Wall Street Journal Recap: January 17-22, 2017

My full notes and analysis on the Wall Street Journal from the past week: January 17-22, 2017 (Week 3).  Please Enjoy.

Buffett & AIG

AIG paid Berkshire Hathaway $10 billion to bring “stability to their balance sheet” and gives them “greater certainty”.  (link)

Meanwhile, Warren Buffett has said, “We pay a high price for certainty.”  Howard Marks added to this comment, “People who want to buy bargains should prefer uncertainty.”

Translation: AIG paid a high price and Buffett got a bargain.

China & Autocatalytic Reactions

China’s economy achieved yet another year of “stable” GDP growth, but their growth comes at the expense of increasing disorder everywhere else in their economy.  This type of behavior is known as an “autocatalytic reaction.”, which is a mental model that I now use to think about China’s economy.

Autocatalytic Reaction: “Order can be created in a system by an even greater decrease in order of the systems surroundings…The order of the Earth’s atmosphere increases, but at the expense of the order of the sun. The sun is becoming more disorderly as it ages and throws off light and material to the rest of the universe.” (wikipedia)

China creates GDP Stability at the expense of Economic Chaos everywhere else.  Below are examples of China’s autocatalytic economy in action.

“GDP Stability”

  1. IMF Raises Growth Forecast for U.S. Economy (link)

“(China) is laboring to keep growth chugging along…the government used its long-worn playbook of state policies to stimulate growth.”

  1. China Hits Growth Goal On Big Does of Stimulus (link)

“Beijing is expected to double down on old growth drivers this year – including fiscal spending and the property market- to keep the economy stable in an important year of leadership change.”

“Beijing posted the lowest annual growth in a quarter-century, and economists say it only got there by relying heavily on short-term measures that are likely to delay much-needed reforms to bloated state-owned companies and the country’s inefficient financial system.”

“Economic Chaos”

  1. A Risky Twist on Repo Trade in China (link)

These “dai chi” agreements are outrageous…Used to temporarily move funds around in order to skirt government audits, as well as take on more risk.  Doesn’t this sound familiar to AIG and credit default swaps?

“A little-regulated practice that companies have used to borrow hundreds of billions of dollars and move risky assets temporarily off their book.”

“The risk is that dai chi agreements tend to be informal and often don’t leave a paper trail.”

“These transactions, by one estimate, may easily top $1 Trillion in value.  The practice is just one of the many unexpected risks that have sprouted up in China’s long credit boom.”

China’s credit boom has “helped send Chinese bond prices to a 14 year high in mid-August and pumped up markets for everything from iron ore to garlic.”

“Traders say the deals are so opaque that even estimates are hard to make.”

Banks sometimes use the dai chi agreements to move risky assets temporarily off their books during earnings periods or audits, the people said.  Brokers like Sealand typically use them to borrow quickly and flexibly-leveraging their investments many times over,”

  1. Copper Tethered to Dollars’ Moves (link)

Chinese investors are grasping for any investments to get their money out of China or the Yuan.  As a result, they are creating volatile and unusual behavior in Copper prices, among other asset classes.

“Metals and other commodities that are priced in dollars tend to fall when the dollar appreciates…But copper and the dollar have been moving nearly in lockstep recently, a phenomenon that many analysts attribute to rising appetite for copper among Chinese investors seeking to protect their wealth against the risk of a sharp Yuan depreciation against other global currencies, primarily the dollar.”

“In November, the correlation between copper and the WSJ Dollar Index reached its highest level since 2007.”

“In five hours on one day, we say (copper) prices trade in a range that would normally take a year” to play out.

  1. Bitcoin Trading Faces Greater Scrutiny in China (link)

China is trying to limit the ability of Chinese individuals and companies to move their wealth abroad, a trend that contributes to a depreciating Chinese yuan and risks destabilizing the broader financial system.”

Trump & China

If Trump stops China from dumping highly subsided products into our markets (link), I think he’ll unintentionally destroy the lynch-pin holding together China’s economy…highly subsidized factories.

To give more detail to this picture, this is what I imagine much of China’s economy looks like:

  1. China’s local governments fund themselves by land sales and real estate development. But the land is only valuable if there are people and jobs.
  2. The easiest way to create jobs is to subsidize industries which can generate LOTS of jobs, like steel production. Steel production creates jobs in mining, transportation, energy, engineering, and of course factory workers.
  3. With lots of people working, or soon to be working, demand for real estate skyrockets. This in turn creates more jobs because workers are needed to build all this new real estate.
  4. It might be ok if only a few cities in China used this model, but I believe this to be pervasive. As a result, China is creating WAY too much steel and other products.  With an oversupply of subsidized goods, they must dump them into U.S., and global markets for whatever prices they can get.

If the Trump administration stops China from dumping its highly subsidized products into the U.S., subsidized factories all over China will quickly implode and take entire cities with it.  Being so highly leveraged, China is not in a position to handle the impact of such an event.

This of course is just my hypothesis, and I welcome any disconfirming evidence.

“Retail Meritocracy” & Deteriorating Moats

It feels like we’ve entered a new area that I’d like to call “retail meritocracy”.  Brand names use to serve an important role in signaling both value and quality to consumers.  But with easy access to internet reviews and scores, brand name goodwill seems to be rapidly deteriorating for many companies.

Luxottica appears to be a good example.  Luxottica has a dominant position in the old world distribution and marketing platform of sunglasses and eyewear.  In this old model, floor space and brand names served as a solid barrier to entry.  But there’s been a trend towards commoditization of sunglasses and eyewear as consumers become more comfortable with buying off-brand names like Warby Parker.  Online reviews, ratings, etc. have weakened Luxottica’s competitive moat.

  1. Merger to Create Eyewear Giant (link)

“The merger joins two companies that previously risked stepping on each other’s toes as Luxottica expanded into lens manufacturing and Essilor moved into frames…both companies could shrink because of a harsher price competition for frames and lenses.”

  1. Why Golfers Covet the Costco Ball (link)

In another example of “retail meritocracy”, Kirkland brand golf balls became a hot selling items when it was discovered that they perform nearly as good as Titleist Pro VI golf balls.  “This is just a perception killer,”  The Kirkland golf balls retailed for $1.25/ball, while Pro VI’s retailed for ~$4/ball.

We  have entered a time of retail meritocracy where many brand-name-moats are being eroded more quickly than anticipated.

Know what’s being measured

It’s important to know what’s being measured.  Sometimes we forget.  Here are some examples:

  1. Private Prison Industry Gets Boost From Election (link)

A likely example of lying with statistics.

The DOJ found that private prisons were more dangerous than government-run facilities.

“Contractors criticized the report, saying it compared private and government-run prisons even thought they house different types of criminals.”

“The private facilities are dominated by lower-security, illegal immigrants who have committed crimes, a demographic in which gangs are prevalent.”

  1. Rocky Route for Rail Line (link)

“If you cut 30 minutes off, I’d be for it,”

Note: Nowhere in his comment does this frequent Amtrak traveler consider the $120 billion cost.

  1. Fed Officials Shift focus on Growth (link)

When the Fed and U.S. Government talk about the success of their economic programs they largely speak of 1) an increase in overall demand and 2) a reduction in unemployment.  When they say the economy is “healed”, they are likely measuring it by overall demand and unemployment numbers.

Global Growth Fuels Netflix Surge (link)

“The streaming video giant has prioritized growth over profit as it pursues its international rollout”

Success is being measured by user growth…which is the same metric used by Netflix’s competitors.  All of its competitors are foregoing profits for revenues

Oops! When Little Errors = Big Mistakes.

Two examples of little mistakes that lead to big errors.

  1. Student-Debt Picture Darkens (link)

The U.S. government WAY underestimated how many students have “defaulted on or failed to pay back their college loans.”

Previous numbers “overstated repayment rates for 99.8% of all colleges and trade schools in the country.”

“The new analysis shows that at more than 1,000 colleges and trade schools, or about a quarter of the total, at least half the students had defaulted or failed to pay down at least $1 on their debt within seven years.”

In 2015, the reported number was 347 colleges.  Today it stands at 1,029.

  1. Afghan Payroll Cut in Corruption Fight (link)

The U.S. military was paying 30,000 Afghan soldiers that didn’t exist!  That came out to $13 million per month.  Now, the U.S. military will only pay Afghan soldiers who were biometrically enrolled in the nation’s army.

The Growth Promise

Why does it seem that troubled companies always insist upon expanding into growth markets?  Why are they so eager to grow a business model with fundamental problems?  Examples include:

  1. Pearson Drops as Future Darkens (link)

“Pearson said its revenue fell 30% in the fourth quarter making for a full-year decline of 18% that it called unprecedented.”

“…which has put pressure on Pearson’s business even as it seeks new sources of growth in emerging economies such as Brazil and China.”

  1. Can Revlon Regain Some of Its Lost Luster? (link)

“One way Mr. Garcia intends to lessen Revlon’s reliance on the U.S. is by entering China.”

I’m Curious. Is this an Accounting Illusion, Real, or Both?

Railroad Mavrick Buoys Investors (link)

I’m curious about this case.  I wonder if Mr. Harrison’s operating efficiencies are real or are merely accounting related.  After all, he’s able to do what no one else in the industry is capable of doing, which should raise some questions.

“Each time the message was similar: Mr. Harrison has proved himself able to cut costs and improve operations and is a better executive than you current team.”

 Irrational Exuberance

On the backs of the second longest bull-market in history, artificially low interest rates have created intense competition among investors for any yield whatsoever.  Furthermore, ultra-low interest rates have incentivized land-lords not to sell, which has reduced supply and intensified competition further.

  1. Texas Billionaires Joined to Strike Deal (link)

Plano Texas’s raw land has gone from $8 to $10 a square foot a few years ago to $60 today.  Due to growing appeal to corporate tenants.

