What’s up with interest rates?

July 5, 2007

There has been a lot of volatility in the fixed income markets in the past few months. Here are some highlites, and some great links to check out for further reading:

What happened:
* In May, Treasuries sold off big-time, sending yields on the 10-year soaring. This also caused a 10% loss of principal to bond holders.
* Two heavily-leveraged Bear Stearns hedge funds might be imploding. The possible liquidation of the funds — both of which own risky debt instruments such as CDO’s and subprime mortgages — could have serious consequences for the entire market.

Where do we stand:
* Yields on Treasuries have risen and the yield curve is no longer inverted.
* If you are a “subprime” borrower, it is much more difficult to get a loan
* Despite all of this, interest rates are still very low on a relative (historical) basis. Money/liquidity is still very plentiful — as is evidenced by the ongoing M&A/Private Equity boom.

My Take:
With interest rates, I think it’s important to think about where they’re going, not just where they are now. With strong global growth and inflation, I would bet on higher interest rates in the future. If true, this suggests a pretty strong headwind for economic growth and for stocks in particular.

As much as ever, it seems that China and certain Middle Eastern countries control the fate of the global debt markets. The Chinese government holds more than $600 billion in US Treasuries. Their aggressive buying of short term notes is one good reason why interest rates have been so low, allowing US consumers to live way beyond their means for the last few years. In the short-run, this situation works out great for us — we are able to import a whole lot of stuff and all we give them in return is dollar bills. Even better, we don’t even have to pay them back…. You can be sure that the dollars we use to pay our debts back will be worth a lot less than those we are borrowing now.

The Chinese might be perfectly happy with this arrangement though because it creates stability at home… Now that 1 billion people know that it’s possible to get rich and improve their lives, they all badly want to do it. Problem is, with an economy that is still largely manufacturing-based, it’s very difficult to create jobs for the 20 million graduates Chinese universities pump out each year. The country needs 10% GDP growth rate to keep things stable.

So what do the above two paragraphs have to do with the fixed income markets/interest rates? A lot, I think. The Chinese (along with other major holders of US debt) have an incredible amount of control over the US economy. Not least of which is US interest rates — witness the inverted yield curve after no fewer than 6 fed funds rate increases; Starting in 2002 when Greenspan raised interest rates to prevent inflation, long term interest rates have actually declined. So, at least for now (and at least through the Beijing Olympics in 2008), China does not want a destabilized bond market.

Follow these links for some excellent, and non-boring, commentary about recent happenings in the fixed income markets:

*Calculated Risk blog post about a great NYT article
*Two articles by Jubak:
* Deepening Debt Crises hits Close to Home
* Can Bond Market Stand to be Exposed?
*Bill Gross commentary


June 22 Linkfest

June 23, 2007


Another Asian Contagion May Be Only a Bad Currency Trade Away: Ten years after the collapse of Asian governments’ overvalued currencies in 1997, the remedies they embraced to prevent a recurrence may have only traded one set of risks for another. Their “never again” determination has led them to new extremes: artificially low currencies, a record $3.4 trillion in reserves and export-dependent economies. (Bloomberg)

Must read Big Picture post how about how the government is lying to us about inflation:
Delving Deeper into the Inflation Issue: Consider what happens when the BLS looks at rent/OER: “They supposedly net out utility payments. So if your rent payment stays constant but utility bills go up, that yields a lower net implied rent. In other words, utility prices going up caused rental prices and CPI to go down.”

But that’s just the tip of the iceberg. Consider the even more bizarre concept of OER as representative of the entire home-dwelling US public. More than three times as many people OWN THEIR OWN HOMES then rent their abodes. So why do we use Rental Measures for measuring shelter inflation? (The Big Picture)

The strong Euro is causing lots of angst in Europe. There is a growing social and political movement against the Euro in a few countries in Europe, Italy and France in particular:
France’s Sarkozy Lashes Out Anew at Strong Euro: French President Nicolas Sarkozy criticised euro strength anew on Wednesday, saying there was no reason why the euro zone should be the only region in the world to be handicapped by an overly strong currency.

