Tuesday, June 12, 2012

Meeting Minutes



We had an engaging meeting today at Chili’s!  We had a total of 6 attendees: (from left to right) Jeff Harrington, VJ Arjan, Elena Swindull, Ry Zamora (who joined us later) and one more who chooses to remain anonymous.  I want to thank Ry Zamora who made some very detailed notes on the extensive material covered during the meeting, which helped me very much in compiling the minutes below.  As there was a lot of material, some of it has been omitted to preserve brevity.



Facebook Fiasco and A Discussion on Bubbles



“Those who cannot remember the past are doomed to repeat it.” - George Santayana


It was quite evident that this topic would come up for discussion.  It is quite incredible how the public can get suckered into these schemes again and again.


In short, here is what occurred:


The initial public offering was set at $38 per share, which would put Facebook’s market cap at $100+ billion.  During the last year, Facebook reported earnings of $3.7 billion, and there were major revisions, upwards to 10%, to its growth prospective merely a week or so before the IPO.  The bottom line was that it would take the investor 100 years to breakeven on the initial investment at the initial public offering.  The stock subsequently sold off close to 40% in the weeks after.


And who might we ask was selling their shares?  Goldman Sachs, Morgan Stanley, and many of the insiders, including Mark Zuckerberg, unloaded a majority of their stake onto the public.  Mr. Zuckerberg sold $5 billion worth of his ownership interest.  Interestingly enough, according to a Reuters article (http://blogs.reuters.com/felix-salmon/2012/05/22/the-facebook-earnings-forecast-scandal/), the public probably doesn’t know that Mr. Zuckerberg also deliberately created a dual-class share structure to ensure that they (the shareholders) can be completely ignored on all decisions.


Elena mentioned that this is not to knock that Facebook may indeed be a leader in the social media industry for many years to come, but the hype, in this instance, perhaps, superseded the reality.  Jeff even suggested how Facebook could become an evolution of our current system of government - a social government, if you will.

The group then had a discussion on bubbles and how the public fails to see them coming time and again.  


Elena Swindull and Jeff Harrington explained how the tulip bubble in the early 17th century in Holland is proof how ignorant people are willing to gamble away their life savings on the promise of fantastic returns on an instrument they do not completely understand.  The truth of the matter is that as great an investment Facebook may pose, the old money was suckered in, got duped by the promise of exponential returns, by an investment they did not completely understand.


VJ Arjan bought up the South Sea Company bubble in 18th century France, which was the Enron of old on a much larger scale.  For more historical details about bubbles, please read Extraordinary Popular Delusions and the Madness of Crowds by Charles MacKay.




Mythbusters: Sell in May and Go Away

As we all know, the market wiped out the year’s gains in the month of May and it is now actually at a negative return YTD.


This prompted VJ Arjan to explore whether there is any truth to the market aphorism.  Here is what he found analyzing data on the Dow Jones Index since 1968.


In 44 years:
- 21 had positive returns with an average gain of 148
22 had negative returns with an average loss of 146


The data is compelling in that although there is not major loss in the month of May, there is also no gain.  So the tentative conclusion is that it is the month of May seems to be a wash.


That being said, Jeff Harrington pointed out that the historical returns from the periods October to April, are significantly better that those from May to September.




JP Morgan Trading Loss



On May 10th, JP Morgan Chase reported that it had accumulated a trading loss of at least $2 billion.


The stock subsequently dropped from $40 to the low $30, wiping out approximately $30 billion in market capitalization.



VJ Arjan asked whether this might be an overreaction as it is hard to justify a $30 billion loss in market cap even if the worse-case scenario were the loss was $5 billion. Jeff Harrington cautioned that the loss was on interest-rate swaps and these instruments are the equivalent of a financial atomic device were an institution on the wrong side – it is prudent remember Lehman and Bear Stearns.  He believes it is best to lie low for a while and wait for the dust to settle before getting into Chase.




Ry’s experience in China


Unbeknownst to any of us, Ry has actually visited China several times.  We asked him to relay his experience with a host family over there.


In his estimation, much of the conversation amongst the Chinese revolves around how to accumulate money – they are very wealth-creation driven and very entrepreneurial.  They admire and try to emulate the Americans and are very inquisitive about American culture and lifestyle.


Personal space is a concept that is less important in China than it is in the US.  A Westerner might find that if one were to take a step back, the Chinese might just step closer.  There are also not big on the concept of lines.


Ry also talked about “spit culture”.  It is, in fact, normal for the Chinese to spit when they feel like it.  It is not considered disrespectful, but is simply a way of life for them.




The Euro’s Final Act





“To be or not to be, that is the question: Whether ‘tis Nobler in the mind to suffer the Slings and Arrows of outrageous Fortune, Or to take Arms against a Sea of troubles, And by opposing end them” William Shakespeare, Hamlet


We had a lengthy discussion about this global crisis.  George Soros recently made the remark that the Euro has another 3 months to go before it will completely collapse should a financial arrangement of the PIIGS not be made.


The problems of this Euro arrangement are plentiful and they have been discussed in this blog before:


Jeff mentioned how Spain’s pension system allows expatriates to possess a dual citizenship and still take advantage of the federal pension system, even though they do not pay taxes to the Spanish government.  Ryan chimed in stating that this can only lead to further money-printing, which would eventually lead to hyperinflation.  However, he did point out that Spain’s crisis might be much worse than say the hyper-inflationary period in Mexico or Argentina because Spain does not have any substantial natural resources it could use to contain the hyperinflation.