“The property attracted the attention of about 40 investors.”

Ultimately it was won by the investor able to secure a high loan to equity ratio.

It’s unusual for an investor group to be able to borrow such a high percentage of a deal’s value, as Mr. Ware’s group did.

Participants said it worked because the bank will get an equity like return if the group hits the “jackpot” with the new leasing and land development.

  1. Investors Pump In Cash But Supply Is Lacking (link)

Investors piling money in: “Investors are piling money into real estate funds, but fund managers are finding it challenging to spend it.”

Hunt for returns in an Ultra low interest rate environment: “The record level of dry powder comes as investors increasingly have turned to commercial real estate in a hunt for returnsUltra low interest rates at global central banks have made returns on offices and shopping malls look attractive compared with other asset classes such as bonds.

On par with 2005 to 2008: “Global fund managers have raised $446 billion for commercial property in the past four years, on par with the total raised from 2005 to 2008 in the run-up to the global financial crisis,”

Fierce competition for few properties: “With competition for deals fierce, “it has been much more challenging to invest,”…”There are very few forced sellers,”

Landlords aren’t willing to sell.  Their low debt levels and readily available bank financing have made it easy to hold on to properties longer in hopes of reaping bigger paydays later,”

Increasing demand: Deflation & Inflation

  1. ‘Rideables’ Could Curb Car Ownership (link)

Increased demand can have either an inflationary effect or a deflationary effect.  Which way it goes is largely dependent upon two factors:

1) The speed at which supply can expand to meet demand and

2) economies of scale.

In the case of electric vehicles, increasing demand has had a deflationary effect:

“…the rapid expansion of the market has led to demand for parts, making them in turn cheaper and more available, much like what happened with mobile phones.”

“batteries are getting cheaper at 4% to 8% a year, and that compounding over the last five years has had a massive impact” on the electronic-vehicle industry.

Meanwhile, increasing demand has had an inflationary effect on price of oil and gas service providers (link).

Significant Housing Developments

  1. Mortgage Lending Shift Spurs Worry Over Risk (link)

There’s been a big shift in the FHA lending market for single-family mortgage market over the past 10 years.

Topped $1 trillion:Bonds backed by certain risky single-family mortgages topped $1 trillion for the first time in November, crossing that threshold amid warnings about that corner of the U.S. housing market.”

Banks have all but stopped participating: “The result: In the first three quarters of 2016, banks accounted for 9% of mortgage dollars originated by the FHA’s top 50 lenders, versus 62% for all of 2010, according to Inside Mortgage Finance. Nonbank lenders accounted for 80% of mortgage bonds backed by single-family FHA loans in July 2016, versus 9% the same month in 2010…This is the biggest shift in mortgage lending since the savings-and-loans debacle in the 1980’s.”

“It’s too costly to originate”: “J.P. Morgan Chase & Co., the nation’s largest bank by assets, isn’t among the 50 largest FHA lenders.  In 2013, it was the third largest,”…”It simply is too costly and too risky to originate these kinds of mortgages,” Jamie Diamon wrote.

FHA share of the mortgage market has tripled: the FHA share of the overall mortgage market is larger than during the last housing boom.  In the years leading up to the housing bust, FHA loans accounted for less than 5% of annual mortgage volume.  Since the meltdown, the share has ranged from 11% to 15% of originations.

FHA loans under Ginnie Mae has Quadrupled since 2007: “That growth has boosted the amount of bonds Ginnie Mae backs. The $1 trillion of outstanding FHA single-family loans in November that it guaranteed compares with $272 billion at the end of 2007. Overall, Ginnie Mae now backs more than $1.7 trillion in bonds, which includes loans backed by other agencies such as the Department of Veterans Affairs as well as the FHA.”

Nonbank lending creates market risks: “The funding issue arises because nonbanks don’t hold deposits. So they rely on short-term financing, often from banks, mostly to originate new loans. That can dry up in stressed times.”

As Power Changes Hands, HUD Makes Swift Move (link)

The Trump administration seems likely to curb large housing affordability programs which make mortgages more accessible to lower income families, but at the same time distort free market dynamics.  This would likely put downward pressure on home prices.

Challenges Lurk in the Economy (link)

“The U.S. home ownership rate is near a 50-year low, and the average debt load for college students is rising.”

The Confidence Illusion

There’s a lot of certainty and confidence going on.  Investors are feeling much more confident, the fed is feeling much more confident, consumers are feeling much more confident, etc.  But should we trust them?  Caution would be the prudent advice.

The article, “Don’t Let Others Sway You When Making Investment Decisions” (link), points out that we can be heavily influenced by people with an intense belief in ignorant views.

“We’re biologically equipped with the potential to allow more-confident people to have greater sway over our own beliefs,”

“In a paper published in 2000, Prof. Shiller showed that confidence varies, often going up after the market rises and falling after it goes down.  The confidence of individual investors rose 4% in July 2008, for instance, right before the market got sucked into the black hole of the financial crisis.

“So you could visualize the stock market as a poltergeist or hobgoblin who takes a twisted delight in play pranks on the expectations of the investing public.”

1. Treasury Yields Resume Ascent (link)

Janet Yellen is viewing things positively.

“In a speech Thursday at Stanford University, Ms. Yellen said she doesn’t see the U.S. economy at risk of overheating and doesn’t expect growth to pick up much soon,”

But be careful to give too much weight to her comments.  Remember that after the financial crisis, Alan Greenspan wrote:

“In the run-up to the crisis, the Federal Reserve Board’s sophisticated forecasting system did not foresee the major risks to the global economy.  Nor did the model developed by the IMF, which concluded as late as the spring of 2007 that “global economic risks [had] declined” since 2006 and that “the overall U.S. economy is holding up well…[and] the signs elsewhere are very encouraging.” (link)

Service Providers with High Fixed Costs

  1. For Shale Drillers, Rising Oil Prices Also Come With Rising Costs (link)

Interesting story for a case study:

During a dramatic drop in oil prices, oil & gas companies get a sort of mini-bailout by their service providers.  These service providers effectively absorb some of the losses from oil & gas companies, thereby shielding them and making the decline more manageable.

But the effect is a two-way street.  When oil price rebound, service providers are quick to raise prices and dampen the benefits of rising prices.

Why does this happen?

The service providers have high fixed costs.  Upon declining oil prices, oil & gas companies cut demand for their services.  Because service providers have high fixed costs, they will continue to provide services at a loss, sometimes just as long as their variable costs are covered.

I believe you could say that, to some extent, the fixed costs of your service providers or suppliers act as a shield in bad times.  They will/must lower their service fees,  thereby making the hard times more tolerable.

What should we learn from this?

1) We should look at service providers and suppliers and determine the level of their fixed costs and variable costs.

2) Oil & Gas companies should really position themselves better to take advantage of a decline in oil prices.

Before the decline in oil & gas prices, the whole industry had positioned themselves aggressively.  When the crash came, no company was in a position to exploit the lower costs offered by service providers.  Or buy oil assets at discounted prices.

Instead, they all waited for a rebound in prices to start working again, at which point, they completely missed out on compelling market opportunities.

The problem with that strategy is that it’s hard to do.  But as Charlie Munger says, “It takes character to sit there with..cash and do nothing. I didn’t get to where I am by going after mediocre opportunities.”

Government Corruption & Lee Kuan Yew’s Advice

  1. Scandal Rocks Samsung (link)

“(President Park Geun-hye) was impeached last month over allegations that her confidante, Choi Soon-sil, sought to shake down the country’s biggest conglomerates for donations in exchange for political favors.”

There’s just so much corruption being exposed in governments around the world right now.  If you’re interested in learning more about the roots of corruption and how to stop it, I suggest reading the chapter “Keeping the Government Clean” from Lee Kuan Yew’s book, “From Third World to First”.  Here are a few great quotes:

“Human ingenuity is infinite when translating power and discretion into personal gain.” – Lee Kuan Yew

“A precondition for an honest government is that candidates must not need large sums of money to get elected, or it must trigger off the cycle of corruption.  The bane of most countries in Asia has been the high cost of elections.  Having spent a lot to get elected, winners must recover their costs and accumulate funds for the next election.  The system is self-perpetuating.” – Lee Kuan Yew

The Wall Street Journal Recap: January 9-15, 2017

My full notes on the Wall Street Journal from the past week: January 9-15, 2017 (Week 2).  Please Enjoy.

  1. China Troubles

    1. The End of the Asian Century: Book Review (link)
      1. “(China’s) economy is still dominated by massively indebted and usually inefficient state-owned enterprises that engage in wholesale theft of intellectual property.”
      2. …towering garbage heaps reveal the almost inconceivable environmental harm,”
      3. “There are, on average, 180,000 reported demonstrations against the regime every year.”
      4. “…nearly 50% of the country’s wealthier citizens say they plan to move overseas within five years…”
    2. McDonald’s sells Chinese restaurants to “a sprawling state-owned conglomerate that boasts a suite of financial services.” (link)
      1. “McDonald’s struggles in China as “many people have turned to cheaper local restaurant joints as China’s economy has slowed.”
        1. 51% of Chinese consumers had eaten at western fast food in 2015, down from 67% in 2012.
      2. “Getting cash out of China will be a ‘top-quality problem’“…”Previously McDonald’s reinvested most of its profit from China back into the country.”
    3. Time to Start Worrying Again About Chinese Property (link)
      1. Property prices in the Middle Kingdom surged 18% in the first 11 months.
      2. A price meltdown will hurt local governments as land sales are a major source of government revenue.
      3. The state-owned banking system is heavily exposed both (1) directly to home buyers and (2) property projects, and through (3) the use of property as collateral in business loans.
      4. Property related loans grew 25% in the first three quarters in 2016 & Mortgages grew at an even faster pace of 33%
      5. New home buyers are much more leveraged.
      6. UBS estimates the loan-to-value ratio for new home purchases at close to 70%, high by Chinese standards, where cash buyers used to be common.
      7. Some of the biggest property developers have also loaded up on debt.
    4. Chinese Insurers are aggressively selling Universal life insurance plans and aggressively investing the premiums. (link)
      1. “Chinese insurers are tapping huge amounts of cash raised from sales of newfangled investments to take big stakes in other Chinese companies and to fund international expansion.”
      2. Driven by rising sales over the internet, industry-wide insurance premium income rose 20% in 2015 to more than $370 billion and is projected to hit $700 billion by 2020
      3. “…many customers see insurance as a path to profits rather than a way to seek shelter.”
      4. “…analysts estimate that as much as a fifth of bank loans are bad.”
  2. Unintended consequences of Government Programs (These examples should give us pause the next time we think we can predict the impact of actions on a complex system.)