In an interesting and somewhat unusual view of a strong currency, Sarkozy argues that a strong Euro decreases the purchasing power of France:
“An overly low purchasing power is the fault of competition from countries with low salaries; of social, environmental, monetary dumping; of the Chinese currency which is too low; of the euro which is too strong; of charges which are too high; of interest rates which are higher than inflation; of house prices which have risen a lot.” (Reuters)

As Mercury Rises, Motorists Get Burned: (Will’s Blog)

Rate Rise Pushes Housing, Economy to “Blood Bath”: The jump in 30-year mortgage rates by more than a half a percentage point to 6.74 percent in the past five weeks is putting a crimp on borrowers with the best credit just as a crackdown in subprime lending standards limits the pool of qualified buyers. The national median home price is poised for its first annual decline since the Great Depression, and the supply of unsold homes is at a record 4.2 million, the National Association of Realtors reported.

“It’s a blood bath,” said Mark Kiesel, executive vice president of Newport Beach, California-based Pacific Investment Management Co., the manager of $668 billion in bond funds. “We’re talking about a two- to three-year downturn that will take a whole host of characters with it, from job creation to consumer confidence. Eventually it will take the stock market and corporate profit.” (Bloomberg)


Commodities Boom Driving Inflation in Latin America: High international commodities prices are becoming a double-edged sword for Latin American countries. After boosting economic growth for years, the high prices are making food more expensive and stoking fears that inflation could accelerate. (Reuters)

Agricultural Commodities – Biofuelled: Every morning millions of Americans confront the latest trend in commodities markets at their kitchen table. According to the United States Department of Agriculture, rising prices for crops–dubbed “agflation“–has begun to drive up the cost of breakfast. The price of orange juice has risen by a quarter over the past year, eggs by a fifth and milk by roughly 5%. Breakfast-cereal makers, such as Kellogg’s and General Mills, have also raised their prices. Underpinning these rises is a sharp increase in the prices of grains such as corn (maize) and wheat, both of which recently hit ten-year highs. Analysts are beginning to ask, as they have of oil and metals, whether higher prices are here to stay.

When demand was growing more slowly, farmers could meet it through gradual improvements in their yields. But to cope with today’s boom, yields will have to rise much faster, or farmers will have to bring more land into production.

Both are possible. Greater adoption of genetically modified strains of corn and wheat, for example, could improve yields. But they are expensive and politically controversial. There is also quite a bit of fallow land to be sowed, especially in developing agricultural powers such as Brazil and Ukraine. But those countries are far from the biggest markets and their idle land tends to be found in areas with poor transport links. A strong price signal will be needed to overcome such obstacles and induce extra supplies.

Neither seems very likely in the near future. This week America’s Congress is debating whether to double its targets for biofuel production.

At the same time, the oil price rose to its highest level in ten months, thanks to a strike and other disruptions in Nigeria. The chaos in the Niger delta, it turns out, has a surprising amount to do with the price of eggs. (Economist)

General Interest:

China Blocks Flickr Photo Sharing Service: Flickr’s blockage in China, which seems to affect only the actual photo files, rather than the entire Web site, ironically arrived almost exactly as Wikipedia was suddenly freed from a long stretch in the big house. Several weeks ago, users posted photos of public protests of a new chemical plant in Xiamen, which led to flickr’s current blockage. (MarketWatch)

Investing & Trading:

Steer Clear of the Rotting Bond Market: You don’t have to believe in collusion between debt underwriters and the ratings agencies, however, to worry that the system isn’t working. The criticism here is coming from bond professionals who have produced a series of studies showing that pools of debt called CDOs (for collateralized debt obligations) aren’t showing the patterns of return and default that their credit ratings predict. For example, one study shows that tranches of CDOs with the same BBB credit rating, which should trade at roughly similar prices, are instead trading at yields that differ by anywhere from 1.4 to 10 percentage points. At the A and BB levels, the gap is something like 4 percentage points. The U.S. Federal Reserve recently weighed in with a paper that said the ratings for CDOs are riddled with “anomalies.” (Jubak’s Journal – MSN Money)

Four CDOs With Subprime Loans May Have Ratings Cut: Four collateralized debt obligations containing subprime mortgages from 2006 and valued at $3.1 billion may have their credit ratings cut by Fitch Ratings. (Bloomberg)

A good acquisition for a stock I own:
Luxottica buys Oakley:
Chances are that many of the celebrities’ favourite brands are owned by Luxottica, the Italian eyewear group. It is now adding another name, Oakley, the California-based sunglasses maker, to a portfolio that already includes Prada and Chanel. And it is paying a rather fashionable price to do so.

