Tuesday, June 30, 2009

GDP Country Growth Rates For 2009

Below is an interesting piece from Bespoke Research tabulating the expected GDP growth rates for 2009. Only China and India are expected to register positive year on year expansion. The rest are in various stages of contraction. What's interesting is the BRICs are doing very well relatively, with the exception of Russia, mainly due to its own undoing, excessive reliance on resources exports and not enough investments into infrastructure and services.

The other interesting point is that resource rich countries do not have it so bad, in fact they are among the better performers.

Below are the 2009 estimated GDP growth for 21 countries. As shown, only China and India are expected to actually grow in 2009, while the other countries are expected to contract. China's 2009 GDP growth estimate is at 7.66%, while India's is at 4%. The US is closer to the top of the list than the bottom with an estimate of -2.49%. It ranks only behind Canada among other G-7 countries. Japan and Germany are expected to see the biggest contraction in GDP in 2009 at -6.61% and -6.06% respectively. The UK is at -3.74%, Russia is at -2.77%, and France is at -2.75%.


p/s photos: Reon Kadena

150 Years For Madoff

Is a crime a crime, or the severity dependent on the amount that was "fraudulently obtained" by the perpetrator? Court rulings have maintained that the sum of money lost is a primary factor. Another factor has to be how many people were defrauded or affected? If Madoff had bilked the US Treasury for the same amount, somehow I don't think the media would make such a big hoo-hah over the case. Collective mob anger (which is understandable and justified) do sway the severity of the crime. So, if you are going to 'steal money', steal from one party only, or at least try to minimise the number of affected parties.

Sentenced to 150 years in prison on Monday, Bernard L. Madoff, the convicted Ponzi schemer, got one of the nation’s most severe sentences ever handed out in a white-collar crime case.

In recent years, some of the most notorious financial miscreants have received sentences of about 15 to 30 years. Below, a graphical look at of some of the longest prison terms for financial fraud, including sentences for former executives at WorldCom, Enron and the hedge fund Bayou Group.

At the relatively low end of the spectrum is Phillip R. Bennett who was 59 when he was sentenced to 16 years in prison for his role in the financial cover-up that eventually led to the collapse of the commodities brokerage Refco and about $1.5 billion in investor losses. Mr. Bennett, who had been Refco’s chief executive, previously pleaded guilty to 20 crimes, including conspiracy to commit securities fraud.

At the high end is Lance K. Poulsen, the founder of National Century Financial Enterprises, who in March received a 30 year prison sentence — one of the nation’s harshest for a white-collar crime. Mr. Poulsen was convicted of leading a $2.9 billion fraud that brought down National Century and triggered the bankruptcy filings of about 275 health care institutions.

“Mr. Poulsen is an architect of a fraud of such magnitude that it would make sophisticated financial analysts shudder,” the judge said in handing down the sentence.

Bar chart

Source: The New York Times; Google Charts

p/s photos: Yu Yamada

Monday, June 29, 2009

China's Liquidity Traps & Benefits

China has been ramping up lending over the last 7 months. Yes, it was with good intentions. Yes, it was actual lending not just for show. Yes, banks in China were "asked" to do their bit to lend aggressively. While there is a lot of good to have money circulating around, it will also weigh down on those borrowing on the "unqualified" end of the spectrum, people who willing take on more debt than they should. Its a mini time bomb. No, it will not implode yet. What the figures below shows to me is that China's equity markets will have a major run up right through the end of 2009. When you pump in so much liquidity, there are very few places for it to surface. We may see a combustion effect only maybe in the second half of 2010.

China's credit card debt that was at least six months overdue rose 133.1 percent year on year in the first quarter to 4.97 billion yuan (727.67 million U.S. dollars), the People's Bank of China, or the central bank. Debt overdue by six months or more accounted for 3 percent of the total outstanding credit card debt at the end of March, or 0.6percentage point more than in the same period last year, the report said.

It warned of potential risks of the increasing overdue credit card debt as financial institutions expanded their credit card business. As of March 31, Chinese banks had issued more than 150 million credit cards, or 0.11 card per person, up 42.9 percent year on year. But Chinese consumers still have relatively few credit cards, compared with 4.39 per person in the United States and 0.95 in Brazil. Outstanding credit card loans rose 87.6 percent year-on-year to165.86 billion yuan at the end of March.

New bank loans in China will exceed 1 trillion yuan (US$146 billion) and may top 1.2 trillion yuan this month as the regulator expressed its concern over irresponsible lending, according to a newspaper report.

This month's figure may be the third-highest this year after March's and January's, the China Securities Journal reported yesterday, citing people it didn't identify. That would also represent a sharp jump from May's 664.5 billion yuan.

The news, coming in the wake of the central bank's remark on Thursday that it will stick to an appropriately loose monetary policy to support economic growth, sent bank shares higher yesterday on expectations of better profit.

Shanghai Pudong Development Bank gained 3.79 percent to 22.98 yuan while the Industrial and Commercial Bank of China, the country's biggest lender, rose 2.02 percent to 5.55 yuan, easily outperforming the key Shanghai Composite Index.