    1. Import tariffs on magazine paper made in Canada triggered a cascade of unintended consequences. (link)
      1. “The tariffs inadvertently hurt Maine outposts of Canadian paper producers that employ 1,200 people.”
      2. “In the end, the tariff…wasn’t a cure-all for the two American mills that advocated for it.”
      3. “You mess with the market, there are always unexpected developments.”
    2. New York providing $7 billion in subsidies to nuclear plants threatens the coal industry. (link)
      1. “Someone needs to let them know that you’re killing coal if you through billion-dollar subsidies to nuclear.” 
    3. Government loan program to bring clean energy to the masses are being hawked irresponsibly to unsophisticated homeowners. (link)
      1. “Some local governments embraced the loans as a way to bring clean energy to the masses didn’t anticipate the consequences.”
    4. The Chinese government’s escalator policy backfired.  They couldn’t foresee the negative impact of getting people to side on the right side of the escalator. (link)
      1. “Beijing and Shanghai struggled for years to convince escalator riders to stand to the right to let those in a rush pass on the left.”
      2. “Nanjing’s subway operator issued a social media post that cited statistics saying 95% of escalators experienced severe wear and tear on the right side.”
    5. The “Chicken-tax” resulting from a 1960’s trade dispute turned Mexico into an auto manufacturing powerhouse. (link)
      1. Introduced in the 1960’s, the Chicken-Tax was a 25% tax on all imported pickup trucks to the U.S. Then, in the 1990’s, NAFTA made Canada and Mexico exempt from the Chicken Tax.  Therefore, trucks could be imported from Mexico into the U.S. without incurring the tax.   Nafta, combined with the chicken-tax, opened the door for Mexico to become a dominant auto manufacturer.
    6. Afghanistan‘s “double-digit growth rates collapsed to almost zero a year after (U.S.) withdrawal.” (link) Additionally, “The Sunni Muslim terror group emerged…establishing a foothold in districts in eastern Nangarhar province.” (link)
      1. This story of the U.S. leaving Afghanistan reminds me of the British with Singapore. Except the U.S. left much more haphazardly than Britain, and there was no Lee Kuan Yew in Afghanistan to lead it out of its terrible predicament.
  3. People will exploit whatever is exploitable…and they ruin it for everybody else.  This goes for politicians, corporations, and civilians.  This should give us insight into how we design laws, oversight, incentives, etc.

    1. Politicians:
      1. Venezuelan President Nicolas Maduro is playing shady games to hold on to power. (link)
        1. Maduro described efforts to remove him as “coup plots” and blamed Venezuela’s troubles on an unexplained “economic war” waged by his political rivals.
      2. Turkish President Erdogan (link)
        1. “The aim is to bring Turkey to its knees, to take over Turkey and to distance Turkey from its goals. Therefore, they are using the foreign exchange rate as a weapon,” Mr. Erdogan said.
      3. Congo’s President Joseph Kabila refuses to leave office. (link)
      4. Columbia Holds Odebrecht Graft Suspect (link)
      5. South Africa: Corruption within the ruling ANC party. (link)
    2. Companies
      1. Car Companies
        1. VW: Pleaded Guilty to a myriad of criminal charges. (link)
        2. Fiat Chrysler : U.S. regulators accused Fiat of using software that allowed them to cheat emissions standards. (link)
        3. Renault: “French prosecutors have opened an investigation into Renault SA on suspicion of emissions fraud,” (link)
      2. Shire PLC: Drugmaker to pay $350 Million to settle allegations that it illegally promoted Dermagraft.
      3. Korean Conglomerates: Dominate Korea’s landscape and questions are abound about influence peddling. (link) (link)
      4. Takata Corp. executives.
        1. “A federal grand jury indicted three former Takata execs with conspiring to provide auto makers with misleading test reports on rupture-prone air bags…” (link)
    3. People
      1. Select Cuban immigrants abused the “wet-foot, dry-foot” policy and ruined it for everyone. (link)
        1. “Cubans themselves provoked this…it was an abuse of that privilege.”
        2. “Some Cuban-American lawmakers have soured on the policy. They say many migrants are draining U.S. benefit programs while helping prop up the Cuban government with all the cash and goods they take back to the island.”
      2. Liu Zhongtian who is allegedly shipping his wealth around the world in the form of 6% of the world’s Aluminum inventories, proving that, where there’s a will, there’s a way. (link)
  4. VW: Mission Accomplished!?

    1. In 2007 Volkswagen set a lofty goal for itself: to become the world’s largest automaker by 2018. (link)
    2. Last week it was officially announced that VW is the largest car company in the world!  Mission accomplished!…But at what cost?
    3. In the very same week VW also plead guilty to criminal wrongdoing charges that spanned from 2006 to 2015, and agreed to pay a fine of $4.3 billion. (link)
      1. The U.S. indicted six current and former executives of VW for their alleged part of the company’s U.S. emissions fraud. 
      2. VW is expected to plead guilty to charges of, Conspiring to defraud the U.S., commit wire fraud, violate the clean air at, obstruction of justice, violating import rules.
  5. Insights from Various Articles

    1. New Zealand is a perfect place for launching rockets: “A small island nation in the middle of nowhere is pretty much exactly what you want.”
    2. Valeant generated fantastic returns with the two sales they just inked (link):
      1. Bought CeraVe in 2008 for $95 million. Sold it in 2017 for $1.3 billion.  
      2. Bought Dedreon in 2015 for $500. Sold it in 2017 for $820 million.
    3. Mental Model: Consistency and Commitment
      1. “Once shoppers start buying from QVC, their habits are remarkably stead; on average, its customers have bought 24 items a year in each of the last five years.” (link)
    4. Uranium demand is declining across the globe…except for in China.
      1. “A huge fleet of reactors” are being built in China. Meanwhile Japan has backed off nuclear since Fukushima, and “plant’s are closing across the U.S. and Europe.”
    5. Germany: “With inflation picking up markedly, there is really no argument left that speaks in favor of a zero-interest rate policy,” (link)
    6. Liquidity is always there…except when you need it. “People thought that forex markets were more safe from this because they’re so liquid.  That might not be the case.” (link)
    7. Demand for U.S. mortgages is down significantly in the third quarter, in the wake of higher rates, which were up 0.82% for the quarter. (link)
      1. Mortgage applications dropped 21% from the third quarter.
      2. Refinances fell 31%.
  6. Artificial Intelligence & Technology

    1. Call Centers are using AI to know more about you. (link)
    2. Restaurant app seeks to learn your preferences. (link)
    3. Lot’s of cool possibilities with AI and self-driving cars, with one exception: Traditional auto makers, unnerved by tech competitors, are “rushing toward self-imposed deadlines to bring self-driving cars to market in the next three to four years.” They’re ‘rushing’ to do this!?  Sorry guys, you can’t can ‘fail fast’ with self-driving technology. (link)
    4. AI can be used to “spot trends and patterns that wouldn’t be evident to the sharpest data scientist.” (link)
      1. “Massachusetts General Hospital plans to use a system that draws on a database of 10 billion images to identify anomalies on medical images.”
      2. “Quickly identify cracks in jet engine blades.”
    5. India’s new digital identification system is scary. (link)
      1. “The system, which relied on fingerprints and eye scans to eventually provide IDs to all 1.25 billion Indians, is also expected to…eventually facilitate daily needs such as banking and buying tickets.”
    6. Space-Based Flight Tracking would enable real-time flight tracking over oceans. (link)
      1. It would also “give pilots greater flexibility to change routes, avoid turbulence and cut flight times.”

Funniest Quote:

“Russian pilots have some-times broken their silence when contacted by a female air-traffic controller.  In early September, a female U.S. air-surveillance officer spotted an unidentified plane approaching allied aircraft over Syria.  ‘You’re operating in the vicinity of coalition aircraft,’ she warned the pilot.  A heavy Russian accent emerged through the static: ‘You have a nice voice, lady.  Good evening.'” (link)

Strangest Photo Award:

French President Francois Hollande.

WSJ Distilled: January 7-8, 2017

Below are my full notes and highlights from the Wall Street Journal, January 7-8, 2017.

1. Examples of Standard Causes of Human Misjudgment: VW, Wells Fargo, and Theranos have each exhibited;

  • Incentive Causes Bias
  • Consistency and Commitment
  • Reinforcements
  • Is it possible Social Proof is also involved?

2. Very few funds put their money where their mouth is.  The Fulcrum Fee: “Fewer than one in 36 funds and less than $1 out of every $14 in total assets charges performance based fees.”

3. Trump Tax Plan could lead to significant inflationary pressures on consumer retail.  “Consumer apparel prices could rise as much as 15% from the tax plan”

4. Boeing: Prolonged boom since 2010 has stalled.  “Airline profits and jet purchases are closely tied to global economic growth.”

5. There’s a big increase in demand for missiles as a result of 1) ISIS 2) A reluctance to put men in the field 3) The increased precision of modern day missiles.

