Wealth International, Limited

Finance Digest for Week of July 9, 2007

Note:  This week’s Offshore News Digest may be found here.


Today it is easy to invest overseas, whether through conventional mutual funds, ETFs, ADRs, U.S.-listed foreign shares, or even through the online trading of shares on foreign bourses. Via E-Trade, e.g., an online purchase of 100 shares of a stock such as Germany’s ThyssenKrupp runs $27 in commissions plus $60 for currency conversion.

If a 13% annualized long-term earnings growth forecast for U.S. stocks is not enough for your investment style, and you are willing to take on additional risks, such as currency swings and political uncertainty, we can suggest several other countries that securities analysts think offer better earnings prospects.

The consensus forecast for China calls for 19% annualized earnings growth over the next 3-5 years. Reflecting such optimism (as well as a certain measure of irrational exuberance), China’s Shanghai Composite Index holds a 183% gain for the past 52 weeks. Of course, there is a price for the promise of exceptional growth. Among the world’s biggest stock markets, China sells at the steepest premium to estimated 2007 profits, a P/E multiple of 26. China’s price/book value ration is, at 4.6, the second priciest, behind another country with a superheated economy: India trades at 4.9 times book. In contrast, Japan, Korea and Taiwan sell for no more than two times book value. Taiwan’s expected earnings growth in 2007 is 26%, while it sells an estimated 2007 P/E of only 14.

Link here.

Global funds invest in both U.S. stocks and foreign stocks. T. Rowe’s Global fund manager, shows how.

The global stocks sector is a bit of an oddball, and many financial planners do not recommend it. Global funds own shares in both U.S. and foreign companies. Purists prefer purer plays, with separate funds for domestic and international stocks. Separating allows you to fine-tune your allocation of assets to the two spheres and, if you are investing in a taxable account, may enable a tax-loss sale that would be unavailable in a blended fund.

T. Rowe Price Global Stock Fund manager Robert Gensler, 49, counters that the world is so interconnected now, with U.S. and foreign multinationals operating both in this country and outside it, that drawing an artificial line between them is silly. To be sure, international stocks have outperformed U.S. stocks for the past five years – 19.5% vs. 12.4% using one set of metrics. But these things always see-saw. For the past 10 years the difference was only 1%, while in the 10 years from 1987 to 1997 the U.S. measure was ahead, 14% to just 6%.

During his brief tenure Gensler has shown that his mixture – 55% foreign, 43% U.S., the rest in cash – can do better than foreign stocks alone. He is not locked into any allocation. Over the past two years his fund scored a 30.3% annualized total return, edging past international funds. Gensler has done this charging just 0.88% of assets per year, a bargain for a global fund. Nor does T. Rowe sock new investors with a load.

Gensler is dismayed that Americans who manage foreign funds often know too little about the scene overseas. “Half their managers and analysts don’t even have passports,” he says. His biggest lament: He speaks only English.

Gensler leans toward blue chips, with an average market cap in his portfolio of $22 billion and an average forward P/E multiple of 15.7, slightly more than the S&P 500. He foresees a bit of cooling off in the world’s bourses. Gensler, who studied at the London School of Economics in 1977-78, warns that the global recovery that started in 2002 is ending. While he thinks that P/E ratios are reasonable, he believes that profit margins have peaked. A good number of global funds have a manager to handle the U.S. portion of the portfolio and another to pick the international stocks. “But you can’t break the world up into pieces,” Gensler says, pointing out that 30% of the profits reported by S&P 500 companies now come from outside the U.S., up from an estimated 14.5% five years ago.

Link here.

How to profit as the U.S. merger mania reaches Europe.

U.S. private equity accounted for $446 billion of investments last year. Now the buyout mania is gaining traction in Europe. American outfits like Texas Pacific Group, Cerberus and Kohlberg Kravis Roberts, eager to gain exposure to stronger currencies and healthy economies, have invested $700 billion in 4,700 deals in Europe since 2004.

Wendy Trevisani, comanager of the $18 billion Thornburg International Value Fund, does not invest with buyout potential or capital restructuring in mind, yet her selections have been prescient. She tends to look for financial attributes that are similar to those attractive to private equity investors: well-managed companies with ample cash on the balance sheet, recurring cash flows and low valuations.

Restricting her portfolio to just 50 to 65 stocks, Trevisani has seen several of her European investments, which account for 60% of total holdings, put in play recently. This has helped her fund deliver a 37% return for the 12 months ended June 15, ahead of the 35% return of the Morgan Stanley EAFE foreign stock index and 24% for the S&P 500.

Trevisani chases after value, paying particular attention to the enterprise multiple. This is the ratio of enterprise value (market value of common stock, plus debt, minus cash) to operating income (earnings before interest, taxes, depreciation and amortization). “This gives a really good back-of-the-envelope view of a cash flow,” she says. “Two different companies can trade at 13 times earnings, but that does not tell you about their debt.” Trevisani also looks at how well a company is covering its interest bills with its profits before interest and taxes.

“There is so much liquidity floating around, we are seeing private equity investors being creative,” says Lewis Kaufman, who comanages Thornburg’s holdings of ADRs. For those who want to get in on the buyout trend, Kaufman cautions that it is risky to buy a weak company only because you think a KKR will want it. “It is better to understand what you own and buy companies that are not expensive,” he says. Nevertheless, there are some European companies that, to the expert eyes of Trevisani and Kaufman, could be the subject of a buyout – or at least the possibility of one ...

Link here.

Europeans are finally embracing real estate stocks. Outside of Britain, they are not horribly expensive.

It is a gorgeous summer afternoon in Paris. A crowd is lolling on the benches and steps outside the deteriorating Forum des Halles shopping center. Too few bother to shop. The 43 million people a year who visit Forum des Halles spend on average a measly $16 each, half what is typical for a French shopping center. The mall has spiraled downward since its 1979 debut. Security guards here long ago gave up the battle against graffiti.

New York money manager James Corl senses an opportunity. “It is an ugly, terrible, absolute joke of a mall in a world-class location – it’s unbelievable real estate,” says Corl, whose $3.8 billion mutual fund, Cohen & Steers International Realty, has bought at least $150 million of stock in Paris-headquartered Unibail Holding, the new owner of Forum des Halles plus 37 other French shopping malls.

After a scorching run-up in six years U.S. property stocks are expensive. If you are hunting for extraordinary opportunities in realty stocks, try Old Europe. One reason is that, on the Continent at least, many government-owned properties are for sale to the private sector, which gives real estate companies some bargain buys that generate good rental income. Europe is finally, and at times grudgingly, embracing the tax cuts, privatization and deregulation that feed the rich soil needed to create a vibrant industry. Real estate is less alluring in Britain, now enjoying huge demand for office space, especially in London’s financial center. Beginning this year the U.K. has allowed real estate companies to convert to REITs.

Compared with U.S. REITs, many European realty stocks (whether designated as REITs or not) look very overpriced. The hot stock market has shriveled their percentage dividend yields. But look at a broader measure called the capitalization rate, and the picture improves. This metric takes expected rental income and measures it as a percentage of property value. Prime office buildings in New York City yield net rental income (after operating costs but before depreciation) equal to 3.2% of their market value. In Paris the cap rate climbs to 3.8%. Go to Munich or Düsseldorf and you could get 6%.

How can American investors get in on European real estate? The easiest route is via two funds, both of very recent vintage, one of them sold exclusively on European exchanges. The iShares FTSE/ EPRA European Property Index Fund tracks a version of the benchmark index that excludes the U.K. This ETF, around since November 2005, charges a not bad 0.4% of assets yearly. The other offering is a U.S. mutual fund, Cohen & Steers European Realty, in operation since late March. Its cost resembles that of other funds dealing in foreign stocks, 1.8%. Another approach is to buy European stocks directly, using ideas from three veteran real estate fund managers we consulted. With their help, we have selected 10 real estate stocks that display a combination of good growth prospects, decent dividend yields and mostly reasonable P/Es (see table).

Link here.

China and India are red-hot. So one money manager is steering investors to elsewhere in Asia.

nvestors sitting happily on their 5% U.S. equity market gains so far this year should note that they would have done better investing in Asia’s emerging markets. Yes, the ride might have been bumpier. Shanghai, for example, has had several big setbacks this year. Emerging markets often spring such surprises, but the Morgan Stanley Capital International Emerging Asia Index is up 18% in the year to date, following four consecutive annual increases.

The relationship between high economic growth rates and superior equity market returns is weak in the short-to-medium term, notes George Hoguet, portfolio manager and investment strategist at State Street Global Advisors, which manages $10 billion, but he sees emerging markets as relatively cheap at a collective 12.5 times forward earnings, given that profits are expected to grow 17% over the next 12 months. Hoguet is one of the managers of the SSGA Emerging Markets Fund, which Forbes rates a “C” for bull market performance but a “B” for bear market returns. These days he sees India and China as frothy, so he is rooting for value in places such as Indonesia, Thailand and Malaysia.

Indonesia sells for 13 times forward earnings. Hoguet sees it as a good long-term bet, though the political risk is significant in a young and fragile democracy. Other concerns: The currency has been historically volatile, and there may be a bubble in the making with surging construction, stock prices and bank lending.

Thailand is, thanks to last September’s military coup, Hoguet’s most controversial choice. Investors may or may not care about constitutions, but they certainly did not like the junta’s attempt to halt the appreciation of the baht through capital controls and subsequent plans to impose new foreign investment restrictions. Still, Thai stocks sell for 11 times forward earnings. Hoguet argues that there is pent-up consumer demand waiting to be unleashed, that tourism remains robust, and that the regime is talking about holding elections towards the end of the year.