Earlier this week, the China Banking Regulatory Commission demanded that lenders avoid a sudden jump in loans at the end of each month and each quarter, a move used by domestic banks to meet internal targets.

The regulator told lenders to ensure the money is channeled to the right sectors such as small businesses to help stimulate the economy, and to monitor capital flow into the stock and property markets.

This month's lending surge was mainly fueled by mortgage loans and funding of government projects, the Journal said.

The new bank loans in the first five months of the year have reached 5.84 trillion yuan, more than last year's total and exceeding the government's target of 5 trillion yuan for this year.

p/s photos: Zhou Weitong

Sunday, June 28, 2009

Update On Marketocracy Portfolio

Fund Performance for salvadordali's Mutual Fund
left curve fund rankings right curve

For the six month period ending March 31, 2009 your fund outperformed 97.8% of the other funds on our site. Your forum and other privileges are based on this ranking

My portfolio was started on 1st August 2008. Marketocracy lets you manage a virtual portfolio of $1M in a simulated trading environment, allowing you to track your performance accurately and compare your fund management skills to other investors and professional fund managers. Yes, they do take into account transaction cost as well. If your track record turns out to be one of the best, you could be hired to help manage a real fund at Marketocracy. It's a great place to learn, and a great place to prove your talent. They also have important rules to ensure that you are running an actual investing portfolio and not just sitting on cash:
  • No position can exceed 25% of your total portfolio value.
  • Half your portfolio must be comprised of positions under 10% each.
  • Your cash position isn't limited by this guideline, although you must be 65% invested
My fund was smartly called SMF, or Salvador Mutual Fund (no, not the foul language acronyms you are thinking). So far so good, although the first couple of months was iffy. SMF fund performance in orange colour.

The main objective of the fund is to beat the S&P 500. For the past 6 months ended 28 June, the S&P 500 has gained 6.76% (previously 1.33%) while my fund has gained 63.3% (previously 51.1%). There are usually rules which dictate that you must be at least 65% invested at all time, and your aim is to beat the index. If you can consistently beat the index, you should be golden. If you look at the turnover rates, I have increased the trading activity over the past two months as I think the recovery is still volatile and is more suited to be traded.

modern portfolio theory, you basically aim to beat the index, based on the premise that:

over the long run stocks offer superior returns

hence if you consistently beat the index, over the long run, you should have superior returns

graph of fund vs. market indexes

recent returns vs. major indexes right curve
SMF 0.42% 46.16% 53.80%
S&P 500 0.14% 15.86% 3.10%
DOW -0.73% 10.90% -3.85%
Nasdaq 3.60% 20.26% 16.56%

recent returns right curve
Last Week -0.18%
Last Month 5.41%
Last 3 Months 42.76%
Last 6 Months 63.67%

Last Week -0.21%
Last Month 3.08%
Last 3 Months 13.30%
Last 6 Months 6.76%

Last Week 0.03%
Last Month 2.33%
Last 3 Months 29.45%
Last 6 Months 56.91%

left curve alpha/beta vs. S&P500 right curve
Alpha 54.37%
Beta 1.26
R-Squared 0.84
left curve turnover right curve
Last Month 36.12%
Last 3 Months 188.85%
Last 6 Months 292.71%

Symbol Price Shares Value Portion of Fund Gains Current Return
BAC $12.75 6,000 $76,500.00 6.90% $36,593.22 42.46%
STT $48.33 2,500 $120,825.00 10.90% $41,368.54 40.97% Details
ACTG $7.60 16,000 $121,600.00 10.97% $37,791.79 30.62% Details
QSII $56.47 1,500 $84,705.00 7.64% $16,267.77 13.56% Details
SXE $32.35 3,000 $97,050.00 8.76% $9,089.54 10.33% Details MIDDLE
MGM $6.78 14,000 $94,920.00 8.56% $5,124.78 5.71%
WFR $17.96 6,000 $107,760.00 9.72% $1,996.56 1.89%
F $5.61 30,000 $168,300.00 15.19% -$1,475.01 -0.87%
JEC $41.37 1,500 $62,055.00 5.60% -$645.73 -1.03%
AIG $1.46 50,000 $73,000.00 6.59% -$1,269.20 -1.71% Details
BDD $8.48 11,000 $93,280.00 8.42% -$5,221.13 -5.30% Details

p/s photos: Fukuda Saki

Friday, June 26, 2009

The History of the Middle Finger & "Fuck You"

This may be the most often used word in the English language, probably after the word "the". But how many of us know the origin of the words "fuck you". Culture and history are intertwined and can explain how things are the way they are today. Teenagers reading this can share the origin of "fuck you" with their parents the next time they get reprimanded for using the phrase - once you can explain the history to your parents, its not so bad. Somehow I think the story is true because I have read and heard many times before about 'giving him the bird' - which I thought was silly although that had overt nasty overtones. Now it all makes sense.

The History of the Middle Finger & "Fuck You"

Well, now......here’s something I never knew before, and now that I know it, I feel compelled to send it on to my more intelligent friends in the hope that they, too, will feel edified. Isn't history more fun when you know something about it?