The $2bn, or $29.30 a share, deal does make sense, though. The luxury goods market is booming and, despite a substantial capital expenditure programme, Luxottica has spare cash to invest. It already distributes Oakley sunglasses through its retail outlets and wants to expand in North America, where it made two-thirds of its €4.7bn sales last year. Luxury sunglasses are becoming increasingly popular in the region. According to Luxottica’s chief executive, only 15 per cent of sunglasses sold in North America cost $30 or more, but the proportion is growing. (Financial Times)

Housewives Outmaneuver UBS, Deutsche Bank Trading Yen: Yukiko Ikebe, a 59-year-old housewife in Tokyo, in April was indicted for evading about 139 million yen in income taxes while earning 407 million yen trading foreign-exchange, according to the Tokyo District Public Prosecutors Office.

“She must have earned more money than us,” joked Yuji Saito, head of the foreign-exchange sales department at Societe Generale SA in Tokyo. “I said to my colleagues, `let’s find her and hire her!”’ (Bloomberg)


June 17, 2007


Finding Arbitrage Plays in the New Forever Stamp: Buy them now, use them forever. That’s the promise of the U.S. Postal Service’s “Forever” stamp, which went on sale April 14. (Bloomberg)

A safe-money bet? Think Canada: Afraid that the U.S. dollar is in a long-term decline? Want to protect the value of your portfolio over the long term? Looking for bigger gains than you’ll get from loading up on Swiss francs or burying gold bullion in your backyard?
Try Canada. I can’t think of a better place to stash part of a long-term retirement nest egg than in Canadian stocks. I’ll give you three in this column to add to your long-term retirement portfolio after the current sell-off has run its course. (Jubak’s Journal – MSN Money)

Barron’s Round Table: Marc Faber interview: In January you also recommended shorting the 30-year bond. We presume you’re still bearish: Yes, although near-term these bonds are oversold. It is a great error to think that in an economic slowdown, the rate of inflation automatically drops. Don’t tell me your cost of living is increasing only 2% a year.

As for a new idea, I’d try to short the U.S. retailers, excluding Wal-Mart…It won’t do as badly as the rest of the industry. There will come a time when middle-class households exact their revenge and do better relative to the Wall Street crowd. The problem with Wall Street is this: If you take away the fees earned by structured products and investment banking and mergers and acquisitions, there won’t be much left. I admire Wall Street and the banking system, which when faced with collapsing co

mmission rates invested structured products from which to earn so much. But one day it will dawn even on financial institutions, and on state pension funds, that they are paying a high fee for a very large basket of hedge funds. Some hedge funds are superstars. But out of 7,000 hedge funds, not all are superstars. And it’s not just hedge funds. The whole system is geared to taking a lot of money out of the pockets of clients. Where are the customers’ planes? (Barron’s)


Yen Drops to Lowest Versus Dollar Since 2002 on Treasury Yields: The yen fell to the lowest against the dollar since December 2002 and declined against the euro as Treasury yields near the highest in five years encouraged investment outside Japan. Japan’s currency dropped against all of its 16 most active counterparts tracked by Bloomberg on an increase in carry-trade purchases of higher-yielding assets financed by borrowings in the yen. (Bloomberg)

Carry Over: Time Might be Running Out on the Carry Trade: It is amazing how many people follow a strategy that, in theory, does not work. They do so, of course, because practice outranks theory. And the carry trade, the borrowing of low-yielding currencies to buy high-yielding currencies, has worked in practice. (Economist)


