Arguing with Paul Krugman - March 29, 2010

It has been far too long since I last made a posting on my website, so I figured what better way to come out of my hiatus than to argue with a Nobel Prize winner about…economics. As both regular readers of my website know, I recently recommended Paul Krugman’s book Depression Economics. I continue to be a fan of his commentary and I have found him to be one of the few consistent sources of rational, articulate debate among the sea of hyperbole surrounding the Great Recession and the subsequent fiscal stimulus.

Dr. Krugman has taken issue with many conservatives who have railed against the massive government stimulus. He has rightly argued that the debt resulting from the stimulus is well worth the benefit of avoiding a global economic depression. While it has become fashionable since the threat of a depression has passed to criticize the stimulus as excessive, Dr. Krugman has argued that it did not go far enough. I have not had any fundamental disagreement with him on any of these points, as it is inevitable that revisionists will downplay the likelihood of a threat after it has been (seemingly) averted.

Where I have some issues with Dr. Krugman is in the way he has characterized the apparent structural deficit that has been forming in the United States. Short term deficits to avert depressions and long-term recurring deficits are two distinct kettles of fish. Dr. Krugman has made the kind of articulate, well reasoned points one would expect of a Nobel Prize winner in his arguing the wisdom of large short-term deficit spending to prevent a global economic depression. His arguments in favour of the apparent ongoing structural deficit have been less impressive.

Dr. Krugman’s argument is that according to the Obama administration’s forecasts, the national debt by 2020 will be 70% of GDP and that is not that big a deal. He has stated that several European countries have gone as high as 100% of GDP and lived to tell the tale. I have two problems with this argument. First, the official government forecast in the year 2000 was for a large budget surplus in 2010, so how much faith can we have in a government (or anyone’s) forecast for 10 years from now?

The second issue I have with the argument is that other countries have managed greater proportional debt loads in the past. What I doubt about this argument is not its veracity but rather its relevance in the future. This same argument could have been used a very micro level to justify taking on a very large 40 year mortgage. Many people could have rightly said that other people had had larger mortgages in the past and things worked out. They could have said that interest rates are forecasted to stay low and that their incomes should rise in the coming years. There was nothing particularly wrong about the assumptions, but nevertheless, the assumptions turned to be wrong. What if there is a double dip recession? What if the global economy stays flat for next few years? Or more ominously, what if China has the kind of crisis that most Asian economies had in the late 90s and almost every emerging economy experiences at one point or another? What would happen to US interest rates if China could not buy US bonds and had to raise money itself? If yields on government debt went up, what effect would that have on the US economy and the Obama budget forecasts?

Paul Krugman may well be right that the concerns about the deficit are overblown, but I would like to hear some more Nobel Prize worthy analysis on the potential risks of long term structural deficits.

Bankers' Bonuses - January 31, 2010

Are you nervous about flying? You wouldn’t be alone even with all the statistics that say it is the safest form of transportation and with all the new security and safety regulations. The fact is there is a risk every time you fly no matter how skilled and dedicated the pilot is. If you are one of the lucky ones who sleep like a baby on airplanes, imagine for second the following scenario. Imagine for a moment that there was a new cockpit that allowed pilots, and only pilots, to survive even the most horrific crash. Imagine also that airlines had a bonus plan in place for pilots based on how little fuel they take off with. The less fuel the pilot takes off with, the larger the bonus if he manages to land the plane. If he can cut it really close, these bonuses can total more than 50 times his base salary and he receives no penalty for the number of passengers killed on the trip. How well would you sleep on that pilot’s plane?

That scenario might sound a little farfetched, but that is pretty much the current bonus system for investment bankers. In fact, it is even worse than the example of the pilot in that bankers have an incentive to cause crashes. The reason is that bonuses do not go negative. An investment banker will have the same bonus whether his firm loses a thousand dollars or a billion. On the other hand, there is essentially no limit to what a banker can earn when things are going well.

When the stock market is flat or slowly increasing over time, it is very difficult for a trader or investment banker to make enormous gains, but when they are volatile their earning potential increases exponentially. When the market is hammered and stocks get driven down to rock bottom prices (and provided the government is prepared to come in and clean up the mess), virtually all traders will perform well. To steal a line from Woody Allen, 95% of a trader’s performance after a financial crisis is attributable to just showing up.

When it comes to the topic of banker compensation, I admit that I am long on complaints and short on solutions. Smarter people than me are still struggling with this issue but this may be a case where increased government involvement is necessary. I believe in free markets, but in the financial services sector at least, the old balance of risk versus reward has been turned on its head in that the government is now prepared to accept the risks while bankers chase rewards. If bankers want government involvement in their risks they should be willing to accept some involvement in their rewards.

Dubai Rhymes with Bear Stearns - December 2, 2009

If the past few years have taught me anything, it is that greed and fear are the two most powerful drivers of the stock market. We were due for some sort of market recovery simply because the market had been pricing in the collapse of civilization in February, but it is the same pre-recession greed that is driving the market back up towards pre-recession levels. Just as in every other rally, investors are worried about missing out on the gains so the more the market goes up, the more money they put into it.

I have gained some personal insight into this phenomenon in recent months as I have been experiencing this exact same feeling. While I once felt smug for picking up some stock at the bottom, I have recently begun cursing myself for not buying more when I had the chance as I watch the market’s relentless move upward. I know that a wise investor resists these temptations, just like an intelligent person does not bother paying attention to salacious rumours about Tiger Woods’ personal life. I consider myself a wise investor and an intelligent person, but I have recently failed on both accounts.

Mark Twain once said that history does not repeat itself but that it rhymes. If that’s true then Dubai now rhymes with Bear Stearns. When I first heard the Bear Stearns story I thought the market would completely collapse the next trading day. Investors though were not yet ready to believe that dark times were approaching and the market continued along by inertia before the reality of the economic crisis shattered the complacency like a 7-iron through an Escalade windshield. After a day of jitters, the market decided it was not ready to believe that the dark times are not completely behind us.

Just three days after Dubai announced that it is seeking to defer payment on $90 billion in liabilities from state-run companies, the market is back above pre-announcement levels. I can’t help but think that investor complacency has something to do with that.

Review of Depression Economics - September 24, 2009

Depression economics is written by Paul Krugman, is a Nobel Prize winning economist. Having suffered though a number of economics courses in university, I was bracing myself for an onslaught of mind-rotting formulas, matrix algebra tables, and insomnia curing prose. Thankfully, this book turned out to be one of the more enjoyable and informative economics books I have ever read and a refreshing change from most of the current economic commentary. I should point out though that readers should not expect an in-depth analysis of the current crisis as much of the book was written over ten years ago but was updated in 2009. Nevertheless, it does give a fantastic, easy to understand explanation of how recessions like the one we have just experienced actually happen.

Many of the opinions on the Great Recession (as the crisis appears to have been christened), and on most matters related to the economy, are like a stew containing equal parts predictability, superficiality and bias. This is likely due to the fact that people have a tendency to want to assign blame for every economic and societal problem. Listen to any cable news station and you may notice that every analyst seems to have a very simple cause that conveniently fits into a short sound bite. The most popular theories include excessive greed on Wall Street, real estate speculation, and at times even capitalism itself.

Anyone looking for someone to blame for this recession will be disappointed. Mr. Krugman shows that recessions are a natural part of a free market system and can happen without greed or corruption. A sign of great intelligence is when you can explain complex problems to ordinary people, and Mr. Krugman does that with his description of how a recession occurred within a babysitting club in Washington DC.

This was a real case where a group of couples came up with a system to share babysitting duties. When a couple babysat for another couple, they would receive a coupon that they could pay another couple to babysit for them in the future. Couples were issued coupons at the beginning so that they would be able to get things started. Because couples would have to babysit to get coupons, the system ensured that over time everyone would do an equal amount of babysitting. Surprisingly, without any greed or corruption, a serious recession in babysitting occurred. This happened because the couples in the group wanted to babysit and build up coupons because they felt they did not have a large enough reserve. Everyone in the group wanted to babysit, and in fact, everyone wanted to go out, provided they had enough coupons for future use. The problem was that they didn’t have enough. The problem was eventually solved when the group issued more coupons. Once people felt they had enough coupons in reserve, they started going out again, which meant more opportunities for babysitting.

Mr. Krugman makes the point that this is very similar to what happens in the real world and argues that most recessions can be fixed by central banks simply printing more money to make people willing to start spending again. Throughout the book, he criticizes the IMF in how it handled many of the third world crises of the 80s and 90s. In those days, the IMF imposed stringent monetary policy at a time when Mr. Krugman argues that the countries, like the babysitting club, should have been loosening policy and printing more money. As a side note, anyone who has read his column or watches his television appearances would know that he has used the same reasoning in arguing for a large fiscal stimulus to confront the current recession.

Depression Economics provides a thoughtful and comprehendible analysis of the causes of recessions and is a refreshing read for anyone who has become tired of the rhetoric on the current crisis.

Mission Accomplished - August 31, 2009

Shortly after the fall of Baghdad, George W. Bush infamously stood on an aircraft carrier in front of a giant Mission Accomplished sign and declared that major combat operations in Iraq were over. Six years later, the conflict still goes on and American soldiers continue to be killed on a regular basis. In 2003, the first stage of the war was indeed over. The Iraqi army had been defeated and the hard work of rebuilding the country and creating stability was about to begin. Some have claimed that the sign was never meant to suggest that the military operations were over, but it is clear that the people who thought it was a good idea to hang that sign had no idea how difficult the years after the war with the Iraqi would be.

Some economists and central bankers have recently declared that the global recession is now essentially over. I have not heard any economists say that all economic problems have disappeared and the world economy is about to begin growing by leaps and bounds. Nevertheless, investors seem to have reacted to the end of the recession much the same way the Bush administration reacted to the fall of Baghdad; by assuming that all of the economic difficulties have disappeared along with the recession. In the process, they have sent the stock market on one of the best six month runs in history. The market seems to have the same optimistic outlook to the recovery as Dick Cheney had to the post-war reconstruction.

At the end of February 2008, I wrote that investors had a similarly complacent attitude towards the initial credit crunch as Europeans had to the invasion of Poland in 1939 and that much like the war, the worst may be yet to come. In the fall of that year complacency suddenly gave way to complete panic and I cannot help but feel uneasy at the possibility that the current steady stream of good news and optimism could come to a sudden halt.

