Any investment manager, broker, or CNBC pundit worth a lick will tell you that it's a healthy exercise to review your portfolio periodically and make sure that the thesis and rationale behind each position continues to make sense. Today I took a slightly different tact. Rather than looking at what I have already, I challenged myself to identify the investment ideas that are compelling, but which I don't have enough (if any) exposure to currently. Simply put, I jotted down an idea and then tried to come up with several ways that I could capture it. It was six items long and I feel comfortable that I had some semblance of a path for each. Not all are necessarily feasible at this moment, but it got me excited about the possibilites. And in the end, part of the joy that I get out of this stuff is in trying to be a unique thinker about the trends that are coming and going and the ways to monetize them.
As a final note, the Knicks got smoked today. But, fortunately, whether you lose by 1 or 33, it still only counts as one game.
Saturday, April 28, 2012
Why not...
Knicks in 6.
And while we're at it, I suggest moving Stoudemire to the bench and Carmelo to the 4 (where he was playing really well in Stoudemire's absence). Amar'e becomes instant offense off the bench, where he replaces Chandler or Anthony when he comes in and has more room to operate.
And while we're at it, I suggest moving Stoudemire to the bench and Carmelo to the 4 (where he was playing really well in Stoudemire's absence). Amar'e becomes instant offense off the bench, where he replaces Chandler or Anthony when he comes in and has more room to operate.
Wednesday, April 25, 2012
Tools of the Trade
I finished up Quality of Earnings by Thornton L. O'glove which provides insights regarding the ways in which companies can get cute with the numbers and accounting in their financial statements and annual reports. Some of the highlights:
-Take note of a company whose inventories are increasing at a far greater pace than sales. Or even within the category of inventory itself, where finished goods are growing at a much quicker clip than the raw materials component. Both can be indicators of a slowing business and a back up of product because of declining demand.
-Pay attention to accounting changes by a company from one year to the next that can boost earnings. Such as slowing down the depreciation of assets, switching from LIFO to FIFO (or vice versa depending on market conditions), or increasing the projected rate of return on pension assets (thereby lowering the contribution that the company has to make each year).
-On the flip side, where expenses increase in a given year because of greater marketing costs (I can think of at least one company where this might help), don't necessarily get distracted by the current results and pay attention to whether it will bring a boost later.
-Be wary the company whose earnings have increased, but where there is also a meaningful increase in interest expense as a percentage of pre-tax income.
Overall, a quick and useful read.
-Take note of a company whose inventories are increasing at a far greater pace than sales. Or even within the category of inventory itself, where finished goods are growing at a much quicker clip than the raw materials component. Both can be indicators of a slowing business and a back up of product because of declining demand.
-Pay attention to accounting changes by a company from one year to the next that can boost earnings. Such as slowing down the depreciation of assets, switching from LIFO to FIFO (or vice versa depending on market conditions), or increasing the projected rate of return on pension assets (thereby lowering the contribution that the company has to make each year).
-On the flip side, where expenses increase in a given year because of greater marketing costs (I can think of at least one company where this might help), don't necessarily get distracted by the current results and pay attention to whether it will bring a boost later.
-Be wary the company whose earnings have increased, but where there is also a meaningful increase in interest expense as a percentage of pre-tax income.
Overall, a quick and useful read.
Tuesday, April 24, 2012
As Mr. Buffett Says...
When there's blood in the streets, pull yourself up by your boot straps and buy. So it goes with gold mining stocks these days. I read nothing but whining and disbelief from gold bulls on one side, and smug satisfaction from gold bears on the other, when it comes to the performance of this sector. It's beginning to smell of capitulation. And I'm prepared to take the contrarian tact. The vehicle: Jan '13 and Jan '14 $15 calls for AUY. I've been wrong before, and it could happen again, but I'm going to ride this one for a while and see what happens.