Malaysia has only recently started to shed a questionable reputation it acquired after former prime minister Mahathir Mohamad tried to stop money from leaving the country during the Asian financial crisis in 1997 by imposing short-term capital controls. His successor, Abdullah Badawi, is wooing investors back with tax breaks.

Link here.

Another communist country now has a decadent capitalist stock market.

Vietnam is hot – so hot that investors should handle it with care. In 2000 the Ho Chi Minh City stock exchange opened for business with just 2 listed securities. The exchange now trades 107 stocks. Though it has cooled a bit, Vietnam’s market is triple where it was at the beginning of last year. At the start of June the 32 biggest companies (by market value) on the Ho Chi Minh City and Hanoi stock exchanges were trading at an average of 38 times earnings. “The Vietnam stock exchange has been the flavor of the month for some time now,” says Lazaros Molho, the IMF’s mission chief for Vietnam.

Why is this communist country going capitalist-crazy? Because capital is coming in. Last year foreign direct investment in the country hit $10 billion. This past January also saw Vietnam's accession to the WTO. An IMF forecast calls for 8% annual growth in Vietnam’s GDP this year and in 2008. Don Lam, head of VinaCapital in Ho Chi Minh City, which runs the closed-end $560 million Vietnam Opportunity Fund, thinks that in this superheated environment the safest strategy is to focus on Vietnam’s domestic-driven sectors. His fund, which trades on the London AIM exchange, is up 39% a year since its inception in 2003.

In a country with 85 million people, half of whom are under 30, Lam looks for a big increase in consumer spending. Following this thesis, Lam likes VinaMilk, the country’s top dairy producer, which has a 40% market share in powdered milk. At 12% it is the biggest holding in his fund. It trades at 40 times trailing earnings. Property developers are busy, too. An abundant part of the population is of marrying age, which is creating a strong demand for new housing. Despite a construction boom in office buildings in the country’s two business centers, Ho Chi Minh City and Hanoi, the scarcity of office space has prices rivaling those in Singapore. For this reason Lam likes conglomerate Ree Corp., which has interests in real estate as well as home appliances and industrial products. Pursuing his theme of a rising consumer class, Lam has his eye on the financial services sector as well.

Lam’s Vietnam Opportunity Fund is available to U.S. investors... for a price. The fund’s expenses run 2% of assets plus management’s additional 20% take on annual returns over 8%. Another option is Eaton Vance’s Structured Emerging Markets Fund, started in 2006, which invests in developing countries like Mexico and the Czech Republic and has a tiny stake in Vietnam. This fund has a 5.75% front-end load.

Vietnam also has its version of the over-the-counter market, which specializes in listings of once-state-owned companies that have recently been privatized. This market serves as a training ground for a listing on the main exchanges. It is possible for U.S. investors to buy shares on the OTC market or on the main exchanges through a brokerage account in Vietnam, which you must have in order to buy individual shares. It can be tough navigating the bureaucracy of setting up an account. Brokerage fees can run from 0.25% to 0.4% per transaction plus $50 to set it up. If the brokerage does not have what you want, you must find the seller yourself. Alternatively, you can go to a U.S. broker to buy in to funds. Many of the funds with exposure to Vietnam are listed in the U.K.

The market is expensive, but the IMF’s Molho says, “For those that have the patience to stay for the long haul, it is a place that is promising.”

Link here.

Fiscal reform, a property surge and the growth of outsourcing have helped the Philippines join the Asian upswing.

Construction cranes line Manila’s skyline, and the hotels are fully booked. Outsourcing companies from India and elsewhere – eyeing wages and real estate prices 30% lower than in Bangalore – are buying up call centers in Manila, pushing prime office vacancy rates below 1%. After a slow recovery from the Asian crisis of 1997, the euphoria in the Philippines is palpable.

It helps that the country’s economic fundamentals have dramatically improved. President Gloria Macapagal-Arroyo’s government has slashed the budget deficit from 4% of GDP three years ago to less than 1% now. That has cut inflation in half to 3% a year, fostered three consecutive years of 5-6% economic growth and enabled the Philippine peso to strengthen 18% against the dollar. “It is an absolutely phenomenal turnaround story,” says Khiem Do, who manages several Asian funds for Baring Asset Management, including the $280 million Asia Pacific Fund (NYSE: APB), a closed-end with an annualized 23% return for the past five years. The Philippine stock market is up 25% through June 15 after a 42% jump last year.

This country of 91 million has its share of problems. The economy is propped up by the remitted earnings of expatriates. 9% of the population, mostly women, works overseas, contributing 13% of the GDP. At home roads are crumbling and utility lines feeble. 30% of the nation has a poverty-level income (less than $1,130 a year for a family of five). The stock market, with a trading value that exceeds $150 million on a good day, provides much less liquidity than equally attractive Malaysia, with its $730 million of daily volume, and Singapore, with $1.4 billion.

Do believes the economic recovery in the Philippines will continue. As a bet on that, he owns shares of Ayala Corp., a $1.4 billion (revenues) conglomerate with interests that include shopping malls, telecommunications and banking. Anton Periquet, head of equities research in Manila for Deutsche Regis Partners, likes Ayala Land, 58% owned by Ayala Corp. and the country’s largest landlord, with commercial and residential properties. “Until you get the next batch of buildings, you will have uninterrupted rent and asset-price escalation,” says Periquet. Prices are still low compared with elsewhere in Asia. Luxury condominiums in Manila sell for 5% of the price of those in Hong Kong. Shares of Ayala Land have climbed 112% over the past year to 48 times estimated 2007 earnings, but Ayala’s market capitalization of $5 billion is less than the liquidating value of its assets, which include 10,000 undeveloped acres, Periquet estimates.

Link here.

The exchange that launched 1,000 ships.

Greece, birthplace of the Olympics and home of ancient relics and honeymoon hideaway isles, is noteworthy for another reason. Over the past 10 years its GDP has grown at an annual rate of 6%, putting this economy far ahead of three of the largest EU economies (Germany, France and Italy). In 2000 Morgan Stanley Capital International, which tracks global stock markets via hundreds of indexes, promoted Greece out of the emerging-market category. The catalyst for this change was Greece’s 2001 entry into the eurozone, which had imposed strict fiscal and monetary policies. The MSCI Greece stock index has a 12-month total return of 42%, a tad ahead of 41% for the MSCI Europe index.

Greece can now capitalize on its central Mediterranean location, says Harris Siganos, a managing director at Alpha Asset Management in Athens. One way is with ships. Over the past four years Greek shipping companies have benefited from increased trade with China and India, and freight rates have more than doubled. Today the shipping industry leads tourism in fund inflows from abroad. Greece has 3,800-plus ships of 1,000 tons or more, the largest fleet in Europe and the 5th largest in the world. Helped by cheap bank financing, shippers have at least 260 new vessels on order.

Two of Greece’s big banks, both available as ADRs, provide exposure to southeastern Europe. National Bank of Greece (NYSE: NBG) is the country’s largest banking group and recently made a big acquisition in Turkey. ADRs of the Athens bank sell for 14 times their Thomson IBES 2007 consensus earnings forecast. Alpha Bank, with $12.8 billion in market capitalization, has been expanding in Romania and Bulgaria. Consumer goods is another Greek sector with exposure to the Balkans. Coca-Cola Hellenic Bottling (NYSE: CCH) is the 2nd-biggest Coca-Cola bottler in the world.

Over 12 million tourists a year visit Greece (more than one tourist per inhabitant), contributing 17% of GDP. The government took advantage of the 2004 Olympics and its tourist traffic to open up the funding spigot for improving roads and railways. Two companies listed on the Athens exchange offer investors an opportunity to take part in the building boom. Hellenic (or Elliniki) Technodomiki has a project backlog of $5.2 billion. Lamda Development, the real estate development arm of the billionaire Latsis family, is behind the two largest shopping malls in Greece as well as office and residential complexes. Lamda sells for 12 times its 2007 consensus earnings forecast.

Link here.

Meet the new boss in Paris, not the same as the old boss.

France, formerly a bastion of the few and brave, is quickly gaining mainstream investment attention with the election of President Nicolas Sarkozy in May. The historically socialistic French populace firmly rang the bell of reform with Sarkozy, who ran a pro-business campaign in one of the more vivid electoral duels in recent memory. Sarkozy cemented his license to change France’s economy in June when his party captured a slim majority of parliament.

Sarkozy’s main tenets: revamp French overtime, make mortgage interest deductible, abolish the 35-hour workweek and decrease corporate taxes. His changes to an already advancing economy are luring businesses to look at France as a front line for expansion and investment. France’s CAC-40 index, which tracks the 40 most significant companies among the 100 largest market capitalizations on Paris’s Euronext exchange, is up 122% over the last four years, compared with 55% for the S&P 500.

Sarkozy proposes that employers pay a 25% premium for work beyond 35 hours a week but be exempt from social taxes on overtime wages. Employees would pay no income tax on their overtime euros. “This will boost productivity, but it will also change the mind-set of France’s workforce,” explains Philippe Favre, chief executive of Invest in France Agency, which has offices on four continents and assists companies seeking to drive roots into France. “The French, when they work, are quite productive – in production per hour they are second in Europe to Norway," he says, who notes that the most productive French workers will likely get the most overtime.

