Long break

... from this blog, that is. Its been more than a month from my last post.

Its been a pretty bad month for equities, with the S&P falling from about 900 points to 687 currently.

The KLCI is also kind of wobbly, at 858 now. Its being dragged down by TMI and Maybank, both of which have been bashed down due to their enormous rights issues.

I dont own either stock so i dont really care. I'm more interested in the outlook for the global economy. Things still seem to be sliding downwards. the US unemployment rate has reached 8.1%. From a personal perspective, I'm hoping this mess lasts for as long as possible so that I can buy as many stocks as possible for cheap as possible. A long mess wont be very good for the average person, of course, but, well, I guess its conflicting interests.

Anyway, going to bed now.

Malaysian workers- trapped in quicksand?

Today, the press reported that the World Bank's World Development Report (WDR) 2009 stated that Malaysia was the only country in East Asia whose real wage per employee has not changed from 1994 to 2007. The report also apparently points out that the wages of government employees have been rising although that of the private sector have not.

I think such findings will hardly feel surprising for most Malaysians, especially among urbanites. I just have a feeling that the material achievements of my parents' generation (e.g. house, a couple of cars etc.) are becoming harder and harder to reach.

Despite my pessimism about my own prospects as an educated, white collar, blue chip company employee, I can only shudder when I think about the plight of the average working class person. Persistent inflation, unrelenting competition from the hordes of imported menial labour, the degradation in affordable public services- life must surely be one hell of a struggle.

Despite Malaysia's dubious honour of being east asia's most stagnant wage market, I think Malaysia is hardly unique, and across the world the gap between the rich and poor has gotten steadily wider over the last decade. The gap is partially noticeable in the huge increase in asset prices (i.e. stocks, houses, commodities, precious metals) in the 15 years or so ending in 2008, which of course benefited asset owners, i.e. the rich.

And the day of reckoning is here.

Asset prices are dropping or in outright collapse, credit and spending have slowed, and the world is in the grip of the worst economic crisis since the great depression. If only most of the losses could be borne by those who have most benefited from the excesses of the last 15 years.

Alas, the world doesnt operate on notions of justice, and so the weak, the poor, and the ignorant will continue to suffer more than the rich and powerful.

If only it didn't have to be this way.

Seth Klarman on our debt culture

Seth Klarman is one of the most lucid writers on value investing i've ever come across. Here he puts the credit troubles in perspective, by comparing the borrowing culture of today's generation with those of our forefathers:

" We live in an era of leverage not just on Wall Street but on Main Street. For two generations, credit has become much more widely available and acceptable. In our grandparent’s era, there were no credit cards, home equity or subprime loans, or CDOs. People paid cash for what they purchased, and worked hard to earn that cash. The sequencing of that mattered, too: first you worked hard, then you bought what you wanted. Even the federal government was expected—except in times of war—to run a balanced budget.

But during our parents’ lifetimes and our own, credit has become increasingly available and standards increasingly lax, to the point where credit cards and checks backed by credit lines arrive unrequested in the mail, where your house can be used as an ATM, where people with dismal credit histories are eagerly sought after to provide them with loans, where investors flock to buy junk bonds and shaky companies seek to issue them, and where investment funds are offered the opportunity to enhance their return through structured products, derivatives and exotic financings, all of which embed high amounts of leverage.

The moral imperative of repaying the banker—your neighbor—who granted you the loan across his imposing desk has been replaced by the moral vacuum of anonymous lenders using credit scoring—who quickly resell your loan to someone you will never meet—and who are actually comfortable with the actuarially determined probability that you may default. Credit rating agencies have embraced the debt orgy with lax standards and naïve models, brewing conflicts of interest and accepting healthy fees to label toxic waste as investment grade."

Here's a 2005 letter by Seth Klarman bemoaning the intense competition for stocks ("Fans of Warren Buffett now fill a sports stadium when they flock to Omaha in May for the Berkshire Hathaway annual meeting."), the consumer debt bubble, housing bubble and the need to conserve cash because of the impending correction in the markets.

Best Resignation Letter Ever

Andrew Lahde, manager of a small Californian hedge fund which returned 866% last year by shorting the ABX index (index of mortgage securities backed by subprime assets), closed his fund and sent his last letter to his investors saying, among others:

"I was in this game for the money. The low hanging fruit, i.e. idiots whose parents paid for prep school, Yale, and then the Harvard MBA, was there for the taking. These people who were (often) truly not worthy of the education they received (or supposedly received) rose to the top of companies such as AIG, Bear Stearns and Lehman Brothers and all levels of our government. All of this behavior supporting the Aristocracy, only ended up making it easier for me to find people stupid enough to take the other side of my trades. God bless America.