 The military will pay any price for extra precision: “Extreme accuracy is the difference ‘between hero and zero’ and a matter of American values. ‘You either get it exactly right, or you get it exactly wrong,’ he said. ‘In the business of modern warfare, the expectation is precision on every strike.  So through that lens, the cost factor is less of an issue.'”

6. Brokers are acting more like financial advisers: “The value-add isn’t ‘I bought a great investment’ anymore,”…”Its ‘I’m going to be your personal CFO, your adviser, and look at everything I can offer you.”

7. Extreme times call for extreme measures? To fight currency short-sellers: “Hong Kong’s overnight lending market for the Yuan jumped to 61.3% on Friday, the highest in a year and the second highest level on record.”

P.S. Why does China’s monetary policy remind me of Teddy KGB from Rounders?

“I will not be pushed around!”

“I bet it all…”

8. China takes a bite out of Apple: Apple posted its first annual revenue decline in 15 years, largely as a result of a sharp slowdown in China sales.  “Revenue in greater China, fell 17% in the fiscal year, compared with growth of 84% the prior year.”

9. Don’t find yourself in a Brazilian prison.  You won’t like it.

10. Afghanistan: Insurgents now control more territory than at any time since 2001.

11. Gen. Michael Flynn said he was fired for “speaking truth to power about the inadequacies of the nation’s national security preparedness.”

12. Standard Causes of Human Misjudgment: Government deregulation of the energy sector has led to a 20% increase in oil prices.   This has sparked Riots in Mexico resulting in 2 dead and 300 stores looted, Rioters are exhibiting cases of;

  • Deprival Super-reaction syndrome
  • Social Proof

13. Standard Causes of Human Misjudgment: Hikers are destroying cages meant to exterminate non-native predators of New Zealand birds.  These (presumably) nature-loving hikers are exhibiting;

  • Pavlovian association
  • Disliking distortion
  • Over-influence from extra-vivid evidence.
  • Poor ability to weight positives and negatives.

14. Bootleg version of Fentanyl (50 times the potency of heroin) is commonly made in China.  Leading to increase in opiod-related deaths.

The Best Investment Quote of All Time is from…Napoleon?

Could the best investment quote of all time come from Napoleon?  Quite possibly.  It was in the unlikely place of Napoleon Bonaparte’s personal diary that I found one of the best investment passages I’ve read.  Bursting with investing wisdom, it would be understandable to mistake Napoleon for Warren Buffett.  Although he’s writing about the art of war, the insights apply to investing just as well.

Interpretation

Below I dissect Napoleon’s journal entry to ascertain its valuable investing insights.

Importance of mathematics & probabilities:

To be a good general a man must know mathematics; it is of daily help in straightening one’s ideas.  Perhaps I owe my success to my mathematical conceptions

Beware of forecasts.  Buffett & Munger don’t invest in a company if they can’t see its strength displayed through history:

a general must never imagine things, that is the most fatal of all.

Eliminate psychological biases & crude heuristics which skew one’s perception of reality:

My great talent, the thing that marks me most, is that I see things clearly;

Identify the main issues and ask the right questions:

it is the same with my eloquence, for I can distinguish what is essential in a question from every angle.

Practice Bayesian updating:

The great art in battle is to change the line of operations during the course of the engagement; that is an idea of my own, and quite new.

Keep it simple. Stick to the fundamentals and common sense: 

The art of war does not require complicated maneuvers; the simplest are the best and common sense is fundamental.  From which one might wonder how it is generals make blunders; it is because they try to be clever.  The most difficult thing is to guess the enemy’s plan, to sift the truth from all the reports that come in.  The rest merely requires common sense;

Stay curious.  Do a lot of reading & research lots of companies.  Eventually you’ll come across a good idea: 

it’s like a boxing match, the more you punch the better it is.

Know how to read financial statements: 

It is also necessary to read the map well.”

“La victoire appartient aux plus persévérants.”

Investment Lessons from a Master Sushi Chef

The best investment book I read this year didn’t come from a Wall Street whiz or hot shot finance professor, rather it came from Jiro Ono, a Master Sushi Chef. Yes, “the Jiro”, the one from the acclaimed documentary “Jiro Dreams of Sushi.”

While in Japan this past September I picked up his book titled “Jiro Philophosy” and was quite surprised. Unlike most investment books, Jiro doesn’t talk about investing at all. In fact, it isn’t even an investment book. Rather Jiro Philosophy simply describes Jiro’s personal work-ethic.

2016-12-17-19-25-01As I read this book, I quickly came to realize just how closely Jiro’s philosophy mirrors that of Warren Buffett, Charlie Munger, and Ben Graham. It was quite surprising to see that the same principles which lead to mastery in Sushi can also lead to mastery in investing.

As a result, I have distilled the book “Jiro Philosophy” down to its 12 core principles and relate each one to the investment philosophy of Buffett, Munger, and Graham.

1. Stick to the fundamentals. Stay grounded.

Jiro

If you stray from the fundamentals – say, trying to set yourself apart from other chefs – you will completely stray off track.  I believe that by adhering to the fundamentals and continuously striving to create delicious flavors, you will be able to be innovative.”

“If you continue to do things the right way, it’s a given that your sushi will turn out delicious.” 

Investing

stick-to-the-fundamentalsMarket manias and bubbles all have two things in common;  an abandonment of fundamental investment principles and an endless series of rationalizations.

Ben Graham understood the immense rationalization power of markets very well.  He experienced it first hand during the lead up to the great depression.  It was his understanding that as markets move higher, investors don’t become more reserved, but rather they invent knew valuation metrics to justify paying any price whatsoever.  As been Graham observed, “We can find no evidence that…investors as a class have sold their holdings because PE ratios were too high.”

Consequently, Ben Graham developed an immutable investment philosophy based on strict fundamental analysis to keep investors from “completely straying off track”.  And much like Jiro Ono, investors who have stuck to Ben Graham’s fundamentals of investing have delivered “delicious” results.

With this, I’m reminded of Lou Manheim ‘s advice to Bud Fox in the movie Wall Street, “Stick to the fundamentals…good things, sometimes take time.”

2. Gain Mastery.

Jiro

“You’ve got to master some skills to reach the next stage.”

“You won’t advance to the next level all on your own.  You need to train properly up to a certain point.  In the case of Jiro, after a decade of training, a craftsman will have mastered everything from preparation to making sushi.  He will be ready to strike out on his own.”

Investing

Warren Buffett pursued and achieved mastery over Ben Graham’s investment philosophy before advancing to the next level.  Warren’s path to mastery took on the following steps:

  • Discovered Ben Graham’s book “The Intelligent Investor” at the age of 19.
  • Read Graham’s 700+ page book, Securities Analysis, at least 12 times.  
  • Attended Columbia so that he could study under Ben Graham.
  • Worked for Ben Graham at his investment fund.
  • Invested using Ben Graham’s investment principles at the Buffett Partnership.

3. Put Knowledge into Practice.

Jiro

“People will teach you new things and ideas, but if you don’t try them out you will not change.”

“No matter how good the teaching, unless you actually put it into practice, you won’t be able to progress.  You will only have the knowledge.  People passionate about their work are always trying to improve upon what they’ve made.  It’s enjoyable and rewarding.”

“Because of this, we can keep trying new things every day.”

Investing

Throughout his life, Warren Buffett has shown an amazing willingness and ability to put knowledge into practice.   This includes applying the teachings of Ben Graham as well as the four hour educational interview he had with GEICO executive Lorimar Davidson in 1950.

Much of Warren’s success simply boils down to seeking out the best knowledge and putting it into practice.  Warren recommends you do the same thing:

“You need to fill your mind with various competing thoughts and decide which make sense. Then you have to jump in the water – take a small amount of money and do it yourself. Investing on paper is like reading a romance novel vs. doing something else. You’ll soon find out whether you like it. The earlier you start, the better.”

4. Improve upon what you’re taught.  Otherwise you will always be an apprentice.

Jiro

“Just doing as you’re taught is the same as being an apprentice.  I tell my young apprentices that they should think about how to achieve good flavor on their own, improve it and then experiment.  I always tell them if they don’t, they will be apprentices for life.”

Investing

Although Warren Buffett began his career as Ben Graham’s apprentice, he did not simply stick to his teaching.  Rather he modified and improved upon Graham’s teachings over time.  As Charlie Munger describes it:

“If we’d stayed with the classic Graham, the way Ben Graham did it, we would never have had the record we have. And that’s because Graham wasn’t trying to do what we did.”

5. Practice Beginner’s Mind. (Shoshin)

Shoshin (初心) is a concept in Zen Buddhism meaning “beginner’s mind“. It refers to having an attitude of openness, eagerness, and lack of preconceptions when studying a subject, even when studying at an advanced level, just as a beginner in that subject would. (Wikipedia)

Jiro

screen-shot-12-17-16-at-07-37-pm“That said, once they’ve become independent they should still pursue improvement just like an apprentice.

“Feeling you can still evolve is important.”

Investing

Both Warren Buffett and Charlie Munger are enthusiastic learners who enjoy the process.  In fact, Charlie has said that he and Buffett are “dissatisfied with what they know.”  As a result, they are always seeking to learn, adapt, and evolve.

Charlie further explains the importance of this mindset,

“Warren Buffett has become one hell of a lot better investor since the day I met him, and so have I. If we had been frozen at any given stage, with the knowledge we had, the record would have been much worse than it is. So the game is to keep learning, and I don’t think people are going to keep learning who don’t like the learning process.”

6. The way you do the small things reflects how you do the big things.

Jiro

Through Jiro’s Philosophy, he stresses the importance of the small things.  From cleanliness, to hot towels, to the preparation process, rice, etc.  All the smallest details are given the greatest care.  The way you do the small things reflects how you do the big things.

