviara Residence Club, I have decided to be nice to myself today, and only do what I feel like doing.

One thing I felt like doing was getting out of my room, which is where I stay when I'm completing paperwork.

So I ambled over the the clubhouse this morning, where I happened to feel like drinking coffee and reading the Wall Street Journal. Both activities are breaks from my regular routine. I'm sure Ray Kurzweil is right, that alkaline water is a healthier choice than coffee to start off the day. But this morning, I had coffee, mixed caffeinated and decaf (as the decaf ran out).

And I read the Wall Street Journal cover to cover. An activity I have never had the time to engage in previously.

Now let me tell you, today, I also don't feel like making online citations, so I'm not going to try too hard to back up anything I'm going to say. I'm just going to tell you what I feel like saying.

But I do feel like writing out my impressions of what I read. So, here they are....

What is the general mood of the journal today?

Tense and on-edge - that's for sure. But of course, that's not an unusual mood for an investment publication. Investors are always forward-looking, and, by definition, the future is unknowable. So the mood is congruent with the topic in a generic sense.

What is today's good news?

Happily, there is lots!

The Chinese Yuan is continuing to appreciate gradually against the US dollar, to which it had formerly been pegged. This helps to rebalance the Yuan against other global currencies, as it has been too weak for too long. Additionally, China thinks it can hold inflation under 5% this year, and in today's inflationary universe, that is a mild rate of inflation. This, in turn, will benefit China's growing workforce, who are now seeing income gains in an appreciating currency.

How will this impact the expected global recession?

Again favourably, these developments will tend to moderate the recession's international impact, as, even if Chinese growth slows, a slowdown will still represent real growth, and China will continue to expand its business with its regional neighbours, regardless of what the "Anglo-Saxon" and European economies are doing.

What else is happening?

Well, the collapsing dollar has reinvigorated US export markets for sure. The shipping container glut of several years ago, caused by containers from Asia arriving full and returning empty, has now literally reversed. From Long Beach to Long Island, American exporters cannot find shipping containers to transport their goods to overseas markets that want them.

Further, the US is again becoming a manufacturing location.

Say that again? This is significant!

Some US-based manufacturers are cancelling plans to outsource their production, and are simply staying put in the US. Others, notably BMW, are expanding their US operations.

And where are those exports going?

You guessed it - Asia. No surprise. The interesting thing, though, is that products made in the US are now in demand by Asians. This represents a dramatic reversal in a short period, and is one of the many benefits of the free market system and floating global currency exchange rates. We are witnessing the virtuous cycle of international free trade at work.

How are American, European and Japanese auto sales faring in China?

Well, they are down domestically - that is no secret - but exploding in the Chinese market. From Ford to Honda to BMW to Volkswagen, Chinese business is booming. GM has a strong base, but is facing slower Chinese sales growth, perhaps due to the 5 years of market exposure hanging over its market-leading Buick Excelle.

Again, how does this impact the looming recession? Obviously, China's steadily growing demand tends to put a floor under the international economy. Remember, a slowdown in China still represents a (continuing) contribution to global growth. China isn't big enough (yet) to "save" the global economy, but it may be big enough to prevent it from falling off a cliff.

And a note of caution: While the US is selling more overseas, this did not translate into a more favourable balance of payments in the just-released February trade figures. Americans continued to spend too much abroad, with the result that the monthly trade deficit grew from January's $59 billion (already a devastating number) to February's unexpectedly high $62.3 billion, exceeding analyst estimates by almost $5 billion.

Another positive note. The growth in mosquito-born diseases in semi-tropical and temperate regions of the world has turned out in most cases not to be attributable to global warming, but instead to continuing international airline travel. Malaria was endemic to Europe and North America until the arrival of the little ice age of Shakespeare's time. Shakespeare referred to the ague in at least 8 of his plays. So - it's still a concerning problem, but it is not primarily a consequence of global warming.

Samir Sumaida'ie, the Iraqi ambassador to the US, asserts that Iraqis' sense of national identity has enabled the country to weather the past 5 years' storms of transition without - so far - disintegration into a civil war. David Petraeus has argued that US troops can't go home yet, but Mr. Bush has agreed to shorten tours of duty. While I continue to maintain that the Iraq intervention, right or wrong, is simply not affordable, at least it remains true that the case for the upside has not yet entirely disintegrated.

(Michael Yon's groundbreaking editorial followed the above two pieces by one day. Writing in the WSJ on April 11, 2008, Mr. Yon stated, "As the outrages of Abu Ghraib faded in memory – and paled in comparison to al Qaeda's brutalities – and our soldiers under the Petraeus strategy got off their big bases and out of their tanks and deeper into the neighbourhoods, American values began to win the war." Read more here.)