I don’t want to give the impression that I am among the sceptics who still think that there is a strong chance the world will still slip into a depression. I believe that there is good long run value in many stocks even after the run-up, but I can’t help feeling that there could be some significant short term jitters once people begin to realize that there may be a long road ahead of us as we come out of the recession.

It almost seems like in the past two years there have only been two types of investor sentiment; wildly optimistic greed and complete panic. This has put me in the odd position of believing the fundamentals may justify stock prices at these levels, but that it isn’t fundamentals that are causing stocks to be priced as they are. I am convinced that a fear of missing out on easy money is at least partly driving this rally. I believe that because I get that same feeling each day the stock market continues to go up.

The Price of Oil - July 26, 2009

My ability to forecast the price of oil has always been as dismal as my ability to predict the price of stocks, but I believe the current recession has provided investors with some valuable insights on the long term outlook for oil. In the middle of what has been popularly described by the financial media (and therefore true) as the worst economic downturn since the Great Depression, the price of barrel of oil is hovering around $70. It was only a few short years ago, as we were entering the bull market, when $55 oil was considered by many to be a bubble and unsustainable. The question investors should be asking is how high the price of oil will go during the economic growth cycle (I will go out on a limb and predict that the recession will end in my lifetime)?

I believe that the recession has been instructive in that it has illustrated the worst case scenario for oil. If we work off the assumption that the risk of a complete global meltdown has now subsided and we will not be going back to living in caves in the near to medium term, there are now two probable scenarios. One is that is that the global economy begins to quickly gain momentum in the near term and we see a surge in the demand for oil. The other is that the economy begins to stabilize and then slowly starts a moderate recovery. 

One consequence of the crisis is that credit and financing all but dried up, particularly for risky projects like oil exploration. Less exploration today suggests there will likely be fewer sources of new production in the short term if there is a rapid increase in demand. That could easily lead to a spike to well over $100 and perhaps to the $140 level we saw during commodities boom (or bubble, depending on your agenda) of a couple of years ago. If the economy slowly recovers, investors can take comfort in the fact that the oil price should slowly but steadily increase along with it, which should provide some respectable stable returns in some major oil stocks. 

In order to take advantage of rising oil prices, I have been doing a little research on a number of oil companies and recently added a few shares of Husky Energy to my portfolio. It pays a decent dividend while I am waiting and may also be a Chinese takeover candidate someday, but that is a topic for another day.

Cautious on US Dollar - July 6, 2009

Some time ago as part of a posting about Wal-Mart when the Canadian Dollar was worth about 95 cents US, I wrote that the US dollar would likely not stay that low in the long term and should help supplement the gains from holding US stocks. Since that time the US Dollar has indeed strengthened significantly, however, in light of numerous factors, not the least of which is the Federal Reserve printing money, I am no longer banking on any further gains from US dollars.

The US government is now doing much the same as consumers were doing in the run-up to the current recession. Unlike consumers, when it runs out of money the US government, with the help of the Federal Reserve, has the ability to simply print more. The government’s spending plans do not seem to have any relation to the amount of money that it brings in. No number is large enough to make headlines anymore. We seem to have reached a point where a trillion dollars no longer seems like a lot of money. The basic laws of supply and demand suggest that there will come a point where the supply of US government bonds will exceed the demand for them. At that point the government will either be forced to pay a much higher interest rate on the debt of the Federal Reserve will run the printing press and purchase the bonds itself.

There is no shortage of stakeholders with a vested interest in keeping the US dollar high, not least of which are China and Japan, whose economies depend on exports to the United States. These countries will happily buy US bonds as a short term solution to a financial crisis, but if such spending continues after the crisis and recession, it stands to reason that their willingness to buy trillions of dollars in long term government bonds will be severely tested. As much as I had once doubted it, we may be witnessing world’s global currency shift from the US dollar to the Euro, much as it once shifted from gold to the dollar.

There are many people out there who are constantly rooting against the United States and have always seen signs of the country’s imminent collapse. I am not one of those people and I am well aware that the country has always managed to recover from previous rough patches, not the least of which was the Great Depression. I am not discounting the ability of the United States to put its financial house back in order, but, I have modified my expectations regarding the US dollar. A year and a half ago, I was factoring in some long term gains in the currency; now I am factoring in a decline.

Ford versus Government Motors - May 7, 2009

There is a school of thought that the recent bankruptcy protection filing by Chrysler may be good for General Motors as it may give it the company the opportunity to copy many of the union and debt renegotiations of Chrysler without having to actually file for bankruptcy protection itself. The idea is that once the current equity holders are more or less wiped out and the debt and union obligations are brought down to manageable levels, General Motors may again become a decent investment opportunity. As always, the price of the shares will be primary determining factor as to whether the stock is a good investment, however, I would urge caution for anyone basing their investment on the assumption that General Motors will remain the number one North American car company in the years to come.

If Ford is able to survive the current crisis without having to go to the government with cap in hand to ask for a bailout, I believe that it will not only surpass Government, I mean General Motors, but that it will become a serious competitor to Honda and Toyota. While its sales have been falling, its market share has been consistently increasing.

There are two things that should help Ford in the coming years. The first is relates to the growing “bailout fatigue” in the United States. Americans are understandably becoming fed up with the hundreds of billions of their tax dollars that are being used to bail out companies that have mismanaged their business and failed to prepare for the current recession. It stands to reason that as the only US automaker not to accept government money, Ford should experience a significant public relations boost. While it is not possible to quantify the effect this will have on sales, there will certainly be plenty of bitter taxpayers who will switch from GM to Ford.

The second, and by far the most important advantage that Ford will have is that government will have no say in how it runs its business. There is a popular myth currently being propagated by the media and Congress that the reason the US automakers are in such trouble is because they made too many pickups and SUVs. Now that government has essentially become the most powerful investor in GM, they will apparently try to correct this imaginary problem and in the process create new real ones for the company. All major car companies, Toyota and Honda included, sell the same classes of cars; they all sell compact cars and they all sell large SUVs. By far the biggest problem that the US automakers have had has been their significantly higher salary, benefits, and pension costs. The fact is that if the Big Three had the same labour costs and liabilities as Honda and Toyota, they would not need any government bailouts.

Instead of acknowledging and addressing this fact head on, the government is pretending that if GM can just hang on until it can figure out how to make an electric only car, all its problems will be solved. While electric cars will likely be common in the future, it will conservatively be a decade or two before they would make a significant contribution to a car company’s bottom line. For all the publicity it has generated, the gas/electricity hybrid Prius still makes up a tiny portion of Toyota’s sales.

I am going to make a bold prediction that the Chevy Volt, the electric car that we have heard so much about, will not hit the market on schedule, and when it does, it will initially be filled with glitches and be a money loser for years.

If you want an idea of the strategies that GM could come up with to satisfy its government overlords in the coming years, take a look at its initiative with Segway to produce a two wheeled electric car. Before investing any of your hard-earned dollars in General Motors, I strongly suggest that you spend five minutes staring at the following picture.

New addition - April 21, 2009

Since I am watching all the Market Call and Market Call Tonight top picks on BNN again, I have decided to start recording each guests top picks on the website. These can be found under pundits. Once upon a time, BNN used to have a list that went back several years of each guest's top picks and it was a very unpleasant surprise for me when they got rid of it. Updating this list is a good way to make sure I watch the top picks and it could perhaps become a useful resource for investors in the future.

Time for high risk stocks - April 3, 2009

After a bear market induced hiatus, I have started watching BNN again recently. I don’t have any stats to back me up on this, but it seems to me that in general the recommendations so far in 2009 have tended to be more defensive than they were a year and a half ago when the market was riding high despite a looming credit crisis. I understand the logic, and even defensive stocks have the potential to deliver a nice return from the current levels, but I can’t help thinking that there might never have been a better time for higher risk stocks than right now. The recent rally offered a glimpse of the returns that can be made if the economy turns around.

I would not suggest that you should run out and start putting all your money in penny stocks, after all, my latest stock purchase was General Electric. There are two ways use a high risk strategy to take advantage of a market turnaround. One is to buy large, relatively high beta stocks (stocks whose returns are strongly correlated with the market returns). These are companies that could realistically double if the market turns around but are highly unlikely to go bankrupt or have its equity wiped out. I purchased General Electric because I thought it might be one such stock.

The other strategy is to be greedy and purchase smaller stocks that do have a legitimate chance of going bankrupt or having their equity completely diluted, but also have a chance of rising dramatically. In normal circumstances, a company’s future earnings are the biggest determinate of its stock price. Right now though, the biggest determinate of stock price is the likelihood of bankruptcy or insolvency. Investors are not looking down the road at earnings streams but rather around the corner at debt convents. Once investors feel comfortable that the company is not in immediate danger of bankruptcy, the stock should spike up even without a significant change in future earnings estimates. The stock could pop again if the company is able to capitalize on the economic recovery, if and when it occurs.


That is the rose coloured glasses scenario. Stock prices are factoring in a risk of bankruptcy because the risk is very real, and there are many companies out there that will not survive this recession. Before you try this strategy, it is important to remember a couple of things. First is that this type of strategy is in a grey area between gambling and investing. Just as you would not put retirement money in a slot machine, you would be well advised to not invest in these type companies if you cannot afford to lose the money. Secondly, if you decide to try this strategy but want to mitigate some of the risk, I would recommend dividing your money among a number of different, preferably unrelated (i.e. not all oil explorers) companies. That way there is less of a chance of getting completely wiped out. A couple of doubles or triples from the survivors should offset a bankruptcy or two. The fewer companies you divide your money among, the closer to gambling the strategy becomes.

I will restrain myself from saying that there is easy money to be made right now as making money in the stock market is never easy. Nevertheless, there has not been a time in recent memory when stocks have been so thoroughly stripped of any vestige of irrational exuberance.

Rolling the Dice on GE- March 19, 2009

Having spent the previous four months as a slack-jawed gawker as the stock market was shoved face first into the meat grinder by the global economic crisis, temptation finally got the better of me and I picked up some shares of General Electric for about $7.60 on March 2, a particularly rough day for the stock. Moths flying towards bug zappers might wonder why I was attracted to such a bellwether American stock when the US economy is teetering on the verge of a depression.