Drink Up: LUXEMBOURG glugs more than 15.5 litres of alcohol per person in a year, more than any other country. One explanation is that the duty on alcohol is relatively cheap in the tiny nation, encouraging booze tourism from its more heavily taxed neighbours. No such explanation for the Irish, however, who quaff 13.7 litres a year, according to the World Health Organisation. European countries, with their cultural acc

eptance of alcohol, tend to dominate the top places. In America, where stricter minumum-age requirements apply, the average person drinks 8.6 litres a year. (Economist)

Fat, Glorious Fat, Moves to the Center of the Plate: These are times of bold temptation, as well as prompt surrender, for a carnivorous glutton in New York.

They’re porky times, fatty times, which is to say very good times indeed. Any new logo for the city could justifiably place the Big Apple in the mouth of a spit-roasted pig, and if the health commissioner were really on his toes, he’d draw up a sizable list of restaurants required to hand out pills of Lipitor instead of after-dinner mints. (New York Times)

Wal-Mart theft: $3 billion a year? Shoppers at Wal-Mart stores across America are loading carts with merchandise — maybe a flat-screen TV, a few DVDs or a six-pack of beer — and strolling out without paying. Employees also are helping themselves to goods they haven’t paid for. The hit is likely to rise to more than $3 billion this year for Wal-Mart Stores (WMT, news, msgs), which generated sales of $348.6 billion last year, according to retail consultant Burt Flickinger III. (MSN Money, AP)

Tainted Food:

The Week magazine has a great briefing about food imports. This is a must-read:
The Dangers of Imported Food: Each month, federal inspectors turn back tons of tainted food imported from abroad, but experts say that far more gets through. How worried should we be about our food supply? (The Week)

F.D.A. Tracked Tainted Drugs, but Trail Went Cold in China: Ten years later it happened again, this time in Panama. Chinese-made diethylene glycol, masquerading as its more expensive chemical cousin glycerin, was mixed into medicine, killing at least 100 people there last year. And recently, Chinese toothpaste containing diethylene glycol was found in the United States and seven other countries, prompting tens of thousands of tubes to be recalled. (NYT)

1,000 Tube of Toothpaste Seized: The Food and Drug Administration earlier this month issued a worldwide alert of toothpaste from China because DEG levels of 1 to 4 percent were found in brands of Chinese toothpaste that the FDA banned June 1. (Pacific Daily News)


The Next Audit Scare: The IRS is planning to Revive Its Random-Audit Program in Hopes of Foiling Tax Cheats; What to do if you’re chosen. (WSJ)

Carried Away: The argument centres on one long-established discrepancy—the gentler tax treatment of capital gains than annual income. Now it is benefiting people in private-equity firms (and to a lesser extent hedge funds), who receive a large part of their pay in the form of “carried interest”—usually 20% of investment gains. In America these are taxed at the 15% capital-gains rate, rather than 35% income tax. In Britain the benefits are even more generous. Those who hold an investment for two years can pay 10% on the gains, compared with a 40% rate of income tax. (Economist)

Rubin, Summers Say Fund Managers Should Pay Higher Tax Rates: Congress should more than double tax rates for many hedge fund managers and private equity partners who classify their pay as capital gains, former Treasury secretaries Robert Rubin and Lawrence Summers said. (Bloomberg)

June 9 Linkfest

June 9, 2007


The Consequences of Asia Rising: Perhaps the most important lesson to be learned from the Asian experience is that economic growth is not a zero sum game where the winners take jobs and opportunities away from the losers. The growth of China, India, and Indonesia is helping all the countries in Southeast Asia. Singapore gets more shoppers from neighboring countries and Hong Kong believes it will remain the financial capital for a burgeoning China since its open and transparent markets can attract more investors.

Similarly the U.S. has much to gain from the growth in Asia. Brand names are very important to the Asians and the consumer market in these developing countries is just opening up.

