Jim Rogers Views Summarised - Oct 11th

Just an update on Jim Rogers and his views. This being his latest on his lecture circuit:

1. The 21^st century belongs to China

According to Rogers, the 19^th century was the era of the British Empire and the 20^th century was the U.S.’ heyday. But the 21^st century is China’s (though the rest of Asia is definitely going to get a boost too).

The reasons for this are many, but some points brought up by Rogers include the following:

1. The Chinese want to live like we do;
2. They are more eager to work;
3. They are better at saving;
4. There are 1.5 billion Chinese citizens (and 3 billion people in all of Asia), and we owe them money. They are, according to Rogers, “among the best capitalists in the world.”

There will be some setbacks, of course, Rogers says, but these are opportunities. “If you see setbacks in China, you should pick up the phone and get more involved,” he advised, before adding his favorite refrain, “The best advice of any kind that I can give you is to teach your children and grandchildren Chinese.”

China’s path to world domination started with Deng Xiaoping’s capitalist programs in 1978, and there hasn’t been any looking back since. Rogers views China’s dominance as nigh-on unstoppable except for one little thing: its water problem. There are parts of the country that are running out of water, and when the water disappears, Rogers points out, so does civilization. However, the country is acting aggressively to combat the problem, and he doesn’t view it as that much of a threat.

2a. Jim Rogers is not a Ben Bernanke fan

Yep, it’s a fact. No “Team Bernanke” shirts for Jim Rogers (who said to scattered applause during the Q&A session that if he was in charge of the U.S. economy he would “abolish the Fed and resign.”).

Rogers is appalled by the government’s actions—Bernanke’s in particular. The U.S. government’s strategy calls for the debasement of the dollar, he says, calling it a “horrible policy.” While he concedes it can work in the short term, it NEVER works in the mid- or long term.

“He’s going to run those printing presses until we run out of trees, because that’s the only thing he knows,” Rogers said of Bernanke.

Add that on top of the country’s rapidly growing astronomical debt, and Rogers believes you’ve got a recipe for disaster.

2b. The U.S. dollar is screwed

Consider this a corollary to point 2a. Its status as a reserve currency is teetering on a precipice, in Rogers’ opinion, and he’s not alone. In fact, so many people are selling dollars right now that he’s sitting tight, waiting for a possible—and ultimately unsustainable—rally in order to exit the market. Of course, if it fails to rally and just drops again …

“I’ll just have to panic and sell like everyone else,” Rogers said.

3. Commodities, commodities, commodities

OK, as mentioned before, there are 3 billion people in Asia, most of whom are aspiring to play the home version of the American Dream game show. And let’s face it: American society is largely about consumption. We like stuff―we buy it, we wear it, we eat it, we flaunt it, we sometimes even bedazzle it (yeah, Google that). So that’s a lot more consumption on the global level. Rogers notes that while consumption is expected to increase exponentially, not a lot of capacity has been added in the last few decades for a lot of commodities. Meaning, not a lot of new refineries have been built, and not a lot of new resources have been discovered or excavated for a variety of commodities.

In terms of oil, Rogers cites the fact that Saudi Arabia has not seen any new oil discoveries but has consistently said for the past two decades that its reserves are at 260 billion barrels (in which time it has sold 60 billion barrels). He also points out that farmers are a rapidly disappearing species. So to sum up―that’s a lot more people competing for diminishing resources (including the all-important energy and food). Basic supply and demand theory pretty much takes it from there.

“Commodities are the second-largest asset class in the world,” Rogers noted. And they are “the best anchor” for your portfolio, he adds.

Rogers says the typical life span of a commodities bull market is 18-20 years. We’re currently in year 11 right now. Yeah, it could end tomorrow, but that whole supply and demand imperative could also extend this bull beyond its typical time frame.

During the Q&A session, though, the conversation took a darker turn. One questioner asked if the increased competition for resources might lead to war, and Rogers allowed it was a possibility, though he hoped it would not come to that. He pointed out that when a rising power clashes with an established power, the result is usually war, and said that research consistently shows that resource shortages lead to war.

So, sure, commodities shortages might start World War III, but if you invest in the commodities themselves, you might at least be in decent financial shape when the shelling stops—and I’m not being flippant at all. War drives up the costs of commodities.