Investing

Likewise, Buffett has a keen eye for detail as displayed by the following two stories:

Story 1:

Buffett also liked Cathy’s attention to detail.  “When I asked her on the phone how many employees she had, she replied ‘504.’  I love this,” said Buffett.  “Not ‘about 500.’ I think she has 505 now and is doing considerably more business.  She won’t be happy until she has 100 percent market share.”  (From the book “The Women of Berkshire Hathaway: Lessons from Warren Buffett’s Female CEOs”)

Story 2:

The following is an excerpt from the Q&A session at the 2016 Berkshire Hathaway Annual Meeting:

Warren Buffett: Yes, sloppy thinking in one area probably indicates there may well be sloppy thinking elsewhere. I have been a director of 19 public corporations. I’ve seen some very sloppy operations and I’ve seen a few really outstanding business operators, and there’s a huge difference. If you have a wonderful business, you can get away with being sloppy. We could be wasting a billion Dollars a year, at Berkshire, you know $640m after tax, that would be four percent of earnings, and maybe you wouldn’t notice it….

Charlie Munger: I would.

Warren Buffett: Charlie would notice it… It’s the really prosperous companies that well….the classic case were the tobacco companies many years ago. They went off into this thing and that thing, and it was practically play money because it was so easy to make. It didn’t require good management, and they took advantage of that fact. You can read about some of that in ‘Barbarians of the Gate’.

7. Listen to good advice.

Jiro

“I take customers’ advice when it makes sense.”

“Even when you think you are right often that’s not the case.  No matter what kind of business you are in, if you only work in an inflexible way, you won’t find success.”

“If (a customer’s advice) makes sense, I will adopt it, otherwise I will never evolve.”

Investing

Warren Buffett and Charlie Munger have exhibited an open mind and willingness to listen to good advice throughout their careers.  In fact, if it weren’t for some timely advice they might not have bought See’s Candies.  As Charlie Munger recounts,

“[Munger’s friend] Ira Marshall said you guys are crazy — there are some things you should pay up for, like quality businesses and people. You are underestimating quality. We listened to the criticism and changed our mind. This is a good lesson for anyone: the ability to take criticism constructively and learn from it. If you take the indirect lessons we learned from See’s, you could say Berkshire was built on constructive criticism.

8. Preserve your main asset…You.

Jiro

screen-shot-12-17-16-at-07-50-pmIn his 40’s, Jiro recognized that his most critical asset as a Sushi Chef was the sensitivity in his finger tips.  As a result, he began wearing gloves in order to preserve the long-term integrity of his hands.  

This might seem like a mildly trivial matter, but for anybody looking to achieve and maintain success in their profession, follow Jiro’s example: Identify the physical or mental attribute that is necessary for success in your field and take measures to preserve it.

Investing

Warren Buffett identifies the most important trait of an investor as “emotional stability”.  As Warren explains,

“To be a successful investor, you don’t need to understand higher math or law. It’s simple, but not easy. You do have to have an emotional stability that will take you through almost anything. If you have 150 IQ, sell 30 points to someone else. You need to be smart, but not a genius. What’s most important is inner peace; you have to be able to think for yourself. It’s not a complicated game.”

Similar to Jiro’s practice of wearing gloves to protect his hands, here are some routines and strategies which Buffett uses to maintain emotional stability, inner peace, and independent thought.

  • An alert and fresh mind: 
    • Warren gets good sleep and takes naps when necessary
    • He plays bridge many hours every week.
  • A temperament uncorrupted by outside influences:
    • He Lives in Omaha
    • Maintains a Clear Schedule
    • Keeps a quiet office where he can think.
  • Health:
    • “My diet, though far from standard, is somewhat better than usually portrayed. I have a wonderful doctor who nudges me in your direction every time I see him. All in all, I’ve enjoyed remarkably good health — largely because of genes, of course — but also, I think, because I enjoy life so much every day.”

Furthermore, Warren explains the importance of preserving and enhancing yourself through life:

“Imagine that you had a car and that was the only car you’d have for your entire lifetime. Of course, you’d care for it well, changing the oil more frequently than necessary, driving carefully, etc. Now, consider that you only have one mind and one body. Prepare them for life, care for them. You can enhance your mind over time. A person’s main asset is themselves, so preserve and enhance yourself.”

9. Be a craftsman. Pursue work to satisfaction.

Jiro

“Pursuing work to satisfaction is the pride of a craftsman.  No matter how time consuming, I will leave no task to others.  I will do them all myself until satisfied.  Even as I get older, I still do all the work, even if it’s bothersome.  I feel very pleased when I develop and create something from a new idea of my own.”

Investing

Likewise, Buffett takes pleasure in doing all the investment analysis himself.  He does not have a team of analysts working for him.

10. Be passionate about what you do.

Jiro

“People who love their work passionately want to continue working.  I’m no exception.  Although I’m 90 years old, I’d like to keep on going.  That’s why I don’t find investing time in my work troublesome.”

Investing

At 86 years old, Buffett still tap-dances to work.  He derives great enjoyment from researching different companies.  He compares it to researching different species of animals.

11. Adapt to changing circumstances.

Jiro

screen-shot-12-17-16-at-07-41-pm“Since all sushi toppings are changing, sushi craftsman must now factor this in when working out flavors.”

“The oceans are quickly changing.  For example, the season for katsuo (skipjack tuna) now starts six months later.  But we have to serve the best of what’s in season.  Fish and shellfish were tastier in the past and it is difficult to find their intense flavors.  The next generation of sushi chefs will face challenges in trying to find ways to bring out and enhance fish flavors.”

Investing

Likewise, in investing you cannot wish for something which doesn’t exist.  You must play the hand that you’re dealt.

When Warren Buffett started investing, he could find net-net investments everywhere.  But the investment ocean quickly changed and he had to adapt to the circumstances.  Over the years, Buffett has invested in a broad range of investment classes including, bonds, common equity, preferred stock, warrants, options, commodities, and special situations.  He doesn’t wish for something that doesn’t exist, rather he adapts himself to whatever asset is on sale below his intrinsic value.

At the same time, Warren will never abandon his core principles and rationalize new investments.  During the “Nifty 50” stock market, he declared that he couldn’t find any cheap stocks and refused to invest.  Later Buffett refused to invest in tech stocks during the tech boom of the 90’s.  In each case Warren has been rewarded for his patience and sticking to the fundamentals.

This leads to a crucial point.  Although you must adapt to changing environments, you must also remember to stay true to the fundamentals.  As it says in rule number 1, “If you stray from the fundamentals…you will completely stray off track.”

So remember: Adapt, but do not abandon.

12. It’s never too early to prepare

Jiro

“It’s never too early to prepare.  You can start preparation way in advance.”

Jiro began working at a local restaurant from the age of seven.

Investing

Likewise, Warren Buffett recalls his youthful experience: “By the age of 10, I’d read every book in the Omaha public library about investing, some twice.”

Furthermore, Buffett said he read the 10Ks of IBM for fifty years before ultimately making an investment in the company.  That’s fifty years of “preparation.”

Jiro Philosophy: Distilled

jiro-philosophy

Haiku Review: Deep Value by Tobias Carlisle

Inspired by a recent trip to Japan, here are my 7 main insights distilled from Deep Value by Tobias Carlisle, in Haiku form.  Arigatou gozaimasu.

Japanese Painting

1. Risk: “A Bundle of Twigs Cannot Easily Be Broken”

Stocks perceived risky,

Find resilience when bundled.

Have fewer down years.

2. Return: Buy the “Ugliest of the Ugly”

Deep Value defies

Investment Intuition.

Ugly is Better.

3. Trust in Mean Reversion & Avoid Naive Extrapolation

Trust Mean Reversion.

Naive Extrapolation

Ignores the Base Rate.

4. Expand Your Time Horizon

Seeking to avoid

Short-term underperformance,

They’re captured by it.

5. Behavioral Biases: Your Intuition is Killing You

Three Crude Heuristics,

Lead us to poor decisions.

What feels right is wrong.

6. Use a Statistical Approach: Focus on Simple & Effective Techniques

Ben Graham’s approach:

Stick to a few Techniques and

Simple Principles.

7. Stay out of the Way: Overconfidence Leads to Reduced Performance

Our judgment misleads,

We find broken legs abound.

Stay out of the way.

number 7 japanese

Deep Value’s 7 Main Takeaways

Deep Value by Tobias Carlisle reads somewhat like an investment version of “Mom’s” classic question, “If your friends jumped off a cliff, would you?”  Wall Street is filled with people jumping off cliffs and the people who follow.  The question is, why would so many people consistently invest in a way that’s bad for their well-being?  The answer lies largely within the errors of our intuition.  Carlisle warns that, often times, “the incorrect decision feels right, while the correct decision feels wrong.”

If our investment intuition is so often wrong, then the first step to becoming a better investor should be to recognize that we are naturally wired to jump off investing cliffs.  The next step involves giving counter-intuitive ideas a chance.   After all, as Einstein said, “The definition of insanity is to keep trying the same thing while expecting a different result.”  Insanity in this case, is relying on our intuition to help us make wise investment decisions.deep-value-tobias-carlisle-6

Consequently, we can view Deep Value as a sort of counter-intuitive survival guide to overcoming our self-destructive investment tendencies.  (aka “How to stop jumping off of cliffs”)

Next to here you will find the summary of my seven main takeaways from Deep Value.  Please feel free to print it out and re-read these points whenever your intuition tries to lead you off a cliff.

Risk:” A Bundle of Twigs Cannot Easily Be Broken”

Within traditional finance, risk is commonly defined as “the currency by which we pay for returns”.  Meaning that if we want higher returns, we must bear greater risk.  This intuitively makes sense if the markets are efficient.  But Deep Value discredits this intuitive assumption.