The grand plan covers entrepreneurship, not something France has been famous for. One of Sarkozy’s proposals would allow people who get snagged by France’s wealth tax the option of investing their money in small and medium-size companies instead of forking it over to the taxman. In an effort to stem capital flight, which has been rampant in France, the government plans to cap income taxes at 50%, from more than 60% now. For large companies the Sarkozy government has set a long-term goal of reducing the corporate tax rate by 5%, which would pull France closer to the rest of Europe. This reform, however, will not be immediate, because Sarkozy will want to keep the deficit below 2.5% of GDP.

Foreign investors poured into France in record numbers last year, with 25% of that coming from the U.S. Dominique Barbet, a senior economist at BNP Paribas in Paris, cautions that a significant economic bounce from the Sarkozy reforms will not occur until after 2008.

The best way to harness a future French stock market rise and keep oneself active in other markets is through international mutual funds with heavy French weightings. AllianceBernstein International Value Fund, which has a front load of 4.25%, is among the most French-heavy at 18%. A no-load option is Causeway International Value, which has a similar stake. The Vanguard European Stock Index Fund, with just 0.27% in expenses, is 14.2% French. You can also get an all-French ETF from iShares.

Arthur Laffer, chairman of Laffer Associates, an economic research firm, ranks 23 developed countries on their investment strength. His latest rankings, from February, have France at number 16. Laffer expects, however, that France will rise into the top 8 by the end of the summer. If so, the time to get in is now.

Link here.

There is more than ethanol and coffee beans in Brazil.

Brazil’s benchmark stock market index, the Bovespa, is hovering around an alltime high, and the economy is booming. GDP looks set to hit the government’s forecast of 4.4% growth. Public debt as a percentage of GDP is 50%, down from almost 60% in 2002. The cost of borrowing money overnight peaked at 26.5% in 2003 and is now down to 12%. Falling interest rates have led to a big increase in residential mortgage lending. Such developments help explain why some Brazilian banks posted record profits last year.

Three big Brazilian banks are available to U.S. investors as ADRs: Banco Bradesco (NYSE: BBD), Banco Itaú, and União de Bancos Brasileiros (Unibanco). They are all expensive at between 2.8 and 4.2 times book. Citigroup, Bank of America and JPMorgan Chase sell for between 1.4 and 2.2 times book. But pent-up loan demand in an economy that is seeing lower inflation and interest rates may imply a higher growth rate going forward.

Could you, instead, buy a non-Brazilian bank that can get a piece of Brazilian growth? Only a few big ones – ABN Amro (NYSE: ABN), Banco Santander and HSBC (NYSE: HBC) – have a sizable presence in Brazil. Donald Elefson, portfolio manager of the Excelsior Emerging Markets Fund, believes that the industry will see more foreign acquisitions over the next six months. He thinks that Banco Itaú and Unibanco could be targets.

Banco Itaú has assets of $92 billion, and last year its deposits grew 21%. Its strength is in auto lending and credit cards. In May it acquired, from Bank of America, BankBoston’s operations in Brazil, Chile, and Uruguay. Security analysts reporting to Thomson IBES expect Banco Itaú to deliver 17% annualized earnings growth over the next 3-5 years. The bank’s ADRs sell for 15 times their 2007 consensus earnings forecast.

Link here.

Don’t wait for a regime change. Invest in Cuba now.

Last summer, while the dictator who has ruled for almost half a century lay hospitalized with intestinal problems, two men at the University of Miami started planning for the post-Castro era. Jorge Piñon, a former BP executive, and Jaime Suchlicki, former director of the university’s Research Institute for Cuban Studies, created the Cuba Business Roundtable to provide U.S. businesses with information they will need should America end its now 46-year-old embargo against the Castro regime. The group has 24 unidentified member companies. “We are telling people this will not be like eastern Europe,” Suchlicki says of a postembargo Cuba. “It is going to be gradual change.”

Prior to the 1961 embargo 80% of Cuba’s trade was with the U.S. Today the Netherlands and Canada are the two biggest recipients of Cuban exports (mostly metal ore, sugar and tobacco). Cuba imports petroleum, grain and electrical equipment from Venezuela and China. The U.S. is the only country that bars its citizens from doing business in Cuba and with Cuban entities.

With 11 million people Cuba is smaller than communist Vietnam, with 85 million people, and, of course, China, with 1.3 billion. And Cubans are too poor to buy most imported goods, limiting any initial postembargo market for consumer products. The per capita GDP in 2006 was $3,900, according to U.S. government figures. It is the location and natural resources that attract ...

Link here.


Times are flush in the Canadian province of Saskatchewan. Dare we call it a boom? “That’s the way we have been describing it,” says Maynard Sonntag, Saskatchewan’s Minister of Industry & Resources. Sonntag ticks off the stats. Saskatchewan, which provides the world with a quarter of its uranium and sells the U.S. more oil than Kuwait, is one of two Canadian provinces to increase its GDP for four years straight. Since 2002 spending on uranium exploration has jumped 10-fold to $280 million annually. “We have more jobs than we have population,” he says.

The recent performance of non-U.S. resources stocks such as energy, construction materials and precious metals reflects the go-go days in the resource-rich north. An index compiled by FactSet Research Systems, for example, shows that shares of nonenergy mineral companies outside the U.S. have gained an aggregate 66% over the last year.

Buyers beware. We looked at non-U.S. natural resources companies with U.S.-listed shares and market values over $10 billion. Of the 80 that qualified, 30 carried multiples of book value, earnings and sales all in excess of 5-year averages. Only four stocks passed a simple value screen of price-to-sales below their 5-year average. Subodh Kumar, a former CIBC World Markets investment strategist who now runs his own strategy firm in Toronto, predicts materials and energy stocks will disappoint over the next 12 to 18 months. “Investors are too complacent that this earnings cycle will continue to be strong,” he says.

Inflation, paradoxically, could hurt the sector, says Kumar. While rising prices have been traditionally a positive for hard-asset investments, demand for such assets and earnings could take a hit if central banks respond to the inflation by applying the monetary brakes. Kumar finds some value in gold and oil producers. But many resource stocks are just too high. Take Cameco (NYSE: CCJ), which in 2006 supplied one-fifth of the world’s uranium. Cameco’s shares sell for 12 times sales. That is striking for a company whose gross margin (sales less cost of goods) over the last 12 months stands at 25% of sales. Microsoft, sporting a gross margin of 81%, is valued at six times its revenues. Consider also Cameco’s 10-year average price-to-sales ratio: 3.8.

Of course, natural resources bulls have an “It’s different this time” argument. For Cameco, there is the promise of a new nuclear age. “The deposits that Cameco holds are 100 times richer than what you would get in other parts of the world,” says Glen Veikle, Saskatchewan’s deputy minister for industry and resources. “There’s nothing on the horizon that could convince me that the price of uranium is going to start coming down.”

Maybe so. But then maybe the price of oil is not going to come down, either. You can buy BP at 0.8 times sales, and ExxonMobil at 1.3. Oil companies earn real money and pay real dividends. BP yields 3.4% and sells for 11 times trailing earnings. Equivalent numbers for Cameco: 0.4% and 65. A stock to consider in gold is AngloGold Ashanti, a miner with operations in Australia, Brazil, the U.S. and various parts of Africa. The stock carries a price-to-book multiple of 3.7, not far from a world precious metals average of 3.4 and below a 10-year average of 4.2. It yields 1.6% and trades at 16 times its consensus estimate on 2008 earnings per share.

Link here.


What is it about an energy source that makes it useful, let alone valuable? One way to answer that question is to think in terms of thermodynamics and to look at how the potential energy of any substance is converted to heat energy. Ask yourself, for example, why is coal useful? It is, as the old saying goes, “the rock that burns.” Among other things, it offers the user the ability to release stored-up heat energy and thus to bring rapid warmth into a cold world. Yes, and so much more.

Or consider what happens when you are driving a car and burning up gasoline. What is it that you really want from your fuel supply? Do you care that gasoline comes from refined crude oil? Or are you more concerned with the fact that the gasoline combusts in the cylinders of your engine, via rapid, explosive release of heat when the gasoline is sparked? Gasoline is also, in essence, a form of stored heat.

Or consider nuclear power. What is the basic principle behind this particular energy source? Radioactive rods in a nuclear pile decay and give off heat, which in turn is used to raise the temperature of water or some other substance in a liquid phase. When the liquid phase gets hot enough, it vaporizes and its expansion turns a turbine. The turbine generates electricity. This is the case for almost all nuclear power plants in the world, whether on land or inside the confined hull of a submarine.

So the bottom line is that when we are looking for energy sources, we are basically looking for ways of obtaining heat energy in some form or another. In our portfolio, we hold shares in companies that drill and extract oil and natural gas, coal, uranium and even a company that manufactures windmill components. (Wind is just a manifestation of the differential thermal heating of air masses by the sun.)

Today we take a look at another way to invest in heat. We are looking at a company that is part of the industry that extracts stored heat energy from the crust of the Earth – namely, geothermal energy. Geothermal energy is the energy contained in the hot rocks, and the hot fluids that fill the fractures and pores within the rocks, of the Earth’s crust. Under the right conditions, geothermal energy can be utilized to generate electricity.

According to thermodynamic calculations performed by many a bleary-eyed graduate student over the decades, if the Earth had simply “cooled” from a molten state, it would have become a completely solid mass of iron and rock within a few hundred million years of its formation. But the Earth has been an active, dynamic planet for near 4.5 billion years, so something must be going on deep inside to keep the planet hot. The current belief is that the source of heat energy within the Earth is long-term radioactive decay occurring within the crust and mantle. It gets so hot down within the Earth that much so-called “rock” is in a molten state, which we observe directly when some of that molten material erupts and forms volcanoes or mid-ocean ridges. In most other areas of the Earth, this heat reaches the surface in a very diffuse state – but it is there. Some areas of the Earth, including substantial portions of many western U.S. states, are underlain by relatively shallow geothermal resources with much energy potential. Here is a depiction by the U.S. Department of Energy. The map makes clear that essentially all of the U.S. has some form of available, near-surface geothermal potential.