Greece is unable to raise money in the debt markets, and the yield on their debt continues to surge.  All bets are on Germany lifting these betroubled countries out of their fiscal mess as Atlas carries the world upon its back.  Jeff talked about how yields for the German sovereign debt were negative, meaning people were paying just to get the principal back. As a result, the Germans are virtually receiving free money, which provides further incentive to spend freely and proceed with bailout policies.  On the flip side, this also provides an incentive for Germany to leave the Euro behind, as this could not go on indefinitely.





With all the money coming into the safe havens of U.S.Treasuries, Jeff mentioned the TLT (T-share 20 year yields). It is an ETF that might present a profitable short since the rise of bond prices.  If the economy should recover, the result will be a drop in bond prices as yields rise once more.


Ryan’s Analysis on the Euro Crisis


Ryan had a particularly articulate well-thought out diagnosis of the Euro crisis, which I present below, except a few edits, verbatim from his own notes:


His observations and research on the unfolding crisis shows that the Euro crisis revolves around four factors: (1) accountability, (2) acceptance, (3) teamwork, and (4) value. He explains it as such:
o Accountability: people must recognize that there is a culprit behind the crises. It doesn't have to be tagged to any specific individual or group of people - it could be a trait. For example, complacency in fiscal discipline, culture of entitlements and government-given spoonfeeding. 
o Acceptance: while many informed citizens are aware of the real problems, the politicians still must accept that the problems are not fiscal/monetary, but deep-rooted in cultural and/or fundamental concerns. 
o Teamwork: if this is followed by teamwork, then this means ceding political sovereignty -- to some extent, freedom -- to a figurehead. It also means one nation's unity towards a certain action (consider that Greek politics are fragmented into at least five parties)


o Value: but whatever the choice, the only thing that can save the nation in question is a unique value proposition. Without it, poverty or dependency ensues. Greece can gamble on tourism. Ryan does not know what Spain, Italy, or Ireland has.


In a talk with VJ after the meeting, Ryan talks about how the humanist point-of-view is even more important now that the crisis has taken the events out of the economics textbooks' jurisdiction.




Change of the Seat of Power


(The Fall of Rome)

Ryan brings a change to the conversation, introducing a subject on cycles - how the seat of power has changed over the past few millennia.


First came Mesopotamia, then Egypt, then Rome, then the European era of dominance (particularly Spain and Britain), and then America. Now, it looks like it's shifting to China.  
As the saying goes, what goes around comes around, and now we are full circle.


Jeff explained how 500 years of European hegemony as the world power shifted in 1991 with the fall of the Soviet Union and moved a couple thousand miles east to Asia.  He also mentioned how many countries in Europe, primarily the PIIGS, haven’t woken up to this fact, and the experience now for the Europeans is similar to being hit with the bag of bricks upon the head as a heavy dose of reality.


Jeff also explained how emerging empires largely stole the technologies from other existing empires and built and improved upon them to emerge dominant.  Such is the case halfway around the world with the current problem of the piracy of intellectual property.


VJ also explained how it seems that the abuse of credit is a singular factor in the decline of a reigning empire.  This is especially discussed in Gibbon’s The Fall and Decline of the Roman Empire as a key factor along with a host of others, as being of principal importance in its collapse.  Also as part of his observations, he noted that the problem of deficit spending for the Romans was denied for quite a long time, and by the time they had recognized the severity of the problem, it was too late.  Looks like the U.S. may be headed in the same direction.




A Bear in India



While China is flying up the economic and political totem pole, India, at least In VJ's opinion, has it dead wrong.  VJ started talking about the problems of India in his estimation:

Unlike the Chinese who were united by Emperor Shi Huang-Di of the Qin dynasty for 2 millenia, and who remain united according to very similar borders today, the Indians have been so divided as a country that it took the British to come along and occupy their territory for 250 years before there was any real semblance of unity. 


To this day, there is constant competitiveness and social class warfare amongst their own people. This extends especially to their bureaucracy, which by some estimates is the worst bureaucratic system behind Egypt; a system designed by the British empire to favor the upper class and aristocracy and make life more difficult for those coming up the ranks.  They also have the second-worst road and telephone system in the world, second only to Haiti.

There is a superiority complex when it comes to culture and intelligence.  This is one reason that countries isolate themselves and actually end up not progressing because the fail to see the beam in their own eye.  Openness breeds creativity and innovation, closeness breeds the opposite.  For proof, look at North Korea and Myanmar.


At the most fundamental cultural level, a crab mentality exists, along with a cultural habit of exploitation for one's own desires.  For proof, the Indian government has recently been swamped with one political scandal after another, some of which directly implicate the current Prime Minister, Manmohan Singh.



Long-run emerging companies


Here are a few companies that were brought up during our meeting that are looking like companies in emerging industries that have great long-term growth potential:


  • Tesla Motors (TSLA)
  • SpaceX
  • HOLCIM (HCMLY)



The next meeting will be on Sunday, July 1st, 2012. 


For those who have not attended a meeting, but would like to attend, please email your wish to VJ Arjan at scarletkings@gmail.com


Also I find that there are many domestic and international readers who are following our blog posts not only in the United States but all over the world including Europe, Latin America, and Asia. If you wish to be added to our email list, please email at scarletkings@gmail.com

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