4. U.S. government bonds are the next big bubble

Well, would you lend money to us? Rogers says short-term bonds are probably OK, but he advises getting out of anything with a longer maturity. He calls it “inconceivable” that anyone would lend money to the U.S. for 30 years at the going rate, and notes that the U.S. was a creditor nation as recently as 1987.

“Now the U.S. is the largest debtor nation in the history of the world,” he said.

And for bond portfolio managers, he had some very pointed advice: “Get a new job.”

5. Protect yourself

The underlying theme of Rogers’ entire speech was that the world is changing, and here are some things you should know if you want to come out the better for it (and for your family members, clients, etc., to also come out the better for it) financially. Based on Rogers’ observations, it seems recognizing that change is a key step, but so is adapting to it (see advice regarding learning Mandarin, for example).

And in Rogers’ eyes, commodities are a good way to achieve this protection. No investment is certain of course, but right now, he thinks commodities look pretty darn good.

Best Comment Of The Night

Addressing one audience member’s question, Rogers asked if the young man were an MBA. The questioner admitted to holding an MBA and was promptly told he should swap his MBA for an agriculture degree from Texas A&M.

“You should become a farmer,” Rogers said.

That’s an old line for Rogers, but he added a new wrinkle. If you’re not going to become a farmer, you should open the first Lamborghini dealership in Iowa. Because with farmers closing in on extinction just as the world needs more food, that’s probably what they’ll be driving in a few years.

p/s photos: Keiko Kitagawa

Li Ka Shing Says It Is Time To Buy

Li Ka Shing says it is time to buy. Let's not be so cynical on his opinion. At least he didn't ask all to buy 2 months ago, or 4 months ago or even 6 months ago. Hence I would view his opinion with some merit.

New York Times: The oracle of Hong Kong has spoken. And his message: it’s time to consider buying stocks and real estate. Li Ka-Shing reported on Thursday that his companies had severe profit declines in 2008, but he said that “if you buy in a slow market, in the medium term you get good returns,” The New York Times’s Bettina Wassener reported.

The proclamation on Thursday by Li Ka-Shing, the self-made billionaire who controls some of Hong Kong’s largest companies and carries enormous sway among investors throughout Asia, was made at a rare public appearance. Exuding confidence, Mr. Li joked with reporters and looked anything but depressed about the sharp fall in profit his companies reported Thursday.

Whether Mr. Li is proved right about stocks and property — and he certainly has a lot to gain personally if he is right — his comments come at a time when stock markets have rallied on hopes that the economic slump may be bottoming out.

“If you have money in your pocket,” Mr. Li said, consider buying into stocks. As for the property market in Hong Kong, he said, “history tells us that if you buy in a slow market, in the medium term you get good returns.”

Mr. Li advised against borrowing to invest in what remains a shaky and volatile environment. Even though couched with caution, Mr. Li’s comments were enough to echo around the investment world and helped send the Hang Seng index up 3.6 percent Thursday. Mr. Li is the man the local media call “Superman” and liken to the investor Warren E. Buffett, who controls Berkshire Hathaway. Considered one of Asia’s most powerful men, Mr. Li is also one of the continent’s most generous philanthropists.

In the last year, as the economic crisis has dragged on and deepened, Mr. Li has jumped in from time to time to try to restore confidence.

Last September, shortly after the collapse of Lehman Brothers caused the world financial system to convulse, savers in Hong Kong lined up outside the Bank of East Asia, one of the territory’s best-known and biggest banks, responding to rumors that the bank was in trouble. Mr. Li let it be known that he had been buying shares in the bank, an expression of confidence that quickly helped put an end to an old-fashioned bank run.

And this month, HSBC was trying to raise $18 billion in a rights offering, prompting the bank’s shares to fall sharply. A majority of local residents here own shares in the bank, which is now based in Britain but has its roots in Hong Kong. When it appeared that the rights offering might falter, Mr. Li — along with several other Hong Kong tycoons — pledged to put about $300 million of his own funds into the issue.

Still, it has been a difficult year for Mr. Li, and the Superman title sat a little awkwardly on him on Thursday, after Cheung Kong Holdings and Hutchison Whampoa, the flagships of the property-to-ports-to-electricity conglomerate he controls, both reported declines in net profit of more than 40 percent for 2008.

Small wonder, given that the rapid slowdown in the global economy had tipped Hong Kong, along with the United States, Japan and others, into a recession and put a damper on the breakneck growth of neighboring China. Rental and property prices in the territory, a mainstay of the conglomerate’s earnings, are expected to tumble further this year, hitting developers hard.