Throughout the book, Carlisle focuses on two groups of stocks that exist at the opposite ends of the spectrum.  Value Stocks and Glamour Stocks.  Value stocks are considered risky investments.  They are typified as companies that you wouldn’t want to own.  They are often down and out companies that exist in unfavorable industries and have poor prospects.  Meanwhile, glamour stocks are considered safe investments.  These are companies that generally have high returns on capital, seemingly endless growth prospects, exist in favorable industries, and are widely admired. (i.e. companies you’d love to own)

On an individual basis, value stocks are indeed the riskier prospect.  Value Stocks, as defined here as net-nets, lose 90% or more in a single year 5% of the time, versus only 2% of the time for all stocks.

But the nature of value stocks changes dramatically when they are bundled together.  In fact, they have fewer down years than the market.  In a study, net-net stocks only had 3 down years in 26 versus 6 down years for the market.

This investment phenomena mirrors a quote by Tecumseh, Native American leader of the Shawnee.  He said, “A single twig breaks, but the bundle of twigs is strong.”  A value stock by itself is like a twig that easily breaks, but finds strength when bundled together.

twig-analogy

Return: Buy the “Ugliest of the Ugly”

If value stocks have less risk than glamour stocks, then traditional finance states that they should have lower returns.  But yet again, Carlisle proves this notion to be wrong.  In fact, he shows that value stocks generate superior returns to their riskier glamour stock counterparts.

Deep Value presents many studies which show that returns for value stocks are significantly greater than glamour stocks.  But perhaps most surprising is Carlisle’s case that the ugliest stocks provide the best returns.  The nature of this counter-intuitive element is steeped in Behavioral Finance.  Everyone in their pursuit of safety, shun companies that look risky, which creates bargains.

The ugliest of the ugly phenomena extends to countries as well.  The countries with the poorest recent performance outperform countries with the best recent performance.

solitude-poemThis investment bias towards glamour and value stocks is perfectly capture by a poem I encountered by Ella Wheeler Wilcox titled Solitude.  In it she wrote, “Be glad, and your friends are many; Be sad, and you lose them all”.

Furthermore, this poem explains why value investing is a successful strategy.  The very nature of investing in value stocks is contrarian because you’re willing to do what very few will.  Value Investors immerse themselves in grief, woe, gall, fasting, and pain.  As a result of these counter-intuitive actions, value investors  get counter-intuitive returns.

Put another way, value investors get pleasurable returns for hanging around companies in sorrow.  While typical investors get sorrowful returns for hanging around companies in pleasure.

Trust in Mean Reversion & Avoid Naive Extrapolation

Deep Value contrasts two starkly different predictive assumptions about the future.  The most commonly used assumption is naive extrapolation, whereby the past performance of a company is extrapolated out into the future.  The less commonly used assumption is mean reversion, whereby a company’s financial performance will  eventually revert towards the mean.

Carlisle demonstrates that, of the two methods, investors should rely on mean reversion.  The importance of mean reversion should not be understated.  Ben Graham identified mean reversion as the phenomenon that leads value strategies to beat the market.   Furthermore, Carlisle writes, “An appreciation of mean reversion is critical to value investment.”

Mean Reversion is built upon a fundamental economic truth that;

  1. Competition naturally eats away at high returns over time. “In most cases competition and other corrective forces work on the highly profitable business to push its return back to the mean.”
  2. Low returns will more often than not, revert towards the mean. “Stocks with big market price losses and historically declining earnings tend to see their earnings grow faster, and outperform the market.”

On the other hand, naive extrapolation makes the assumption that past results will generally continue undeterred into the future.  While this appears to be mathematically sounds, it ignores the “Base Rate”.  The Base Rate  shows that this simplifying assumption is not true for most companies.

As a results, predictions using naive extrapolation often disappoint, while predictions using mean reversion are the more likely outcome.  The chart below provides a good visualization of these two methods at work.

mean-reversion2

Mean reversion appears to have an element of Biblical faith to it.  It reminds me of a Bible Verse, Hebrews 11:1, which says, “Now faith is confidence in what we hope for and assurance about what we do not see.”  Likewise, value investors have confidence in what they hope for (anticipating mean reversion in both fundamentals and valuation) and assurances (base rate, invisible hand) about what they do not see.  Whereas most investors mistakenly invest based on what they see (historical figures), but shouldn’t expect (naive extrapolation).

Expand Your Time Horizon

To be a value investor, you must expand your time horizon.  Mean reversion often takes time.  In fact it can take 3-5 years, during which time, you may experience years of poor performance.  Most investors don’t have this kind of patience.  Wall Street generally isn’t kind to short-term underperformance.

Consequently, many fund managers will chase short-term performance at the expense of long-term success.  Quarter on Quarter and Year on Year is their focus.  But as Carlisle writes, “by attempting to avoid short-term underperformance, they are captured by it.”

Behavioral Biases: Your Intuition is Killing You

Behavioral Bias is really a dual sided topic.  First, you must understand the various Behavioral Biases which contribute to your poor investment decisions.  Secondly, you must recognize that even after understanding these biases, it remains difficult to overcome them.

Carlisle writes,

“Kahneman and Tversky found that we make decision about uncertain future events based on three heuristics…Each leads us to make poor decisions about uncertain events because it leads us to consider irrelevant evidence, and in so doing diverts us from considering the underlying probabilities about the events.”

The three biases as identified by Tversky & Kahneman are:

  1. Anchoring & Adjusting: Causes us to stick with our first impression, even when evidence arrives that conflicts with our view.
  2. Representativeness: We use stereotypes to make simplifying assumptions.
  3. Availability: Only consider things that are quickly brought to mind.

It has been shown that people still fall victim to these three biases despite working to prevent them.

“No matter how well trained we are, humans tend to have difficulty with probabilistic, uncertain, and random process.  Confronted with problems requiring an intuitive grasp of the odds in an unfamiliar context, even the best investors and behavioral finance experts flounder.  If mere awareness that our judgment is clouded by our nature does little to correct the errors we make, how then can we protect against them?

So then, what can we do about it?

Use a Statistical Approach: Focus on Simple & Effective Techniques

Carlisle offers a solution to this behavioral bias dilemma: Remove yourself from the equation.

You can accomplish this by using a statistical based approach.  Ben Graham found that the best investment approach is one that follows simple and effective techniques.

Tobias covers three value investing formulas in Deep Value which follow simple and effective techniques.  They are:

  1. Net-Nets by Ben Graham (http://www.libertyinvesting.com/benjamin-grahams-checklist/)
  2. The Magic Formula by Joel Greenblatt (www.magicformulainvesting.com)
  3. The Acquirer’s Multiple by Tobias Carlisle (http://acquirersmultiple.com/)

Net-Nets are excellent when you find them, but they are heavily exploited, illiquid, and there’s a limited opportunity set.  Meaning that you can’t grow the strategy beyond a certain size.

The Magic Formula attempted to derive Buffett’s investment strategy down into two elements, and has had great results.

  1. Quality of Business: ROIC = EBIT/(net working capital + net fixed assets).
  2. Attractive Price: Earnings Yield/Enterprise Value

The Acquirer’s Multiple, developed by Carlisle, is an evolution of the Magic Formula.  Carlisle finds that the Quality of Business element in the formula only serves to detract from overall returns.  He finds that the formula can simply be boiled down to “Attractive Price”, as defined as (Enterprise Value/Operating Earnings).

Stay Out of the Way

After Choosing your statistical approach, you may be tempted to alter the results using your subjective judgment, but this should be avoided.

self-reflexivity-2Carlisle demonstrates that the returns of the model are a ceiling from which we detract.  Not a base from which we add.  The reason being twofold:

  1. We are largely over-confident in our abilities.
  2. We find more broken legs than there really are.

In a sense, we want to de-correlate our thinking from that of the markets.  But when we introduce our subjective judgment, we begin using more intuition and thereby increase our correlation with the market.  Thus reducing returns.

Summary

The Deep Value strategy can be summarized in four steps:

  1. Create a simple & effective statistical model using counter-intuitive value investing insights, including mean-reversion.
  2. Remember, you are investing based on an expected group outcome, so don’t over-concentrate your portfolio in any one stock.
  3. Expand your time horizon to 3-5+ years.
  4. Recognize your limitations, and, for the most part, stay out of the way.

Despite many findings that demonstrate the soundness and relatively safe nature of a value portfolio, investment professionals largely shun value stocks.  The reason for their reluctance is largely centered around self-preservation.

Managers must defend their investments to clients who are usually emotional, impatient, and unsophisticated.  So if a manager invests in a group of poor companies which are undervalued, he’ll likely have to answer to his clients who see those investments as risky and imprudent.  Especially if there’s any prolonged period of underperformance.

On the other hand, it is much easier for a manager to appear prudent by simply investing in a portfolio of slightly overvalued glamour stocks that look safe.  Since the portfolio looks safe, clients will sleep well at night under the belief that the manager is acting prudently.  The manager too will sleep well because he has less stress and greater job security.  So be aware, appearances of prudence can be deceiving.

I recently came across an interview with Walter Schloss, the late great value investor, who gave an example of such a dilemma that he faced;

People have certain emotions, and they wanted to not lose money.  So we didn’t tell people what we owned, and one guy said, ‘You know Walter, I can’t stand it not knowing what we own.’  He was an old man, so I said, ‘Well we own some bankrupt bonds of the Pennsylvania Railroad.’  Which  actually turned out very well later, and he said, ‘I can’t be in your partnership knowing that, it makes me too upset.’  So he withdrew.  So people act emotionally, and if they know what you own, then they look at it and say, ‘Oh I don’t like that stock.’  Then they call you on the phone and say, ‘Well why do you own it?’  I don’t want to hear people complaining.  They trusted me with their money, and that’s what a lot of hedge funds do, they don’t disclose what they own.”

Event Notes: Cybersecurity Challenges & Preparedness for Emerging Managers

Cybersecurity is not a subject that comes racing to mind when thinking about hedge funds.  I certainly hadn’t given it much thought before today.  But upon discovering an HFA event on this topic, I was eager to expand my understanding.

