Only for the Long Term Investor

"This discussion of repurchases offers me the chance to address the irrational reaction of many investors to changes in stock prices."

"When we buy a stock in a company that is repurchasing shares, we hope for two events: ... earnings ... will increase at a good clip ...; and second, we also hope that the stock underperforms in the market for a long time as well."

Buffet, 2011 Letter to Investors

It was said

You could feel it while sitting down in the audience and listening to one of the directors of a Federal Reserve Bank. 

It had a familiar ring that I had witnessed before: specific opposite views and a campaign posture. 

Bernanke's role in the FED might change in the near future. He was between complete collapse and continuing on the same broken road. It was too risky to be innovative at the edge of the cliff. Many say otherwise: that he was bold and innovative. 

It was a tough position. He is not government. The FED was created to contain the dam from breaking when there is a run on the money supply or a freeze on the lending houses. Back in the storm, it looked like he was standing alone holding the puzzle together while the waves kept coming.

He was unsuccessful at one thing that seems small but that might have derailed progress. He was unsuccessful at fighting back on politicians requesting him to fix the economy while they were incapable to sign a budget. 

Outside of the FED, there hasn't been any accountability for the economy on either side. While the FED kept been requested to fix it, Congress has been playing Nerf wars. I never thought the encrypted messages of a Greenspan would be so on point as on today's state of affairs.

If the books about the collapse were inflammatory, I am hoping the new titles after his departure will return to serious analysis. There are two things Bernanke's reign leaves behind: a successful legacy to discuss and THE human face of the FED itself. 

Random Tick

65% of the world is not online yet.

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I am actually surprised 35% is.

SolChin

Something was telling me about that big solar company. "There is something in the water" I heard while walking through the empty halls like the Propel spot announcing its arrival.

This is why when there is not enough information on a sector, the best course is to try to find the hedge among the players while staying away from the market leader. I like to call it insulated isolation. It has a classy ring to it. Insulated because if a disaster occur in the sector is probably going to hit the leader the most absorbing most of the negative swing. This is why CSUN was a better investment than SunTech. And SunTech has become the first Chinese default of a US listing.

Sor

I had started this posting a few weeks back. Then, Soros passed away. I leave it unfinished.


"Soros looks for patterns of errors. He profits from calculating other people’s misinterpretations." from Brooks.

If I recall correctly it was breaking the bank of England based on a unsustainable pegged currency rate of the German Frank that led him to bet the house and make a billion in one trade. Later on, he would watched very closely Eastern European Communist countries and follow the ripple effect of their economies. At the same time, he flooded Hungary with printers and photocopy machines in a time when all printing material was closely controlled.

He became the greatest international philanthropist throughout his life reaching 350 millions in one year.

He is often cited as the top macro analyst of all times. I believe he was assigned the trucking sector early on in his career, and in no time he had consumed every detailed on what was considered an insignificant industry. But when M&A came knocking at the door, it made him a name for being the only expert around on such a niche sector.

And I always thought the Quantum fund had the greatest name of all.


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There is a drawback about being able to be on top of the news beat. Soros passing was a misprint. I leave it unfinished, Again, as it should.

Ben's legacy

The legacy of Bernanke is on the making every single month that passes. His most influential trait is probably that he has become a man of his time. Bernanke has opened up the Fed's decision making to the public discourse.

His new speeches are on a new book, and for a change, they seem to be a lot more fun to read than his essays on the Great Depression. It almost seems like the Fed is going through the same process the Catholic church went through a few years back when they started to review their own history publishing their past stances.

Bernanke has been painting the new view of recent events like defending the low interest rates against the guilt of the financial collapse by providing a better explanation based on the flow of massive capital from raising powers.

Where does the road goes from here? The main point of discussion is still the question on the Fed's role and on whether the Fed has been or is effective enough to become the new planner. One thing that everyone seems to miss is the fact that this is 2013 in the middle of a global multi-polar world. One has to wonder if the new research based on past decades of economic data apply to today's world or even to the immediate future.

Without any sure findings, the only course to follow is the academic discourse of ideas, and the one that has been there, and the one who is opening this new path is Ben. When there are no answers, it reminds me of when the crisis of 1909 surprised and panicked every banker, and J. P. Morgan's assistant asked him: Why don't you just tell them what to do?

J.P.Morgan replied for first time ending his assistant calm demeanor:
"Because I don't know. But one of them will have an answer; then, I will tell them."

And it all began

Mrs. Freddie sues big banks for losses related to a misstated Libor rate.