The uses to which these geothermal resources can be put are controlled by temperature. The highest temperature resources are generally used only for electric power generation. Current U.S. geothermal electric power generation totals approximately 2,800 megawatts (MW), or about the same as five large nuclear power plants. Uses for low and moderate temperature resources can be divided into two categories: direct use and ground-source heat pumps. I am not going to say that geothermal energy is infinite in scale, but the heat sources within the Earth are immense, and a well-managed program has the potential to be operational for many decades, if not centuries.

There are two basic types of geothermal power plants used today, steam plants and binary plants. Steam plants use very hot steam and hot water resources, such as are found at The Geysers complex of plants in Northern California, which is the largest geothermal electricity producer in the world and has been going strong for about 40 years with no sign of letup. Either the steam comes directly from the underground geothermal resource or the very hot, high-pressure water is depressurized (“flashed”) to produce steam. Binary plants use lower-temperature, but much more common, hot water resources. Because these lower-temperature reservoirs are far more common, binary plants are the more prevalent. The hot water is passed through a heat exchanger in conjunction with a secondary fluid (hence, “binary”) with a lower boiling point, such as isobutane or isopentane. The secondary fluid vaporizes, which turns the turbines, which drive the generators. The remaining secondary fluid is simply recycled through the heat exchanger. The geothermal fluid is condensed and returned to the reservoir. Because binary plants use a self-contained cycle, there are essentially no emissions.

Extracting the Earth’s heat and selling geothermal power is subject to the same regulatory structures as are almost all other energy generation and transmission entities in the country. So the 50 state-level public utility commissions (PUCs) control much of the destinies for geothermal producers. Also, geothermal energy is capital intensive, hence it takes time to pay off any major investment. Geothermal power competes against the rest of the electrical grid, within the PUC-dictated regimes of rate setting and tariffs for transmission.

Once a plant is up and running, geothermal power is quite reliable. Geothermal plants offer a continuously available (24/7) base-load power source, with historic reliabilities in excess of 90%, which is comparable to the reliability of many nuclear plants. Compare this with wind-generated power with 25-40% reliability or solar-generated power with 22-35% reliability (the sun sets each night, among other drawbacks). Reliability is a critical issue in terms of operations, because plant owners usually bear the risk of getting charged back by utility customers for what is called shortfall energy, meaning the power that a utility has to go out and purchase on spot market if the designated source is not operating on schedule or up to capacity or promised load.

Geothermal of late has benefitted from what the regulators call policy support. That is, there are certain things called pivot points within government policy, which tend to swing investment trends in a positive or negative manner. Geothermal power is considered a renewable form of energy production, and in our own era, it benefits from the renewable energy “production tax credit”. Many states (22 plus D.C., so far) have adopted renewable portfolio standards. These are legislative mandates for utilities to meet specific numerical targets for renewable energy or other environmental criteria by certain dates. Any future carbon tax, or so-called “cap and trade” regime for CO2 , will doubtless benefit the geothermal industry, what with its miniscule CO2 footprint.

The last major geothermal “exploration” effort was about 30 years ago, during the energy price spikes of the 1970s. There has been next to no significant geothermal exploration program in three decades. So much of the knowledge of the resource base is grounded on older data, gathered with older instrumentation. Future efforts in the field of exploration and development will undoubtedly refine the older knowledge base and expand the resource base.

Link here.
Geothermal energy ... that’s hot – link.


Tiny companies are a great way to make a fortune off of the stock market. Synutra International (SYUT: NASDAQ) is a great example of this. This dairy-based, nutritional products company has jumped from a little Bulletin Board operation to a billion dollar corporation. The company finally graduated from over-the-counter status to NASDAQ, bringing with it 113% gains in less than two months.

This happens all the time and is how some of the best investors became the richest investors. Buying some shares for pennies on the dollar and selling at $10 or $20 is possibly the fastest way from being a hobby investor to a super investor. But do you really think that you have access to these lucrative companies? Not really. The problem is most of them are not even traded on a major exchange.

The average penny stock (literally) is found on one of two places: Pink Sheets or the O-T-C Bulletin Board (OTCBB). Until recently, it has been nearly impossible to get good information about companies like these. Until a few months ago, the Pink Sheet stocks offered virtually unaccountable information. No required filings, inaccuracies rarely corrected, and even shell companies. Until now.

The pinks have released a new classification system that helps investors sort out the companies with little or no information, leaving you with only credible companies with enough info to make smart investment decisions. The top level of classification is called PremierOX. This level ensures investors that the companies listed here sell for at least $1 per share and have at least 100 shareholders with a minimum of 100 shares each, as well as meet the requirements of all the major exchanges.

The second tier is called PrimeOX. This level requires virtually the same, except there is no minimum share price and only 50 shareholders with a minimum of 100 shares to gain entry. The third is for international companies. This level, International OTCQX, is currently being broken into two separate categories: International Premier OTCQX and International Prime OTCQX. The requirements here are basically to meet those of the company’s national exchange (a U.K. company would have to meet the London Exchange’s requirements, e.g.). The second prerequisite is to have their filings available in English.

This new classification system makes us ecstatic because it gives more incite into the relatively unexploited area of true “penny stocks”. This is a subject that hopefully interests you as investors. It is certainly one that we will talk about more in the future.

Link here.


Back to their caves, the bears skulk. A few months ago forecasters at Merrill Lynch and Goldman Sachs predicted the Fed would cut interest rates several times this year as the economy slowed. Now few Wall Streeters expect even one cut. Credit this change of heart to jobs creation, growth abroad, business outlays and that unstoppable economic force – the American shopper.

Is there a pessimist left? Here is one. Van R. Hoisington of Austin, Texas, a bond investor with a record of beating the market, is betting $4.8 billion the cheery new consensus is wrong. He says the U.S. will fall into recession within a year and the yield on 10-year Treasurys, now 5.1%, will drop to 3.5% within two. To play this hunch he has put half the portfolio at Hoisington Investment Management into long-term zero coupon Treasurys. Zeros rise – and fall – faster when rates change. This year’s rise in rates sent Hoisington’s portfolio down 6% through mid-June. “This would give most guys acid indigestion,” says Hoisington, 66. “Not me.”

Why should we listen to this guy? He bought zero coupon bonds in 2004 and 2005, when others thought inflation would crush them, and returned 11% and 12%, net of fees, versus the Lehman Aggregate Index’s 4% and 2%. His 10-year return is 9.1%, vs. the index’s 6.5%.

What is throwing investors off this time, he says, is the Bureau of Labor Statistics payroll survey. The latest report said 157,000 jobs were created in May, double the level a month earlier. But the BLS itself admits a key component of this statistic – estimates of jobs added at small businesses just opened minus jobs lost at small ones just closed – tends to exaggerate employment in a slowdown. Hoisington notes the estimate accounted for 58% of purported job growth in the past year.

Hoisington is equally dour about U.S. consumers. They have kept spending longer than he expected, but he says they will not be able to defy their weak balance sheets much longer. Net consumer borrowing relative to personal disposable income has fallen 4% in the year through March, the 2nd-largest drop in 55 years. This may have already hit shoppers hard. Hoisington estimates consumer spending rose just 2.2% at an annual rate in Q2, less than half of the previous quarter’s rate. Increased outlays by businesses likely picked up the slack, he says, but stronger GDP growth in Q2 will prove a “false bounce”. Weak U.S. spending is already having knock-on effects abroad, he says. Port traffic has flatlined. Industrial production in Germany and Japan fell in April.

Of course, Americans may confound skeptics again by continuing to shop, and many economists do not think stronger growth recently can be dismissed as a mere quirk of the inventory cycle. Hoisington says investors should exploit that conventional wisdom. That drop last quarter in bond prices? “A gift,” he says, to people who have not bought yet.

Link here.


The speed of the drop in home sales has slowed over the past few months, leading some commentators to argue that the housing-market crisis will soon be over. But it is far too soon to start anticipating a recovery. In fact, there are solid reasons to think that the bottom might not be reached for a year or more.

The dynamics have changed since sales began to fall in the summer of 2005. At that time, the Fed was in the middle of its program to normalize short-term interest rates, which inexorably raised the cost of adjustable-rate mortgages. The flood of cheap ARMs when the fed-funds rate was very low was a key driver of the housing boom es latter stages. Many borrowers who were lured into the market by the availability of cheap ARMs should never have been granted loans, but there were not many complaints at the time.

While demand was beginning to falter, home builders were still running at full tilt. The flow of new homes onto the market did not slow significantly until Q2 2006. This slow response to falling demand ballooned inventory. From Q4 2005 through this year’s first three months, the supply of new homes rose to a level equivalent to 7.9 months of sales at the then-current pace, up from 4.7 months. During the boom years, from 1998 through 2005, supply typically equaled just over four months of sales. The supply of unsold new homes is now almost double what it was in the 1998-2005 boom.

Falling demand and rising supply rapidly slowed the gains in home prices. The downshift, accompanied by outright declines in cities where oversupply is acute, has changed the downturn’s nature. The key problem now is not the level of nominal mortgage rates, which are not particularly high by the standards of the past decade. Instead, buyers are backing off because the real mortgage rate has rocketed and continues to rise. At the peak of the boom, people essentially were being paid to buy a home. The average 30-year fixed mortgage rate in 2005 was a tax-deductible 5.9%, while home prices rose 10.7% that year.