Sunday, April 22, 2012
Yen Update
I am convinced that the Yen stands to be a wonderful short for years to come, and I have spent time already posting the chart and pointing out weakness. Nevertheless, lately the chart is telling me something else. Whether you want to call it an inverse head and shoulders or a cup and handle, I think there might be a rally coming. As in the past, I am using FXY as a proxy. My tentative read is that the ETF could make a move back up to 128ish if it breaks through 122.50. In actual USD/JPY terms, a break below 81.65 could signal a move to at least 78.10. Take a look for yourself.
Update: After taking a look at the USD/JPY chart, the number of interest is ~80.5, with a break below potentially signalling a move to the 76-77 area.
Update: After taking a look at the USD/JPY chart, the number of interest is ~80.5, with a break below potentially signalling a move to the 76-77 area.
The Week in Review
I have been radio silent lately as my day job takes up more time. Some deal stuff, but also a lot related to defining my role within the firm and expanding my responsibilities. Which I think is a good thing.
At the same time, my mind has been contemplating the broader investing universe. I really do feel like the world is at an inflection point and I want to position myself ahead of the changes coming. And the complication is less in what the ideas are, so much as what will be the best way to capture them.
At the same time, my mind has been contemplating the broader investing universe. I really do feel like the world is at an inflection point and I want to position myself ahead of the changes coming. And the complication is less in what the ideas are, so much as what will be the best way to capture them.
Saturday, April 14, 2012
Futbol Update
I started this blog right around the time that the World Cup was going on in South Africa. In fact, it was the subject of several of my first entries. I got caught up in it and watched about 95% of the matches, coming away from the experience wanting to follow the sport in some manner after it was done. Well, turns out it's not so easy to follow the EPL from New York. As fate would have it, Thierry Henry came to the Red Bulls that summer. So, as a New Yorker who likes convenience, they became my team. I knew up front that Major League Soccer was like watching the JV as compared to the varsity in Europe, but it is what it is. Anyway, over the past two years (or just a little under), I've started watching Red Bulls games on a regular basis, even going to one match in Harrison, NJ against Tottenham. I enjoy it. Tonight's match, though, was rough. The Red Bulls gave up the lead twice and had to settle for a draw. Essentially, it was pass, pass, turnover. That was the offensive game plan, I think. Their defense is definitely weak, especially with the loss of Tim Ream to the EPL (good for US soccer, not so good for New York soccer).
No real point to all of it, just that futbol was in some way an impetus to start writing when I did. And here's what I've done with it since.
No real point to all of it, just that futbol was in some way an impetus to start writing when I did. And here's what I've done with it since.
Friday, April 13, 2012
My Take
A coach with a defensive mindset has them understanding which end of the court is more important, and they're 9-0 at home under him. A great frontcourt-backcourt tandem of elite defensive players is imposing its will on games. One of the best offensive players of his generation finally remembers who he is and what he does. An oft-injured but talented veteran point guard seems to be getting his sea legs under him. And all of this as we fast approach the playoffs.
Wednesday, April 11, 2012
Good Reading
To follow up on a point that I made recently, you never know where a good investing idea will come from. The website Stratfor focuses on geopolitical topics. Recently, they added Robert Kaplan to the roster of regular correspondents. He comes out with a weekly piece, one of which was the inspiration for my thinking about investing in real estate along the Gulf Coast. Last week, he delved into Myanmar, also a country of great interest to me. His current article is about the situation in Mali, but speaks more broadly about the issues of governance in Africa and why the borders that exist are really a fiction -- central authority does not often extend much beyond the capital cities. And, perhaps, in thinking about real estate and frontier market investing, that is why the capital city is often the best location to place your bet. In any event, Stratfor is a paid service but it is worth the price of admission in my opinion.
Tuesday, April 10, 2012
No Rush
I have suggested before that I think shorts on the Yen, JGBs, and Treasuries will all be good ideas. And not just for a minute. That's why I have never felt any great rush to initiate those trades. But as further endorsement of why patience is a virtue, I recommend taking a look at the recent action on the 10-year and 30-year bonds.
Wednesday, April 4, 2012
When the Bow Breaks...