I will no longer manage money for other people or institutions. I have enough of my own wealth to manage. Some people, who think they have arrived at a reasonable estimate of my net worth,
might be surprised that I would call it quits with such a small war chest. That is fine; I am content with my rewards. Moreover, I will let others try to amass nine, ten or eleven figure net worths. Meanwhile, their lives suck. Appointments back to back, booked solid for the next three months, they look forward to their two week vacation in January during which they will likely be glued to their Blackberries or other such devices. What is the point? They will all be forgotten in fifty years anyway. Steve Balmer, Steven Cohen, and Larry Ellison will all be forgotten. I do not understand the legacy thing. Nearly everyone will be forgotten. Give up on leaving your mark. Throw the Blackberry away and enjoy life.

So this is it. With all due respect, I am dropping out. Please do not expect any type of reply to
emails or voicemails within normal time frames or at all...

I have no interest in any deals in which anyone would like me to participate. I truly do not have a
strong opinion about any market right now, other than to say that things will continue to get worse for some time, probably years. I am content sitting on the sidelines and waiting. After all, sitting and waiting is how we made money from the subprime debacle."

This guy makes a lot of sense.

Coca Cola during the Great Depression

Decaying structures everywhere, but the world's greatest brand floats above it all...

Bank of England cuts rates

The Bank of England has cut its base rate to 1.5%, the lowest rate since 1694. Wow. 314 years.

We are really in one of the seminal moments of economic history.

Gold: 1

Let's have a running commentary on gold. First, we start with a quote from the man himself:

"[Gold] gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head."

As a stock market freak, the quote above has immediate appeal to me. But at the same time- "[gold] has no utility"? Surely that's a bit extreme. There's a value to gold. The only question is what is gold's value? Could it be like just any other commodity, i.e. slightly above the cost of production?

Satyam's USD1 bn fraud

Satyam, a giant Indian outsourcing provider, revealed today that about USD 1 bn of assets recorded in its financial statements do not exist.

Said the chairman: “What started as a marginal gap between actual operating profit and the one reflected in the books of accounts continued to grow over the years. It has attained unmanageable proportions as the size of company operations grew,” he wrote. “It was like riding a tiger, not knowing how to get off without being eaten.”

Wow. I wonder whether this is only the first of many scandals to be revealed in corporate India, and maybe also corporate China.

The New York Times report.

Dow Price to Book Chart

Here's another chart of the Dow:

Long Term Dow

Here's a really helpful 100 year (well, almost) chart of the Dow Jones Industrial Index.

Interestingly, it shows that during the Great Depression, the absolute lowest Price to Book of the Dow was about 0.55x (during 1931), and the average Price to Book for that year was about 0.9x.
This suggests that even if the world falls apart, the US S&P 500 can fall about 50% to 75% from its current price to book of 1.8x. This comes as a bit of a surprise to me. I thought Great Depression prices would be even cheaper.

Anyway, here it is. Like I said, its really helpful:

Update: The Dow's remarkable Great Depression rally between 1931 to 1937 (41 points to 200 points, or +400%) would have left me gobsmacked were I living during the period. Subsequently, the index crashed and it took another 15 years (1951) for the Dow to break out from the 200 points level. This was largely because of World War II.

Diagnosing depression

The ever-helpful Economist reminds us what depressions really mean, and offers some useful benchmarks:

Sime Darby- Air Asia LCCT

So Sime Darby gets govt approval to build a RM1.6 bn LCCT in Labu, Negeri Sembilan. The project will be privately funded (by Sime Darby I guess). I think Sime has a book value of something like RM 18 bn. So I guess it shouldnt be a problem to come up with the cash for this project.

Of course, the taxpayers will have to foot the bill. Details to follow.

Is the market fairly valued?

Well, the KLCI has been rising over the last couple of weeks. Its now at 920, from 860 about a month ago. That's a gain of about 7%. Not bad at all.

I'm not particularly given to commenting on the day to day or even week to week gyrations of the stock market. If 2008 taught me anything, it is that in the long run, the stock market reflects the performance of its constituent businesses.

I'm also realising that over the long run, the average public listed company can only increase its intrinsic value by about 5-7% a year. Thus, stock prices should only appreciate by that amount per annum. Anything more than that is not sustainable. Of course, in addition to the capital appreciation, investors can also receive dividends, which also contribute a long term return of say, 2-3%.

I'm currently thinking about how to value stocks when taking into account the possibility of a severe recession or depression. My guess is global stocks in general would have to fall about 30% to be fairly valued in a severe recession (think Malaysia's financial crisis), and about 50% to be fairly valued in a Great Depression Scenario.

2005 Presentation forewarning financial crisis

Here is a 2005 presentation by Raghuran Rajan titled: Has Financial Development made the World Riskier?

Its remarkable just how many people (experts, that is; 99.9% of laypeople probably never had a clue) forewarned of the dangers of the credit bubble. Of course, my impression could be due to a survivorship bias, and in fact, very few experts actually saw it coming.

Roubini: U shaped recession (66% probability), L shaped recession (33% probability)

Article here.

Dollar Comeback?

The Economist says that the dollar is likely to rally next year. Here's the article.