But the Cheung Kong group is not just any Hong Kong company, and Mr. Li is not just any Hong Kong company chairman. Thursday’s event was not just any annual news conference, but the pinnacle of the Hong Kong earnings season, complete with a boisterous media scrum that regularly lends the bespectacled and affable Mr. Li the aura of a pop star.

The complex network of companies Mr. Li controls — three of them members of Hong Kong’s benchmark Hang Seng index — epitomize the hustle and bustle of entrepreneurial Hong Kong and its roller-coaster economy. And Mr. Li himself has the kind of rags-to-riches history that inspires every Hong Kong resident. The Cheung Kong group and its various interlinked companies grew out of the humblest beginnings imaginable: a plastic-flower manufacturing business the young Mr. Li set up in the 1950s.

Five decades later, Mr. Li is now one of Hong Kong’s leading developers of residential, commercial and industrial properties — about one in seven private residences here were developed by the group. Hutchison Whampoa, of which Mr. Li also is chairman, operates businesses as diverse as ports, hotels, supermarkets and drugstore chains, and is a major telecommunications operator in Hong Kong and abroad.

Cheung Kong Infrastructure, headed by Mr. Li’s son Victor, and HK Electric, one of the territory’s dominant power companies, also belong to the Cheung Kong/Hutchison stable of businesses.

Together, these businesses are a cross section of Hong Kong’s economy and reflect more than any other company the territory’s boom-to-bust character: riding the wave of Asia’s breakneck growth in recent years, and now suffering in line with the slowing global economy.

Mr. Li’s personal fortune has fallen as well, having slipped to 16th in the Forbes annual ranking of the world’s richest people, down from 11th in 2008, with a fortune now worth $16.2 billion — down from $26.5 billion a year ago.

p/s photos: Keiko Kitagawa

Rating The Top US Banks, Which Are The Zombies?

Came across this very interesting piece by Martin Hutchinson on the current state of the top 12 banks in the US. Which banks are zombies?

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Please note that the yen rate has scaled above 94 yen to the dollar, for those who are still following my thesis. Refer to posting on January 16, 2009.

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There is a lot of information - both about potential bailout needs and possible investment bargains - which we can gain from the banks’ annual earnings figures. For instance:

• Banks that made profits in the very difficult fourth quarter of 2008 are probably in good shape, especially if their loan-loss provisions exceeded their charge-offs (the amount actually lost).
• Even banks that lost money in the fourth quarter - an exceptionally harsh three months - have no immediate need for funding, provided they made money the rest of 2008 and seem likely to resume making money going forward.
• In this context, management’s dividend policy is a good indicator: If the dividend is maintained, rather than being sharply cut or suspended, management is probably genuinely confident about the bank’s position and outlook.
• Another good indicator of a bank’s health - at least of the market’s perception - is the ratio of share price to book value. If that’s below 25% or so the market lacks confidence in the bank’s ability to solve its problems.

Using these indicators, we can assess the viability of the leading U.S. banks. Each bank can then be classified with one of our four "official" Money Morning designations. These designations, or labels, consist of:

• Zombies: Institutions kept alive only by TARP funding. These subtract value from the economy and should be put out of their misery through controlled liquidation, with the healthy parts being salvaged.

• Walking Wounded: These banks may need a little bit more help, but are currently operating adequately on their own. One caveat: An intensification of economic downturn could push some of them into "zombie" status - or even bankruptcy.

• Risky but Proud: These banks have relatively high risks, because of acquisitions or their business models, but are operating at full blast and can hold their heads high for their success in dealing with 2008’s enormous difficulties.

• Hidden gems: These banks have conquered 2008’s difficulties, taken care of their bad debt problems, and still managed to make a substantial profit. Short of a repeat of what U.S. banks had to deal with from 1929-1933 as part of the Great Depression, these financial institutions should continue to operate in the black.

