Thursday, January 28, 2010

Ipad or Polypad ?

I watched two great speeches today from two absolute experts at making speeches. Barrack Obama and Steve Jobs. You would be hard pushed to pick between the two as presenters – alive, dynamic, inspiring and brilliant at selling their promise.

The key difference – Jobs has delivered already. He was there with the product. The product is new, innovative, generates jobs, puts the US at the top of the technology pile, is competitively priced and facilitates education in ways that are both important and which others have, to date, tilted at tentatively.

His promise and product is also subject to the toughest of tests – the consumer market – maybe it will win maybe not – but either way the guy’s money is where his mouth is.

Obama was there with the promise – the hope, the expectation, the exhortation. Ironically Jobs is delivering what Obama hopes will happen. Obama couldn’t have been better in exhortation and pushing out the responsibility to be great to Americans… he promises to help, and, OK we should be gracious and give him the benefit of that doubt.

But Jobs didn’t start but detailing the shortcomings of Amazon and its Kindle, Microsoft or anyone else…. instead he was saying…. “this is what we are offering you. This is why we think you win with our product.” No “blaming the last lot” – just promoting the positive parts of his and his team’s efforts.

I don’t doubt the sincerity of either of these people. I do have sincere convictions about which is adding the greater amount of value.

Friday, January 22, 2010

From Obama to Oh Barmy

The rapid exploitation of obvious public anger at Wall St bonuses to distract attention from blowing the Kennedy legacy in Connecticut might be smart (if obvious) politics. It is also likely to be costly and generate capital flight from the U.S.

Costs we can see already – S&P finance stocks shed 4% of value on  the boy scout’s heroic announcement – losses which ripple through to the returns which his beloved widows and orphans were hoping their mutual funds and pensions might produce for them. Very clever.

One of Obama’s concern turns out, it seems, to be fair enough – he doesn’t like the idea of taxpayer “investments” (his giving in to bailout demands and stimulus nonsense) being used, albeit indirectly, to pay bonuses to banks which are “too big to fail”. Neither should he.

There are three solutions here.

One – don’t give taxpayers’ dollars to banks. Their investors and depositors took the returns – time to wear the risk.

Two – do not get sucked into “expert” mumbo jumbo about “too big to fail”. It sounds quaint. That sound is a politician getting sucked in. If Lehman’s can fail so can the rest.

Three and more practically…. now that both these solutions have been roundly ignored and it’s far too late – make sure the contract under which he props up these banks with taxpayer funds has a clause which says “no bonuses till you pay back all the debt”.

Dead simple. This stops the bonuses and creates an incentive to pay back outstanding taxpayer debt.

It would help if the ridiculous statutory deposit insurance and fidelity schemes which say “fine – do it again only harder I’ll save you” were removed as well….

This stuff is so obvious that a reasonable question becomes “why is this not happening?” A reasonable answer is that most of it would remove the marvellous political opportunity which the vote winning celebrity hangings provide for the guy whom the Connecticut result says can easily enough be put on the slippery slope to oblivion.

Peter Lynch Style Investing Today

If you were going to pick one guy in “value investing” who was a vast success, was modest, could explain what he did and was entertaining at the same time it would be Peter Lynch (largely unknown – like many of the more important experts – in N.Z.)

The Motley Fool ran this recently….

January 18, 2010

     Once in a while I like to think about what some of the great investors of the past would do in today's market.  I ask myself, what would Benjamin Graham do or what would Philip Fisher do in today's market climate?  I decided to focus on Peter Lynch for today's thought experiment, and why not?  $1,000 invested in Peter Lynch's Magellan fund from start to finish would have generated $28,000, no small feat considering most mutual fund managers can barely beat out index funds.  He even coined the term "ten-bagger."  He is truly an investing legend and above and beyond all that, a nice guy.  In fact, the proceeds of all of his investment books went to charity (you know you can trust an investment book author when there is no financial incentive for him to write the book in the first place).