Hosted at the British Consulate General in San Francisco, I was fascinated to learn about cybersecurity and some of the real issues that face fund managers today.  Here are my 12 takeaways:

  1. Firms should guard against “Reputational Risk”. i.e. the risk that a client’s trust in a firm or institution is irreparably damaged with a hack.
  2. Even mere pieces of client information is valuable on the dark web, where it can be pieced together to build a more complete, and potentially damaging profile.
  3. The Average hack takes 208 days.
  4. Hackers can potentially frame, bribe, or coerce employees into participating.
  5. Some hacks aren’t what you’d expect.  For example:
    1. One hacker actually took over a corporations’s infrastructure in order to produce Bitcoin.
    2. Another hacker broke into a firms biometric system to add finger prints to the system.
    3. And yet another involved vending machines at a company that uploaded employee information to the cloud without the firm’s knowledge or approval.
  6. Insurance on hacks can be purchased “quite cheaply”
  7. It’s surprising how many people keep passwords in files or documents named, “passwords”.
  8. A specific hedge fund was using cybersecurity as a way to differentiate themselves.
  9. AITEC: This is a society for hedge fund CTO’s.  Who knew?
  10. If you get hacked, contact the FBI right away.  There’s no reason not to.  And there’s a much higher chance of catching the hacker if you do.
  11. The number of “attack surfaces” is multiplying.  Particularly due to smart devices.
  12. Various Recommendations:
    1. Disable automatic links.  That link to 1-800-Flowers you see may be a trap.  Copy and Pasting URL’s creates an extra step with which to prevent hacks.
    2. Use encrypted emails with clients to guard against sensitive information.
    3. Use two cell phones.  One for Uber and one for sensitive information.
    4. Password Keeper has been shown to be an effective tool.

Lewis Screener: Abercrombie & Fitch and Michael Kors

Abercrombie & Fitch (ANF)

featuring Michael Kors (KORS)

Note: This analysis of ANF and KORS leans heavily on my personal stock screener.

Summary

Last weekend I took a look at Abercrombie & Fitch and Michael Kors with the aid of my stock screener.

Given ANF’s poor performance in recent history, I approached it as a case of mean reversion.  ANF appears as relatively cheap to its peers, but is not “undervalued”, as defined by my screener.  At $22.55 per share, ANF is still within its predicted valuation range of $18.48 to $70.05 per share.

Still, there are a few ways to invest based on the findings.  First, you can write put options at a strike price outside of the predicted range.  Second, you can simply wait and take advantage of a sudden pull back in the stock price.

KORS meanwhile appears “undervalued”.  At a price of $50.78 per share, KORS falls well outside of its predicted range of $61.84 to $108.93 per share.  This range is based on KORS’s current ROE of 42.1%.

It’s likely however that the market expects a coming decline in ROE.  The market expectations derived from the screener show that KORS’s ROE will decline to somewhere between 14.9% to 31.9%, with a central prediction of 23%.  This is a sharp drop from its historical average of 45.2%.

First Screen: Abercrombie & Fitch

To determine if Abercrombie & Fitch (ANF) is currently “undervalued”, I utilized the aid of my personal stock screener.  For this screen the pairing multiple of Return on Equity and Price to Book is used.  The regression made on ANF and its peers results in a rather high R^2 of 0.92.

Brief explanation: The stock screener uses a simple linear regression to find “Undervalued” stocks.  An “Undervalued” stock, as defined by the screener, is any stock that fall two standard errors below the regression line.  An “Undervalued” stock in this context is assumed to provide a statistical margin of safety.

As seen in the regression below, ANF falls just slightly above the blue trend line. This indicates that ANF is trading slightly above fair value.  But when we consider the inputs used in this screen, it becomes clear that there’s a problem that needs to be addressed.

Note: Any stock that falls outside of the “regression channel” created by the red and blue lines can be considered mis-priced by the market.
1 start

Note: The peer companies included in the screen were; related in nature, dividend paying, with a market cap greater than $100 million, and an ROE between 0% and 60%.

ROE Problem

This first screen used the trailing 12 month Return on Equity data from Yahoo Finance.  This creates a problem in two ways:

  • First: Using a single period ROE has the implicit assumption that financial performance of a company is rather consistent from year to year. This assumption may be reasonable for a company like Coca-Colca, but Abercrombie & Fitch has too much fluctuation in its business to make use of a single period ROE.
  • Second: Using a depressed ROE in the screen will result in a stock appearing as more expensive than it truly is. Given ANF’s recent poor financial performance, it will experience this form of screening bias.

The alternative to using a trailing 12 month figure is to use a historical average which we will look at next.

Mean Reversion

In forecasting the future, there are often two paths one can take; extrapolation of current trends, or mean reversion.  As just discussed, the trailing 12 month figure is based on extrapolating the present while a historical average is based on mean reversion.

In his book, “Deep Value”, author Tobias Carlisle explains that the process of extrapolation feels natural to the human mind, but is often misleading.  We instinctively want to reward good companies and punish bad ones.  But as we carry this out, we become blind to one of the most powerful elements in investing; Mean reversion.

Among Carlisle’s counterintuitive insights includes this quote;

“Stocks with big market price losses and historically declining earnings tend to see their earnings grow faster, and outperform the market.” Meanwhile, “Stocks with big market price gains and historically high rates of earnings growth tend to grow earnings more slowly in the future, and underperform the market.”

Carlisle explains, “The better bet is the counterintuitive one: deep undervaluation anticipating mean reversion.”  Consequently, given Abercrombie’s poor recent history, I thought it appropriate to look at ANF as a mean reversion candidate.  This leads me to the second screen.

Second Screen: Abercrombie & Fitch

To account for mean reversion, I made the simple assumption that ANF will mean revert to its 10 year average ROE.  Using Morningstar data, I calculated ANF’s 10 year average ROE as 11.9%.  Using this new ROE for ANF, I re-ran the original screen.

In this new screen, ANF goes from being mildly overvalued to one of the cheapest stocks.  Despite this move, AFN is still not “undervalued”.  Thus we cannot reject the hypothesis that the market has mis-priced AFN.

Note: In the following graph notice that ANF has shifted closer to the lower green line, but has not crossed.

2 mean

Solving for X

Through the use of the stock screener, we have concluded that although ANF may appear relatively cheap, it is not undervalued.  Now we move on to answer three important question:

  1. ROE: At what ROE is ANF undervalued?
  2. Price: At what price is ANF undervalued?
  3. Profit: Can we profit from this today?

1. ROE: At what ROE is ANF undervalued?

Given ANF’s current Price to Book Value, I want to know what ROE assumption would make ANF undervalued today.  We will call this ROE the “Undervalued ROE”.  Within the regression, the “Undervalued ROE” is the lowest expected ROE where ANF drops out of the regression range and becomes undervalued at today’s price.

As seen in the graph below, it’s found that that ANF’s “Undervalued ROE” is 14.1%.  Meaning that if we believe ANF will earn an ROE greater than or equal to 14.1% moving forward that we should invest today.

3 test

It might be tempting to convince ourselves that ANF can achieve a 14.1% ROE moving forward.  Especially after looking at ANF’s ROE from 2004 to 2009.  Or after considering that the median ROE of companies in the screen is 14.8%.  But there are three reasons to be cautious about expecting a 14.1% ROE moving forward.

Screen Shot 08-24-16 at 01.41 AM

First: ANF only averaged an 11.9% ROE for the past ten years.

Second: The last time ANF’s Fiscal Year ROE exceed 14.1% was 2009. It was 15.72%.

Third: High long-term ROE is achieved by businesses that build wide and durable competitive moats, and then rigorously maintain them.  In my cursory readings of ANF’s 10k, moat building did not appear high in their priorities for the past 7 years.  Rather their plans for the future were largely based in making a swift return to the past.  i.e. Their chief focus was restoring gross and operating margins to historical levels through cost cutting.

It’s challenging to expect ANF to enjoy great returns when they haven’t laid the ground work.  This reminds me of a quote I read in the WSJ about Yahoo recently, “What Yahoo is going through today is not because of decisions they made three years ago.  It’s because of decisions they made 10 years ago.”

2. Price: At what price is ANF undervalued?

Using the earlier mean reversion screen (which assumed an 11.9% ROE),  we can find the share price at which ANF is undervalued.  This price is $13.68, which is a 39% discount from its close of $22.55 on Friday (08/19/2016).

Screen Shot 08-23-16 at 10.15 PM

Before moving on however, I’d actually  like to refine this regression a little further.  In the “mean reversion screen” conducted earlier, JWN and GPS appeared as Over and Under-valued respectively.  This tends to exact a significant influence on the regression.  Sometimes it can prove to be quite informative to remove them, which is what I did in the chart below.

4 without

 

Once removed, the predicted PBV of the lower trend line moves from 0.76 to 1.00.  This results in an undervalued price of $18.48, or an 18.05% discount from the current share price.

The Price to Book trend data and predicted values for both screens are show below.  Notice that the screen gives you the price at which a stock is undervalued (Lower), fairly valued (Trend), and Overvalued (Upper).  This feature can assist with both buying and selling decisions.

Screen Shot 08-24-16 at 01.43 AM

Note: Not all stocks that appear as under or over-valued within the screen are indeed good or bad investments.  There are quantitative and qualitative elements which the screen misses.  The screen is generally meant to be an aid which is best used in unison with an investor’s knowledge, insight, and research .

3. Profit: Can we profit from this today?

While ANF’s share price does not provide that statistical margin of safety that we require, there are still a few way to implement these findings today.

Write Put Options: An alternative strategy to invest in ANF is to sell put options with an exercise price near or below the “undervalued” price.