As long as buyers expected prices to keep rising, the implied real mortgage rate – home-price increase minus mortgage-interest rate – was minus 4.8%. This was an enormous incentive to borrow heavily to buy real estate. Result: a bubble. But recently, the average 30-year mortgage rate was 6.5%, so with home prices up just 3%, real mortgage rates are now 3.5%. And with most potential buyers well aware of the huge excess supply of homes, there is no reason to expect prices to rebound soon. A reasonable person might expect them to fall further, boosting the real mortgage rate further.

People do not like to borrow to pay for a depreciating asset. Circumstances will lead some to buy a home, but discretionary purchasers, including second-home shoppers, will be scarce for the foreseeable future. Over the past 30 years, there has been a very close association between our measure of real mortgage rates and the pace of home sales, adjusted for the U.S. population’s expansion. This chart suggests that, even without further movement in nominal mortgage rates or the pace of home-price gains, sales must fall another 10% to 15% to match historical norms. But if our projections for home prices are correct, and the rate of increase almost hits zero this year, home sales will slip by an additional 20% to 25%. That would make the total decline almost 40% from their mid-2005 peak.

Bulls have recently been cheered by rising mortgage applications, but this chart shows that these have become an unreliable indicator. Applications have overshot actual home sales in previous cycles, too, probably because, when the market is weak, a higher proportion of applicants back out of deals. In this cycle, however, the gap is bigger than in the past, and it probably will widen.

People with less-than-perfect credit are finding it hard to obtain loans at acceptable rates, so they are apparently making multiple applications in the hope of finding a friendly lender. Thus, it makes sense to emphasize readings from the pending existing sales index and the National Association of Homebuilders’ monthly survey. Both are still deteriorating. If home sales do drop for another year or more, even at a slower pace, expect further pressure on retail sales of housing-related items, such as building materials, furniture and appliances.

At the same time, the end of the boom in home-equity extraction means that all consumption is vulnerable, even with employment and wages still rising. The early part of this year saw quite robust spending, but this should be viewed in the context of the biggest drop in gasoline prices in 20 years in Q4 2006. Now that fuel prices have rebounded again, chain-store sales are suffering badly, and there is no reason to expect improvement.

The consequences of the bursting of the housing bubble will be felt for years.

Link here.
Why a changing lending and borrowing ethos led to the housing bubble – link.
Will your house do the NASDAQ meltdown? – link.

Home cleanup business is booming.

The aerial photography of mosquito-infested pools and removal of birdcages, possums, and trash from foreclosed homes is a booming business. Who would have thought that a few years ago? Moreover, banks are reluctant to spend money on cleanups “because the market hasn’t hit bottom.”

From the Orange County Register (Southern California) we get:

“Patti Donovan, president of Stearns Asset Services, a Santa Ana firm that manages and markets real estate-owned properties, said she got back in the business last year after a four-year hiatus when the market was hot and she ‘pretty much played a lot of golf.’ Donovan, who started in the foreclosure business in 1984, said she expects the down market to last three-five years.
“‘The difference this cycle is it’s not the economy that’s causing this to go upside down,’ she said. ‘It’s more the types of loans – 100%-financing, adjustable-rate mortgages. Before, it was people losing jobs. Now it’s just people borrowing too much.’
“Robert Rosenthal is a San Fernando Valley attorney who specializes in evicting tenants from foreclosed homes. He expects a lot of jobs over the next three or four years as more people lose their homes.
“‘With this market now, my guess is we’re in the first or second inning of a nine-inning baseball game,’ he said.”
Link here.

Six Phases of the Housing Bubble

The popping of the housing bubble is much like the six phases of the typical project:

Right now, we seem to be in an overlapping state centered around panic (this phase can last a long time) with lingering pockets of “disillusionment” and the beginnings of the “search for the guilty” now under way. As anecdotal evidence as to where we are in the cycle, I point to “Foreclosure Crisis Sparks Investigation”:

“Amid Wisconsin’s deepening mortgage foreclosure crisis, Legal Aid Society of Milwaukee ... announced an inquiry into what went wrong. ... [S]aid Catey Doyle, the organization’s chief staff attorney. ‘There are a lot of questions about who bears responsibility for this situation, [and] the only way to find out who the players are is to manually go through court files.’ ... ‘Loans made in the last year got progressively more and more outrageous,’ Doyle said. ‘It was like a feeding frenzy. Now we’re seeing 20 foreclosures a day on average in Milwaukee County, and sometimes 30. It’s really depressing.”

As part of the “search for the guilty” phase, there is an ongoing denial and coverup by some of those who are guilty but are trying very hard to stop any fingers from pointing in their direction. This “One on One With David Wyss, Chief Economist of S&P” shows what I mean:

“SUSIE GHARIB, NIGHTLY BUSINESS REPORT: Let’s begin by getting your reasons of why S&P put these mortgage- backed securities on negative credit watch.

“WYSS: Well, the basic reasoning is they’re simply not performing as well as we expected. The housing market is not turning around in a hurry. We didn’t really expect it to. Home prices still have a ways to drop. And we’re already seeing substantially higher default rates on these securities than we had anticipated at this point. So it was time to move them.

“GHARIB: But why now? All of these factors that you’ve mentioned have been going on and the housing sector has been struggling for some time – why now?

“WYSS: Well, largely because we need to get enough record on these securities to see how they’re performing. We knew the housing sector was underperforming. We knew that when we rated these securities. But what surprised us is that even given the poor performance for the housing sector, the default rates are running higher than we would have expected given the FICO scores here, given the loan-to-value ratios in these mortgages. ... Let’s keep this in perspective. We’re looking at $12 billion. That sounds like a lot of money – it is a lot of money to most of us. It’s only 2% of the subprime securities we rated during that period. And it’s 0.01% of the U.S. mortgage market.”

David Wyss is trying like mad (as are numerous others in the state of denial) to contain the damage by containing the negative sentiment. It is galling to see shills saying with a straight face the problem is only with 2% of subprime when a full 65% of the bonds in indexes that track subprime mortgage debt do not meet the S&P ratings criteria that were in place when they were sold. The 2.1% downgrade of debt by the S&P is a joke. I talked about this at length in “Stress Test”. The ploy by David Wyss at the S&P is doomed to fail. Sorry, David, no matter how hard you try, you cannot put air back into a popped bubble.

Link here.


Is an attempt to make some sense out of recent crosscurrents even plausible? One would have expected rising global yields, mounting U.S. consumer debt issues, and serious festering problems within Wall Street “structured finance” to have by now at least somewhat impinged marketplace liquidity. And, indeed, the vast majority of credit spreads have widened meaningfully over the past few weeks. Deteriorating market conditions have forced an increasing number of debt deals to be repriced, postponed, or canceled altogether. M&A bubble vulnerability has become palpable.

Yet over-liquefied global equities markets are at or near record highs, crude is rapidly approaching $73, gold is back above $650, major commodities indices are rallying back toward all-time highs, and international debt issuance is running at a record pace. Buyout announcements are unrelenting. And despite the housing downturn and subprime implosion, the U.S. bubble economy chugs right along.

Let us first delve briefly into the (bubble) economy and then return to the markets. June’s and May’s revised jobs created confirm ongoing economic expansion. This should not be surprising considering continuing credit excess and the strong inflationary biases that persist in many sectors (certainly including the stock market/M&A/general finance, exports, energy, commodities, agriculture, healthcare, the military and government). June Hourly Earnings were up 3.9% y-o-y, now hovering near 4% annual increases for 14 straight months. Upward wage pressures certainly appear more pervasive today than they were during the technology/telecom bubble period. Skilled workers remain in short supply in most industries – a dynamic one would not expect to play well with bond managers.

The schizophrenic Treasury market was hit head-on by strong ISM Manufacturing and Non-Manufacturing reports, and robust jobs data. Rather abruptly, last week’s fear of impending credit tumult was – at least for top-tier fixed income – temporarily displaced by angst associated with an overheated global economy, heightened inflationary pressures, and rising global rates. Visions of impending Fed easing were overcome by the menacing view of a Fed forced down the road into additional rate hikes.

On the one hand, there is significant stress in the U.S. CDO marketplace with the very real potential to expand into a serious liquidity event. On the other, energized credit systems across the globe are today firing on virtually all cylinders. The debt markets are caught confounded and indecisive with respect to the nuances of this newfound global credit and liquidity juggernaut, as well as to the scope of the liquidity-creating function undertaken by the CDO marketplace over the past couple years. There is today an unusually fine line between an unwieldy global liquidity bubble and the mounting risk of a liquidity dislocation in the market for financing risky securities. Such uncertainty has become a distinguishing feature of the today’s monetary disorder.

The risks of a flight away from the CDO market are very real and will not likely dissipate anytime soon. “Ponzi Finance” dynamics have created acute fragility. A run on these illiquid instruments would be immediately problematic, requiring re-pricing throughout. Since a large amount of these securities are financed through the Wall Street “repo” machine, lower prices would instigate margin calls and forced liquidation. The risk of a problematic deleveraging and marketplace dislocation is today quite high.