Trying to call the bottom on something that resembles a falling knife lately is probably foolish. But that's never stopped me before. Gold is fast approaching the long term trend line that served as the lower bound for its screaming race downwards at the end of December. In terms of GLD pricing, I'm looking at 156 as the place to arrest this decline.
Update: And if I'm wrong, try 152.
Update: And if I'm wrong, try 152.
Keynes Revisited
I confess, the first time I read The General Theory I was looking for reasons to disagree. Moreover, Keynes’ writing style is, well, challenging, and my own comprehension was still in its formative stages (not that I am a scholar by any stretch at this point), so much of it went over my head anyway. Enter Steve Keen. After reading his book and some papers, I developed a greater appreciation for Keynes and his heterodox ways, feeling compelled to re-read him. Below are my takeaways from that experience:
-Keynes calls his theory “General” to contrast with the classical theory that he believes only applies to the special case of full employment, as it assumes that all unemployment is either frictional or voluntary (the latter of which can always be resolved by lowering wages).
-Thus, his argument for inflation is largely premised from the theory that wages are actually sticky. Put differently, the nominal wage is much more important to a trade union than the real wage. So, if the wage level is an impediment to increasing the level of employment from the point of view of the employer, decreasing the real wage can solve that problem.
-His rejection of Say’s Law (that Keynes formulates as all money that is earned will in turn be spent, whether as present consumption or later on) is derived from the position that there exists a class of people whose objective is the accumulation of wealth as a goal unto itself. And so there can be a “paradox of poverty” in the midst of plenty when money is hoarded and effective demand declines.
-Expectations matter and the planning that the entrepreneur/investor does is constantly evolving and fraught with uncertainty. Each moment and act has a corresponding impact that shifts everything else. We live in a dynamic world, not a static one. Having said that, he makes reference to equilibrium concepts throughout the book which make me think he is not totally consistent on this point.
-He does not seem to think that the macro can be analyzed by building up from the micro. He makes that case intuitively, pointing out that if an individual chooses to save a little more than normal (rather than consume), it will not have a huge impact on his own income in the future. But if everyone in society emulates that behavior, then overall demand will decrease and take aggregate incomes down with it.
-He suggests that redistributive policies can encourage the “propensity to consume” and thereby raise aggregate demand, guided by the belief that as incomes rise consumption does not increase at the same clip (translation: the poor spend a larger percentage of their incomes than the rich and are less likely to “hoard”). He also notes that higher rates of interest will discourage investment, thereby leading to lower incomes, impacting aggregate demand negatively. Put differently, higher rates of interest tend to lower the “marginal efficiency of capital” (defined as the difference between the expected yield from an additional unit of output and its cost of production).
-In times of higher unemployment, Keynes suggests that there is a multiplier attached to each dollar of investment that will cause an increase in utilization beyond the primary employment for which those investment dollars are targeted. It is in the discussion of this concept that Keynes implies that deficit financing in times of depression/recession, even on potentially wasteful activities, can pay for itself by virtue of the overall increase in employment, incomes, and the propensity to consume that results.
-If there is any topic from Keynes’ work that receives a lot of attention, it is his explanation of how the rate of interest is determined. The classical tale is that it is a loanable funds story – as in, the rate of interest is where the demand for capital is in equilibrium with the supply of savings. In contrast, Keynes says it is not just about loanable funds, but also about liquidity preference – the extent to which people want to hold cash for everyday transactions, as a safety buffer for unexpected events, to be able to speculate, or simply because potential yields do not encourage investment; all of which adds a psychological / expectations / confidence component to the analysis. Moreover, Keynes objects to the classical theory on the basis that it is very static, ignoring how the level of income will change as the supply and demand features of the loanable funds story shift.
-And, finally, in his concluding chapter, we come to see what I view as the slippery slope with his theory. In general, society faces sub-optimal levels of employment and gross inequalities of wealth. Keynes does not seem to think these problems are self-correcting in a laissez-faire setting, and so the State can help, be it through redistributive taxes, managing interest rates…or something else. Namely, “determining the aggregate amount of resources” and the rate of reward to those who own them – a reality that he deems a form of limited and minimal socialization.