For example, one could sell a January 2017 put option with a $19 strike price and take in a $1.70 premium.  Then, if you get put the shares at expiration, you’d effectively be buying them for $17.30.  Well below the undervalued price of $18.48 per share.

Wait: Understanding the range where ANF is undervalued, we can opportunistically use this information if stock price should decline.  But periodic updating of the screen results will be necessary.

Recap: Abercrombie & Fitch

The regression analysis found that ANF is not currently “undervalued” at its Friday close price of $22.55.  Rather you may say it becomes undervalued somewhere below 18.48.  But that’s ok.  It’s still possible to wait and buy ANF if it becomes undervalued.  Additionally, it is possible to write uncovered put options with a strike near or below the undervalued price and benefit accordingly.

Michael Kors

Note that when I ran the ANF screen earlier, I excluded all non-dividend paying stocks.  This meant that stocks like Michael Kors (KORS) did not appear.  So after I finished, I doubled back and ran another screen to include these non-dividend paying stocks.

The result: Michael Kors appears as undervalued.  In the screen below, KORS appears significantly below the lower green trend line.  This means that we can reject the hypothesis that KORS is fairly valued given a 42.09% ROE.

kors

The lowest valuation that is justified by the regression is $61.84 per share, which is an 18% discount from its current share price of $50.78.  In fact, the regression predicts a valuation range for KORS of $61.84-$108.93.

Screen Shot 08-24-16 at 01.45 AM

These predicted values are contingent upon KORS’s future returns on equity resembling its past.  The market on the other hand, likely believes the future will be worse.  Exactly how much worse is what I want to know.  For that, we can go back to the screen.

Earlier, we found the “Undervalued ROE” that would make ANF fall outside of the “regression channel”.  This time, we want to find the range of ROE’s that would make KORS fall within the “regression channel”.

Screen Shot 08-24-16 at 01.46 AM

Doing this we find the that the market expects a future ROE in the range of 14.9% to 31.9%, as shown above.  This is in contrast to KORS’ historical ROE of 45.2% and trailing 12 months ROE of 42.1%.  This implies that if an investor expects Michael Kors’s future ROE to resemble the past, or be higher than 31.9%, then KORS offers considerable value at today’s price of $50.78 per share.

The News Distilled: “The Worst…Since 2008”

I’ve been having a serious case of “financial headline” déjà vu.  Over the past month I’ve been seeing the phrase, “the worst…since 2008”, repeated over and over throughout various economic and financial articles.  The repetitive nature of this ominous headline seemed glaring.  But was it really as pervasive as I thought?  Or was I just seeing something that wasn’t there?

Fueled by this “Neo”-like  curiosity, I decided to look into it further.  I searched for any article from the past month that said, “worst” + “since 2008”, “since the Great Recession”, “since the financial crisis”.

This search yielded rich results of news articles which confirmed my observations.   Without much surprise, these articles painted a gloomy picture of the global economy, reminiscent of 2008.

Despite the one-sided nature of this search, it’s generally “not good” to draw strong parallels with the Great Recession.  If the global economy continues down this path, we could end up experiencing an economic déjà vu.   Only this time we may be faced with the truth of reality as we come to realize that “Blue Pills” are suddenly hard to find.

Image Credit: Matrix.Wikia.com
Image Credit: Matrix.Wikia.com

The articles below summarize some fascinating insights into various economic struggles around the world.

Asia

China
China stocks saw Worst Jan since 2008(Monday, 1 Feb 2016)

The benchmark Shanghai Composite index tanked more than 24 percent last month while the Shenzhen Composite tumbled 27 percent, taking the title of Asia’s worst-performing indices in what has been a tumultuous start to the year.

Japan
Nikkei Suffers Worst Weekly Decline Since 2008(February 12, 2016)

For the week, the Nikkei dived 11.1 percent, the biggest weekly drop since October, 2008.

Worst Asian Junk Bond Start Since 2008 Limits Lippo Debt Revamp. (February 1, 2016)

Standard & Poor’s has eight Indonesian companies on negative outlook or on review with negative implications, the highest level since 2009.

Japan’s exports suffer Worst post-crisis fall as Chinese demand slows (February 18, 2016)

Japan’s annual exports in January fell the most since the global financial crisis as demand weakened in China and other major markets…Exports fell 12.9% year on year in January in their fourth straight month of declines…led by a slump in shipments of steel and oil products.

Indonesia
Indonesian GDP, Worst since 2008/09 crisis. (February 5, 2016)

On quarterly basis, GDP, however contracted by 1.83%, again a bit better than 1.93% expected contraction. Economists expect, Indonesian GDP growth to stick around 4.5% in first half of 2016 due to slowdown in China.

India
India: FFI (Foreign Institutional Investor) selloff in Jan Worst since 2008(Jan 27, 2016)

Foreign institutional in vestors (FIIs) have net sold equities to the tu ne of nearly Rs 10,700 crore so far in January , making it he worst start to a New Year (worst January) since 2008 when the global financial crisis roiled the markets across the world.

Taiwan
Taiwan logs slowest annual growth since ’09 (Jan 29, 2016)

The island nation’s gross domestic product expanded 0.85 per cent in 2015, the slowest rate since 2009. Meanwhile, GDP dipped 0.28 per cent in the final three months of 2015 — the second-straight month of contraction.

Taiwan’s exports could suffer as in financial crisis: official (2016/02/17)

Exports have sustained a double-digit drop for eight consecutive months, the Worst since the 2008-2009 financial crisis Yeh said Tuesday, adding that exports in the first three months of the year could all be negative. If this is the case, Taiwan will experience again the longest decline in exports of 14 consecutive months, which occurred during the financial storm, Yeh said.

Australia

Australian consumer confidence just had its Worst start to a year since 2008(Feb. 1, 2016)

Ominously, ANZ note that the last time sentiment fell in January was in 2008, right before the onset of the global financial crisis.

U.S.
Fitch: High-yield defaults Worst since financial crisis (Feb 19 2016)

Eleven U.S. high-yield bond defaults have occurred this month, according to Fitch- the highest one-month count since September 2009.

U.S. Public Pensions Post Worst Returns Since Market Crash(February 2, 2016)

Government-worker retirement plans had 0.36% return last year…the smallest advance since 2008.  State and local pensions count on annual gains of 7 percent to 8 percent to pay retirement benefits for teachers, police officers and other civil employees. When pensions don’t meet their targets, governments have to put more taxpayer money into the funds to make up the difference. The need to do so has led to credit-rating cuts for New Jersey, Chicago and Illinois, which are being squeezed by rising retirement bills.

HFR: CTAs Shina as Hedge Funds Post Worst Start Since 2008(Feb 5 2016)

Hedge fund performance since the start of the year has been the worst since 2008, according to new data from Hedge Fund Research.

Worst 12 months for high-yield bond funds since financial crisis (February 12, 2016)

Fewer than one in 10 US high-yield bond funds delivered positive returns last year

No Inflation in Sight, Say Two Bond Masters (February 20, 2016)

Personal consumption, which accounts for more than two-thirds of U.S. GDP…according to the fourth quarter estimate…was the Worst year-end showing, year over year, since just after the 2008-09 recession ended.

This has been the Worst quarter for company earnings reports since 2009 (Feb 16, 2016)

The fourth-quarter earnings season, currently wrapping up, is shaping up as the worst quarter for earnings growth since the financial crisis, Bank of America analysts said

 Restaurant Industry Suddenly Tanks, Worst Plunge since the Beginning of the Financial Crisis (February 3, 2016)

The Current Situation Index had hit an all-time high of 103.8 last July, at a time when the restaurant industry, while keeping a worried eye on the market turmoil and the slowdown, was still optimistic that restaurants were independent from it all, that Millennials would pull through, and that consumers in general were still hanging in there. Since then, the Current Situation Index has plummeted 4.2%, on par with the worst 5-month plunge during the Financial Crisis. Back then, the index started out at a lower point, from 102 in early 2007, dropped for two entire years, in all 6.3%, to hit 95.7 in early 2009, before edging back up.  So this is not a good sign. These kinds of plunges only occur when something big is going on.

Europe

European banking sector records Worst performance since 2008 amid global turmoil. (February 8, 2016)

Fears over a sell-off in the European banking sector have gathered pace after the Stoxx Europe 600 Banks Index, the gauge of the banking sector in Europe, recorded its sixth consecutive weekly decline, the worst streak since 2008.

Worst Earnings Letdown Since Crisis Add to Europe Stock Woes. (February 16, 2016)

Europe’s earnings season is only half-way through, but so far even stable profit generators are showing signs of capitulation.

UK

UK productivity gap widens to Worst level since records began (Thursday 18 February 2016)

The gap – up one percentage point on the previous year – was the widest since 1991 and showed a particularly marked deterioration since the onset of the financial crisis and deep recession of 2007-09….Productivity among all the G7 countries deteriorated since the so-called great recession, but the ONS said Britain had been hit hardest.

Canada

 Alberta job losses last year Worst since early 1980s recession: Statscan (January 26, 2016)

Alberta’s job losses last year were 19,600…those losses exceed the 17,000 jobs Alberta shed in the Great Recession in 2009.  It’s the worst year since, 1982, when the province lost more than 45,000 jobs, amid the double-whammy of a global recession and the notorious NEP, a federal government program that capped prices, raised taxes and dramatically discouraged investment in the oil patch.

Canada: Retailers just endured their ‘worst year’ (February 19, 2016)

“[2015] was the Worst year since the Great Recession for Canadian retail,”
It’s been 13 months since Target Canada filed for bankruptcy protection in an Ontario court on Jan. 15, 2015, capping one of the most disastrous expansions in the history of the retail business.

Russia

Russian economy has Worst year since financial crisis (Jan 25 2016)

Russia’s economy shrank 3.7 percent in 2015, the worst drop since the depths of the global financial crisis, as the country struggled with a drop in the price of its oil exports and international sanctions