By their nature, prolonged credit bubbles concentrate incredible financial power in fewer and bigger hands. Those most successful at financial innovation exploit their capacity to intermediate credit and issue the debt instruments sought by the marketplace. The natural inclination is to capitalize fully on one’s financial prowess – to consolidate power and influence by outgrowing, acquiring, merging or linking with a dwindling cadre of “competitors”. This dynamics melds well with the progressively arduous task of creating and distributing the ever-larger quantities of credit instruments necessary to sustain the bubble. Wall Street’s astounding “success” with electronic “money” owes much to its ability to have made a Monopoly out of the business of “structured finance” (i.e., contemporary “money” and money-like Credit).

When this credit bubble inevitably bursts, the large financial operators (the Wall Street firms, “money center” banks, hedge funds, financial guarantors, and rating agencies) will be anathema to the general public as they were in the post-1929 crash environment. In the meantime, however, we should expect the “‘money’ changers” to go to great lengths to sustain the boom. Not only do Wall Street investment bankers today control the creation of debt instruments, these firms also dominate the entire risk intermediation (derivatives) and financial asset management business. As one should expect at this stage of a historic financial bubble, we are not these days dealing with “free” or “efficient” markets. It does not work that way.

At the same time, I do not believe the Fed, Wall Street, or any group has much control over developments other that to work diligently to ensure sufficient credit creation. Command over how this created purchasing power flows through the global economy and markets is becoming a different story altogether. And that, loyal readers, is the age old dilemma of inflationary booms. I may believe we are on the precipice for one heck of a problem associated with the reversal of speculative flows to risky and illiquid debt instruments. But what this means in the near-term for the U.S. and global equities game is anything but clear.

I have written in the past how markets can go haywire near inflection points. In reality, these days they have a strong propensity for doing it. The NASDAQ bubble is the poster child. Increasingly evident fundamental problems – a faltering telecom debt bubble, rapidly weakening industry profit trends, and acute “Ponzi Finance” dynamics – surely played an instrumental role in the final melt-up and resulting subsequent collapse. Huge short positions and derivatives bets created the backdrop for destabilized market conditions and unavoidable dislocation.

Witnessing recent market dynamics, I am increasingly of the view that we are experiencing oddities reminiscent of the 1999/early-2000 market dislocation. There are eerie fundamental parallels along with abundant “technical” fodder. The number of outstanding NASDAQ shares sold short in June was up 37% from a year earlier and were 28% higher at the NYSE. We also know that derivative positions and trading activity have surged.

I will assume that so-called “market neutral” strategies are responsible for much of the increased shorting. Having lived through all the squeezes and nonsense orchestrated against bearish positions during the ‘90s, I will cynically suggest that we should not be all too surprised if this current bout of speculative excess runs its course only after wreaking some bloody havoc on this popular strategy. For sure, there is a plethora of players new to shorting. This dynamic already may help explain the strong gains posted by stocks with oversized dollar value shorts positions (e.g., Amazon, Apple, Google, GM).

Short squeezes create market liquidity, albeit temporarily. I would also argue that rising stock markets (and asset markets generally) generate their own liquidity, especially when derivatives strategies proliferate. Writing out-of-the-money call options to finance the purchase of out-of-the money put options was a popular hedging strategy in the late ‘90s. Such trades have little impact as long as the market trades in a narrow range. But, and as we saw with NASDAQ, these strategies can be destabilizing in rapidly rising markets, adding additional marketplace leverage and the forced unwind of hedges as prices surge higher. I see no reason why we should not expect today’s unfathomable derivatives markets to run amuck.

How far we are today into an upside market dislocation is impossible to discern. Yet I certainly suspect that speculative dynamics have reemerged as an integral aspect of market behavior, at home and likely abroad. The specter of a synchronized global market “melt-up” and the acute susceptibility to breakdown such a scenario would entail is one aspect of the unfolding “worst-case scenario”. Today’s global credit apparatus has extraordinary command over the liquidity-creation process. It is just losing more and more control over inflationary effects in an asset manic world. Wall Street is immersed in a dangerous Game.

Link here (scroll down).

Bank for International Settlements warns of Great Depression dangers from credit spree.

The BIS, the ultimate bank of central bankers, has warned that years of loose monetary policy has fuelled a dangerous credit bubble, leaving the global economy more vulnerable to another 1930s-style slump than generally understood. “Virtually nobody foresaw the Great Depression of the 1930s, or the crises which affected Japan and Southeast Asia in the early and late 1990s. In fact, each downturn was preceded by a period of non-inflationary growth exuberant enough to lead many commentators to suggest that a ‘new era’ had arrived,” said the bank.

The BIS pointed to a confluence a worrying signs, citing mass issuance of new-fangled credit instruments, soaring levels of household debt, extreme appetite for risk shown by investors, and entrenched imbalances in the world currency system. “Behind each set of concerns lurks the common factor of highly accommodating financial conditions. Tail events affecting the global economy might at some point have much higher costs than is commonly supposed,” it said.

The BIS suggested China may have repeated the disastrous errors made by Japan in the 1980s when Tokyo let rip with excess liquidity. “The Chinese economy seems to be demonstrating very similar, disquieting symptoms,” it said, citing ballooning credit, an asset boom, and “massive investments” in heavy industry. Some 40% of China’s state-owned enterprises are loss-making, exposing the banking system to likely stress in a downturn. It said China’s growth was “unstable, unbalance, uncoordinated and unsustainable,” borrowing a line from Chinese premier Wen Jiabao.

In a thinly-veiled rebuke to the U.S. Federal Reserve, the BIS said central banks were starting to doubt the wisdom of letting asset bubbles build up on the assumption that they could safely be “cleaned up” afterwards – which was more or less the strategy pursued by former Fed chief Alan Greenspan after the dotcom bust. It said this approach had failed in the U.S. in 1930 and in Japan in 1991 because excess debt and investment build up in the boom years had suffocating effects.

Link here.


The powers that be are evidently more worried about the subprime mortgage crisis than they let on.

Two hedge funds, managed by Bear Stearns, are on the verge of liquidation due to making highly leveraged bets on securities backed by subprime mortgages. Bear Stearns’s woes have investors worried that any negative developments in the credit markets will also drag down the whole stock market – which has become quite volatile since the bad news from Bear Stearns surfaced. The ripple effects of the subprime-mortgage implosion will continue to roil the credit and stock markets, but is the subprime-mortgage bust truly large enough to drag down Wall Street with it? If the recent performance of GM’s stock is an indicator, the Working Group on Financial Markets (aka the Plunge Protection Team) is answering this question with a resounding “yes”.

As Karen De Coster and I asserted in our essay General Motors, Market Engineering, and “Confidence” Protection, the Working Group manipulates GM’s stock in order to prop up the Dow Jones Industrial Average so as to maintain investor confidence in the stock market, Wall Street, and the economy in general. Indeed, based upon our assertion, GM’s stock definitely has big shoes to fill. In light of GM’s stunning performance, during the exact period of Bear Stearns’ hedge fund catastrophes, the “General” is strutting up and down Wall Street as if he is Big Foot ... with members of the Plunge Protection Team peering from behind the curtain in delight.

This second quarter has been a barnburner for GM’s stock. Through this period, the DJIA was up by 8.5% while GM was up by nearly 23%. Talk about market leadership. During the trading week of June 25th, when Wall Street was really feeling the heat of the Bear Stearns meltdown, GM’s stock closed the week up by 6.6%. The General is fearlessly spearheading the market’s charge upward. Moreover, during this hard-charging week, GM’s stock hit a 52-week high which tallies up to nearly a 43% gain from its 52-week low. GM most certainly served to steady a jittery stock market.

Interestingly enough, this magical week began with an upgrade from a Wall Street brokerage powerhouse. On June 25th, Goldman Sachs analyst Robert Barry put out a “buy” recommendation on General Motors citing his rather dull insight that “GM can make a compelling case to UAW members that material wage and benefit cuts are needed ... And we suspect members and retirees are increasingly amenable to such cuts.” The less than awe-inspiring recommendation was much less important than putting the prestige of Goldman Sachs’ name behind GM’s stock. And this is where, in my opinion, the heavy hand of the Plunge Protection Team has been exposed yet again.

So let’s connect a few important dots here. For openers, the four key members of the Plunge Protection Team (which reports directly to President Bush) are the Secretary of the Treasury, the Chairman of the Fed, the Chairman of the S.E.C., and the Chairman of the Commodity Futures Trading Commission. Henry M. Paulson is the current Secretary of the Treasury. Mr. Paulson used to be the Chairman and CEO of – you guessed it – Goldman Sachs. In light of this, it is highly plausible that Goldman Sachs’s buy recommendation was a political favor to help the Plunge Protection Team do damage control.

Now, let us look a little deeper into the company whose common stock Robert Barry so uninspiringly recommended to American investors. Upon reviewing GM’s December 31, 2006 fiscal year-end audited financial statement, I certainly can see why Mr. Barry was so bland. To analyze GM’s 12/31/06 FYE financial statement is to understand that this once great company is likely heading towards bankruptcy. Here are the gruesome details:

In spite of “the General’s” ill financial health, Robert Barry proclaimed a 52-week target price of $42 per share. This target price was simply pulled out of thin air. Without earnings and without a tangible net worth, it is impossible to apply basic analytical tools in order to derive a rational target price for the stock. Since most “investors” are financially illiterate, it is easy for Wall Street analysts to get away with making such absurd proclamations.

When Barry stated that “GM can make a compelling case to UAW members that material wage and benefit cuts are needed” he clearly understood the grim reality of General Motors’ financial situation. In essence, Barry’s “buy” recommendation is based upon the bizarre logic that although GM’s acute financial weakness may be a “strength” when bargaining for concessions from the UAW, that investors should ignore this extreme financial fragility. After all, this company just may survive if its negotiations, with the UAW, go exceedingly well. And what if the UAW does not give an inch? Heck, let’s not spoil the convincing case (wink, wink, nod, nod) made by Goldman Sachs’s star auto-industry analyst.