----------------------------
My experience in reading other people who hold Keynes in higher regard than I do is that there are three key innovations from his writing: (1) the liquidity preference theory of interest rates; (2) the rejection of Say’s Law; and (3) an emphasis on uncertainty. I’m not fluent in Keynesian theory, but I feel satisfied that I saw each of those ideas come and go in this pass-through.
-Keynes calls his theory “General” to contrast with the classical theory that he believes only applies to the special case of full employment, as it assumes that all unemployment is either frictional or voluntary (the latter of which can always be resolved by lowering wages).
-Thus, his argument for inflation is largely premised from the theory that wages are actually sticky. Put differently, the nominal wage is much more important to a trade union than the real wage. So, if the wage level is an impediment to increasing the level of employment from the point of view of the employer, decreasing the real wage can solve that problem.
-His rejection of Say’s Law (that Keynes formulates as all money that is earned will in turn be spent, whether as present consumption or later on) is derived from the position that there exists a class of people whose objective is the accumulation of wealth as a goal unto itself. And so there can be a “paradox of poverty” in the midst of plenty when money is hoarded and effective demand declines.
-Expectations matter and the planning that the entrepreneur/investor does is constantly evolving and fraught with uncertainty. Each moment and act has a corresponding impact that shifts everything else. We live in a dynamic world, not a static one. Having said that, he makes reference to equilibrium concepts throughout the book which make me think he is not totally consistent on this point.
-He does not seem to think that the macro can be analyzed by building up from the micro. He makes that case intuitively, pointing out that if an individual chooses to save a little more than normal (rather than consume), it will not have a huge impact on his own income in the future. But if everyone in society emulates that behavior, then overall demand will decrease and take aggregate incomes down with it.
-He suggests that redistributive policies can encourage the “propensity to consume” and thereby raise aggregate demand, guided by the belief that as incomes rise consumption does not increase at the same clip (translation: the poor spend a larger percentage of their incomes than the rich and are less likely to “hoard”). He also notes that higher rates of interest will discourage investment, thereby leading to lower incomes, impacting aggregate demand negatively. Put differently, higher rates of interest tend to lower the “marginal efficiency of capital” (defined as the difference between the expected yield from an additional unit of output and its cost of production).
-In times of higher unemployment, Keynes suggests that there is a multiplier attached to each dollar of investment that will cause an increase in utilization beyond the primary employment for which those investment dollars are targeted. It is in the discussion of this concept that Keynes implies that deficit financing in times of depression/recession, even on potentially wasteful activities, can pay for itself by virtue of the overall increase in employment, incomes, and the propensity to consume that results.
-If there is any topic from Keynes’ work that receives a lot of attention, it is his explanation of how the rate of interest is determined. The classical tale is that it is a loanable funds story – as in, the rate of interest is where the demand for capital is in equilibrium with the supply of savings. In contrast, Keynes says it is not just about loanable funds, but also about liquidity preference – the extent to which people want to hold cash for everyday transactions, as a safety buffer for unexpected events, to be able to speculate, or simply because potential yields do not encourage investment; all of which adds a psychological / expectations / confidence component to the analysis. Moreover, Keynes objects to the classical theory on the basis that it is very static, ignoring how the level of income will change as the supply and demand features of the loanable funds story shift.
-And, finally, in his concluding chapter, we come to see what I view as the slippery slope with his theory. In general, society faces sub-optimal levels of employment and gross inequalities of wealth. Keynes does not seem to think these problems are self-correcting in a laissez-faire setting, and so the State can help, be it through redistributive taxes, managing interest rates…or something else. Namely, “determining the aggregate amount of resources” and the rate of reward to those who own them – a reality that he deems a form of limited and minimal socialization.
----------------------------
My experience in reading other people who hold Keynes in higher regard than I do is that there are three key innovations from his writing: (1) the liquidity preference theory of interest rates; (2) the rejection of Say’s Law; and (3) an emphasis on uncertainty. I’m not fluent in Keynesian theory, but I feel satisfied that I saw each of those ideas come and go in this pass-through.
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