My purchase of GE is simply a less cowardly version of the strategy I have taken since the market collapsed, which to this point had been to buy index funds with the assumption that, while some companies will go bankrupt, at some point the market will turn around and this period in history will be looked upon as a good buying opportunity, as have most bear markets. GE has long been one of the best managed companies in the world, so I am reasonably confident that they will find a way to weather this storm.

GE is a stock, similar to ICICI, that I have followed for years but for one reason or another was never able bring myself to pull the trigger on it. It is involved in a number of growth industries, such as water, nuclear, and wind power, and unlike Nortel, it remains one of the market leaders in these industries. During bull markets, investors often make the mistake of falling in love with well managed companies and driving up the valuations to unwarranted levels. GE itself became an example of this at the end of the 90s when Jack Welch was being hailed as the world’s greatest CEO. Mr. Welch may well have put together the best managed company in the world, but investors simply had unrealistic expectations on the growth that one of the world’s largest companies could deliver. It seems to me though that in tough times investors put too little stock in management.

When times are booming, it is important to pay attention to the numbers to make sure you don’t get carried away and overpay for a stock. When times are both tough and volatile like we are currently facing, I believe it is equally important to focus on the quality of management. When every company is losing money, numbers alone will not tell you who will survive. It is the quality of management that will often determine which companies can best ride out the storm. A classic example of this would be Citibank. The company has long been considered one of the worst managed banks in the world, and it has lost almost all of its value during the crisis while better managed banks like JP Morgan may emerge even stronger than before. I am making a bet that GE’s management will help the company survive this crisis and deliver a solid long term return on my investment.

End of an Era for Nortel- February 16, 2009

With the recent announcement that it was filing for bankruptcy, Nortel has solidified its title as the world’s all-time greatest wealth destroyer. It isn’t just the amount of wealth that Nortel destroyed, but the manner in which it went about it. This stock has been an unrelenting wealth destruction machine for almost an entire decade.

Often times a company will quickly go to zero after a major drop in price or stabilize at some point and then work its way back to respectability over time. Nortel lost most of its value right after the tech bubble burst, but then continued to lose half its value repeatedly over the remainder of the decade time until it effectively went to zero. Throughout its long road to perdition, Nortel repeatedly found believers who convinced themselves that it somehow had to recoup some of its losses at some point, as if collective faith could somehow turn the company around. Blind faith may be fine with religion but when it comes to the stock market, all successful investors are agnostic. I can think of nothing other than its name recognition and formerly high share price that justified this faith. Nothing the company has done over the past 8 years has given any indication that the company has a vision to turn the company around and become a clear market leader in any particular industry.

The reason I am writing about Nortel now is not just that I want to highlight one of the few things I got right in the past year (although that is certainly part of it), but because it has some valuable lessons for those brave enough to invest in today’s market. Investors in Nortel had a sound goal in mind; the problem was that investing in Nortel was the wrong way to achieve it. The idea is that if you invest in a good company during difficult times when its price has been beaten down, you can make a nice profit when things finally turn around. Unfortunately, this is much easier said than done. For this strategy to work, you need to find a company that still has the ability to maintain or win a leadership position in its particular industry; there needs to be a clear light at the end of the tunnel. General Electric is one such company that I currently have my eye on. The industries that it is in have all suffered during this bear market, but it is still a strong competitor in them. There is no reason to think that it will not be able to weather these current conditions or that it will not maintain its competitive position once the economy turns around.

When the economy turned around after last recession at the beginning of the decade, Cisco and other technology companies recovered along with it, but Nortel didn’t. That should have been a sign to walk away from the company for good. My goal over the coming months is to come up with a list of strong companies that should deliver a solid return when the economy recovers, whenever that may be.

Christmas is Over, Back to Work- January 20, 2009

On the odd chance that there is someone out there who looks forward to my postings, I apologize for going silent over the past couple of months. Like most people, Christmas is a hectic time for me, so since hardly anyone reads my website anyway, I decided to take a break and enjoy the Holiday Season. Now that I am out of excuses, I will be making posts on a weekly basis. Despite my break from writing, I have continued to periodically use my maturing GICs to purchase index funds over the past several months. My most recent purchase was today, when the market decided to disregard Barack Obama’s exhortation and chose fear over hope.

In a take on Stanley Kubrick’s Dr. Srangelove, over the past few months I’ve learned to stop worrying and love the recession. I didn’t buy my first individual stock until 2004 and didn’t really have any significant stock holdings until well into 2005. As this was already well into a bull market, I always resented those people who were able to pick up companies at ridiculously undervalued prices just a few years earlier. I had to study to do plenty of homework and take some gambles to have a chance at making some healthy returns, whereas a monkey throwing darts a few years earlier looked like a genius. Despite the carnage that this bear market has inflicted, for the first time in my investing life I am actually rooting against the market. Instead of fearing a drop in prices, I am now worrying about a speedy recovery before I am able to invest enough money in the market. I’ve found this to be a very liberating experience.

While many more individual companies will likely go bankrupt, I believe that in the long run, the market as a whole should provide a decent return. I plan to continue to methodically shift cash investments into index funds and will likely take a few gambles on some individual stocks in the coming months.

Financial Shock - book review,  November 16, 2008

The reason I bought Financial Shock, by Mark Zandi, was because I wanted to read a book about the current financial crisis and this was the first book on the topic to appear in my local bookstore. In so far as it really is a book about the financial crisis, Financial Shock was not a complete disappointment. While it did make for a lively read, there are a number of major problems that prevent me from recommending this book.

The first problem is simply that the author is writing about a crisis that is still unfolding. I give Mr. Zandi full marks for being quick on the draw with Financial Shock, but no matter how talented the author, right now any book about the financial crisis is going to feel dated almost as soon as it is published. The situation is changing dramatically on a weekly, if not daily, basis. The book was written after Bear Stearns was taken over by JP Morgan but before Lehman Brothers went bankrupt. Mr. Zandi can be forgiven for surmising that the worst may be over, although the statement will no doubt be cringe inducing for any former investors in Lehman Brothers.

The primary drawback of this book, however, has nothing to do with timelines. It has to do with the author’s blatant conflict of interest. Mr. Zandi works for a subsidiary of the bond rating agency Moody’s. To his credit, he acknowledges his lack of independence on that issue and says that he will not be addressing the role of the ratings agencies. While he is absolutely correct that he would be conflicted in addressing the issue, it is impossible to write a proper analysis of the current financial crises without dealing with the ratings agencies. I believe that history will likely show that it was the ratings agencies and their conflicts of interest that were at the heart of the crisis. If the ratings agencies had not given these (now virtually worthless) securities an Aaa rating, most of the subsequent buyers would never have been allowed to purchase them in the first place. To put the author’s conflict in the proper perspective, it would be similar to the infamous analyst Jack Grubman writing a book on the tech bubble and saying that he would not address the role of telecom analysts because he has a conflict.

Mr. Zandi’s narrative flows well and does provide some interesting and relevant statistics, but his analysis, no doubt due to both his rushed timeline and inability to discuss ratings agencies, appears shallow at times. Many of his points are those you would hear on any business news program. If you asked Joe the Plumber or Tito the Builder to list the root causes of the financial crisis they would likely repeat most of those listed by Mr. Zandi, although Joe the Plumber might actually mention the rating agencies. I can’t help but think that some future author may be able to uncover some less obvious and more insightful contributing factors.

One example of his hurried and less than profound commentary is when he states that all asset classes had become overvalued. If the definition of overvalued is that they were higher then than they are now, then yes, everything was overvalued. But many of the largest, most actively traded companies in the United States were still trading well below where they were at the turn of the century. Many analysts would say that based on traditional fundamental analysis measures such as P/E and dividend yields that they were quite cheap by historical standards. The reason why many of these companies were so cheap is that the market was anticipating a slowdown of some sort due to the housing sector. Few investors were surprised that there was a decline in housing prices; what was surprising was the scale of the decline and the affect it had to the global financial system.

Mr. Zandi makes the well worn argument that a fundamental cause of the crisis was that nobody was doing the proper due diligence once banks began to move the mortgages off their own balance sheets and into pools of asset backed securities. This is not entirely correct. Because these mortgages were pooled and sold as bonds, it was the bond rating agencies who had responsibility for assessing the risk of these bonds. Banks did indeed become less diligent with their due diligence because they were selling off the mortgages, but what was the Bond Rating Agencies’ excuse for not doing the proper homework? I can think of only two causes. One would be that the rating agencies are largely incompetent at assessing these types of securities. The other is that they were perfectly aware that these securities were risky but classified them as investment grade so they could bring in more money, similar to the telecom analysts in the 1990s.

Despite its limitations, I did find Financial Shock to be an interesting read as the subject matter is so topical, but I suspect that if you are not planning to read a book about this in the next few weeks that you would be well advised to wait for the next expert to publish his or her take on the situation. The best book on this crisis will no doubt be written some time from now after the dust settles. This is too complex an issue properly analyze in a hurry.

Monkeys for Obama - November 2, 2008

I have been an admirer of John McCain for nine years, but in this US presidential election, I, along with my dedicated staff of monkeys, am endorsing Barack Obama for President. While I do believe Barack Obama is the best candidate for president, I do not get the same thrill up my leg that Chris Matthews and so many of Mr. Obama’s other supporters feel when listening to his oration.

Except for the “palling around with terrorist” nonsense, I agree with much of the criticism of Mr. Obama. Aside from his well documented lack of experience, his apparent unwillingness to clash with his own party is worrying given that the Democratic Party will not only have an iron grip on both Congress and the Senate but will also be frothing at the mouth to exact payback on the Bush administration and its policies. A certain amount of policy reversal is certainly warranted after 8 years of perhaps the most incompetent President in history, but there is a serious risk that the Democrats will go overboard. The President needs to act as a calming influence and a voice of restraint during this volatile time. While there are no clear examples of Mr. Obama challenging his Party as John McCain has challenged the Republicans, his rhetoric, notwithstanding some shameless union pandering regarding NAFTA, has been for the most part pragmatic, though clearly left of center. It is also worth pointing out that he has only been in the Senate for four years and half of that has been spent trying to secure his Party’s nomination for President, so he has not had much time or opportunity to take on his party. If he is elected by the wide margin that is expected on Tuesday, he will be in a much stronger position to chart his own course.

Whatever the risks of an Obama presidency, they are dwarfed in comparison to the risks of electing John McCain. His baffling choice of Sarah Palin for running mate suggests he may continue George W. Bush’s pattern of appointing woefully unqualified and incompetent people to the most important positions in the country.