There is little doubt that Robert Barry “took one for the team” ... the Plunge Protection Team that is. Typically, a “buy” recommendation is accompanied by exciting and positive developments regarding the company being analyzed. All Barry could muster was tortured logic intertwined into an insipid endorsement of a company teetering on failure. But the deed was done. Goldman Sachs’s endorsement of GM provided the market leadership investors yearn for when instability is afoot.

As I see it, the intense manipulation of GM’s stock indicates that the Plunge Protection Team is frightfully worried about the damage subprime mortgages will inflict upon Wall Street. In the end, it is quite ironic that GM’s financial condition really is not substantially different relative to the financially-strapped individuals who are defaulting on the very mortgages that toppled the Bear Stearns hedge funds.

Link here.

When Wall Streeters run into trouble do others come to their rescue? Only, it seems, if their own money is on the line – link.


On the face of it, it seemed like a great idea: an insurance policy for investment portfolios. No wonder it was popular with the Wall Street crowd. Unfortunately, it was not until the strategy was put to the test in the fall of 1987 that its many shortcomings came to light. By then, of course, it was too late.

“Portfolio insurance” was first developed more than two decades ago in an attempt to limit the damage caused by significant share-price declines. Previously, fund managers found it hard to adjust quickly to sudden market turbulence, mainly because of practical issues associated with rebalancing large portfolios at a time when technological solutions were limited and communications networks sluggish. Dreamed up by academics Hayne Leland and Mark Rubinstein – who were later joined by marketing whiz John O’Brien – portfolio insurance involved adjusting hedges or cash holdings in discrete steps that were tied to changes in market values, a process known as “dynamic hedging”. The lower prices went, the larger the offset and the smaller the exposure to additional downside risk. Generally speaking, the LOR approach necessitated selling more and more index futures as prices fell. In some respects, it was a glossed-up version of the mechanical stop-loss tactics long employed by traders and chartists.

For a while, the strategy worked reasonably well, and it gained widespread acceptance. That was because once threshold levels were hit, portfolio managers would find themselves effectively in cash without the logistical hassles or high transaction costs of the past. By 1987, it was estimated that portfolio insurance covered some $60 billion of equity-related assets.

In the wake of the October crash, however, investors learned a few hard lessons. They suddenly realized, for example, that the strategy assumed trading conditions would remain as liquid as they had been and that there would always be willing buyers at a price. LOR and its clients also reckoned that various structural and statistical relationships would remain intact, even when markets were under stress, which proved to be wide of the mark. Beyond that was the belated recognition that the LOR approach was not really insurance in a traditional sense. While portfolio insurance did offer protection against certain threats, they were not necessarily the one that investors were really worried about. The popularity of the dynamic hedging approach also ensured that it would fall short when needed most. It was like insuring a great many homes in a vulnerable locale against the same threat.

Perhaps the most insidious aspect associated with the widespread use of portfolio insurance stemmed from moral hazard. Investors felt fully protected, and saw little need to watch out or steel themselves for a negative turn in the cycle. They reduced cash holdings to a minimum, and many sought to capitalize on the most marginal of opportunities. Instead of protection, portfolio insurance ended up meting out a great deal of punishment. Most experts believe the onslaught of sell orders only worsened matters in October 1987, hurting everyone in the process.

Needless to say, enthusiasm for portfolio insurance waned after that, though the search for allegedly foolproof methods of controlling risk remained. Nowadays, aided by advances in knowledge, computing power and technology, increased electronic connectivity, industry consolidation, and a gusher of cheap money, various tactics, approaches, and regulatory mechanisms have somehow morphed into a framework that many once again view as protection from bear markets.

Taken together, they constitute a larger and more pervasive, and ultimately much riskier version of the protective backstop that many investors thought they had in place in the mid-1980s. In essence, what exists today is what might be described as the virtual equivalent of old-fashioned portfolio insurance. And along with it, the very same threat of a devastating crash that investors faced before. Most people probably would not characterize the ethereal and loosely constructed shield that the financial community seems to be counting on nowadays as “portfolio insurance”. Yet, one could argue that the widespread and hubristic enthusiasm for large-scale risk-taking is prima facie evidence of its existence.

How else can one explain the mind-boggling degree of speculation – leveraged or otherwise – now taking place in global financial markets? Or the notion that concentrated bets and out-sized holdings of illiquid and other risky assets makes more sense than traditional investment management approaches? Logic suggests that only those who are very confident about their potential downside risk would dare to be fully invested at a time when credit spreads are at historic lows, various indicators point to an impending downturn, bond yields are rising sharply, and structural imbalances are at levels that have triggered financial crises in the past.

If you look hard enough, there is a great deal of evidence pointing to the existence of a portfolio insurance-style protective latticework, with a reach that stretches the length and breadth of the financial marketplace. Some attributes are formulaic, like the dynamic hedging strategy used in LOR’s approach. The phenomenal growth of the hedge fund sector, where performance is frequently measured in absolute terms over short spans, has spurred the widespread adoption of mechanical trading tactics such as stop-losses.

The illusion of permanent liquidity, which buttressed the 1980s classic, also plays a starring role in promulgating the growing acceptance of today’s virtual equivalent. With point-and-click trading technology, instant communications, arbitrage powerhouses operating across markets and borders, and portfolio-based risk management, more investors than ever are convinced that they have an “out” if they need it. And as was the case in the years leading up to the 1987 crash, when positive feedback from early adopters of the strategy powered a wave of demand that sowed the seeds of its eventual undoing, the financial world has been similarly smitten to excess by the apparent “successes” associated with the modern version. The resolution of one crisis after another, including the LTCM and Amaranth meltdowns, has spurred complacency very reminiscent of two decades ago.

While these days no one is really interested in the protective backstop that LOR created, much of the investment world has nonetheless been signing on to its new age equivalent. Eventually, though, when prices start heading south – as they are wont to do every now and then – those naïve enough to believe that they have insurance against bear markets will realize once again – belatedly, of course – its many shortcomings.

Link here.


Some may remember the movie Tin Men. Set in Baltimore during the 1960s, the main characters, Danny DeVito and Richard Dreyfuss, make a living selling aluminum siding for houses. They are part of a quickmoney operation that leaves customers possibly defrauded and certainly disillusioned. The main plot pits the two against each other in a brawl that eventually destroys DeVito’s marriage. The camera periodically cuts to a courtroom where hearings are held of the shenanigans used to entice customers. DeVito and Dreyfuss are oblivious to the proceedings even though the dubious operation is front-page news. Their battle for one-upmanship, DeVito’s wife, and aluminum-siding sales completely ignores the noose that eventually falls on them, after testimony has condemned them. Whatever crimes (if any) they committed are incidental in political circles, compared to the image contrived of the bureaucrats doing their all to protect the Little Man. One could deduce that devious practices were old hat by the time the authorities decided to act, possibly having collected their own booty before feigning disgust and doling out retribution.

There is little that is new in the current private-equity, hedge-fund, prime-broker, rating-agency, derivative mixture. The question seems to be how the borrowing and leveraging will end. If past is prologue, it will be the politicians who will shut the door ... after the tide has turned. The current boom is coagulating into the same, dark mixture that drowned the market twice before – in the late 1960s and the late 1980s. The timeline of the earlier periods is repeating itself today: the limited attraction of a new bull market, the massive attraction of an aging bull market, the publicity drawn to victors in a moribund bull market, the overinvestment and overleveraging of funds that lead to a bear market, criminality, and bankruptcy. It is the latter two developments so essential to political involvement. These are tangible – and inevitable – developments. Poor coverage ratios and the structure of payment-in-kind bonds will not make the Congressional docket.

Link here.


The principle difference from one age to the next is the line of flimflam each falls for. Remember that gobbledygook by George Gilder in Wired magazine, during the last big delirium? Towards the end of the 1990s, it felt as if the moment of Rapture had arrived. Who could doubt that electronic communications, fed through the Internet like a belt of ammunition through a machine gun, were annihilating space, time and ignorance?

At last, everyone with a Yahoo account had infinite access to information. Even the lowliest assembly line worker in Guangzhou could read Shakespeare ... even the humblest bellhop at the Ritz could solve Poincare’s last theorem ... and even the dustiest goat-herd in the Hindu Kush could learn to make a car bomb. We were all supposed to become geniuses. Now, a decade later, what happened to all those geniuses? One humbug gives way to another. The flimflam of this New Bubble is that only some people are super-smart, and everyone else is a moron. These new Werner von Brauns work for hedge funds, investment banks, and private equity firms. Like old Werner, their funds aim for the stars ... and are likely to blow up in London.

So smart is this new brood of geniuses that they are able to spot overlooked values – right in plain view of the rest of us in the public markets. Somehow, we missed them! Private equity mavens can even pay a premium for these stocks, and still add so much value that everyone comes out ahead. And just to show how smart they are, they are able to do what million-dollar managers cannot – buffing up their acquisitions to such a shine that the whole world looks upon their beauty like Anthony on Cleopatra. And with similar consequences.

In America, no further proof of genius is needed than the evidence that comes with dollar signs in front of it. While the average person earns no more per hour than he did in the Carter Administration, the two Blackstone founders took home more than half of the $4.8 billion from their recent IPO - the biggest payday in history. Overall, no group is better paid that hedge fund managers and private equity entrepreneurs. No art auction is complete without their professional buyers. No luxury private aircraft manufacturer could stay in business without at least a few of them.