Haute Russ

With 85% of its economy depending on exporting commodities, the Russian economy desperately needs to diversify.

And all the sudden, every commodity oligarch sold their major stakes in commodities, and now they are looking to start new lives in other industries.

There is something to say about the efficiency of an autocratic rule. It is pretty much the same as to Paulson's interaction with the banking industry.

Always Darker Before The Dawn (depending on where you are)

A few months back, the mantel of pessimism was starting to creep up the stairs. Hedge Fund Managers, politicians, The Euro Zone, the Arab upheaval, the banking crisis, Greece, and the housing market. Recession was called upon to give its blessing once again.

The current indicators were raising the flag of a shift instead of another slowdown. Macro observers have pointed at this phenomenon for the last few years. The BRIC have been suffering a slowdown in GDP growth even though they were the engine that dragged the economy out of the crisis.

Morgan Stanley Emerging Markets predicts it is in places like Indonesia, Philippines, and Nigeria that growth have been outpacing the usual engines. But these markets are not sufficient to propel the world economy one penny.

Among others: Czech Republic, South Korea, Turkey, Poland and Thailand.

There seems to be a new dawn with the US housing market finally up and walking together with the European Union stumbling along after containing and "Regionalizing" Spanish banks. But the American dream is still referred to as "In Peril".

SOX IT

Slowly IT is finally digesting the power of governance. From contracts on installment to governance.

Systems are created under stress, and the ones who survive are the ones who can withstand change. There is no other way to accommodate what comes your way than by being able to accommodate it.

IT lost its transparency by the sale of systems and roles without a perpetuity plan. They are unable to obtain the right information. The ones that couldn't, went out of business already and their brands have been forgotten.

This is simple math. A corporation is the most efficient way to expand, obtain capital, and its entity status gives it the legal right to survive. A drug dealer is better off going public if he can establish internal controls, and a heavy management layer. If he is not able, he is better off staying private. Dell is trying to take his own company private.

Technology companies lost the ability to run a corporation. They lost the ability to read their business. Best Buy and Dell decision to go private is a sign that they found the actual cause.

IRS looses lawsuit regulating Tax Accountants

The IRS had increased the requirements for tax accountants. A federal judge struck down the requirements. The IRS does not have authority to regulate the profession.

It might sound like a naive decision for many, but the profession is an interesting one and this is a big win. Tax Law and its written text is the ruler of the profession not the IRS.

A US citizen has a God given right to his property and his own money, and the written text is usually expanded in court challenging the IRS. Allowing the IRS to regulate the profession puts them in a dangerous position like striking down any adversarial point of view. Moreover, the IRS would be inheriting rights only given to Congress to write or maintain the Law. At the end, Congress delegates the writing of the Law to the Accounting bodies - not the IRS. 

And so it is.


The arguments might continue through the courts, but it is becoming increasingly rare to at least feel a weaken wind of freedom in a land that is loosing it.

300

There are only 300 Peloponnesian souls left guarding the Thermopylae.

Guarded by stone columns The New York Stock Exchange resembles more the New York City of "I am Legend" than what its name stands for.

300 traders remain from 3,000 in 2007. The last guard protecting against the turbulent waters of automated trading. The last ones left that will pay for mistakes with their own paychecks.

From now on, any personal money lost will have to be battled by a lawsuit if you can afford it. Against any common sense, a glitch in the system is a reasonable excuse beyond any reasonable doubt. Imperfection is after all Only a Human Quality.

There won't be anyone down there, in the Pit, reading the eyes of adversaries trying to do good by the client.

The legacy of books written on how Hedge Funds masters kept the pulse of the market by personal and direct communication to the individual traders has vanished.

It is the world of PIMCO. Only the ones who can read the macro waves will be able to keep their change. And then again, the world is back from the hands of the Titans. The Fire has been restored.

No Impact

News are sporadically showing up demonstrating how automated trading has no impact in our lives.

It should be left alone given their minimal impact. There is no need for regulation. The industry can self regulate itself is the obvious conclusion.

Ethos

The recent dispute with an executive at Hathaway highlights the shady waters every finance person finds himself in today's world.

Speaking from experience, every single conversation with a client is an opportunity of advisement and founding of strong relationships while the fast pace of the law and its interpretation is open to any point of view.

An executive bought stock on a chemical company. Months later, he decided to recommend an investment in the company to Buffet. They could be two separate and independent events. In this case, the possible acquisition of the company by Berkshire Hathaway can make his initial investment seem like a clear insider trading case.