     Peter Lynch specialized in investing in companies which he referred to as "fast-growers," companies that could grow earnings over 15 percent a year.  He looked for companies with a PEG of less than 1.2, since he didn't want to overpay for growth.  Also, he hated companies that carried large amounts of debt on the books.  Another important factor, especially in today's market climate, he didn't care about the macroeconomic conditions or where interest rates were going.  Lynch was a stout believer in investing in what you know, otherwise known as your circle of competence.  He liked companies that were simple to understand, ones you could ask your neighbor about.  He looked for companies with low market caps because he wanted to get in before other institutional investors and analysts caught wind of the companies themselves.  Additionally, Peter Lynch liked companies that eat their own lunch; companies with large amounts of insider ownership.  Lastly, Lynch loved companies that carry a lot of cash on the books, especially cash over the stock price (harder to find today).  

     With these considerations in mind I came up with this list of companies that I think Peter Lynch would have looked at today: Life Partners (LPHI), Buckel Inc. (BKE), Gymboree (GYMB), Stepan (SCL), and Orchids Paper Products (TIS).

     Life Partners is a financial services company that purchases life insurance policies at a discount to their face value for investment purposes. This company was named #1 of the fastest growing companies by Fortune.  It has no debt, 1.28 in cash per share, grows equity at 65%, and with a 311m market cap it has very little institutional investment (25%).  This company also has a 4.80% dividend yield to boot.  Insiders own a whopping 50% of this stock.  The only reason Lynch wouldn't invest in this stock is because it doesn't have that ask-your-neighbor-about-their-service type of quality to it.  Other than that it fits right in his wheelhouse.

     Buckle Inc., however, fits right into the ask-your-neighbor category.  Anyone who has been to the mall knows of this trendy clothing retailer. With a 40% ROE, zero debt, $2 of cash per share, 44% insider holding, and a 2.5% dividend yield it is safe to say this is a stock Lynch would be buying.  The only reason he might not like it is that 64% of the stock is held by mutual funds. 

     Gymboree is a popular children's clothing retailer that also has the ask-your-neighbor quality to it.  It is geared to be the new Kids R Us.  ROE is 27%, cash per share is $7, and insider holding is 13%.  However, institutions have largely caught on to this stock and hold 95% (according to yahoo). 

     Stepan is a 660m company which specializes in surfactants, polymers, and specialty products.  For being a fairly large company with strong potential it is surprising that only 55% of the shares are own by mutual funds and institutions.  They've grown earnings at 15% a year, ROE is 22%, insiders hold 22%, and they have a 1.40% dividend yield.  The only reason Lynch might not want this company is that it is more difficult to understand and cash is slightly less than debt (72m vs. 110m).

     Orchids Paper Products is a small paper company (160m cap) that sells paper towels, bathroom tissue, and paper napkins to big retailers like Wal-Mart, Dollar General, and Family Dollar.  This company has grown earnings 168% yoy, holds enough cash to cover its debt, has a 28% ROE, and has an insider holding of 20%.  Lynch would especially like this company because of its aggressive growth strategy.  Only 24% of its shares are held by mutual funds.  For a company with such a tremendous amount of growth ahead of it, I think lynch perhaps would have liked this company best. 

     Although Peter Lynch retired his fund in 1990 his methods are still sound today (in fact, I paid $1.00 for his book "One Up On Wall Street" and it has already made me thousands).  Lynch was always a firm believer that the individual investor could out-perform most mutual funds (and do so without paying fees).  It is my hope that these Peter Lynch style stocks will provide a launching pad for further research into these companies and the Peter Lynch investing style, and will help you too to out-perform mutual fund managers.

Wednesday, January 20, 2010

From pain killer to killer pain

The Medicines Classification Committee wants to limit sales of products containing the opioid codeine, such as Panadeine and Nurofen Plus, to direct sale by a pharmacist with pack sizes be to a maximum five days' supply, in response to concerns about addiction and misuse.