Perhaps the single biggest reason why I can no longer support Mr. McCain is his temperament and judgment. The supposedly young and inexperienced Barack Obama has maintained a cool and consistent demeanor throughout the financial crisis, while the experienced John McCain has appeared to become discombobulated. Exhibit A would be his dramatic and bizarre announcement that he was suspending his campaign, which turned out not to be a suspension at all. Exhibit B would be his decision to make “Joe the Plumber” the focal point of his campaign. His inability to move on gives the impression that he has run out of ideas.

The John McCain who appears set to lose to Barack Obama is a much different person than the John McCain who lost to George Bush in the Republican Primary almost nine years ago. Someone who has only gotten to know John McCain through the current election would find it difficult to believe that he actually voted against the George Bush’s tax cuts. At the time he apparently believed that the country could not afford them. Instead of benefiting from being proved right by history, he is now proposing to cut taxes even further at a time when the United States is incurring the largest budgetary deficits in history. The John McCain of 2000 would have a great chance of winning this election. Unfortunately, the John McCain of 2008 may get blown out on Tuesday and deservedly so.

Market Massacre - October 16, 2008

Baron Rothschild once said that the time to buy is when there is blood in the streets. But that advice is much more difficult to follow when some of that blood is your own. In an earlier posting I discussed how the only investment I made this past summer was in a good set of golf clubs. I argued that golf clubs are probably one of the best investments you can make in a bear market. In a sign of how bad things have become, I looked at my golf clubs the other day and even they have dropped in value as I was missing my five-iron.

Investors are currently facing a difficult choice. The entire world may be on the brink of a serious recession and conceivably even a depression. If that is the case, the best thing any investor could do would be to hold cash. However, if the concerted efforts of Governments and Central Banks are able to get credit flowing again, this could turn out to be a once in a lifetime buying opportunity. A year from now you will look back on this and the correct decision will appear obvious. Unfortunately, hindsight always comes too late and it would take a mix of genius and clairvoyance to perfectly time the market right now. I will only point out that the markets are pricing in a very bleak future for the global economy. To put things in perspective, many major indices are worth about the same as they did almost a decade ago. If things turn out only slightly better than currently forecast you will likely make an enviable return over the next few years.

While the potential upside is much greater now than it has been in years, so is the potential downside. This is a classic illustration of the principle of investors expecting more return for taking on more risk. If you were to decide to roll the dice in this market, it should go without saying that you should not invest money that you might need in the next year or two. I would also suggest that you keep in mind that while many, and probably most, stocks will see a major price appreciation in the coming years from this point, many companies may not survive this crisis. To avoid the bad luck of picking one of the stocks that will not survive, it may make sense to purchase some index funds instead of individual stocks. In my own case, I will be using cash from some retirement account GICs that matured some time ago to purchase index funds. To smooth out the timing risk, I will be buying small allotments every couple of weeks over the course of the fall. Depending on how the market and my nerves are holding up in a few weeks time, I may also decide to take a chance on one or two individual stocks.

John McCain's Harriett Miers - October 7, 2008

Although my website is about investing, I am writing today about John McCain. That is one of the upsides of not having an editor to overrule you or readers to complain. I have been a devoted fan of John McCain since he first ran for president of the United States in 1999. I was attracted to him because he was unlike any other politician I had ever seen, and I have seen quite a few up close.

Whereas most politicians and even (perhaps even particularly) people who work for political parties are united in a common goal of self advancement, had proven himself to be someone who could put others ahead of himself even under the toughest of circumstances. There isn’t one politician in a thousand who would turn down release from a POW camp before those that have been there longer have been released. I had also never seen a politician be quite open and forthright about his own shortcomings and failings as McCain was in 1999. Unfortunately his straight talking style was not enough to defeat George W. Bush for the Republican nomination, to the great detriment of the United States and the world.

I have followed his campaign very closely this time around and initially my admiration for him grew as he took positions on immigration reform and the troop surge in Iraq that were initially unpopular. As he did in 1999, he appeared to stick to his principles and this time he was successful in becoming his party’s nominee for president.

Unfortunately, my support for John McCain has been steadily eroding the more I learn about, and the more I hear from, his choice for Vice-President, Sarah Palin. While John McCain did not call to ask my opinion, I had always believed that Mitt Romney would have been the logical choice. Even though the two did not get along well, with McCain showing a particular antipathy towards Romney, Romney would have been the perfect balance to his ticket as he has the in depth knowledge and experience with financial markets that Mr. McCain lacks. As someone who has been a public figure for years, and as the son of a former governor, there was little more the press could dig up on him that they did not already know.

Of all George W. Bush’s shortcomings, the most damaging was his judgement in selecting and replacing government officials. He showed a tendency to pick people he liked and who were loyal to him instead of those who were most likely to deliver results. When they did not perform, he remained loyal to them. While this may be admirable in a friend it is not in a president. Any company president who used that method would quickly begin to struggle, much like the United States has in the past eight years. The president’s disregard for competence was highlighted in his Quixotic attempt to nominate his own personal lawyer, Harriett Miers, someone with no experience as a judge, to the supreme court. That stood as the single most appalling human resources decision in history, until John McCain nominated Sarah Palin as his vice presidential running mate.

The point has been made repeatedly that with John McCain’s age and history of cancer, there would be a significant possibility of the Grim Reaper causing Sarah Palin replacing him as president should he be elected. While that is certainly a chilling thought, even if we knew with certainty that John McCain would survive the next four years, how could anyone have any confidence that he would do a better job than George Bush at filling important posts with qualified people? With all the current troubles awaiting the next president, the United States cannot afford another president who surrounds himself with incompetent people.

Efficient Market Plane Crash - September 17, 2008

As you would expect from someone with a website like Blindfoldedmonkey.net, I have long had a keen interest in market efficiency. The reason I created my website was not to argue for or against market efficiency, but merely to explore the question. That question may finally have been answered on Monday, September 8th, when Google, Bloomberg, and a newspaper with an impressive archive of news stories combined to shatter the efficient market hypothesis into pieces.

On the preceding Sunday, Google’s search algorithm dug up an article written in 2002 about United Airlines’ parent company UAL filing for bankruptcy protection in the archive of the South Florida Sun-Sentinel’s website. The exact sequence of events remains murky, but the article was highlighted by Google and was later circulated by Bloomberg and then picked up on by various news organizations. Once reputable news sources like Bloomberg were associated with the article, the stock immediately lost about 75% of its value in the first 15 minutes of trading. Trading was halted shortly thereafter and when it resumed the shares quickly recovered most of their losses.

What makes this story so incredible is that the article was never actually republished and apparently it was clear that it was published in 2002. It is also worth noting that this is not some small company that only has a few thousand shares trading in the run of a day. This is a high profile company with significant analyst coverage. If this can happen with a large company like UAL, one has to wonder what kind of wild inefficiencies occur in the stock prices of small companies on the venture exchange. Presumably there were investors out there who knew right away that the story was ancient history and made a killing on the stock in a few hours. If markets were efficient, it would be impossible to make such easy arbitrage profits on publicly available information.

I am not about to rush out and cash in my index funds, but this case does give a hint of some of the downsides of passive investing. The more passive investors there are, and the more faith they put in the efficiency of the market, the more vulnerable they will be to being lead off the edge of a cliff. Those who maintained a market weighing in US financials over the past year and a half may tend to agree with me on that point.


An Almost Meeting with Robert Novak - August 30, 2008

A number of years ago, I was listening to a radio interview with Rex Murphy in which he was asked which three people in the world he would most like to have lunch with. Two names came to mind immediately; satirical novelist Mordecai Richler and columnist Robert Novak. I considered Mordecai Richler to be my more realistic chance as he was known to frequent various bars near Montreal and would spend his winters in London, a city I would pass through frequently in those days. Unfortunately, Mr. Richler suddenly became sick with cancer and died shortly thereafter in 2001.

This summer, my wife and I decided to take a trip to the United States that included a stop in Washington DC. Not wanting to take the chance of my favourite columnist suddenly suffering the same fate as my favourite author, I couriered a letter to Mr. Novak in which I asked if he would allow me to meet with him and autograph my copy of his autobiography. I was I was ecstatic when I received a call from his assistant the day after I sent the letter and she set up a time for me to meet him. Unfortunately, excitement soon changed to apprehension as the day I left on my trip Mr. Novak accidentally hit a pedestrian with his Corvette. Initially I thought that he might have to cancel our meeting because of some court date. In the end, I did not get to meet Mr. Novak but it was because of something much worse than a traffic ticket. That weekend he collapsed while visiting his daughter in Cape Cod and was diagnosed with a brain tumor. I stopped by his office to drop off a card and a bottle of wine to his assistant. She told me to leave my book there and he would sign it and send it to me on when he returned. Unfortunately, in the airport on the way home I saw that Mr. Novak had announced he was retiring and that his prognosis was “dire”.

Last week I received my book in the mail unsigned but with a note saying that Mr. Novak has been too ill to sign it and his condition was unlikely to improve in the near future. I remain hopeful that he will miraculously recover, but he has never been known for exaggeration or being overly dramatic, so I can only assume that his situation is every bit as dire as he says it is.

One of the few things I find more interesting than the stock market is politics and Robert Novak was able to write at least three columns a week for 45 years and always managed to provide some keen insight or inside information in every one. My own attempt to make a couple of postings on my website a month has given me an even greater appreciation for his talent and work ethic.

As big a fan as I am of his column, I am as much a fan of the man behind the column. Many people with only a passing knowledge of the man will know him from the controversy surrounding the leak of the identity of Joe Wilson’s wife, CIA employee Valerie Plame, and consider him to be just another right wing commentator. But in an era when political commentators tend to agree with everything one political party does and denigrates everything done by the other, Robert Novak has been able to maintain his independence and did what he felt was right, even if that made him some enemies from time to time, as in the case of the Valarie Plame affair. Mr. Novak sat in silence and listened to countless people state that he was used by Karl Rove to smear Joe Wilson, but Mr. Novak, who would not compromise his source, kept it to himself that it was actually Richard Armitage, very much a foe of the neoconservatives, who told him that Joe Wilson’s wife worked at the CIA. Furthermore, the conversation had been initiated by Mr. Novak. Nobody had called him to plant a story. He could have spared himself from a great deal of abuse by stating how he learned that Joe Wilson’s wife worked at the CIA but had too much integrity and pride in his job as an investigative journalist to reveal his source. The person whose reputation should have taken a beating in all of this is Richard Armitage, who let Robert Novak twist in the wind for well over a year even though he had told the special prosecutor, Patrick Fitzgerald that he had been Mr. Novak’s source.