Alas, now theory is giving way to fact, and the pretensions of the Smart Set are getting marked down faster than subprime-backed CDOs. If you went back and looked at all the LBOs over between 1981 and 2003, according to researchers from Harvard and Stanford, you would find that the buying firms were almost always harmed by the transaction. Last year, KKR raised $5.1 billion from the public for a company that funds KKR deals. Despite the biggest bubble in private equity ever, the shares now sell for about 10% less than the IPO price. And over the long sweep, KKR’s track record is no better than an index-following mutual fund. It is just more highly leveraged.

A conceit of the private equity industry is that taking companies out of the public markets allows managers to focus on longer-term strategies. But a Moody’s report has contradicted that claim too. Meanwhile, according to figures from Credit Suisse Tremont, the data provider, the average hedge fund across all strategies has returned 7.86% over the year to date – almost exactly the same as the performance of the S&P 500 index. And a recent S&P study of Absolute Return Funds – funds designed to outperform the benchmarks – showed that none of them hit their targets, after fees. Of the 21 funds tracked by S&P, only four beat the rate of return an investor could have gotten from cash – without paying any fees at all.

Both in theory and in practice, an investor would have to be a moron to want to pay a hedge fund “2 and 20” for the privilege of getting ordinary returns (actually, many funds charge an additional 1% management fee, plus an additional 10% of performance as a commission, bringing the total to “3 and 30”). But a man who was looking for idiots in the investment markets of 2007 is spoiled for choice. He might as well be trying to identify the dumbest member of the British parliament or the fattest American tourist.

But the financial world, circa 2007, is full of wonders. Who could have imagined that professional investors would buy leveraged packages of mortgages made to people who lied about their incomes and were unlikely to be able to pay the money back? Or that shareholders would allow their companies to be loaded up with debt, stripped of assets, and used to pay huge “dividends” to the private equity marauders?

And now, who would have imagined that those same public shareholders would buy shares from Henry Kravis, Stephen Schwarzman, and other private equity hustlers? What do they think, that they are going to put one over on the very geniuses who made such suckers of them?

Link here (scroll down to piece by Bill Bonner).


As the Japanese government continues holding short-term interest rates near zero while printing yen like it is going out of style, getting out of the yen has now replaced pachinko as the national pastime for rank and file Japanese. With housewives and cab drivers debating the best techniques to exchange their yen savings for higher yielding non-yen assets, the Japanese monetary authorities are facing the prospect of the complete destruction of their own currency, subjecting their citizens to the horrors of hyperinflation.

For years, the storied efficiency of the Japanese economy has kept its citizens from understanding just how much purchasing power they were losing to inflation. As the extremely productive Japanese economy worked to lower consumer prices, the inflationary monetary policy of the BoJ reversed those declines, robbing Japanese consumers of the benefits of falling prices. This loss represents a massive subsidy to American consumers.

However, inflation is about to get so out of control in Japan that prices will soon rise despite the natural forces that would otherwise have lowered them. As rising prices become impossible to ignore, perhaps the Japanese will borrow a page from the U.S. playbook and recalculate their CPI to hide the grim reality. However, with the carry trade kicking into high gear, such propaganda efforts will likely not succeed.

The Japanese are pursuing this reckless monetary policy with the deliberate goal of creating inflation, and they are in danger of succeeding beyond their wildest dreams. “Deflation” was never a real threat to Japan. On the contrary, falling consumer prices are one of the natural rewards that people enjoy in market economies. The fact that this benefit has been denied to most people in modern times as a result of government created inflation is one of the great tragedies of our time. To spare its citizens from suffering the “scourge” of being able to buy products at lower prices, the Japanese are close to destroying one of the greatest savings hordes in history. The question is why are they doing it?

The only logical answer I can offer is that the Japanese realize that if they stop the flow of global liquidity they will destroy the dollar and the U.S. economy. To survive, the U.S. must be able to both limitlessly exchange the dollars it prints for the goods the rest of the world makes and then pay low rates of interest on its IOU’s that foreigners accumulate as a result. Were the Japanese to turn off the monetary spigot and raise interest rates to normal levels, Americans would not be able to do either.

A real rate of interest on the yen would reverse the carry trade by creating demand for Japanese assets and diminishing demand for dollar denominated assets. Such a move would simultaneously send U.S. interest rates and consumer prices thought the roof and stock and real estate prices through the floor. The entire U.S. consumer economy would collapse and Americans would experience the greatest period of economic hardship since the Great Depression.

This scenario apparently terrifies the Japanese, as they fear that such a severe recession in American means similar problems for Japan. However, their fears are misplaced as their real problem is the enormous cost of trying to prevent this from happening. Their fixation on what might happen to Japan if the American economy were to run off the rails has blinded them to the far greater costs of trying to keep in on track. Therefore, the Japanese need to carefully consider what they are doing. They need to ask themselves whether propping up the U.S. economy, merely delaying its inevitable collapse, is really worth the destruction of their own currency and the potential chaos that might create for their own economy? Do they really want to commit economic hara kiri just to keep their short-sighted vendor financing scheme going a while longer. If they come to their senses soon, as they must do to avoid this fiasco, this time it will be the Japanese that drop the atomic bomb on us!

Link here.


It is not uncommon for someone watching a tennis game on television to be bombarded by advertisements for funds that did (until that minute) outperform others by some percentage over some period. But why would anybody advertise if he did not happen to outperform the market? There is a high probability of the investment coming to you if its success is caused entirely by randomness. Judging an investment that comes to you requires more stringent standards than judging an investment you seek, owing to such selection bias. For example, by going to a cohort composed of 10,000 managers, I have a 2% chance of finding a spurious survivor. By staying home and answering my doorbell, the chance of the soliciting party being a spurious survivor is closer to 100%.

The same logic that applies to the spurious survivor, also applies to the skilled person who has the odds markedly stacked in her favor, but who still ends up going to the cemetery. This effect is the exact opposite to the survivorship bias. Consider that all one needs is two bad years in the investment industry to terminate a risk-taking career and that, even with great odds in one’s favor, such an outcome is very possible. What do people do to survive? They maximize their odds of staying in the game by taking black-swan risks – those that fare well most of the time, but incur a risk of blowing up.

Another misconception of probabilities arises from the random encounters one may have with relatives or friends in highly unexpected places. “It’s a small world!” is often uttered with surprise. But these are not improbable occurrences. The world is much larger than we think. It is just that we are not truly testing for the odds of having an encounter with one specific person, in a specific location at a specific time. Rather, we are simply testing for any encounter, with any person we have ever met in the past, and in any place we will visit during the period concerned. The probability of the latter is considerably higher, perhaps several thousand times the magnitude of the former.

When the statistician looks at the data to test a given relationship, say to ferret out the correlation between the occurrence of a given event, like a political announcement, and stock market volatility, odds are that the results can be taken seriously. But when one throws the computer at data, looking for just about any relationship, it is certain that a spurious connection will emerge, such as the fate of the stock market being linked to the length of women’s skirts.

What is your probability of winning the New Jersey lottery twice? One in 17 trillion. Yet it happened to Evelyn Adams, whom the reader might guess should feel particularly chosen by destiny. Using the method we developed above, researchers Percy Diaconis and Frederick Mosteller estimated at 30 to 1 the probability that someone, somewhere, in a totally unspecified way, gets so lucky!

Some people carry their data mining activities into theology – after all, ancient Mediterraneans used to read potent messages in the entrails of birds. Michael Drosnin provides an interesting extension of data mining into biblical exegesis in The Bible Code. Drosnin, a former journalist (seemingly innocent of any training in statistics), aided by the works of a “mathematician”, helped “predict” the former Israeli Prime Minister Yitzhak Rabin’s assassination by deciphering a bible code. He informed Rabin, who obviously did not take it too seriously. Needless to say, the book sold well enough to warrant a sequel predicting with hindsight even more such events.

My favorite time is spent in bookstores, where I aimlessly move from book to book in an attempt to make a decision as to whether to invest the time in reading it. My buying is frequently made on impulse, based on superficial, but suggestive clues. Frequently, I have nothing but a book jacket as appendage to my decision making. Jackets often contain praise by someone, famous or not, or excerpts from a book review. Good praise by a famous and respected person or a well-known magazine would sway me into buying the book.

What is the problem? I tend to confuse a book review, which is supposed to be an assessment of the quality of the book, with the best book reviews, marred with the same survivorship biases. I mistake the distribution of the maximum of a variable with that of the variable itself. The publisher will never put on the jacket of the book anything but the best praise. Some authors go even a step beyond, taking a tepid or even unfavorable book review and selecting words in it that appear to praise the book.

I am frequently asked the question: When is it truly not luck? There are professions in randomness for which performance is low in luck: Like casinos, which manage to tame randomness. In finance? Perhaps. All traders are not speculative traders: There exists a segment called market makers whose job is to derive, like bookmakers, or even like store owners, an income against a transaction. If they speculate, their dependence on the risks of such speculation remains too small compared to their overall volume. They buy at a price and sell to the public at a more favorable one, performing large numbers of transactions. Such income provides them some insulation from randomness. Such category includes floor traders on the exchanges. The skills involved are sometimes rare to find: Fast thinking, alertness, a high level of energy, an ability to guess from the voice of the seller her level of nervousness. Those who have them make a long career (that is, perhaps a decade). They never make it big, as their income is constrained by the number of customers, but they do well probabilistically. They are, in a way, the dentists of the profession.

Link here (scroll down to piece by Nassim Nicholas Taleb).
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