The potential impacts of driving up the costs of these items currently sold, at great convenience and low cost relative to regulated alternatives, to many thousands of people? Difficult to know where to start isn’t it? Let’s try it this way:

§ Are the concerns justified? They could be. So were the concerns about alcohol abuse and addiction at the time prohibition was introduced. So are concerns about the most lethal weapon ever invented by man – the motor vehicle. In neither case is resorting to a “five pack only” approach or raising costs to consumers an effective response.

§ Most importantly, even if the restrictions were effective – they raise costs for everyone and possibly, only possibly benefit a few. So to the community as a whole it’s a net loss. Those who suffer most from the loss are the poor, the elderly and those who can least afford the increased cost which necessarily accompanies restrictions.

§ Third we know that consumers will search for – and find – substitutes. These could take any number of forms. For the products themselves the possibilities include other less suitable drugs, more alcohol, putting up with pain, longer off work or more sick days and on and on. Substitutes for complying with the regulations would be legion as well – send in the kids, the Aunt, sweet talk the chemist.

§ Are these costs trivial? Many are tough to measure and involve all sorts of subjective judgments. In crude financial terms though, total turnover for all goods in supermarkets and groceries was worth about $9.95bn over the year to June 2009. It is easy to see that even the loss of one item such as this is likely to have significant impacts on consumers.

We know that to figure what the origins of any regulation are we need look no further than to who benefits.

Since first manufactured, aspirin based products which have the potential to, and have, killed consumers who take them when they are suffering from stomach ulcers have been sold in shops and supermarkets while paracetamol derived products which do not and are more benign, were restricted, pharmacy only products. The fight to make paracetamol more widely available was a bitter one. The result, unsurprisingly involved lower prices and grumpy chemists.

Now we are about to have a re run.

How could this happen? Here is a small clue drawn from the Department of Justice website:

“Under section 9 of the Medicines Act 1981 the membership of the Medicines Classification Committee shall consist of:

* two persons, to be nominated by the New Zealand Medical Association;

* two persons, to be nominated by the Pharmaceutical Society of New Zealand; and

* two persons, being officers of the Department of Health, one of whom shall be appointed as chairman.”

Monday, January 18, 2010

Returns on N.Z. businesses – not pretty

Bernard Hickey does a good job here…. and it’s scary.

The inability of the N.Z. economy to provide a platform to grow large companies from is well enough known – and some of the reasons are understandable enough. They all applied once though, to Hong Kong and Singapore – which makes it worth asking “what’s different?”

Wednesday, January 13, 2010

Numbers – NZ… just stop taking holidays and work harder

From IMF …. World Bank and CIA stats agree. This is GDP per capita… just how productive are we  ?????

Singapore                  4th
US                             6th
Hong Kong equal         7th
Swiss        equal         7th
Aus                          17th
Poms                        19th
Italy                          27th

NZ                            34th  ….. plus ACC and like delusions

Sunday, January 10, 2010

Exporting risk to helpful foreigners

“The bank workers union Finsec wants tougher regulation of banks. It says dividends paid to their parent companies, are "unacceptably huge".

Finsec says the combined profit of Australian-owned banks in the last financial year was $790 million and dividends were more than $1.7 billion.

The union says that is more than 200% of their profits. It says the dividends are "not acceptable" when New Zealand has just come through a recession.”

Leaving aside the fairly attractive proposition of how one pays $1.7 billion in dividends when one makes only $0.79 billion in profits for a moment, there still seems to be zero understanding of the fact that we exported at least $790.0m worth of risk to helpful foreign shareholders – mainly Australians – who bore that risk for the banks, their owners, depositors and workers.

There are many thousands of former Lehman Bros employees who no doubt wish they had been able to have the bank’s owners export risk as successfully.

The Aus / NZ banking sector represents one of the great survival stories of the recession – due in no small part to its competitive ownership structure.