People who depend on late night talk shows for their news likely believe that Robert Novak was a mouthpiece for the Bush administration, but they may be surprised to know that he was very critical of the Iraq war from the very beginning and was derided as a Paleoconservative by the neoconservatives who championed the war. In the years following the war he has often found himself treated as an outcast by both the left and the right.

Mr. Novak has on numerous other occasions taken positions that have stood in stark contrast to many of the traditionally core positions of the Republican Party. The best example of this would be his longstanding championing of the cause of the Palestinian people, in particular the beleaguered Christian minority in Palestine. Long before 911 few people in the United States had the interest or the courage to look at the Israeli-Palestinian conflict from the point of view of the Palestinians.

Regardless of how Robert Novak describes his prognosis, I am holding out hope that he will beat cancer and return to his column. The closer we get to the election the more I miss his column.

Golf Clubs: World's Greatest Bear Market Investment - August 19, 2008

At the beginning of this summer I made one of the smartest investments of my life; I bought a good set of golf clubs.  In keeping with the spirit of diversification, I replaced my embarrassingly cheap and worn assortment of golf clubs with a Taylor Made driver, a set of Calloway irons, and a Goliath putter. I started playing more rounds of golf, practicing at the driving range, and spending more time on the putting green. Instead of watching BNN videos, I spent some time watching YouTube videos of PGA golfers’ swings.

While my golf game was improving, the market has gone through a severe bout of Schizophrenia. Early in July before going on vacation, I wrote a profile of ICICI Bank which was then trading around $28. Shortly after I wrote the profile news came out that Freddie Mac and Fannie Mae were in trouble and I was preparing to write an update to warn people to proceed with caution on the stock, and then within days it had skyrocketed to $37 as the worry eased. I thought I had once again missed out on a great opportunity to load up on the stock but here we are in mid-August and it is back below $30.

If I were just a little smarter and had a lot more time, I no doubt could have made some nice profits with some short term trading, but knowing my limitations I decided the most sensible thing someone like me could do was to just withdraw from the market altogether. The last trades I made were back in the spring when I took profits in Dianna Shipping and Scandinavian Minerals and I haven’t even logged into my online investment account in months.

Nearly all of the stocks that were on my watchlist in the spring have become significantly cheaper and less volatile in the past three months and I intend to add one or two of them to my portfolio in the next few weeks. I am not attempting to call a bottom on this market, but I believe that a disciplined investor should selectively add to his portfolio during bear markets.  It isn’t easy, but it has generally worked better in the long term that rushing into the market when it is at its peak.

Confessions of a Wall Street Analyst - book review, July 15, 2008

In Confessions of a Wall Street Analyst, former top-ranked telecom analyst Dan Reingold provides some interesting insight on the workings of Wall Street analysts, and it is not a very pretty picture. The book is written in the years following the bursting of the tech bubble, so while his account of rampant conflicts of interest among analysts is appalling, it is essentially old news here in 2008. Nevertheless, Mr. Reingold has crafted a compelling story that provides behind the scenes details that you would not get from reading newspaper articles.

As I have said before, I generally enjoy it when authors rip on someone, and Dan Reingold did not disappoint in this book. If there is one underlying theme throughout this book, it is that Jack Grubman was horribly corrupt and nowhere near as good an analyst as Mr. Reingold. More civilized readers than I would likely find this excessive, but I found it spiced up what many would consider a rather pedantic subject matter.

For me, what sets this book apart from almost any non-fiction book you will ever read is Mr. Reingold’s honesty. With almost no exceptions, authors who recount a story in which they were involved invariably portray themselves slightly more positively than the New Testament portrays Jesus. Mr. Reingold candidly admits to some examples of where he made mistakes and where his performance was lacking. This may not sound like much but you will have to read at least 1,000 books to find an author who recounts a story about himself in which he does not come across as a saint.

Honesty aside though, after reading of his successes and failures, I cannot truly say that Mr. Reingold’s analysis provided any more value to investors than a blindfolded monkey randomly assigning buy and sell ratings. Given that a blindfolded monkey would have made an equal number of sell ratings during the bubble, you could even make the case that the monkey would have provided more valuable recommendations (because he is not here to defend himself, I should point out that Mr. Reingold provides an explanation in his book as to why sell ratings are so much rarer than buy ratings). This sounds like a cheap shot at the author, but it is not my intent. My point is that the market may be so efficient that analyst buy and sell recommendations in general may not be nearly as useful to investors some would like to believe.

Whatever your view of stock market analysts, if you have an interest in the stock market you will likely find Confessions of a Wall Street Analyst to be a fascinating and entertaining read.

ICICI Bank - July 9, 2008

I came close to buying ICICI Bank several years ago. I had been watching it for months and was about to place an order at a little over $21 but I hesitated and the stock ran away from me, eventually peaking at over $60. As I watched it go up I couldn’t help but think that my patience had backfired on me as I missed out on a triple in less than two years. Throughout that time, I checked the price of the stock almost as often as the stocks I own, but it never got to the point where I felt the risk return was favourable enough for me.

If there has been one silver lining of the global credit crunch, it is that stocks like ICICI are starting to look like bargains for the first time in years. With the stock recently trading below $27, I may finally be time to pull the trigger on this one. The reason why I am still a little hesitant to start loading up on ICICI is that I do not fully understand the fine details of the bank’s business or all of the associated risks. Moreover, I have not, and will not, spend any time trying to figure it out. I simply don’t have the time or the mental bandwidth to become an expert on the Indian banking system.

My thinking is not particularly complex on this stock. ICICI is the second largest bank in India, which is the world’s largest democracy and is one of the fastest growing economies in the world. If this growth were to continue even at more modest levels and the country were to at least approach 1st world status, it would stand to reason that ICICI would grow exponentially as the majority of the country’s billion people began taking out mortgages and car loans. I am betting that in the next few years the second largest bank in India, which has one billion people, will have about the same value as the second largest bank in Canada, which has a little over 30 million people. I do not think that is a particularly bold bet, but if it were to happen I would be looking at a healthy return on current prices.

It is also worth keeping in mind that this is not purely an Indian bank, but has a presence throughout the world and is capitalizing on the vast, and often well paid, Indian expatriate communities. I even have an online account with the bank. Its global growth should hopefully smooth out some of the turbulence that goes along with being an Indian based bank.

Investing in any financial stock at this time is risky, let alone one based in India, but if you have the stomach to weather some volatility, this may be a good buying opportunity. While I realize that there is a chance ICICI could go bankrupt, I believe there is a greater chance that the stock will triple than go to zero.

Altius Minerals - June 24, 2008

BCE - June 9, 2008

A few months ago I compared the advantages of investing in BCE versus Webtech wireless. At the time I argued that the market was trying to tell you that there was a strong chance that the deal was not going to go through, at least not at $41.50. One of the cardinal rules of investing is to not gloat about a stock pick until after you’ve sold it, so I will merely point out that the stocks have been going in opposite directions as of late due to some new contracts for Webtech and some new hurdles for takeover of BCE. The crux of my argument was that the potential upside versus potential downside was much more favourable with Webtech. Now that the market has apparently settled on the fact that the deal will not get done at the original price, and perhaps not at all, investors are focusing on what the price of this stock would be without a takeover. The conventional wisdom seems to be that it is somewhere in the low thirties. Depending on the mood of the market, that may be true in the short term, but I can’t help but think that both the stock and the company are likely in for a slow but steady decline.

With the recent auction of wireless spectrum, BCE is going to be facing increasing competition, which could cause it lose customers and lower prices for existing ones.
Unfortunately, instead of focusing on preparing for these challenges, Bell’s management has been distracted for the past year with its attempt to sell itself. Even if management did have the time to focus on developing a successful business strategy, I do not have faith in their ability to do so. The CEO of BCE was a civil servant, and BCE has been run much like an inefficient, lumbering bureaucracy, not the dynamic, innovative company it needs to be if it wants to survive. Its most comparable company and biggest rival, Telus, has for many years been three steps ahead of BCE. Bell’s advertising, which involves cartoon beavers, look embarrassing when compared to Telus’s stylish and understated.

If you would like to see a small but emblematic example of BCE’s business performance, you should go to their website and check out the Russian television stations that they have to offer. One of the stations is NTV, a formerly controversial station whose owner was later driven out of the country. If you click on NTV in the Russian programming section on the website, you see a description of the NTV from Newfoundland. I’m sure this has been pointed out to them every time someone subscribes to one of these stations. I know for a fact that it has been pointed out at least once because I am a subscriber and I mentioned it to them when I ordered the station. This is admittedly a very small issue but it does give some hint at the kind of pride in work and attention to detail that exists at the company. Either the front line staff didn’t bother to report the issue or management just doesn’t care. This is the type of thing that is common in government departments but not in successful businesses.

One thing I took from a Random Walk Down Wall Street is the importance of earnings growth. Earnings growth will eventually force an undervalued stock to go up. On the other hand, declining earnings can cause a cheap stock to stay cheap forever. If this takeover does not happen, I can see BCE becoming at best dead money for years.

 

New Stock Watchlist Section - May 25, 2008

I have added a new feature in the Portfolio section of the website that lists the stocks that are currently on my radar and which I am researching. Right now it is just a list but I will be adding some more detail shortly. For instance, some stocks I like and am waiting for an entry point but others I am deciding if the company is worth investing in.

India Arriving, by Rafiq Dossani - book review, May 19, 2008

As the title indicates, this is a book about India. If you would like to learn more about India, you should definitely consider buying this book. If you are also the type who prefers a book that focuses on its subject matter and does not get distracted with attempts at humour or occasionally wandering off with interesting but tangential anecdotes, then this will be required reading for you.