Even though the SEC is not following up suit, the executive's actions are serious enough to cause a clash an a resignation even when no ill intended act was committed.

Random Ticks

Apple tablet market share decreased from 65% to 50.1% in a quarter.

The atmosphere has 4% more vapor.

The Article Cap has decreased 50%.

Android devices in used are more than 50% of the market.

The US economy contracted 0.1% last quarter.

60% of trades are automated trades.

36% of emails were open in a mobile device.

KPMG reports 40% of technology leaders believe that Silicon Valley will be supplanted by China.

What would have happened without GM?

The story goes that the defense budget was cut by 20% at the end of the 1950s. A lot of engineers and radio technicians saw themselves without jobs or without great prospects, and this was the foundation of Silicon Valley.

What would have happened if we hadn't saved General Motors? We would have had all this manufcturing open for contracts. What would have happened if as a consequence, Tesla was able to buy three automovile plants at rock bottom prices? It might have been a great story for the US automovile industry.

Philip Auerswald
Economist

An older Perspective

A long time ago, the Gold Standard ruled. It has been praised again as the answer for current issues.

But once upon a time, England left the Gold standard, and bankers rushed to reinstate the precendent in the land of Money.

The story goes that bankers feared that if interest rates were not tied to Gold, they would be manage by politicians:
"Sober finance might be held hostage to political expediency, giving a bias towards inflation and paper money"

"Keynes...is flirting with strange gods and proposing to abandon the gold standard forever and to substitute a 'managed' currency...it is better to have some standard than to turn our affairs over to the wisdom of the economists for management."
- J. P. Morgan was warned.

Trying to bring England back to the Gold standard, bankers in the US kept interest rates extremely low. This might accelerated the bubble that ended in the crash of 1929. So similar. So close to recent events.

And the story went. Trying to push British currency up to match the previous honored place of an overvalued currency, it destroyed the British industry which needed cheap currency to be competitive in foreign markets.

1926 was a tumultuous year in England's history. The old bankers had no choice than to "returned to their natural habitat: the shadows. Playing duets at their pianos while strikers and police clashed in the streets" of London.

Micron, ARM, and the cycle GiG

I was writing this a while back trying to bring some sense to Intel's prospects at this point, and Otellini announced his retirement later that week.

There is not much to add. There is always tomorrow, and it is all we have to wait for.

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It probably still has the edge of the pure science for the next wave of computing chips.

Sony Chocolates

It was a long time ago that Sony sued a chocolate maker for its name. It was a landmark case driven by the concept of brand dilution. The fact that nobody could find Sony in any dictionary, gave Sony the rights to its name across the planet way before global was a business adjective. Back then, Sony was a mere transnational.

Sony was the first Japanese company to sell stock in a US market. It conquered the Americas and later boasted of their disciplined character when raising debt.

Fast forward at least 30 years, and a Sony debt offering causes the stock to plunge. The markets have reacted as if a wet cat just jumped on the table.

It is convertible offering for common stock at a premium price in 5 years. The problem is not a subtle matter of the right capital-debt ratio that might not serve their wise investors well. It is one of those rare offering where every possible outcome is bad. Without anywhere to look, investors headed for the exit of the house of mirrors.

If Sony gets in serious trouble, getting common stock for debt is like loosing the whole investment. Debt gets serviced first.

If Sony reaches a premium in 5 years, and the debt is converted, it would be an additional 15% dilution for the stock. So the stock plunges.

If Sony does revamps its facilities and comes out ahead with "taking names" products, it might be better to keep the debt given the high yield it will carry instead of an unpredictable and diluted stock price.

A good place to start might be to get a good read on the market for their offering before sitting at the gambling table of the consumer electronic tournament trying to take back their old global spot.

Geo

Geo-politics is inserting itself in the Thanksgiving Turkey.

Among the most cunning observations is the melting of the Artic cap. Preventable, human made, or precognized in tabular scriptures, the Artic cap is breaking.

The opening ceremony occurred a few years back at the height of Russian growth. Seen as a transcient nationalistic act by most, it was explained by a few as the begining of a race to a new world. It was a simple event: a Russian submarine placed the Russian flag on Artic underwater soil which was accessible for first time in thousands of years.

The most relevant prediction is the raise of Canada from Backyard neighbor to Artic power with new direct commerce routes to very developed markets. It is like the discovery of a new route to the Indies except this time the walkway might be private.

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I think the new edition of Smithonian copied from this posting; they just added a page to each sentence.
March 25th, 2013.