Friday, January 9, 2015

Recent articles of interest


Fortune profiles Jonathan Bush, cousin of Dubya and CEO of AthenaHealth. The profile reads like a parody of the tech/startup bubble. I know nothing about AthenaHealth, but the article convinced me that it's worth looking at as a short.

Australian housing

The Sydney Morning Herald looks at the role investors play in Australia's housing bubble. Many of Australia's housing speculators have negative cash flow but expect to offset that with capital gains. Further appreciation may not be forthcoming, however, because "Australia has the world's most overvalued housing market on a price-to-income basis after Belgium."


Chris Nichols argues that banks will be worth more in the future because the FDIC is approving almost no new banking charters, reinforcing "one of the greatest barriers to entry that any industry enjoys." He expects this to lead to rising profits, rising bank valuations, and industry consolidation.

I'm more skeptical because I think that macro forces can overwhelm industry-specific developments. E.g. if there's another financial crisis, I would expect bank stocks to plunge regardless of the sector's long-term direction. But it's something to keep an eye on.

Biotech stocks

Jeff Chmielewski offers a fascinating overview of the biotech industry. He describes how a biotech company's decision to build a distribution channel for one drug influences its subsequent investment decisions:

When you decide to build, you inherently become a buyer. You have the distribution channel, and you need a stream of new drugs to keep than channel full, otherwise your business dies. 

Chmielewski also argues that the boom of the past few years has sown the seeds of its own destruction:

You buy a company for $10. It pays you back $50 over the next few years. So now you have $40 to spend. And you must spend it. In a few years the original product expires and you need to fill that channel.

This is the current state of the biotech market. Large cap biotech bought companies for $10, and made a LOT of money. Problem is there are no more $10 companies.  They all cost $40 now.

I don’t think I have to go any farther.  You know how this ends. The lucky ones get sold for $40, but the payback is still only $50, so next time around, the buyer only has $10 to spend.

China, Citigroup, and Commodities

Citigroup made a $270mm loan that was secured by copper and aluminum stocks in a Chinese port warehouse. It was later revealed that the metals' Chinese supplier had committed fraud by pledging the stocks to multiple parties. The Wall Street Journal describes how Citigroup has rapidly grown its commodities-lending business over the past few years and how it made the loan over internal objections. Corruption also played a role in the bank's blunder:

[Citigroup executive Georgina Baker] acknowledged under examination by Mercuria’s lawyer that she did business with Mr. Chen’s company for eight years at Standard Bank before joining Citi, that she attended a party and numerous dinners where he was present, and received a $15,000 watch from him for her birthday in 2012. However, she denied knowing that Mr. Chen was the source of Mercuria’s metal.


The Wall Street Journal writes that many companies that have recently gone public are reporting "adjusted" earnings which may overstate their true profits. They include Zoe’s Kitchen, which "is serving up profits—but only after leaving some of its expenses off the menu."


UndervaluedJapan describes Japan's economy during the 1920s and '30s in a series of three posts: The Showa Recession, The Showa Depression, and Did Korekiyo Takahashi Save Japan?

This is the most compelling thing I've read recently, in that it's both relevant to today's markets (there are several parallels between the Japanese economy then and now) and unfamiliar to most investors (I've never seen it discussed in the financial media before).


Ben Hunt of Salient Partners argues that oil's supply/demand fundamentals are much better than media narratives suggest they are. Hunt writes that "today’s dominant Narrative [is] that OPEC is broken and oil is now in free fall.... [but] November OPEC production was down 390,000 bbls/day from October and down 510,000 bbls/day from September."

Jim Rogers

Stagflationary Mark revisits some of Jim Rogers' recommendations from the past few years. They include buying silver at its 2011 high (three times the current price) and buying Russian stocks in late 2012 (nearly twice the current price). Notably, Rogers became a Russia bull after years of being bearish while Russian stocks rose.


Vienna Capitalist bought Russian securities during the recent ruble panic and explains his reasons for doing so. He makes a persuasive case that Russia's national balance sheet is much stronger now than it was in 1998.


Oddball Stocks writes about the importance of having a durable investing strategy:

The best investors have survived multiple recessions and market cycles, and in the mean time beat the market by a few percent.  To me the superior investment strategy is one that survives any market cycle, and while it doesn't provide eye-popping returns in any given year it doesn't implode during downturns either.  A few percentage points of outperformance can result in a large gains when compounded over a significant period of time...

Sometimes I feel like a broken record saying investors should be aware of the risk in their portfolios. But when I read message board threads where posters are saying they are disgusted by a 10% return I start to wonder what sort of environment we're in.  Others have done 25% annually and speak like they're just average and feel they can do better.  There are not many investors who've compounded capital at 25%+ or higher for decades.

Oddball also mentions that investment themes have a finite life. Or as Credit Bubble Stocks writes, "There are no evergreen investment strategies that will always work."


Robert Shiller says that Treasury bonds don't fit the classic definition of a bubble.

1 comment:

  1. I love these summary posts (and not just because I'm mentioned in this one ;))!

    They include Zoe’s Kitchen, which "is serving up profits—but only after leaving some of its expenses off the menu."

    Restaurant sales and restaurant employment growth overall have been impressive, but not so much if we factor in how much cheap money has enticed people to open up new restaurants. With intense competition, it's really hard to say how many of these new restaurants are struggling.

    For what it is worth, I think we've got way too many restaurants (as seen in McDonalds same store sales). If I'm right to think this way, then the next recession is going to clear out a lot of marginally dead wood.

    The party will continue until it can't though. The unemployment rate can't fall forever, and at some point that alone could easily be the straw that broke the camel's back. At the very least, I wouldn't want to be a restaurant struggling with rising quit rates and shrinking overall employment pools.


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