If we shut ourselves off from developments abroad, we will be the major ones to suffer. Opportunities abound in these developing markets. You can be sure that if the U.S. does not catch them, others most certainly will. (Yahoo! Finance)

U.S. economy’s fate in Saudi hands: Saudi Arabia is running the U.S. economy.
I’m not sure the Saudis want the task, but they’ve got it. Because the United States still doesn’t have a national energy policy, we’ve thrown decisions about how fast our economy grows and whether our standard of living rises or falls into the hands of Saudi Arabia’s oil ministry. (Jubak’s Journal – MSN Money)

How Ethanol Bites you in the wallet: Ethanol is attractive as a solution to high gasoline prices because it promises a free lunch:

* U.S. farmers would grow corn.

* U.S. ethanol companies would turn the corn into ethanol.

* U.S. consumers would go about business as usual.

* And everyone in the U.S. would be less dependent on foreign oil producers.

* But, repeat after me: There is no free lunch.

So far, this not-so-free lunch has resulted in higher food prices and rising U.S. dependence on fertilizers produced by, you guessed it, foreign oil and natural gas producers.

The costs are just starting to work their way through the U.S. and global economies. But it’s none too early for investors to revise their portfolios to take account of the costs of this free lunch.

On June 4, corn (No. 2 Yellow, Central Illinois) sold for $3.77 a bushel. A year ago, the price was just $2.25 a bushel. That’s a 67% jump in price in a year. (The futures markets say prices will stay here, too, with corn for December delivery selling at $3.83 a bushel on June 4.) (Jubak’s Journal – MSN Money)


Years of Global Growth Raise Inflation Worries: For the past decade, low-priced labor from China, India and Eastern Europe has helped much of the world enjoy economic growth without the sting of inflation. Now that damper on prices is beginning to reverse — and global inflation pressure is starting to build. (WSJ)

General Mills Raises Price on Line of “Big G” Cereals: General Mills Inc. is expecting consumers to pay more for fewer Cheerios. By reducing the size of its cereal boxes, General Mills will be selling less for more. The new, smaller boxes will mean a low single-digit percentage increase in the price per ounce of such well-known cereal (WSJ)

Hot Commodities Ignite “Agflation” fears in Europe: Red hot agricultural markets are pushing food prices up in Europe, putting central bankers on alert for a new phenomenon economists have termed “agflation”. (Reuters)

Bank of England May Need to Move Faster on “Sticky” Inflation: The Bank of England, which left interest rates unchanged yesterday, may have to move faster to curb the U.K.’s worst bout of inflation in a decade. (Bloomberg)

Globalization Creates Secular not Cyclical Inflation: The conclusion that this round of inflation is cyclical rather than structural is ridiculous. It brings us to the central debate – is globalization inflationary or deflationary? As the article implies, the growth of low-cost India and China has been a deflationary force on labor prices and certain manufactured goods. While this is undoubtedly true, this growth also has created inflation in many other sectors of the global economy. (Will’s Blog)


Why So Many Suicides in Japan: Japan’s agriculture minister hanged himself Monday amid allegations of bid-rigging and padding government expenses. The following day, an executive allegedly linked to one of the scams leapt to his death. In 2005, 32,552 people killed themselves in Japan—one of the highest suicide rates among industrialized nations. Why are there so many suicides in Japan? (Slate)

Iran Adding Attack Boats in Persian Gulf: Iran is increasing its fleet of small attack boats capable of challenging warships and disrupting oil traffic in the Strait of Hormuz, the sea route for two-fifths of the world’s daily supply of crude oil, the U.S. Navy says. The boats — up to 70 feet long and capable of speeds up to 57 miles per hour — are armed with torpedoes and rocket- propelled grenades as well as cruise missiles and also are used to lay mines. The U.S. estimates Iran has 5,000 sea mines. (Bloomberg)

Gay Lawyers Come Out as Clients Demand More Diversity: The number of openly gay, lesbian, bisexual and transgendered lawyers increased by more than 50 percent from 2002 to 2006, according to the National Association for Law Placement. (Bloomberg)

Hong Kong Winters May Vanish in 50 Years: Hong Kong’s winters could vanish within 50 years, with the number of cold days declining virtually to zero due to global warming and urbanization, the head of the city’s weather observatory warned on Friday. (Yahoo! News)

Personal Finance

More Advice Graduates Don’t Want to Hear: While there may be a debate among economists about how much 50- and 60-year-olds should be saving for retirement, there is little dispute about how much the young should save: more. (NYT)

Sunday Linkfest

June 3, 2007

Here is delayed version of this week’s Linkfest. I apologize for the bad formatting — I’m working on a weird computer.