Bruce Wasserstein, CEO of Lazard, has proposed a Liquidity Funding Bank, analogous to the World Bank and the historic Bank of the United States. This entity would support the US banking sector, but be subject to "profit discipline." This would keep the US Federal Reserve from intervening in the US financial system on an ad hoc basis, and would be at arm's length from the US central bank. In my view - any length from the Fed would be better than none!

Gary Stern, president of the Minneapolis Fed, has acknowledged that governments should "minimize support for creditors of failing banks," as this "encourages further risk-taking." Can't argue with him there!

Dell is joining its rivals in the race to produce low-cost PCs. Let's credit Nicholas Negroponte for getting that one started!

Larry King, though he is 74, with his current contract up for renewal next year, is continuing to thrive at CNN. (Unfortunately, Katy Couric seems to have been misplaced at CBS News, and her days there are almost certainly numbered. Laments all around for Dan Rather, of course!)

Oil futures remain strong, which is good news for energy investors, but perhaps not good news for most other investors, who face escalating energy-based costs. The consensus is that the oil market is still awash with speculators, and that a slowdown will moderate that market in particular - again - representing another of the natural checks and balances of the free market system which no centrally-planned economy (think Venezuela or Zimbabwe) can hope to replicate.

Here's the conundrum for you, though. Alcoa was slammed in the market earlier this week, with profits down almost by half, despite near-record prices for aluminum, due to escalating energy and production costs. However, perhaps follwoing oil, copper continues to indicate readiness to move to higher highs, leaving open the question as to where commodities are headed in the short to intermediate term.

That tells us that while the US market remains weak, global markets are so far still relatively strong - and that may prove to be the message of the current recession. That is, US-based weakness will be manifested through economic contraction, but global weakness may be manifested simply through slower rates of growth. Of course, only time will tell. There are too many variables, making economic prediction akin to predicting the weather....

Goldman was able to find takers for Chrysler loans at 63 cents on the dollar and a 20% yield. It helps new owner Cerberus Capital Management keep the business afloat. Remember (courtesy of Wikipedia) that Cerberus was the hound of Hades, a monstrous three-headed dog[1] with a snake for a tail and snakes down his back like a mane, whose analogs in other cultures are hellhounds. Another hellhound is Orthus, his two-headed brother. Cerberus guarded the gate to Hades and ensured that spirits of the dead could enter, but none could exit, and additionally, that no living person was to come into Hades. That about sums up Cerberus' position in Chrysler, as far as I can tell!

Here's a hint - you could have had the same yield in the much more sustainable Canadian Natural Gas Energy Trust market only a few months ago - though not now - the market has finally grudgingly begun to concede the value that was waiting to be unlocked in that investment sector. That is, if you'd invested in, say,
Paramount Energy Trust (my favourite unloved Canadian Energy Trust) at its December 19, 2007 low price of $5.79, you'd have received a sustainable and conservative dividend yield of 20.7%, and you'd also be looking at a capital appreciation rate of 59% over the ensuing 4-month period.

Now in my book, that is value investing. Sorry, Cerberus - you can stay at the gates of hell. There are better places to park one's capital!

In the general equities sphere, big biotech (think Genentech and Genzyme, though this year, not Amgen) is faring well, due to the diversity of products such firms now have on the market, and to the growth potential for drugs by design, as opposed to drugs by trial and error (as represented by "big pharma," which, by way of contrast, remains an underperforming sector, due perhaps again to the "creative destructive" forces of capitalism).

Circuit City grew its profits on a year-to-year basis, but against declining and lower-than-expected sales, so the share value of the company did not fare well. Good news, but not good enough, and I'm sure we can expect more of that.

We've now made it through to the Personal Journal... and here's where we start....

Stuart Weitzman has developed a trade-off for women whose high heels reflect the toppy and wobbly state of the current global markets at 3-4 inches, with thin padding and sturdy shanks. Cole Haan has airbags, borrowed from Nike, and Naturalizer can also be counted on to deliver a comfortable high heel (ask Susan on that one). These cobblers are borrowing from athletic and orthopedic shoe technology to deliver comfort, stability, resilience and safety. Women, the high heel is your power equivalent of the male wingtip shoe. Enjoy!

Big personal journal story - blogger mom Heather Armstrong shares the trials, travails and rewards of being a full-time stay-at-home mom/blogger. Her advertising business has swelled to perhaps $40,000 per month as she has reached #59 on the bloggers' top 100.

No surprise, her husband is staying home, and she is the target of the bitter and envious, including former close friends - who find new ways to put her down - and hurt her feelings. She and I share in common a recent trip through the
Palm Springs Airport - it's literally outdoors, and very small-town feeling, not at all like the San Diego Airport, which is our usual hub. She met Rick Springfield on a puddle jumper flight there, and also got her first 4 hours of uninterrupted sleep as the mother of a youngster, and that's good news, isn't it?