It is difficult to criticize India Arriving, but I will give it a shot. This book is very utilitarian, similar to a well made, reliable toilet or pair of toenail clippers. Rafiq Dossani gets a passing grade for technical merit but a zero for artistic impression. The author appears to have lived a remarkably interesting and accomplished life, but somehow manages to come across as dull and boring. While he has certainly done many interesting things in his life, Mr. Dossani is now very much an academic and this book reads much like a textbook on Indian history and public policy. Luckily for the general public, but unfortunately for his publisher, nobody can force you to read his book. I realize I am being somewhat unfair, but I generally like authors who sprinkle plenty of interesting anecdotes throughout the book or rip on someone or something. This book offers neither. I did get the sense though that deep down he would like nothing more than to take a few shots at the Chinese. At one point in the book he discusses how it is “puzzling” that Indians have been so disproportionately successful in Silicon Valley. I can’t help but think that he does not find this puzzling at all, but believes that the true reason is that Indians are smarter than everyone else, in particular the Chinese, but he is too professional to write it. In the author’s defence, there are a few sections of the book where he becomes less professorial, particularly when discussing the Gujarat riots. This is the one part of the book that is likely to be viewed as controversial.

While my concerns with the book are mostly stylistic, I do have a few issues with the content itself. While I most definitely learned a great deal from this book, Mr. Dossani devotes more time to dull public policy issues (in particular as they relate to information technology) than to deeply important events in Indian history, such as the wars with Pakistan. This is fine if you are from India and know those topics inside out, but it is a drawback for an outsider such as myself trying to learn about India. The most frustrating example of this is in the author’s discussion of the caste system. He provides an overview of what it is and discusses some of the political implications of the system, but he does explain how this system actually began. India is the only place in the world that has such a formal and historical classification of its people. Surely an understanding of why such a system took root in India and has persisted for so long would provide valuable insights for investors or people doing business in India.

On balance though, the content of the book is solid and the author’s points are well presented. The section on the history of the Indian stock market was particularly interesting for me, not just because I am so interested in stock markets but because the author has a great deal of practical, firsthand experience with the Indian exchange. If you are only going to buy one book on India, I would consider looking elsewhere. However, if you have a keen interest in India, and are not expecting a riveting page turner, India Arriving is worth reading.

Inside Information – commentary, May 5, 2008

While there is no substitute for the analysis of a company’s financial statements, investors can often gain some insight on the true health of a company by actually trying to buy the product or service that is sells. Often times this information can be far more valuable than anything found in even the most transparent annual report. To take a simple example, if you were thinking about investing in a restaurant chain, it would be worthwhile having a meal there. If the food and service are terrible, you might want to reconsider your choice even if the numbers look good.

I was looking for a particular Blu-Ray movie a few weeks ago, and after coming up empty at Wal-Mart and Future Shop, I decided to stop by Zellers as I have heard that they are the last place to get sold out of a lot of popular items. When I first walked in it felt like the store was closed; I saw only a half dozen shoppers in the entire store. I went to the electronics department and looked around for a while without seeing any Blu-Ray movies. I asked a couple of older ladies who were working there if they had any Blu-Ray movies in stock and they looked at me like I was speaking Aramaic. They had never heard of a Blu-Ray movie, even though they were in the electronics department. Neither Zellers nor its parent, HBC, is a public company but if they were that visit would have helped me avoid falling into a value trap. If the people in your electronics department do not know what a Blu-Ray movie is 4 years into your turnaround plan, there isn’t much hope for the future.

This reminds me of the case of Circuit City which not too long ago had the brilliant idea of cutting costs by firing most of their highest paid salespeople. The fact that these were also their best salespeople didn’t seem to factor into the decision. Predictably, the company has suffered considerably from this decision and is losing money while its rival Best Buy continues to grow its sales by double digits. Because there is a lag of several months before deteriorating performance shows up on quarterly financial statements, a visit to Circuit City could have provided a hint that the strategy was a failure and would have allowed the investor to get out of the stock before the herd started stampeding to the exits.

Aside from the fact that it was simply overvalued, one of the reasons I have avoided buying Loblaw is that I so strongly dislike shopping there. For years I have driven past the Loblaw near my house to go to Sobeys because the service was so much better. Even with the longer drive I get back to the house sooner because there are more people working on the checkout. Despite all the talk of fixing their inventory problems, my wife recently went to Loblaw to buy some chicken breasts for a dinner party we were having and found they were all sold out and wouldn’t have any more in for several days. While the Sobeys up the road did not have as much lawn furniture or baby clothes, they did have all the chicken we wanted. While the stock has gotten cheap lately, I will not be investing money in the company if they cannot even keep chicken on their shelves.

I’m certainly not suggesting that investors should stop looking at financial statements of companies. In fact, one of the worst things an investor can do is to blindly invest in a company whose products they like. A great company does not necessarily mean it is a great stock, as anyone who bought Amazon, or even GE, back in 2000 has learned. Nevertheless, I do believe though that taking the time to sample a company’s products or services can be a fabulous source of supplemental information and can help investors make better decisions.

A Random Walk Down Wall Street - book review, April 27, 2008

If you publish a website called blindfoldedmonkey.net, it is mandatory to speak highly of “A Random Walk Down Wall Street”. This book goes to the very heart of the reason I have blindfolded monkeys picking stocks every quarter. If you are just getting involved with the stock market and are considering buying stocks or mutual funds for the first time, I can think of no better book to recommend. The primary thesis of the book is that the stock market, while perhaps not perfectly efficient, is efficient enough so as to make it highly improbable that any individual investor or mutual fund manager will consistently outperform the market over time. If there is a golden rule in investing, this is it.

One of the things I admire about Mr. Malkiel is that he is not completely dogmatic in his views. While he makes a compelling argument that the movement of stocks is largely random, he does acknowledge that there have been many cases were this randomness has been violated. He does qualify these examples, however, by showing how factors such as transaction costs and taxes can make it difficult to consistently exploit temporary non-randomness in the market.

The book discusses some of the most common techniques used by investors to beat the market. While he takes the stance that none of these approaches will allow you to consistently outperform the market, fundamental analysis is presented as the best, or least bad, method. The author acknowledges, correctly, that fundamental analysis will at least prevent investors from being caught up in the most obscenely inflated stock market bubbles. Not surprisingly, the method that gets the worst treatment is technical analysis, which involves predicting a stock’s future price movement based on analysis of its past price movements. Technical analysis, despite its name, is the least scientific of all investment methods and so it is the easiest target for an academic like Malkiel. By far the best point he makes though is that technical analysts never seem to have much money. The richest man in the world uses fundamental analysis but technical analysts, according to the author, tend to have holes in their shoes and frayed shirt collars.

While I admire Mr. Malkiel’s ideological flexibility, there are certain areas of the book where he slips into ideological contradiction. The worst example of this is where he discusses the prospect theory problem of investors selling their winners and holding on to their losers, but later states that stocks that go up in one period invariably go down in the next. Aside from contradictions like these, the biggest shortcoming of the book is that he does not address the implications that the rise of index funds will have on the efficiency, and by extension,  randomness of stock markets. Presumably there is some point at which the amount of passive investment in the market will begin to negatively affect the efficiency of markets. This book was written in 1973 when index funds were essentially non-existent. With the incredible increase in passive index investing in recent years, it may be time to stop updating the book and start work on a new one. Whatever its shortcomings, A Random Walk Down Wall Street remains required reading for any investor.

Financial Advisors or Financial Salespeople? - April 11, 2008

Mutual fund companies like to promote the professional advice that you can get from their highly trained advisors, but the reality is that most financial advisors are not advisors at all; they are salespeople. There is nothing wrong with being a salesperson as long as you are not pretending to be something else.

While many financial advisors have business degrees, many firms do not require any post secondary education. The only level of education that you can be sure a financial advisor has in Canada is the Canadian Securities Course. A classic example of this is Primerica. Their website states that “Best of all, you don’t need a degree in financial services to start your own Primerica business: you just need a desire to help people and a willingness to help yourself at the same time!” While a desire to help people is admirable, some investors may expect a little more than that from the person who is helping them plan for their retirement. The products that Primerica and any other mutual fund company sells are all completely sound and legitimate. There is absolutely nothing fraudulent about what they do, but they are not always providing balanced, independent financial advice to their clients. They are salespeople paid to sell their company’s mutual funds, just like a car salesman is paid to sell his company’s cars.

I personally attended a Primerica recruitment session several years ago and was quite taken aback by the level of stock market knowledge that the other prospective hires had and even more so by the compensation structure of the company. Before I had even agreed to join the company, I was encouraged to recruit other people as I would receive a percentage of their sales, just as the person who would hire me would receive a percentage of my sales. The person who was going to hire would also “accompany me” for my first 10 sales. The reason for this was not so that the person could get sales for herself, but rather so she could help me learn. There was no suggestion, however, of me accompanying her on any of her leads.

I’m picking on Primerica a little bit here, but the financial advice that small investors will get, regardless of the qualifications of the advisor/salesperson will always be the same; buy our mutual funds. The only specialized advice you will get, and it will be the same for all advisors, is that they will ask you what your risk tolerance is. If you are young and not afraid of risk they will advise you to buy (their company’s) growth funds. If you are older and have a lower risk tolerance, they will advise you to buy (their company’s) balanced funds. That’s it. In a sense, Primerica is only being honest by not requiring a business degree because you don’t need one to sell mutual funds. They, like most mutual fund companies, have an entirely, or at best primarily, commission based compensation structure, so their motivation is entirely focused on selling as many mutual funds as soon as possible. There are little or no commissions for advising someone to pay down debt, buy GICs, or to buy index funds.

As I’ve said, there is nothing wrong with being a salesperson and the products that mutual fund companies are selling are sound investments, but investors should bear in mind that the person selling them their mutual funds is not necessarily an expert on finance and the stock market. This fact is particularly relevant these days in light of the recent troubles in the asset backed securities market. Many investors bought these products on faith from financial salespeople who did not have a complete understanding of the true risks associated with the products they were selling.

Risk of going to zero - March 24, 2008

Value investors, myself included, typically look for low price to earnings ratios to help them identify bargain stocks that can provide long term value. This has proven to be a very effective method in many instances as it can uncover stocks that have been driven down to unwarranted levels by fears in the market or companies that for one reason or another have not caught the attention of large investors. There is a danger, however, in focusing too much on P/E ratios to identify cheap stocks, particularly in the current environment. It is important to take into account the business risk of the companies behind the shares.