General Interest:

Making Yourself More Likeable at Work: Ask yourself: Do people like me? You get promoted in this world because people like you, not because you get work done. There’s always more than one person who can get a job done. But everyone’s personality is different, so when you want to differentiate yourself at work, focus on your personality. (Yahoo! Finance)

The Best Novels You’ve Never Read: A few ideas for beach reading. (New York Magazine)


Another reason why rising real estate values are not a good thing:
To the Barricades! Property Taxes Spur Revolts: John F. Wasik: In a rising market, the local assessor will raise his estimate of your home’s worth, which usually results in a higher real-estate tax bill. Nowhere has the burden incensed more taxpayers than in New Jersey. The state has the dubious honor of having the highest property-tax bills in the country, averaging $6,300 last year, a 7 percent increase over 2005. (Bloomberg)

Here is a fascinating article about oil shale and its potential as a huge new source of oil:
Colorado, Utah Rival OPEC Reserves, Lure Chevron, Exxon, Shell: Colorado and Utah have as much oil as Saudi Arabia, Iran, Iraq, Venezuela, Nigeria, Kuwait, Libya, Angola, Algeria, Indonesia, Qatar and the United Arab Emirates combined.

That’s not science fiction. Trapped in limestone up to 200 feet (61 meters) thick in the two Rocky Mountain states is enough so-called shale oil to rival OPEC and supply the U.S. for a century.

“The breakthrough is that now the oil companies have a way of getting this oil out of the ground without the massive energy and manpower costs that killed these projects in the 1970s,” said Pete Stark, an analyst at IHS Inc., an Englewood, Colorado, research firm. “All the shale rocks in the world are going to be revisited now to see how much oil they contain.” (Bloomberg)

5 Myths About That $3.18 Per Gallon: Here are five common myths about why we’re paying so much at the pump. (Washington Post)


Investors Learn a Lesson as Stock Index Hits High: The Standard & Poor’s 500 index — a stock market benchmark for the retirement savings of millions of Americans — hit an all-time high Wednesday, raising hopes that Wall Street’s 4 1/2 -year rally will keep on rolling.

But for many average investors, the event is a painful reminder that a key part of their portfolios has done little better than break even over the last seven years. The S&P index has just regained the last of its nearly 50% decline from 2000 to 2002, when plummeting shares of technology companies led the market down in the worst slump since the Great Depression. (LA Times)

Nikkei Climbs to 3-month closing high, techs up: Market participants said the Nikkei’s rise may also be a sign that investors are reevaluating Japanese equities. The share average has inched up just 3.8 percent so far this year, making Tokyo one of the world’s worst-performing equity markets. “If there is a global sell-off, Japan is likely to see the least amount of damage. The markets have yet to advance this year.” (Reuters)

Kuwait Kicks Sand on the Dollar: The combination seems to be heading toward a jury-rigged global monetary system. This system doesn’t rely on market mechanisms to adjust the relative value of currencies. Instead, individual countries opt in and out of those market mechanisms as they choose with their policy moves designed to maximize their own return from the rules of the market. (
Jubak’s Journal — MSN Money)


Google Street Level View Maps. This is incredible! Here’s a picture of my apartment from the site:


Ex-China Drug Regulator to be Executed: China’s former top drug regulator was sentenced to death Tuesday in an unusually harsh punishment for taking bribes to approve substandard medicines, including an antibiotic blamed for at least 10 deaths.

The sentence was unusually heavy even for China, which is believed to carry out more court-ordered executions than all other nations combined — and likely indicates the leadership’s determination to deal with the recent scares involving unsafe food and drugs.