The Envelopes Please …

We listed the 12 largest U.S. banks by assets, as of Dec. 31, ignoring foreign-owned banks, Goldman Sachs Group Inc. and Morgan Stanley (those last two are onetime investment banks that are technically now commercial banks, but still possess a very different business mix. We give you a rundown on the financial stability of each one, and give each institution with the single-most-appropriate of our four official Money Morning designations. The Top 12 banks, biggest first, are as follows:

1. Bank of America Corp. - Zombie: BofA has about $2.8 trillion in assets including Merrill Lynch, and Countrywide Financial Corp., formerly the nation’s No. 1 housing finance bank. It received $45 billion from TARP, plus $118 billion in guarantees against Merrill Lynch’s assets. At Friday’s closing share price of $5.17, the stock was trading at 21% of book value (it closed at $4.90 yesterday). BofA posted a fourth-quarter net loss of $1.55 billion, plus a Merrill Lynch net loss of $15.3 billion, which forced BofA to cut its quarterly dividend to a nominal one cent per share. Judging by other banks’ results, if Bank of America had made no acquisitions in 2008, it would be in solid shape. With the acquisitions, however, it’s a basket case - and may well need even more federal funding.

2. JPMorgan Chase & Co. - Risky but Proud: JPMorgan has $2.175 trillion in assets, and received a $25 billion TARP investment. It’s a major international bank with a large investment banking operation. It bought Bear Stearns, investment bank in March and Washington Mutual in September, both with Federal government help.

JPMorgan booked $702 million in net income in the fourth quarter and $5.6 billion in net income for all of 2008. The company also had a fourth quarter loan-loss provision of $8.5 billion and charge-offs of $4.5 billion. But there were also $2.9 billion worth of securities markdowns in the investment banking operation. Again, this bank is high-risk from an investment standpoint because of its acquisitions, but it appears to be in excellent shape with no immediate need for extra funding. Its Friday closing share price of $24.69 equates to 72% of net asset value, though it closed yesterday at $21.65, down 12.3%. It pays a quarterly dividend of 38 cents per share.

3. Citigroup Inc. - Zombie: Citi remains the nation's third-largest bank, with $1.9 trillion in assets. It received a $45 billion TARP investment, plus guarantees on $301 billion of assets. At Friday’s close of $3.49, it was trading at 25% of book value. Citi lost $8.3 billion in the fourth quarter of 2008 and $18.7 billion for the whole year. It was finally forced to sell control over its Smith Barney brokerage operation to Morgan Stanley in January, and has reduced its dividend to a nominal penny a share. Citi has been a serial flirter with bankruptcy over the past 30 years and remains a basket case. There are a few good assets buried within the rubble - chiefly because the company is so large and diverse.

4. Wells Fargo & Co. - Risky but Proud: Wells Fargo has $1.3 trillion in assets, and garnered a $25 billion TARP investment. Originally a small bank based in San Francisco, Wells Fargo came into the big leagues when it merged with Wachovia, late last year. Its Friday closing price of $15.76 equated to 104% of its book value, though it closed yesterday at $13.69. Wells Fargo’s stock pays a quarterly dividend of 34 cents. The company posted a fourth-quarter net loss of $2.55 billion, not including an $11 billion net loss at Wachovia. Wells Fargo’s full-year earnings totaled $2.84 billion. It had a fourth-quarter loan-loss provision of $8.4 billion, compared with actual charge-offs of $2.8 billion. Wachovia’s 2006 acquisition of the California mortgage bank Golden West Financial puts Wells Fargo at risk, but the company’s operations appear solid and it has no immediate need for extra funding.

5. PNC Financial Services - Risky but Proud: The Pittsburgh-based PNC has $291 billion in assets, after buying the slightly larger National City Corp in October. It also received a $7.6 billion TARP investment. At Friday’s closing price of $28.20, PNC’s shares were trading at 79% of book value. The company pays a quarterly dividend of 66 cents per common share, and posted a fourth-quarter net loss of $248 million (excluding costs associated with its acquisition of National City, the company had a fourth-quarter profit of $132 million). PNC had provision for credit losses of $990 million, compared with net charge-offs of $207 million. This is one of the riskier banks because of the difficulties in integrating National City and possible problems in National City’s loan portfolio. But it appears to have no immediate need for funding and is currently profitable, and its stock is selling close to book value and paying a solid dividend. One final point: PNC’s shares fell only 6.1% yesterday, a day when the shares of most major banks fell by more than twice that amount, perhaps hinting that investors perceive less risk in PNC’s shares.