The share prices of US financial stocks like Citibank are not at their current levels because they are reflecting the revised earnings estimates. They are trading at this level because the share prices are factoring in the possibility that these companies may fail and either go into bankruptcy protection or get taken out at a fraction of its price such as what happened with Bear Stearns.

If Citibank is not destined to collapse, then the P/E ratio is telling the truth and the stock is very cheap, but that is a big if. If you buy Citibank under $20, there is almost no chance that the stock will be trading at the same level in two years. There are only two possible outcomes: you will have lost substantially all of your investment or you will have doubled your money or better. Last week Lehman Brothers reported a large drop in earnings but better than expectations and the stock soared almost 50%. This was only partly due to investors adjusting their value models based on the higher earnings. The biggest reason was that the risk of bankruptcy was believed to have been diminished.

The risk reward is probably in your favour right now, but investors should be careful not to confuse these stocks with blue chip conservative investments. I would suggest that investors treat these companies the same way they treat high risk high reward speculative resource companies and only invest money that they can afford to lose. 

Nortel Networks - profile, March 17, 2008

The topic of my latest stock profile is Nortel Networks, one of the all time great destroyers of value in the history of securities trading. Nortel caught my attention again recently when they announced yet another round of layoffs as part of their latest restructuring attempts. I also think that Nortel offers a valuable lesson for contrarian value investors like myself who have trouble resisting stocks that have been hammered by the market. I have read and heard a mountain of research and opinion on investing strategies, but one of the most reliable rules in Canadian stock market investing in the past decade has been to not own Nortel. This is second only to always sell Nortel short.

Like most value investors I like to focus on P/E multiples when evaluating stocks, but Nortel is in a situation where these types of measures have become less relevant, and not just because it does not have any earnings. In order to thrive in the long term and create lasting value for shareholders, businesses need to do something better than anyone else. Google has the most successful search engine, Microsoft has its operating system and office software, RIM has its push e-mail, etc. In all the BNN programs, financial articles, and even conversations with computer nerds (I work in an IT company), I have never found anyone who could offer a clear explanation of what it is that Nortel does better than anyone else. There may very well be something, but I have not heard of it. If any Nortel employees ever come across this article, I would invite them to enlighten me. You can’t blame a layman like me for getting the impression that Nortel has somehow been following the inverse of General Electric’s strategy and is aiming to be last or second last in all its segments.

One of the biggest traps that value investors can fall into is to look at a stock that is down 50% and think that it can’t go down much more. The only valuable thing that Nortel has done for investors is to illustrate the danger of this assumption. Since it’s high of around $1,250 per share in 2000 (taking into account the reverse split), Nortel has fallen by 50% an incredible 18 times. You can be sure that after each 50% drop there were self-described value investors who bought in thinking that it couldn’t possibly go much lower. The long term stock chart for Nortel is so bad that it could easily be mistaken for an illustration of the mathematical concept of a limit. In calculus, if an equation has a limit of zero, it will continue to approach zero into infinity without ever exactly reaching it. While I sincerely hope that Nortel does manage to turn its business around, in theory, this stock could continue approaching zero and reverse splitting its shares for another decade.

Mike Zafirovsky had a great reputation when he came to Nortel, but I have not seen any evidence that he has a solid long term plan for the company. What I have seen is a lot of layoffs. With some other companies in the past, this has been a short sighted strategy to achieve bottom line profits in the short term. The thinking behind this is not particularly profound; cut costs faster than revenues are declining. While this can produce profits, it often does not lead to a stronger company in the long run. Unfortunately, the only argument I can make for buying Nortel here is that it has come down so much that it can’t possibly go much lower…

Phoney Bear Market?- February 29, 2008

When Germany invaded Poland in 1939, all of Europe’s worst suspicions of the Nazis were confirmed, justifiably causing widespread panic about what the future held. Shortly after the invasion, most countries in Europe were formally at war and their citizens braced themselves for the worst. But after Hitler had defeated Poland, there was a lull in the fighting from the fall of 1939 to the spring of 1940 and the fear began to subside, leading some to label it the “Phoney War”. Some experts postulated that Hitler was satisfied with his seizure of Poland and the Sudetenland and had no further territorial ambitions and the war for a time earned the moniker of the “Phoney War”. These hopes were soon shattered as the world was plunged into the most destructive war in history.

I can’t help but think there are some similarities with the stock market right now. All of the stock market bears’ most dire predictions seemed to have come true in the second half of 2007: there was a complete meltdown of the subprime mortgage sector, major banks have been caught up in a variety of risky structured investment vehicles leading to billions of dollars in write downs, the US dollar has devaluated, causing a spike in the price of oil and gold, housing prices are falling and growth has slowed to the point where the country may already be in a recession.

Investors initially panicked at all this news and the markets have certainly taken a beating, but there seems to be an eerie calm in the market right now. Although the economic indicators keep getting worse, there may even be some optimism creeping back in the market as investors wonder if their worries were perhaps overblown and we are perhaps in a “Phoney Bear Market”. This optimism is not entirely unwarranted, as both the congress and the Fed are doing everything they can to prop up the economy and in most sectors corporate balance sheets have never been better.

I do believe that anyone who has a very long time horizon is unlikely to get badly hurt with the type of stock market valuations we see right now, but there seems to be a few too many bulls in the market for my liking. Investors seem to be searching for any silver lining they can find in the storm clouds moving over the economy, but if we get a situation where the sky opens up and we get a downpour of bad economic data for a few days, the market could get hit with a blitzkrieg as the bulls run for shelter. This would not be pretty, but for those with plenty of cash and strong nerves it could turn out to be a great opportunity for some profiteering.

Nuclear Power is not the Answer, by Helen Caldicott - book review, February 11, 2008

I bought this book at the same time that I bought “Power to save the world” because I wanted to read conflicting opinions on pros and cons of nuclear power. On that point, and on that point alone, I was not disappointed. To say that Ms. Caldicott is not in favour of nuclear power would be an understatement akin to saying that Hitler was not much of a Zionist. I like to consider myself a fairly well read individual, but this, by a country mile, the worst book I have ever read in my life. While Ms. Caldicott is a froth-mouthed rapid anti-nuclear crusader, her book did more to convince me that nuclear power may be the way to go than the pro-nuclear “Power to Save the World”.

Ms. Caldicott’s polemic against the nuclear industry has only served to stereotype the anti-nuclear movement as a bunch of fanatical left-wing nuts. This book is an affront to intelligent, open minded people everywhere. I quite literally felt that my intelligence was being insulted as I read this book, and I would strongly caution that anyone who has ever tried and failed to publish a book should avoid reading anything by Ms. Caldicott lest they suffer a massive rage-induced stroke. On the other hand, if like me you have never tried to publish anything, this should give you hope that if she can do it, anyone can do it.

I’m reminded of a little episode that happened way back in high school in calculus class. The teacher had put a problem on the board and went around the class to look at the students’ answers. When he came to my friend, who spent more time passing notes than taking notes, he just stood staring at her answer with a puzzled look. When she asked him if she had done it right he just shook his head said “There is more wrong with that answer than I can express in 50 words or less”, and walked on. I feel like I would need a book of my own to properly critique this book, so I will simply a few examples to give you feel for the type of book this is.
On the cover of this book is a quote from Naomi Klein in which she states that Ms. Caldicott has the rare ability to combine urgency with humor. I did not find any humor in this book, but perhaps that is just me. Perhaps more insightful readers will pick up the subtle humor in the passage where Ms. Caldicott, when discussing the potential effects of a nuclear accident in New York, writes “Consequently, the symptoms that will be experienced by people in Westchester County and Manhattan include: acute loss of hair, severe nausea, vomiting and diarrhea, bleeding from every orifice – hose, mouth, gums, stomach, and bowel – and massive, overwhelming infection.”

The closest that Ms. Caldicott comes to humor, albeit clearly unintentional on her part, is when she says that “the design for an atomic bomb can easily be found on the internet; some basic materials purchased at the local hardware show will complete production.” I find it infuriating that she apparently assumes I will take that as fact and not wonder if there was another body of thought that would suggest it is not so easy to pick up a few things from the hardware store any make a nuclear bomb.

Ms. Caldicott states in her book that every male in the northern hemisphere has a tiny amount of plutonium in his testicles from radioactive fallout that is still falling on the earth from the upper atmosphere, which was polluted by the atmospheric weapons tests…” If she really had a sense of humor, she should have given us a few funny anecdotes from her time spent traveling around North America gathering information on the plutonium content in men’s testicles.
I am someone who actually enjoys a good spirited debate, be it about business, politics, or sports, and one thing I’ve noticed is that when someone resorts to personal attacks and insults it is usually a sign of the weakness of the person’s argument. Consistently throughout her book she portrays her opponents not as fair minded people who have a difference of opinion with her, but as liars or as simpletons who have been manipulated by the nuclear industry and, even worse, the Bush/Cheney administration. In reference to Dr. James Lovelock, a highly regarded scientist and environmentalist who recently came out in favour of nuclear power, Ms. Caldicott but does not mention any of his reasons but instead simply states that he now “wrongly advocates the use of nuclear power as one solution to the global warming crisis.”

I could go on and on with more examples of absurd bias childishness, but there is no need to beat that dead horse. If you have made up your mind that the nuclear industry and all who support it our evil and just want to see someone rant about it, by all means buy this book. If you are someone who wants to weigh the pros and cons of nuclear power, you should look elsewhere. I rate this book 0 out of 5 bananas.


BCE vs. WEW. Which is the Better Gamble? - February 4, 2008.

In an earlier post I posed the question “is the market out to lunch or is it me?” While I believed then, as I still believe now, that the market was wrong about Talisman Energy, investors should be very careful not to completely ignore what the market is saying.

In the case of BCE, the market is telling you that the deal is not going to go through, at least not at the previously agreed-upon price. I had been toying with the idea of buying some shares and cashing in on what appears to be free money that the market is giving away. I have listened to some smart people on both sides of the argument, and I have come to the conclusion that it is best to avoid the stock at this time. This is a highly liquid stock in which many large institutional investors hold significant stakes. These groups are highly sophisticated, and more importantly, are very well connected with Ontario Teachers Pension Plan and the other members of the consortium. If these institutional investors, who at the very least have access to inside rumours if not inside information, thought that this was a done deal at $42.75, they would be aggressively buying this stock in the $35 range. One analyst on BNN pointed out that there would be serious consequences in terms of reputation and credibility on the street for the members of the consortium if they were to pull out of the deal, but I would argue that these people are much more concerned about the hit their reputation would take from their investors if they were to overpay for the company by several billion dollars.