According to the official magazine Outlook Weekly, a survey by the quality inspection administration found that a third of China’s 450,000 food makers had no licenses. Also, 60 percent of the total did not conduct safety tests or have the capability to do so, the survey found. (Yahoo! News)

May 26 Linkfest

May 25, 2007

Links to some interesting articles I read this week. My comments are in italics.


A commodities boom makes itself felt in the supermarket: Agricultural commodity prices are often volatile, in part due to weather fluctuations that affect crops. But what is unusual about recent price increases is that so many prices – everything from grains to ground nut oil – are rising simultaneously. Economists worry that the sudden increase in the cost of such a basic good as food will fuel inflation.

Meanwhile, humanitarian agencies are worried that a sustained rise in prices will make it more difficult to feed people in the poorest countries. Greg Barrow, spokesman for the UN’s World Food Programme, says rising demand for raw materials from China, as well as a weaker US dollar and higher transportation costs, are making its food purchases more expensive.

Economists worry that the sudden increase in the cost of such a basic good as food will fuel inflation. James Paulsen, chief investment strategist at US financial advisor Wells Capital Management, says the rise in non-energy commodity prices could presage an increase in core consumer inflation later this year. (wsj)

Lots of China Stories this Week:

China to Diversify Foreign Currency Reserves: Authorities have said the country will diversify part of its foreign exchange reserves, which amounted to 1.02 trillion dollars by the end of March and are believed to be invested mainly in dollar bonds. (Xinhua)

Hmm…where to put the money??? Aha! Private Equity!!
China Puts Cash to Work in Deal With Blackstone: The landmark deal signals China’s determination to earn higher returns on its reserves and gives Blackstone a potential advantage in doing deals in China. (WSJ)


Marc Faber Says Financial Markets in “Final Stages of a Bubble”: Not if, but when: global markets are in a bubble and will crash one of these days. The only asset he would buy now: farmland in Argentina, Brazil, Africa, New Zealand, Australia (Bloomberg)

Dividends or Share Buybacks?
Essentially, companies have four things they can do with their free cash flow: 1) reinvest in the business; 2) pay back debt; 3) issue dividends; 4) buy back stock.

The relative merits of each option vary widely. Lately, share buybacks are in vogue. While this has undoubtedly (in my opinion) contributed to rising stock prices, I don’t think it’s necessarily a good thing for long-run oriented shareholders.

In a May 8 article, my favorite financial journalist Jim Jubak, makes a compelling argument that cheap debt is the fuel for the share buybacks:

How Cheap Debt Overinflates Stocks: Take the practice of using borrowed money to buy back shares. Bet you thought all those buybacks that companies are announcing were funded out of current cash flow. Think again. Even big players such as IBM Corp. are piling on debt to repurchase their own shares.

Since 2003, IBM has purchased 203 million of its own shares at a total cost of $30.7 billion. That’s a huge percentage — about 52% — of the company’s total operating cash flow of $59.5 billion during the period. It looms even larger if you add in the $17 billion IBM spent during this period on capital expenditures, the $8.8 billion it spent acquiring businesses and the $5.3 billion it spent paying dividends to investors. All that — added to the spending on buying its own shares — comes to 104% of operating revenue.

Or look at it another way. In 2006, IBM used the equivalent of 67% of its total net income to buy back shares. In 2005, the percentage was 82%. In the two years before that, 64% and 42%, respectively.

If you add in dividends, 2006 payouts to investors came to 85% of total net income at IBM. (Jubak’s Journal – MSN Money)

As a follow-up article, Jubak lays out sectors where there are fewer and fewer shares available due to share buy backs and buyouts:
3 Sectors Where Shares are Scarce: The supply crunch in the overall market is astounding. First, thanks to buyouts that take public companies private and acquisitions that merge one company with another, the number of publicly traded stocks is shrinking. Second, even when companies stay public, they’re buying back their own shares, reducing the number of shares trading in the public markets. Add stock buybacks to buyouts and acquisitions and, Standard & Poor’s estimates, a total of $1 trillion in stock will exit the public stock markets in 2007. (Jubak’s Journal – MSN Money)