Before the Battle of Agincourt in 1415, the French, anticipating victory over the English, proposed to cut off the middle finger of all captured English soldiers. Without the middle finger, it would be impossible to draw the renowned English longbow; and therefore, they would be incapable of fighting in the future. This famous English longbow was made of the native English Yew tree, and the act of drawing the longbow was known as 'plucking the yew' (or 'pluck yew').

Much to the bewilderment of the French, the English won a major upset and began mocking the French by waving their middle fingers at the defeated French, saying, “See, we can still pluck yew!” Since 'pluck yew' is rather difficult to say, the difficult consonant cluster at the beginning has gradually changed to a labio-dentals fricative F', and thus the words often used in conjunction with the one-finger-salute! It is also because of the pheasant feathers on the arrows used with the longbow that the symbolic gesture is known as 'giving the bird.'

Current PE Ratios Comparison & Buffett's Latest Interview

In a recent interview with Warren Buffett:

On whether he will cash out of Goldman Sachs:
No, no, no. I will keep those Goldman warrants right through their full -- they've got four and a quarter years or so to run. But I think we'll make a lot of money out of those.
On the possibility of the United States losing its AAA Rating:
As long as you're issuing money and you're issuing debt in your own currency, you can print money. The U.S. -- no, I think we will have a AAA for not only as long as I live, but as long as you live, which is more important.

On whether unemployment will continue to rise:
It’s going higher—business has not bounced back. We have not come off the bottom yet. It will work out in the end. Since 1776 it’s been a mistake to bet against America . America solves its problems. How soon, nobody knows. But we have not come off the bottom yet. And it will work out in the end.
On inflation in the United States :
What we’re doing raises the probability significantly of very significant inflation down the road—not this year or next year or the year after that, but we’ve taken actions and they were appropriate actions… it will have consequences and nobody knows exactly what they will be and how effective we will be at draining a system we’ve been flooding, but the probability of significant inflation has gone up.


Bespoke came up with the current P/E ratios for these countries. Please note that its current ratios and not forward ratios. Below is a chart showing these valuations. As shown, Russia currently has the lowest P/E ratio at 6, followed by Italy (10) and France (11). At 14, the US is more attractive based on its P/E ratio than most countries. Taiwan has the highest P/E at 60, and the UK is surprisingly bad at 34. It's valuation is worse than China's. Germany also has a very high P/E ratio at 27. Malaysia's is at a fair 18x.


p/s photos: Reon Kadena

Thursday, June 25, 2009

Insiders' Selling & Beating Warren Buffett At His Own Game

There are plenty of investors who monitor the buying and selling by company insiders, i.e. senior management and substantial shareholders. There were two major waves of buying by insiders, in November last year and March this year, and they have proven to be very astute in timing the markets. Now insiders have been net sellers for 14 consecutive weeks. That might not be as bearish an indicator because the length of time is a lot longer than usual, indicating that this time the insiders could be wrong. Secondly, the fact that the net selling is so prolonged may hint at more long term institutional and private funds are re-entering the markets. Even insiders cannot always be right.

Insiders are selling their company shares at a pace not seen in two years, providing further evidence that the recent stock-market rally may be coming to an end.

Insiders of S&P 500 companies have now been net sellers for 14 consecutive weeks, according to research firm InsiderScore.com. That marks the longest stretch since June 2007, which was just a few months before credit markets started shutting down and a bear market for U.S. stocks began.

Stock purchases by highly placed executives, such as chief executives and chief financial officers, has been a bullish metric in the past, suggesting a broad market rally was imminent. A wave of buying last November and early March each came right before more than a month’s worth of stock-market rallies.

But company executives have shifted from buying binges to selling splurges, suggesting insiders are questioning the recent three-month rally that has seen major indexes increase at least 30%. Insiders are collectively making a valuation call that their stocks have become too expensive compared to earnings expectations as the second quarter comes to an end, according to Ben Silverman, director of research at InsiderScore.com.

“Certainly within the insider community there’s some questioning of whether evaluations have peaked and whether this bull run is going to come to an end,” Silverman said.

Stocks experienced broad-based selling on Monday as the Dow Jones Industrial Average was recently down 169 points at 8371, adding to last week’s 3% drop.

With less than two weeks left in the quarter, Silverman said insider activity should start slowing down as companies generally close trading windows approximately a week before the quarter ends.


This article is even more interesting. You can actually beat Warren Buffett at his own game. How? Well, some of his stock picks are now much much cheaper than at the time when Buffett bought them. He is still holding onto them, indicating that he still likes them. His views echoed his belief in his picks. He does not seem to be cutting any of his positions anytime soon. You can buy Conoco Phillips at HALF the price Buffett paid for.

You can buy Johnson & Johnson at $55 or 12% lower than Buffett's entry price of $65. How about US Bancorp, which Buffett paid $31, you can buy today and boast over lunch that you got in some 45% cheaper. ... And get this, Buffett is still adding to the positions mentioned above even as we speak... that means they are still good.

Of course I jest, Buffett is never a market timer, he could not care less whether he bought at the low or near the lows. All he is concerned is that he bought at value, and he knows that it will be worth a lot more sometime into the future.