Also good news for our complicated era - there is now a booming market for textbooks on counterinsurgency. Thank Daniel Marston and Carter Malkasian for their recent contribution to the field. The US learned in the Philippines a century ago that the protection of the civilian population is the key to effective counterinsurgency. Hard lesson: protection of our own troops - along with insurgent body counts - doesn't cut the mustard. Also remember - humanitarian aid better separates civilians from insurgents than military force, and intelligence gathering is of more value than soldiering per se.

Whether we like it or not, we'll be fighting insurgencies for the foreseeable future, so it is good to know that there are lessons to be learned and applied.

Susan and I plan - tentatively - to be in New York in later August and early September, so we'll miss the Stravinsky Festival taking place now at Columbia University's Miller Theatre. That's a shame, particularly as his less familiar pieces will be featured. We'll have to keep alert as to what is on for the end of August!

OK, what's the bad news?

I don't happen to feel like composing an article-by-article review of this more negative subject, though I'll highlight some interesting themes and questions.

In short, prices are up, way up - inflation has become undeniable, and it is sparking riots in third world centres, such as in Cairo. This is due to excess liquidity, and you have heard my thoughts on this topic previously. Inflation is reaching its (acknowledged) decade high. Somewhere down the road, that portends higher, not lower, interest rates, and that spells RECESSION on both Main Street and Wall Street. While broad markets are transmitting bottoming signals, all of us know that bottoms are very rarely reached with the onset of a recession. It's going to get tougher, full stop, and the tough times may endure for a lengthier than accustomed period.

All of the presidential candidates, including the president himself, are sending out what I can only read as the "wrong" messages.

GWB remains unable to rein in his spending habits, particularly with regard to his favourite beneficiary - military contractors. He is now having to share their funds with Wall Street players and market makers, and that is going to create tension at some point, not to mention unbearable pressure for US taxpayers somewhere down the road.

John McCain, of all the candidates, seems to have the firmest grasp of ethics. He actually cares about what is right and wrong more than anything else. His weakness is economics. That is, he may be right militarily and strategically to plan to commit the US to a sustained future in Iraq (I don't know, but I respect his commitment), but he is weak in economics, as the US cannot afford his plan, no matter how virtuous it may be (and it could also prove to be counterproductive, of course).

All three major party candidates seem to have made noises about wishing to invite the advice of Alan Greenspan. That is not a good omen regarding any of the three.

Barack Obama has totally turned me off with his proposal to bump up the first tranche of capital gains taxes from their current 15% to 28% in 2011 (when current tax relief arrangements expire). This is concerning, explains Michael T. Darda, as already, capital gains taxes are not indexed to inflation, with the result that the market for capital investment is steadily eroding. Further, the least efficient way to promote economic growth is consumer tax relief. That strategy simply shifts spending in one place to savings and investment in another, as somebody has to invest the money that is loaned to the spendthrifts! Obama's proposal will be a disaster, and proves that he has more to learn about economics than he can hope to acquire, even in two terms in office. He is a no-go from the start, I'm sorry to say.

How about Hillary?

Well, she now admits to embarrassment about her recent outing in a release of archived Wal-Mart videos from the early 90s. Regrettably, she failed to demonstrate integrity through standing by her prior remarks in favour of Wal-Mart (of which she was then a board member, for goodness sake!).

So, yet another Democratic candidate succumbs to political correctness, demonstrating the backbone of a strand of spaghetti.

From praising the Arkansas-based company that has almost single-handedly kept consumer prices under control in North America (and sustained incomes nearer to parity with America's global competitors) for the past 15 years, she now publicly describes Wal-Mart's contribution to America as "mixed."

Well, that term ("mixed") about sums up my support for Hillary.

As far as I can tell, she has only strategies (granted, often more sophisticated than those of her two opponents) but no ethics.

Some of Ms. Clinton's policies may even be wiser than those of her two major competitors (it is at present a 3-way race for the white house), but as far as I can tell, she stands for nothing, and that distinguishes her from her husband, who was committed to doing well while getting along with our global neighbours.

It seems to me that Bill has the greater emotional intelligence of the two (I think he towers in that area, as well as in the area of general knowledge, with his Rhodes-Scholar background often showing through), though that stops at his relationships with junior aides and interns, as is well-known. (I'm less offended about his sexual dalliance with Monica than I am about his leaving her with the impression that he would abandon Hillary to be with her... Now, that is shameful....)

In any case, the US will require a president. I would side with most libertarians in preferring Ron Paul, but of course, he is not going to be elected any time soon. Given the choices, I am truly stumped. As I vote out of Canada in any case, this will probably be an election year to sit it out, unless one of the candidates does something so ethical that I simply have to make a gesture of support by voting!