The Dividend Dearth: Still Too Stingy: The waning importance of dividends in the States reflects the rise in the past two decades of institutional investors, who tend to see stocks as vehicles for capital gains, not income. Historically, however, dividends have been crucial to investors. Since 1928, stocks have returned 10.4% annually, with 40% of that generated by dividends. (WSJ)

Personal Finance:

Get More Miles for Your Money: Tips for reducing gas costs. (Yahoo! Finance)


Supreme Court to Address State Tax Breaks for Bonds: In a case with the potential to rattle, if not reshape, the market for state and municipal bonds, the Supreme Court agreed on Monday to decide whether states can continue to exempt interest on their own bonds from their residents’ taxable income, while taxing the interest on bonds issued by other states.

The preferential tax treatment for in-state bonds is longstanding and very common, offered by nearly all the states that have an income tax. State and local governments issued more than $350 billion worth of bonds a year from 2002 to 2006.

May 19 Linkfest

May 21, 2007

Links to a few interesting articles I read this past week:


Too Much Cash Pouring Into Emerging Markets: Overseas investment will flood emerging markets with $469 billion this year, according to the Institute of International Finance in Washington. That will bring the total since 2005 to almost $1.5 trillion, twice as much as in the prior three years. While fueling growth, all that cash is bringing side effects that threaten to turn booms into busts. (Bloomberg)

Want to Measure Actual Inflation? See the Core/Headline CPI Spread: One way to actually measure how absurd the US core inflation measure is to look at what has happened to the spread between headline CPI and Core CPI. If Core CPI is understating inflation, than the spread should be widening. If it is accurate, the overall ratio between the two should be relatively steady. What does the data show? The spread has increased substantially since the US adopted an ultra low rate/easy money policy under Greenspan.

Whenever I hear the phrase “excluding volatile food and energy” I just laugh. Can a pricing group be considered volatile if it merely goes up each month in an orderly fashion — for years and years? That’s not volatility, thats a trend. (The Big Picture)

Insight: Dollar story no thriller, but it’s compelling: Jim O’Neil writes in the FT that the USD, despite its present weakness is not that awful compared to European currencies. Compared to BRIC currencies though, the LT trend is almost certainly down. (Financial Times)


The New Era of Tech Investing: Three great rules of technology investing:

  1. Look for the Hockey Stick: This has nothing to do with sports. Instead, the “hockey stick” describes a highly desirable pattern in a company’s sales growth.
  2. Look for the Killer App: the software program, piece of hardware, product improvement or whatever – that everyone has to have is the key to hockey-stick growth.
  3. Look for a company with sustainable high margins

These days you won’t find many companies in the technology sector which fit into the above-mentioned rules. But in the energy sector, the three rules of technology are still a great fit. Take a look at Color Kinetics (CLRK), Transocean (RIG), Satoil (STO), Tenaris (TS) and Johnson Controls (JCI). (Jubak’s Journal – MSN Money)

Why Investing is Safer Overseas: With U.S. markets growing more risky and global markets looking safer every year, savvy investors need to recalibrate their views. Here’s how to assess the new world order.

I think you need to compare markets one by one to look for those where investors, who tend to stick with the conventional wisdom until something whacks them over the head, have mispriced risk. The countries that I find particularly interesting as investment targets are those that have made the biggest strides in getting their houses in order. Of course, you still need to find good companies in those markets, but when you do, I wouldn’t let old prejudices against risk cause you to pass up higher returns because they used to be more risky. (Jubak’s Journal – MSN Money)


Too much of a good thing? Vitamin link with cancer: Men who pop too many vitamins in the hope of improving their health may in fact be raising their risk of the deadliest form of prostate cancer. In men who took too many multivitamins, the risk of aggressive cancer increased by one third, and the risk of fatal prostate cancer doubled compared to those who took no multivitamins, according to the study, published in the Journal of the National Cancer Institute.

No studies have yet found that people benefit from taking multivitamin and mineral supplements, and some studies have found that vitamins like A and iron are toxic at high levels. Beta-carotene has been found to increase the risk of lung cancer in smokers. (Reuters)