Can you beat Warren Buffett at his own game? Despite the recent equities rally, some of Buffett’s favorite issues look pretty affordable at the moment:

Mr. Buffett liked oil giant ConocoPhillips (COP) enough to invest $7 billion in the stock through the end of last year, at an average price of $82.55, according to the Berkshire Hathaway annual report. Anyone buying today can get it for about $41.

Mr. Buffett has conceded an “unforced error” in buying this oil stock when oil prices were booming. But that doesn’t mean he has given up on it. In his last comments on the subject a few months ago, he reiterated his belief that demand for energy would remain strong. At current prices ConocoPhillips is about 13 times this year’s forecast earnings, but analysts predict that will drop to a cheap 7 times in 2010. That’s because they believe oil and gas prices will rebound.

He bought Johnson & Johnson at about $62 a share: It’s now about $55, or 12 times likely earnings, yielding 3.5%. He had also invested about $4.3 billion in food company Kraft, at around $33 a share. It’s now around $25, 13 times likely earnings and boosting a hefty 4.7% yield. He had also invested $2.3 billion in US Bancorp at an average price of about $31. Today’s it’s $17. (Mr. Buffett has added to his positions in both Johnson & Johnson and U.S. Bancorp since.)

p/s photos: Kama

Economic Impact Of H1N1 Should It Worsens

There is some genuine concern now over the H1N1 virus. Fact, this is nowhere as deadly as the H5N1 which ravaged HK and most of Asian economies. H5N1 has a mortality rate of 58%, while the newer strain is not as deadly. There is sufficient antiviral for the new strain unlike the scramble for H5N1. Experts predict that during a pandemic up to 30% of the global workforce could either be off work due to sickness or stay away due to fear. Absence levels at the expected rates would cause severe problems. The economic impact of H1N1 is more global tha H5N1. If conditions worsen, the impact will initially appear in two primary aspects of business. The first will be the availability of the workforce, the second and more unique impact will be in the market place.

Left unchecked, real estate values would be slashed, bankruptcies would soar and the insurance industry would be decimated. Naturally airlines would be one of the most directly impacted, followed by the tourism sector, in particular economies that are heavily dependent on tourism such as Australia, Thailand and HK.

Business are better prepared nowadays, especially in Asia. Many have planned for workers to work remotely from home where possible. More indoor time will naturally slow the flow of money and the service industry will be affected as well.

How the businesses will be affected will depend on how long the impact will last. If the fear conditions persists, we could see about 20%-50% of revenue for most companies being affected if high-alert persists for at least 6 months. During such an extended high-alert period, its best to stay cashed up, pay down all bills and reduce your leverage. Not a time to buy a property.

Hence property developers will be back to where they were 9 months ago if the high-alert conditions were to worsen further. The trade for livestock will again take on a highly protective shield.

What businesses can do is to have contingency plans: do you already have surgical masks at work for staff who may be coughing or seems to be slightly sick; do you have plans to get staff to work remotely from home to sustain the on-going critical services; do you have plans when only 50% of your staff is available; what about 30%; etc.

While the current strain is not as devastating, the entire issue could snowball into extreme fear and crushes confidence - not good for any economies at this juncture of recovery. We are not there yet, but one should know what precautions to take, and how to cash out properly and swiftly when things take a turn for the worse.

p/s photos: Kim Ah Joong

China's Growth Sustainable???

China has led the way by asking its banks to loosen the lending taps, and that has been reflected in the broader economy. China is an important export market for most of the smaller Asian countries. China's stimulus plan is a huge kicker, and the country has begun to stockpile a lot of soft and hard commodities. The black spot is that the easy credit has seen outstanding balances on credit cards more than doubled in the most recent quarter. Can China continue on its merry ways to lead the way to stimulate the rest of the world out of the recession?

