Sunday, February 1, 2015

Lazy Greeks

First Rebuttal posted some interesting charts and posits that "what you think you know about the Greek situation is likely not the real issue".

I wanted to confirm this data for myself and presented it slightly differently.  Below is the not seasonally adjusted annual Production of Total Industry numbers scaled to 100=January 1, 1999.

The chart outlines the growth of the various regions before and after the Euro (look at Greece go!).  It also highlights the outsized benefits to Germany under the Euro scheme and the difficulties of surviving a severe downturn without control over your currency. 

Total OECD and the UK are in there, as well, for reference.


Source: FRED

Wednesday, January 28, 2015

Leaving the labor force stats

Marginal Revolution asks who is moving out of the U.S. labor force?

I'm filing this under Good News Bad News because while it's bad that young people are out of work, it's good that many of these are not necessarily the most vulnerable.

Saturday, January 24, 2015

Tuesday, January 6, 2015

The collapse of the Canadian housing market

More Americans predicting the collapse of the Canadian housing market.

I've encountered many blog posts, newspaper articles, and sell-side reports of this vein and would like to comment on their main points.

Foreign buyers

  • not the bogeyman
  • usually putting down significant down payments
  • if renting the space, then the issue should be the appropriate rental financing/regulatory regime, not a foreign buyer issue per se
  • else if they are using the space for their kids/family who are living in Canada and may be Canadians themselves, then what's the problem here?
  • else if not renting the space, and not using for family, then they're likely quite wealthy and see real estate as a place to store a lot of CAD (what other asset class would you have them invest in? and if the predicted stampede of capital occurs, which currency is going to act as safe haven vs CAD... (keeping in mind that the wealthy investor probably already holds lots of USD, HKD, JPY, EUR, GBP)?)

Household debt-to-income: Canada vs U.S.
  • the shape of the chart is accurate but Canadian and U.S. stats are not directly comparable
  • Canadians pay higher taxes so, all else being equal, you'd expect the Canadian ratio to be higher
  • households are less sensitive to health related shocks due to universal insurance
  • a corporate obligor with a 1.6X debt/EBITDA ratio would probably be investment grade rated

Valuations
  • I'm very sympathetic to the view that we're in bubble territory
  • but the market is the market
  • there are explanations for the very extreme cases such as Toronto and Vancouver especially taking into account international comps

Frequency of defaults on mortgages
  • don't panic until employment is a problem

Loss given default on mortgages
  • overall LTVs are about 54% for CMHC as at 2014 Q3 (should be about similar for the big 5 banks)
  • high ratio mortgages, and any conventional mortgages securitized through the NHA MBS program are insured by CMHC or the two private insurers
  • and no, CMHC insurance is not a bail-out of banks, they have made billions of dollars for their shareholder (the Government of Canada) and if some black swan event wipes out a year or two of profits and a portion of the capital base (which is over 150% of regulatory minimums) then I think we call that a success



Sunday, January 4, 2015

Looking ahead to 2015

Time to position for the year ahead.  2014 was marketed by ever higher highs in the stock market, continuation of crisis-time monetary stimulus, and geopolitical tensions--particularly of the Russian variety.  Six and a half years after Lehman's collapse, pundits, bloggers, and academics are still arguing about whether or not we are in a correction (or the right kind of correction).

In 2014 I moved a material portion of my stock portfolio into cash and gold ETFs.  Even after missing out on gains, and suffering meaningful losses on the gold, I'm comfortable with my cash position and look to increase it opportunistically.

Even if it's not in 2015, I have a grave sense--of the Tolkienesque variety--that a severe correction is coming that will shock and awe market participants of all ages  By the mysterious processes of the market, the sins of cheap money and price manipulation, or the fundamental problems that they intend to mask, will be fully discounted; perhaps quite suddenly.

On potential indicators of fundamental problems that are 'poking out', I note that the collapse in oil prices towards the end of 2014 has a demand component in addition to the much discussed supply side (Saudis, shale, tar sands).

Monday, October 13, 2014

Beer moats

Quartz has an infographic showing the family tress of the six largest beer companies that sell 50% of the world's beer. Consolidation has been huge factor in the beer as an investment story.  As anecdotal evidence of the industry's progress, AB Inbev was running ads against itself during the last World Cup.

One could spin a negative story that the industry has been growing by acquisition rather than organic growth and that tastes in major markets have been steadily shifting to wine and spirits.

The positive story is that the industry has recognized changing tastes and that consolidation is a sign of market discipline to keep margins high.  Size also creates strong moats around the firms.  It would be very difficult for any new entrant to take on the large incumbents in terms of: (1) brewing large volumes of beer of consistent quality; (2) mass marketing; (3) distribution to stores, bars, restaurants, stadiums, festivals, etc; and (4) entering emerging markets where beer can still be a growth story (due to some combination of rising incomes, weak local competitors, and beer as a relatively novel category).