At this point, buying into BCE is not investing; it is speculating, which is just a more respectable sounding word for gambling. I am not above doing a little gambling on the stock market from time to time, but right now I am placing my bet Webtech Wireless. With BCE, the absolute best case scenario would be that the stock goes to from $35.70 to $42.70, whereas the worse case scenario in this market would likely be a drop to under $28. With Webtech, however, the stock appears to be trading at only a little more than worse case scenario levels. When this company ran into major difficulties with some contracts in Brazil, the market lost faith in the company and the price fell from $7 to as low as $2 during the peak of the fall panic. It is well known that the company has been in negotiations on a major deal with Fedex for some time, and it recently gave guidance that a major potential customer has given financial approval on a large contract. While they have not stated that this is FedEx, their website states that they are currently looking for a Program Manager to work in Memphis, Tennessee, which just happens to be where FedEx’s head office is located.

I originally bought into this stock around $2.80 after it bottomed in the summer and recently doubled my position in it at around $2.90 after the announcement came out. I do not deny that this is a gamble on my part, but when gambling you need to weigh the potential upside against the potential downside. By my estimation, if luck is on my side and the FedEx deal goes through, this stock could go to five or six dollars (which would still be below its 2007 highs), whereas the tough luck scenario would likely see the stock languishing in the mid $2s.

Are We Staring into the Abyss? - January 22, 2008

As I’ve stood by and watched the stock market get impaled by the subprime mortgage meltdown, I’ve been trying to be unemotional and consider whether I might uncover some once in a lifetime buying opportunities, but my longstanding faith in the United States economy is descending into agnosticism.

As a rare Canadian defender of the United States, I am becoming increasingly frustrated with the apparent incompetence of the people running the country, and after listening to some recent presidential debates, I have even come to doubt whether it is really impossible for the next President to be any worse than the Bush administration. Because voters still like to ask themselves if they are better off than they were 4 years ago, the Democrats have the clear advantage going into November and I have heard some frighteningly unintelligent statements from some of their leading candidates. A couple of nights ago I heard Hilary Clinton in a debate talk about how she would freeze interest rates on mortgages for five years. In all likelihood she is lying and only saying that to get elected, but it is still chilling to hear the most likely future president putting forward such economically reckless ideas.

I find myself asking why it is that the rest of the industrialized, and even the developing world, have figured out that huge budget deficits are not a good thing, but Americans have not. Can they really be as arrogant as the so much of the rest of the world thinks they are? Do they really think that because they are the United States that their currency must therefore remain the dominant world currency?

There appears to be a culture of debt that has emerged in the country, from individuals to the federal government. The drying up of liquidity in the debt markets is eroding this culture for individuals, but the President and Congress need to stand up and change this culture before the global currency markets do it for them. With their powerhouse economy, it should be straightforward to get them out of this mess, but the government keeps the country in huge budget deficits which continue to erode global confidence in the dollar.

How did their government go from being so good to so bad so quickly? All of the blame does not belong to President Bush, just like President Clinton was not solely responsible for good government of the 1990s. The Republican controlled congress in the 1990s was a driving force behind cutting government spending, getting people on welfare back to work, and eliminating the deficit. What happened to these people? Why did they destroy their own legacy? It baffles the mind.

My hope is that the people who are not running the country are far more competent and have enough influence through running and creating businesses to compensate for the incompetence of the federal government. Deep down I have faith that the entrepreneurial spirit and talent of the American private sector, which is still without parallel in the world, will be enough to prevent the country from sliding into the abyss, but I will still likely keep my powder dry for a little longer before putting my money where my mouth is.


Power to Save the World, by Gwyneth Cravens - book review, Jan 15, 2008

As the half dozen people who have ever read anything on my website are probably aware, I have been interested in Uranium lately, but I’ve been reluctant to buy in because of the tremendous amount of hype that has been associated with it. Rather than just listen to the talking heads, I picked up a couple of books on nuclear power. Because it is tough to find an unbiased opinion of nuclear power, I bought both a pro-nuclear and an anti-nuclear book. The first one I read was ``Power to Save the World``, by Gwyneth Cravens. Ms. Cravens claims to have originally been an anti-nuclear protestor, but like many environmentalists, has come to look at nuclear power as a way of preventing climate change.

The biggest criticism I have of this book has nothing to do with her analysis of nuclear power but rather with the fact that she is primarily a writer of fiction and how clear she makes that fact in her book. I haven’t read any of her novels, but I am sure they are awful. Some her passages are hackneyed and out of place that they are actually comical. Some of my personal favourites from the book include when she tells us that in Albuquerque “the sunsets unfold like a series of long thoughts” and that the “thousands of stars…can inspire contemplation about where we came from, what part we have to play during our brief sojurn, and where we’re going”.

Another problem I have with this book is it is told as a narrative of her various travels throughout the United States touring nuclear facilities, mostly with her friend Rip Anderson, a nuclear power expert and scientist at Sandia National Laboratories. I couldn’t help but get the impression that she was perhaps secretly in love with Rip, or at least wanted the reader to fall in love with him. When we are introduced to Rip we are told that he seems relaxed but is extremely observant, that he likes faded jeans and a Stetson hat, and that he is wiry of build and quick of step.

Despite her tortured prose, this book does provide a great deal of useful information on nuclear power and anyone interested in learning a lot of technical information about nuclear power will not be disappointed. The reader can simply skip over the descriptions of Rip’s clothing and moustache and the philosophical musings.

Ms. Cravens is clear not satisfied with explaining how nuclear power works; she wants to convince us that nuclear power is the best source of energy we have and that much of the anti-nuclear movement is based on fear and ignorance. Some her methods for achieving this are quite effective. One of her more interesting points was that people get exposed to radiation all the time and are not even aware of it. For example, flying on an airplane will expose you to far more radiation than touring a nuclear facility, as will riding the New York subway.

The author’s lobbying for nuclear power runs into trouble when she tries to make the point that even the worst nuclear accidents in history and the scenarios that anti-nuclear activists bring up are actually nowhere near as catastrophic as people are led to believe. She starts off well and makes some interesting points that the fatalities from Chernobyl were much lower than people think and that there were no fatalities from the 3-mile Island meltdown. If she had quit while she was ahead and been satisfied with convincing the reader that will nuclear accidents are bad, they are not as apocalyptic as people often believe. Unfortunately Ms. Cravens becomes overzealous in downplaying these accidents to the point where her objectivity falls into question. She even tries to downplay the severity of the effects on Nagasaki and Hiroshima. Some things are so awful that is pointless to quibble about how awful they are. Whatever the exact death toll and cancer rates, events such as those are horrific events that must be prevented. Her attempts at downplaying those events are pointless and irrelevant to her argument.

Nothing gets under my skin more than blatant, unrepentant hypocrisy and bias. Throughout her book, Ms. Cravens harps on the importance of using probabilistic risk assessment when considering the dangers of nuclear power. Essentially this means not just looking at how bad a particular event would be, but rather the probability that the event will occur. She voices her frustration that critics of nuclear power only focus on the worst case scenario, however, she makes no mention of probabilistic risk assessment when she talks about how global warming could cause the oceans to rise by six feet and kill a billion people. The same goes for the way she states that “coal fired plants cause the deaths of twenty-four thousand Americans per year as well as hundreds of thousands of cases of lung and cardiovascular diseases”, but that we can’t attribute the high rate of cancer near Chernobyl to the meltdown because there are many factors involved.

I don’t know enough about the subject matter to contradict most of what she says, but the one case where I do no better is quite troubling. When discussing some research that was conducted near Chernobyl, we are told that nobody in these hamlets had any identification except name and birth date. Anyone who has spent any time in the former Soviet Union, as I have, knows that this is preposterous. Everybody must carry a passport in these places and anyone can be detained for not having their documents with them. This highlights one of the fundamental limitations of the book; Ms. Cravens is constantly repeating what others tell her and is not an expert in any of the matters she is discussing.

Despite its shortcomings, this book does provide a good technical overview of the nuclear power industry and is worth reading for anyone with an interest in this area. Unfortunately, the author’s background as a fiction write rather than a scientist, combined with her obvious bias, prevents it from meeting its full potential. I rate this book two out of five bananas.

Brookfield Properties - profile, January 1, 2008

This Christmas I purchased some shares in Brookfield Properties on what looked to me like a great tax-loss selling Boxing Week sale. This decision was influenced somewhat by my lingering bitterness from the waterboarding the market gave Cinram this past fall. Cinram was never intended to be a long term hold and I should have sold it some time ago for a 50% gain. Instead, being distracted with other matters, I let it slowly deteriorate and then suddenly crumble. Going into 2008 I want to expand my core holdings of stocks that I can buy and hold for the long run without having to watch them every day.

Brookfield is one of the premier real estate companies in the world, with some of the most valuable properties in North America. While it is certainly understandable how a CD/DVD manufacturer like Cinram can find itself in dire circumstances, it is difficult to imagine how Class A commercial properties in the heart of major cities can be made obsolete. My thought process on this stock is not particularly complex. Smarter investors than me were paying over $38 a share for this stock earlier in 2007, so I felt that the risk reward was very much in my favour at a little over $19.

From my research on the stock, there are two primary reasons why the stock has fallen as it has; one market specific and one company specific. The first, most obvious reason, relates to the difficulties in the US markets in general and the real estate market in particular. The other reason for the fall in stock price has to do with the possibility that its largest tenant in New York, Merrill Lynch, may move from its current location. To the best of my knowledge, this decision has not been made, but they have given strong indications that they are considering relocating to a new skyscraper in mid-town. This would certainly not be a positive for the stock in the short term, even though a move appears to be priced in, but in the long term the company will find other tenants. In Brookfield’s favour is the strong political will in New York to ensure the resurgence of downtown Manhattan and the ground zero area. City officials are likely help keep Merrill Lynch where they are and to help attract other potential tenants to the area should they leave. It is also important to bear in mind that if Merry Lynch were to make a decision tomorrow to relocate, it will likely be years before the move is completed.

I bought this stock with the assumption that Merrill Lynch will move and I still feel that it offers good long term value. They have locations in the right places and they have a talented, experienced management team that should be able to steer them though whatever trouble spots may arise.



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