Friday, January 8, 2010

A Robert Shiller Prediction…

Alex Tabarrok (Marginal Revolution) reports this from Shiller…

“Strategic default on mortgages will grow substantially over the next year, among prime borrowers, and become identified as a serious problem. The sense that ‘everyone is doing it’ is already growing, and will continue to grow, to the detriment of mortgage holders. It will grow because of a building backlash against the financial sector, growing populist rhetoric and a declining sense of community with the business world. Some people will take another look at their mortgage contract, and note that nowhere did they swear on the bible that they would repay.”  (WSJ)

My experience ex Provincial Finance on this is that some borrowers did get “confused” in thinking that with a company in receivership their obligation ceased. This little fantasy was easily corrected.

The genuine “no morals” had long gone… money never to be seen again. With 29,000 borrowers, even a normal distribution is going to throw up a huge number of miscreants. The main parties not understanding this were investors collecting 8% – 11% and never bothering to ask why the returns were so high.

This last point has got close to zero recognition… thereby increasing the chances of it happening all over again.

Monday, January 4, 2010

The very good news we love to ignore….

Readers know I am a fan of aggregator / interpreter economist Tyler Cowan…. the following is a great example of aggregating and blogging at its best… as well as being an important story in its own right.
"Fruitful Decade for Many in the World"

Tyler Cowen

My NYT column today is about how good the last ten years have been for China, India, Indonesia, Brazil, and much of Africa. It is not, as Time magazine has suggested, the worst decade in human history. Here is a brief excerpt:

One lesson from all of this is that steady economic growth is an underreported news story — and to our own detriment. As human beings, we are prone to focus on very dramatic, visible events, such as confrontations with political enemies or the personal qualities of leaders, whether good or bad. We turn information about politics and economics into stories of good guys versus bad guys and identify progress with the triumph of the good guys. In the process, it’s easy to neglect the underlying forces that improve life in small, hard-to-observe ways, culminating in important changes.

Here is Alex's earlier post on African success in the decade. In addition to growth statistics, I see much of the developing world as having demonstrated a much higher than expected level of social and political cohesion. Excerpt:

Since 2007, according to Goldman Sachs, the biggest emerging markets—Brazil, Russia, India and China—have accounted for 45% of global growth, almost twice as much as in 2000-06 and three times as much as in the 1990s.

Arnold Kling notes: "Even in the United States, the fact that people are living healthier longer represents an improvement above and beyond the GDP statistics."

I did not have enough space to discuss the question of growth rates versus per capita growth rates, but here are a few relevant points:

1. Babies are pretty cheap to feed. In the short run, if your economy grows, and at the same time produces more infants, the adults are still better off.

2. In the longer run, developing countries are making the "demographic transition" quicker and more dramatically than had been expected. Mexico is an extreme example of this more general point. So if you are very worried about overpopulation (not my view), there still has been plenty of good demographic news in the last decade. Economic growth in the developing world will not be "swallowed up" by rising population.

3. "More children" can be a legitimate way for a country to enjoy higher living standards.

4. Social indicators such as water and sanitation in households are generally higher in the afore-cited countries, over the last decade. That's further evidence for #1.

Again, I'd like to stress the general point that most American-born economists are not sufficiently cosmopolitan in their thinking and writing.

Sunday, January 3, 2010

Useful statistical analysis….

Matt Yglesias calculates:

...monitoring the UK’s 1.5 million Muslims is a lost cause. If you have a 99.9 percent accurate method of telling whether or not a given British Muslim is a dangerous terrorist, then apply it to all 1.5 million British Muslims, you’re going to find 1,500 dangerous terrorists in the UK. But nobody thinks there are anything like 1,500 dangerous terrorists in the UK. I’d be very surprised if there were as many as 15. And if there are 15, that means you’re 99.9 percent accurate method is going to get you a suspect pool that’s overwhelmingly composed of innocent people. The weakness of al-Qaeda’s movement, and the very tiny pool of operatives it can draw from, makes it essentially impossible to come up with viable methods for identifying those operatives.

Aggregated by Marginal Revolution.