  • China's economy seems to have re-accelerated from the lows of Q4 2008 and Q1 2009 helped by significant government investment and credit extension. While exports continue to deteriorate, reducing the trade surplus, government investment has surged and consumption influenced by government investment is holding up, suggesting that that the Chinese economy may grow at a faster pace in Q2 and Q3 2009 than the 6% rate at the beginning of the year. However in the absence of new external demand and limitations on domestic demand, there is a risk of developing over capacities.
  • In April 2009, many private sector analysts began scaling up 2009 estimates to the 7-8+% range from 6-7% range following the investment and lending surge and suggestions that the Chinese economy might be bottoming out. Now forecasters like the world bank are also doing so, if more cautiously.
  • World Bank: very expansionary fiscal and monetary policies have kept the economy growing respectably with the country likely to experience a 7.2% growth rate for all of 2009. But China may not grow in the high double digits until the global economy recovers. Market based investment will lag, and despite resiliency, consumption will slow, meaning that the boost to growth may not carry through to 2010.
  • In Q1, China's real GDP growth slowed to 6.1% y/y, the slowest in more than a decade and the seventh consecutive quarter of deceleration. Growth slowed to 6.8% in Q4 2008 from 9% for 2008. Several indicators (investment, stabilizing Manufacturing sector, robust consumption) began to show improvement by March 2009, indicating that the growth may accelerate in Q2-Q4 09 from the very weak pace and near stall of end 2008/early 2009.
  • In Q1, Government stimulus boosted investment and consumption holding up despite a fall in real incomes. final consumption, investment and net exports contributed 4.3, 2.0, and -0.2 percentage points to GDP respectively.
  • Goldman: More aggressive policy stimulus and stronger domestic demand response than previously expected suggests a growth will be 8.3% (previous estimate 6%) in 2009 and 10.9% in 2010 (9%) policymakers will eventually normalize and shift away from aggressive policy loosening, when they are more assured of a stabilization in domestic unemployment and external demand, giving additional insurance to the growth trajectory.
  • The recent flood of credit-fuelled (and government-led) investment has staved off an economic collapse that might have sent unemployment surging and damaged the confidence in China's growth trajectory that is so important to its development prospects. However, it is a huge leap to go from this short-term success to declaring China to be out of trouble and back on the road to double-digit growth.
  • Morgan Stanley: On a seasonally adjusted basis, the economy experienced a 5% rebound in Q109, after the first qoq contraction (-0.5%) in almost eight years. The aggressive policy stimulus should bring about further recovery in H209, making China among the first to emerge from the global downturn. The recovery should be relatively ‘job-rich’ but ‘profit-deficient’, especially in H109, with those exposed to government-supported capex programs likely benefiting most.
  • BNP: In Q1, GDP rebounded as a result of the fiscal stimulus and the most expansionary monetary stance since 1997. Household demand for property and autos is rebounding while the credit surge is boosting fixed asset investment meaning China will achieve GDP growth of 7.7% in 2009.
  • Citi: After seasonal adjustment GDP growth actually rebounded to 5.3% annualized in Q1, compared to 0.9% growth in Q408. The aggressive expansion in credit and investment seem to bank on a substantial rebound in final demand, or run the risk of greatly increasing overcapacity.
  • HS: Given the prevailing external environment, it would still be a severe challenge for mainland China to achieve its 8% growth target this year and officials need to have exit strategies to prevent credit and money supply from expanding too rapidly to jeopardise future macro-economic stability.
  • Even with the stimulus, China’s overall economic growth is likely to decline to around 5% in 2009. Although the country could potentially sustain higher growth, the poor outlook for exports over the next two years severely limits any quick recovery.
  • ADB: Little evidence that China is rebalancing away from investment-led growth, but it is shifting investment sectors. Risk of entrenched inflation and overheating in some sectors

p/s photos: Zhang Xin Yu

Wednesday, June 24, 2009

Jim Rogers Views Summarised

I don't have a terribly high opinion of Jim Rogers. Big picture guys can take a terribly long time before they are proven right - my adage, if you are bearish or bullish long enough, you will eventually be right. The following is an updated piece on Jim Rogers' views by Market Folly:

Rogers has opinions on a vast array of topics so we'll just dive right in and try to present the updates as orderly as possible. Firstly, we want to start with the topic of the crisis in general. Obviously, Rogers thinks the United States and the U.K. are in bad shape and will be for some time. He likens the current situation to that of the 1930s. He says,

In the 1930s, we had a huge stock market bubble which popped. And then politicians started making many mistakes. They became protectionist. They made solvent banks take over insolvent banks and then both banks failed in the end. They are making many of the same mistakes now. What's different this time is that we are printing huge amounts of money which they did not print at that time. So, we are going to have inflation this time.

While the current crisis is unique in its own right, it does have shades of the 1930s written all over it. As such, Rogers focuses on inflation a lot and we'll get to that below.


Rogers still likes agriculture and thinks it will be one of the best investments in our lifetime. He says so under the premise that the world is growing and so are the number of mouths to feed. The economic emergence of countries that previously did not enjoy protein heavy diets have also spurred this trend on. Add into the equation the fact that supply is not necessarily growing to match demand, and you could have a real imbalance in the future. As such, Rogers likes agriculture and specifically farmland.

In the past, we've covered the farmland investments he has made and have elaborated on his thoughts. His main active investments are in Agcapita Farmland Investment Partnerships (in Canada) and Agrifirma Brazil. His bullishness on agriculture comes down to a simple supply and demand equation imbalance. Food inventories are at multi-decade lows and this is without a ton of major droughts or weather problems. Not to mention, there is a shortage of actual farmers (and not to mention farmland) and Rogers says this can be attributed to the fact that it has been a horrible business for the past 30 years. To see more of his thoughts on this topic, see our post about Rogers' extreme bullishness on agriculture.

Currencies, Commodities, and Bonds (Inflation Theme)

On the topic of currencies, Rogers has varying opinions as each currency is its own equation. Recently, he has been out saying that he owns the Chinese renminbi and he likes to add to his position every chance he gets (as he cites the difficulty to buy and sell the currency due to it being blocked). While he still has some US dollars due to being a citizen, he has sold nearly all of his holdings in the currency and sees serious problems developing. Overall though, he sees a currency crisis looming due to the amount of money governments around the world are printing. He sees the U.S. dollar as a flawed currency and thinks it could be the source of the currency crisis. He explains saying, "I would suspect that somewhere along the line, someone's going to say, 'I'm going to start selling mine (dollars) before everybody else does.' That's when you have a currency crisis."