One piece of bad news was good news to me. Business is finally turning down at Las Vegas casinos, and perhaps that is an early indicator that the gambling economy (which has dominated the past 15 years in North America and perhaps globally, judging by business in Macau) is now perhaps finally reaching its peak. And may it soon flame out!

Hugo Chavez has adopted a striking strategy for nationalization. On a Mugabe-like course in Venezuela, he has made the business climate in his country so bad that international investors are now happy to cash out for the meagre allowance he affords them to take over their businesses. If only the current crop of US presidential candidates were a little less like Chavez, and a little more like Ron Paul!

The IMF tells us that the US disease has infected the global economy. The US remains by far the largest player, even with a dollar cut by half in exchange value with other also-faulty currencies (there are now so many more of them!). Global growth could fall below 3%, and discounting inflation, that figure may actually be negative in real terms, but, as has remained the theme, global economic performance, wherever it falls, will still outpace US economic performance. Of course, the IMF has its own malady, as it is selling out its gold due to the lack of business for its loans in a world where third world players now in many cases are outperforming their first world cousins.

Another downer - Windows Vista is a total loser as an operating system, and Windows XP is being taken off the market as of June 2008. I am thinking we had better buy our next-generation laptop now, as Vista is slower than XP, and requires a staggering 3 GB of RAM just to function. As I have written earlier, the world requires a solution to Microsoft's bloated operating systems and software products, and I've been advising Google to move into this line of business in order to keep pace with BHP Billiton!

The other option is to consider a MAC. I have never liked the MAC interface, as I prefer the more "linear" Windows design (and the two-button mouse) to the touchy-feely and excessively cluttered MAC concept. But Vista could push me over the edge! Walter Mossberg at WSJ is reassuring on this count, as one can run Windows on a MAC as well. Vista might well spell the end of Susan's and my personal relationship with Microsoft operating systems. It has been a long, bumpy, and mostly downhill ride, that is for certain!

Mac, perhaps with the new Mac OS X Leopard operating system, might yet prove to be the ultimate solution to Windows Vista.

In business broadly, earnings are down, and that is now true of the hedge funds as well - who are no longer true hedgers, but instead players of leverage. Again, equity values do not bottom at the beginning of a recession, it's that simple.

An unrelated thought - what is dogging the smaller precious metal miners and explorers with gold, silver and platinum at recent record highs?

I think I have finally figured out the obvious. Everyone is talking energy and materials costs, and that is certainly reinforced by Alcoa's example this week.

But there is another equally or more important factor.

While gold and silver are the antidotes to excess liquidity - and to the resultant inherent constrictions in liquidity which inevitably follow it further down the road - the miners and explorers run on liquidity just like everyone else. Perhaps this is too obvious, but clearly the market is sensing that the junior miners and explorers are going to have trouble funding planned future operational growth. Even the high integrity and entirely sound lenders in this field - and I watch Quest Capital in this category - are being squeezed.

Keep your eyes on such funding sources as Silver Wheaton and Royal Gold to see how the combined capital and cost squeezes in junior mining and exploration play out. It could be tough for a while longer, unless the precious metals explode to the upside - still a definite though not a widely anticipated possibility. At this point, no one can tell with respect to that question (the monetary metals are so far stronger than usual, as downturns in this market are typically steep, sudden and persistent), so we will simple have to wait and watch.

On my advice, there are now two primary factors to attend to:

(1) How are energy, equipment, labour and materials costs impacting junior precious metal miners and mine developers (watch the 2007 end-of-year cash flows, which are now being announced)?

(2) How are the capital markets treating junior precious metal miners and explorers (think of Nevsun Resources - with perhaps the world's best soon-to-be-developed gold deposit in Eritrea, and European Minerals - facing upcoming capital development costs in Kazakhstan - with both operating in geopolitically shaky regions - as the bellwethers here)?

And that's it for today's leisurely stroll through the WSJ print edition.

I hope the trip has been informative!

It has certainly been relaxing....


  1. Sounds like you had a great "day off"!! It wouldn't have worked nearly as well around here with out newspaper .. all 26 to 30 pages!

  2. The local San Diego paper has a lot of content too, but the WSJ is almost unique. Of course, there are also the New York Times, the Los Angeles Times, the Financial Times, which is probably my favourite newspaper, the Washington Post, our two great Canadian national newspapers, and in fact many more. Business has been tough for all papers, and most are cutting back. It's striking how well they can do in an overall adverse climate.

  3. i am i glad u took the day off, u need and deserbe more of those days off. Although i do have to admit i didnt finish reading this blog, i stopped after the mosquito and malaria part.
    But go have some fun u deserve it