6. U.S. Bancorp - Hidden Gem: U.S. Bancorp has $266 billion in assets, and received $6.6 billion in TARP funding. This regional banking firm is based in Minneapolis, and the company operates primarily in the upper Midwest and Northwest. With a closing price of $12.40 on Friday, USB shares were trading at 131% of book value (the shares closed yesterday at $10.73, down 13.47%). The company also pays a quarterly dividend of 42.5 cents per common share. U.S. Bancorp posted a fourth-quarter profit of $260 million, and a profit of $2.94 billion for all of 2008. It also had a credit-loss provision $1.3 billion in the fourth quarter, compared with actual charge-offs of $627 million. U.S. Bancorp is in good shape, with no apparent need for extra money.

7. The Bank of New York Mellon Corp. - Hidden Gem: New York Mellon has $237 billion in assets, mostly through its operations in New York and Pennsylvania. It received $3 billion in TARP funding. With closing price Friday at $25.26, Bank of New York Mellon was trading at 125% of its book value (the shares closed yesterday at $23.13, down 8.4%). The bank posted a fourth-quarter profit of $28 million, and net income of $1.39 billion for all of 2008. The fourth quarter was tough as for everybody, but Bank of New York Mellon appears to have no near-term need for funding.

8. SunTrust Banks Inc. - Walking Wounded: Sun Trust has $189 billion in assets, and received $4.9 billion in TARP financing. Based in Atlanta, the bank has operations in the Mid-Atlantic and the Southeast. Its Friday closing price of $8.72 meant that SunTrust shares were trading at only 19% of their book value. The company posted a fourth-quarter loss of $379 million, but a profit of $747 million for all of 2008. It also had loan-loss provisions $962 million in the fourth quarter, compared with $552 million in charge-offs. SunTrust has reduced its quarterly dividend sharply to 10 cents per share, but it appears to be in no immediate trouble. However, if the economy deteriorates, the bank’s exposure to the Florida housing market could be an Achilles' heel. Investors are clearly concerned: SunTrust shares was down 18% yesterday and is down 88% in the past year. The Atlanta Journal-Constitution reported yesterday.

9. State Street Corp. - Hidden Gem: State Street had $174 billion in assets, and received $2 billion in TARP funding. It’s a Boston-based bank, but serves institutional investors throughout the world. At Friday’s closing price of $27, the shares were trading at 111% of their book value. State Street posted fourth-quarter earnings of $65 million, and 2008 earnings per share of $3.89, up 13% from the year before. With a global business, conservative leverage and Boston management, State Street could gather strength when the financial crisis finally ends.

10. Capital One Financial Corp. - Walking Wounded: Capital One has $161 billion in assets, and received a $3.6 billion TARP investment. It’s primarily a credit card company, headquartered in McLean VA. At Friday’s close of $12.11, it is trading at just 20% of book value. Capital One lost $1.4 billion in the fourth quarter of 2008, and was just below break-even for the full year, but made $895 million from continuing operations. Its stock pays a quarterly dividend of 37.5 cents per share. Capital One is in dangerous waters and could soon succumb to a zombie if credit-card problems really escalate.

11. BB&T Corp. - Hidden Gem: BB&T has $152 billion in assets, and accepted a $3.1 billion TARP investment. It’s a regional bank, headquartered in Winston-Salem NC, with its primary operations in the Mid-Atlantic region. At Friday’s closing price of $15.33 a share, the stock was trading at about 58% of its book value. The company posted net earnings of $284 million in the fourth quarter, after loan write-offs of $528 million. It posted a profit of $1.5 billion for all of 2008, and pays a quarterly dividend of 47 cents a share. I’m sure it would gladly take more taxpayer money, but it certainly doesn’t appear to need it.

12. Regions Financial Corp. - Walking Wounded: Regions has $146 billion in assets, and received $3.5 billion in TARP financing. It’s a regional bank, headquartered in Birmingham, AL, with operations primarily in the Southeast. At Friday’s closing price of $3.38 a share, Regions’ stock was trading at about 18% of book value, and the bank has suspended its dividend. The company lost $5.6 billion in 2008, and its tangible net worth is only $10.5 billion. However, on an operating basis, it made a profit of about $300 million. Regions had a fourth-quarter loan-loss provision of $1.15 billion, and charge-offs of $796 million. I’m classifying it as "walking wounded," but think it’s more likely to revive itself than to accept a toe-tag. In fact, it’s likely to need only a modest amount of additional funding to see its health improve.

p/s photos: Keiko Kitagawa