While he has focused largely on the U.S. dollar, he has often remarked that the British Pound could have major issues as well. We found it intriguing that Rogers has repeatedly focused on the possible currency crisis scenario in his appearances. He has gone as far as to say that sovereign defaults are not out of the question. And, he would not be alone in that regard. Kyle Bass, manager of hedge fund Hayman Capital agrees and predicts sovereign defaults will be the next crisis. Bass is well known for predicting the housing crisis and profiting handsomely (along with John Paulson as well). To back up claims for possible sovereign defaults, Rogers highlights the U.K. in 1918 as it transformed from world power to a nation wrought with default in 1970. Additionally, he talks about how Iceland has already defaulted too. He thinks we could possibly see more defaults between now and 2011.

Commenting on the government's actions, Rogers says

It's a mistake what they are doing. It's giving short-term pleasure, but there's long-term pain as we are going to have much higher inflation, much higher interest rates and a worse economy down the road.

Clearly, Rogers likens the current scenario to placing a bandaid on a gunshot wound victim and calling everything 'good.' Short-term solutions do not solve long-term issues. He cites this with evidence of the bond market already beginning to taper off and he thinks this will continue as the government sells a ridiculously large amount of bonds. This can be boiled down to one simplistic notion: when governments print a lot of money, you get serious inflation. At least, that's how Rogers sees it.

As such, Rogers does have one recommendation to benefit from this possible impending phenomenon: Buy commodities. As fiat money depreciates in value and inflation rises, assets (and namely commodities) appreciate in value. He thinks that commodities could lead the global economy out of this mess and even if that doesn't happen, they will still appreciate due to inflation. In terms of specific commodities, Rogers likes cotton, sugar, as well as silver.

Gold and Silver

While we could technically lump his gold and silver commentary in the commodity section, we felt it deserved its own section due to his views on the precious metals. Overall, Rogers likes gold and has no plans to sell his. In fact, he could be adding to his position should the right circumstances pop up. He says,

The fact is that the IMF is trying to get permission from everybody to sell gold. I don't know if it will succeed or not. But if and when the IMF sells its gold, gold prices may go to a bottom. Who knows? It may go down to $700. The IMF has a lot of gold to sell. If it does, I hope I'm brave enough and smart enough to buy more.

So, he likes gold. However, he likes silver even more right now due to it being cheaper on a historical basis since everyone has been piling into gold and driving up the price. Reverting to the topic of currencies quickly, we know that Rogers also thinks the debate on a new international reserve currency is a legitimate one. He thinks change is coming in this regard and he is not alone in those thoughts. Noted trader Dennis Gartman sees gold becoming the next reserve currency.

Short Positions

Rogers says it is rare for him not to have many short positions and so this definitely classifies as a 'rare' time for him. Derived from his stance on currencies, he hardly has any short positions at the moment due to the amount of paper money governments are throwing at the crisis. He thinks that a currency crisis is imminent and that investors should avoid shorting the market. Rogers says, "I'm afraid they're printing so much money that stocks could go to 20,000 or 30,000. Of course it would be in worthless money, but it could happen and you could lose a lot of money being short." As such, Rogers is not fighting the current trend and will pick his battles.

(Do note that Rogers tends to exaggerate things to make a point and we highly doubt he realistically sees the market hitting those numbers). He thinks the extended rally is nothing more than a bear market rally which could be further fueled in the near-term due to a weakening dollar and the Fed utilizing the 'printing presses' and printing more money.

China, India & Sri Lanka

While Rogers is bullish on agriculture and commodities in general, he is also bullish on select sectors in emerging markets too. Specifically, he has focused on water treatment. He notes China and India's water problems and he has bought water companies in China. He did not cite specific names, but we do know that Heckmann (HEK) has had a large presence regarding water in China, even if it is not right along the lines of what Rogers is referring to. He says that the Chinese are aware of their problem and are spending "hundreds of billions" to solve their agricultural problem. So, his bets on water treatment and agriculture are tied together.

When pitting the emerging market nations against one another, Rogers favors China over India. He does so because of the reforms and change that India requires to fully compete. While he likes the commitments coming out of India lately, he needs to see action rather than just pledges for it to become the next real big investment opportunity. Specifically regarding India though, he did say that he likes the prospects of tourism in that nation. While Rogers likes China, he has not added to that position since picking up shares back in October and November of last year. Instead, he is directing money toward commodities.

Turning specifically to Sri Lanka, we find out that Rogers really likes this nation as an investment because it looks as if the 30-year war is coming to a close. He cites numerous other examples of war-torn countries that have emerged successful after troubled times. Rogers highlights that there is significant opportunity at hand, and all it takes is hard work. He likes Sri Lanka as an investment more so than India, Pakistan, or Bangladesh.