In regards to craft beer:  Often delicious.  But the trend is not new, and for every successful independent, there are a host of competitors hoping to be bought out by a large multinational.


Disclosures
I hold a material part of my personal portfolio in beer stocks.  This is primarily through Ambev, SABMiller, MolsonCoors.

Wednesday, October 8, 2014

Where's the gold?

Ron Paul writes about a Swiss referendum on repatriating their national gold reserves.  Some conspiracy theorists will have you believe that this is a major problem because the gold no longer exists.  It has been lent out so many times that physical delivery may be very difficult or even impossible without causing havoc with gold prices.

This is not entirely crazy.  Like inventories of securities, inventories of gold are traded (or lent).  And like securities, sometimes there's going to be a squeeze.

In light of this, and leaving aside the extreme basis that some may hold for the trade, gold as an investment raises practical questions.  The costs of acquiring, transporting, storing, and insuring physical gold seem far out of reach for any normal person.  But when you buy an ETF, how can you be sure that there's anything in the vault backing it?  What other forms of gold can an ordinary investor use?


Monday, October 6, 2014

Canadian international merchandise trade (balance of payments) - August 2014

Balance of payments swung from a surplus of $2.2B (adj) in July 2014 to a deficit of $0.6B in August 2014.  At the product level, Canada exported $0.6B less energy products and imported $0.7B more energy products.  Yup.

Friday, October 3, 2014

Share buybacks

There has been much hand wringing and consternation over share buybacks. There's also been WTF BBBuYbacks.

As an investor I can't help but feel good about getting cash back through share buybacks.

However, I do appreciate concerns about having sufficient cash on hand to invest in the business, to pursue opportunistic transactions, and to get through a rainy day. The market is happy to take the money at any time, but is not likely to eagerly reinvest when the company needs the cash.  We tried this model in Canada, with income trusts (pay out all your cash, then go back to the market for more money), but the government shut down the trade before it ever went through a real test of faith.

There needs to be confidence that management is going to make good use-of-cash decisions over time--or else why invest in the company at all?  So the discussion should pivot from buybacks as the devil, to the proper incentive structure for managements.  It's easy to see how management could use buybacks to maximize personal compensation: juice up EPS based bonuses, raise the value of stock options, and make the company a less attractive takeover target (where management would be fired).  It is less clear how to fix the situation.

See Aswath Damodaran for an in-depth look at buybacks.

Wednesday, October 1, 2014

Inequality in the 21st century

It is hard to deny that Thomas Piketty's book, Capital in the Twenty-First Century, has lent unprecedented attention to the issue of inequality, both of income and of wealth.  It's especially interesting that it has even captured the imagination of the U.S. media and politicians (don't forget the Fed) in a country where no one is poor...they just haven't made it yet!

Technology and productivity are part of the story and I think most reasonable people would say those are both good things.  But there's also the issue of fairness.  Are there mechanisms to curb outrageous concentrations of dynastic wealth; are there conditions for equal opportunity in the form of (realistic, not hypothetical, not mythological) access to education, healthcare, clean water, nutritious food, clothing, and shelter; are there incentives to innovate, advance our understanding of the universe and improve our (read: humans') standard of living?

This last point is not trivial, so I will digress.

It has been suggested that U.S. economic growth is over due to lack of technological innovation.  Try to imagine life without likes or tweets or lolcats or the latest killer app in the iTunes store.  Now try to imagine life without indoor plumbing.  Where's the real innovation?

The U.S. semi-conductor industry can trace their roots, through predecessor companies, founders, and employees, to public funding, for math, science, and engineering, and big government contracts from NASA.  And of course, this was before start-up companies had to contend with certain death from broken patent system.  What is the contemporary example of hardcore public support for the so-called STEM fields?

My mental model of this stuff is that it takes 5 years to put together a salable new product or process.  It probably rests on the work of 10 years of engineering research in novel and useful areas.  But that engineering rests on the results of 100 years of basic research in math and science.  That's 115 years of R&D.

Thoughts as an investor:

  1. Long term investing is relative.  In 115 years we'll all be dead.  In the absence of strong public sponsorship, investors will tend towards the path of least resistance and buy the nonsense (either of the Bay Area or Wall St variety) even if the present value of truly innovative R&D is exponentially higher and more beneficial for all of humanity.  
  2. There is a riskiness in a society that concentrates wealth and power to extremes.  I worry about the U.S. where it is legal to buy the government and where there is an origin story based on violence in the face of unjust rule. Remember, "No taxation without representation!"
  3. The plebs are multitude and the elites are, well, elite.  I have to believe in the benefits of a trickle up effect more than a trickle down effect.  It is a matter of surplus.  Billionaires are hoarding cash while people in U.S. cities are living in food deserts and without clean running water.  Give someone at the bottom $1,000 and it goes straight into the (local) economy.  Give a billionaire $1,000 tax break... and who knows.