As you can see, Rogers is very opinionated on a large set of topics and likes to think in macro themes. After all, this is where his successful background comes into play. He made a fortune running the Quantum Fund with George Soros using similar strategies. While the fund is now defunct, both are still active investors and are good to track for their macro methodology. Make sure you check out our past update on Rogers' portfolio to get a better idea as to what other positions he holds.

To conclude, Rogers thinks that the stock market will eventually hit new lows this year or next year after the bear market eventually subsides. He thinks that our problems remain largely unsolved and we have a whole lot of work to do in order to emerge from this mess. He thinks that the UK is potentially worse off than the US (because the US has agriculture to fall back on), but that the overall picture is still bleak either way. He thinks that moving to London in 1807 was brilliant, that moving to New York in 1907 was brilliant, and that moving to Asia in 2007 would be the next brilliant move. He clearly sees a shift of power to the east as the emerging markets (and particularly China) start to bloom. He sees Mandarin as the most important language in the world going forward and has already begun teaching his daughters.

Speaking on the global economy's future, Rogers draws from the past by saying,

Throughout history, the center of the world has shifted to where the capital is, where the assets are. You don't see any period in history where things are shifting to the debtors, and America's the largest debtor nation in the history of the world. Unless something's different this time, unless the world's changed very very dramatically, the center of the influence, the center of the power, the center of the earth, the center of the globe, is going to be shifting towards Asia, because that's where all the money is. Have you ever heard of anybody saying, 'Let's go to where all of the debtors are'? It just doesn't happen that way.

If you want to follow Rogers, then bet on inflation, agriculture, commodities, China, and bet against the US and the UK. For more on what he deems to be the best investment opportunities out there, check out Rogers' two books: Hot Commodities and then A Bull In China. We'll leave everyone with one last bit of advice from Rogers: become a farmer.

p/s photos: Li Rui Xi

Tuesday, June 23, 2009

Have Commodity Prices Run Ahead of Fundamentals?

Have commodity prices run ahead of fundamentals? Or is it that China has begun stock piling aggressively? Commodity prices have rallied since February on the belief that putative 'green shoots' around the world validated a V-shaped economic recovery in 2009. However, these 'green shoots' merely signal the stabilization of economic activity at low levels, rather than a return to trend growth. Even if GDP growth around the world has bottomed, growth will continue to be negative or sluggish until 2011. As such, commodity price gains are a false sign of economic recovery - like the recent spate of bear market rallies in stock markets. The strong uptrend in commodity prices has been propelled more by technicals (investment demand - arbitrage, opportunistic stockpiling at low prices) than fundamentals (real growth in physical demand and production). Commodity prices will likely snap back to reality before resuming a more moderate uptrend in line with a U-shaped global growth path:
  • 2 factors to mitigate global slowdown impact on commodities: 1) Growth to continue to be strongest in EM economies whose consumption is most commodity-intensive and 2) Investment to raise production capacity takes time - investment cuts and delays due to lower prices may lead to supply crunch in the future
  • Sectoral performance: Traditional sectors such as metals and energy remain fundamentally cyclical as they are more closely tied to industrial production than agriculturals. Agricultural commodities may outperform metals and energy due to less elastic demand and the increasing rarity of very good harvests
  • Review

  • Mar 19 2009: Commodities surged the most this year, led by precious metals and energy, on speculation that the Fed's steps to revive the U.S. economy will spur demand for raw materials as a hedge against inflation. Silver jumped 13%, the most since 1979. Gold had the biggest increase since September, and crude oil topped $52 a barrel. Every commodity in the Reuters/Jefferies CRB Index of 19 prices climbed
  • Worst annual performance: Reuters/Jefferies CRB Index of 19 raw materials fell 36% in 2008, the most since the gauge debuted in 1956, to 229.54. It rose to a record 473.97 on July 3, then dropped to the lowest since August 2002 on Dec 5
  • Biggest 1-day drop since 1956: Sep 29 2008, Reuters/Jefferies CRB Index fell 21.35 points or 5.8% to 343.2 after the House voted against US bailout plan
  • Steepest monthly drop since 1980: In July 2008, CRB Index fell 12%

  • Outlook

  • Despite current correction, the secular trend remains upward due to tight supply/demand fundamentals. In the medium term though, focus will be on global slowdown, easing inflationary pressures, dollar recovery, and credit tightening - all bearish for commodities
  • There is a risk that some commodity markets have decoupled from fundamentals. The fundamental outlook represented by e.g. stocks for aluminium, nickel and lead has not changed significantly in the last month. Demand for oil in the US is also still pretty weak. It seems that the commodity market has run a bit ahead of the fundamental picture. Both base metals and oil are quite vulnerable if we get a set-back in risk sentiment.
  • Supply has been a big support for industrial metals. Demand destruction has led to a correction in energy prices. Agricultural prices have corrected significantly based on improved crop conditions and concerns regarding increased regulation of commodities markets in the US. Prospects for higher inflation has been muted by the correction in energy and has depressed the gold price
  • There is only so much demand to accommodate price increases amid tightening in credit markets, falling asset prices and slowing nominal incomes. Maintaining the bull run in commodities in the face of sharply slowing US demand will require that decoupling theories hold

p/s photos: Fan Bing Bing

Monday, June 22, 2009

Tracking & Learning About VIX

VIX is an often quoted indicator, especially over the past 9 months, to say something about the volatility in the market place. A higher trending VIX implies a trend towards risk aversion, or higher fear ratings on all assets. Plenty of players are now looking at VIX as the most immediate indicator for sensing 'fear' in the market place. Those trying to get a forward reading will go as far as tracking the trades in VIX options. Last week's selloff in developed markets coincided with a sharp jump in VIX and a rapid run up in VIX call options, somehow that has dropped down again, as noted by Bespoke. As a rule of thumb, anytime the VIX appears to be headed north of 40, its time to exit all stocks, ... still just a rule of thumb.


After settling nicely below the 30 level for about a week, the S&P 500 Volatility Index (VIX) jumped back above 30 earlier this week. Today, however, the VIX has dropped significantly below 30 once again down to 28.36. Earlier in the day it was down even more, but even as the market has moved back to flat, the VIX is still down quite a bit. As long as the VIX continues its downtrend, fears in the market are subsiding.


10 Things You Should Know About VIX by Bill Luby

Q: What is the VIX?
A: In brief, the VIX is the ticker symbol for the volatility index that the Chicago Board Options Exchange uses to calculate the implied volatility of options on the S&P 500 index (SPX) for the next 30 days.

Q: How is the VIX calculated?
A: The CBOE utilizes a wide variety of strike prices for SPX puts and calls to calculate the VIX. In order to arrive at a 30 day implied volatility value, the calculation blends options expiring on two different dates, with the result being an interpolated implied volatility number. For the record, the CBOE does not use the Black-Scholes option pricing model. Details of the VIX calculations are available from the CBOE in their VIX white paper.

Q: Why should I care about the VIX?
A: There are several reasons to pay attention to the VIX. Most investors who monitor the VIX do so because it provides important information about investor sentiment that can be helpful in evaluating potential market turning points. A smaller group of investors use VIX options and VIX futures to hedge their portfolios; and an even smaller bunch use those same options and futures to speculate on the future direction of the market.

Q: What is the history of the VIX?
A: The VIX was originally launched in 1993, with a slightly different calculation than the one that is currently employed. The ‘original VIX’ (which is still tracked under the ticker VXO) differs from the current VIX in two main respects: it is based on the S&P 100 (OEX) instead of the S&P 500; and it targets at the money options instead of the broad range of strikes utilized by the VIX. The current VIX was reformulated on September 22, 2003, at which time the original VIX was assigned the VXO ticker. VIX futures began trading on March 26, 2004 and VIX options followed on February 24, 2006.

Q: Why is the VIX sometimes called the “fear index”?
A: The CBOE has actively encouraged the use of the VIX as a tool for measuring investor fear in their marketing of the VIX and VIX-related products. As the CBOE puts it, “since volatility often signifies financial turmoil, [the] VIX is often referred to as the ‘investor fear gauge’”. The media has been quick to latch onto the headline value of the VIX as a fear indicator and has helped to reinforce the relationship between the VIX and investor fear.

Q: How does the VIX differ from other measures of volatility?
A: The VIX is the most widely known of a number of volatility indices. The CBOE alone recognizes nine volatility indices, the most popular of which are the VIX, the VXO, the VXN (for the NASDAQ-100 index), and the RVX (for the Russell 2000 small cap index). In addition to volatility indices for US equities, there are volatility indices for foreign equities (VDAX, VSTOXX, VSMI, VX1, MVX, VAEX, VBEL, VCAC) as well as lesser known volatility indices for other asset classes such as currencies.

Q: What are normal, high and low readings for the VIX?
A: This question is more complicated than it sounds, because some people focus on absolute VIX numbers and some people focus on relative VIX numbers. On an absolute basis, looking at a VIX as reformulated in 2003, but using data reverse engineered going back to 1990, the mean is a little bit over 19, the high is just below 90 and the low is just below 10. Just for fun, using the VXO (original VIX formulation), it is possible to calculate that the VXO peaked at about on Black Monday, October 19, 1987.

Q: Can I trade the VIX?
A: At this time it is not possible to trade the cash or spot VIX directly. The only way to take a position on the VIX is through the use of VIX options and futures. On 1/30/09, Barclays Capital launched two new VIX ETNs that are based on VIX futures: VXX, which targets VIX futures with 1 month to maturity; and VXZ, which targets 5 months to maturity.

Q: How can the VIX be used as a hedge?
A: The VIX is appropriate as a hedging tool because it has a strong negative correlation to the SPX – and is generally about four times more volatile. For this reason, portfolio managers often find that buying of out of the money calls on the VIX to be a relatively inexpensive way to hedge long portfolio positions. Similar hedges can be constructed using VIX futures.

Q: How do investors use the VIX to time the market?
A: This is a subject for a much larger space, but in general, the VIX tends to trend in the very short-term, mean-revert over the short to intermediate term, and move in cycles over a long-term time frame. The devil, of course, is in the details.

p/s photo: Cristine Reyes