It is not unusual now, I think, to expect to feel like a sponge that has soaked in lots of water after these meetings. I want to send a heartfelt thanks to all who attended and contributed to the liveliness and depth of the discussion; as always, we end up more knowledgeable by feeding off of one another. In addition, I want to welcome Shelley Gomez and Phil Garcia to the Scarlet Kings and thank them for sharing their stories and insights with us all. We had 6 attendees: (from left to right) Shelley Gomez, VJ Arjan, Phil Garcia, Jeff Harrington, Tommy Schultz, and Kevin Day.
Food and as an Insight into the Cultures of People
We started the first three-quarters of an hour on a discussion about food. Phil Garcia, who has been an astute observer of cultures worldwide, explained to us that the was food is flavoured tells much of the culture of a people. For example, sweet and tasty flavours in a type of food can be interpreted to mean that the people have sunny, positive, and open dispositions. Likewise, sour and tangy flavours can be interpreted to mean that the people are dry, negative, and closed-minded inclinations.
Investing Like a Lion
Phil Garcia, who has been himself a very successful trader and investor, related to us that the key to success in investing in the markets is to invest when the lion (the market) is calm and dormant with the potential to explode at any moment. Most people make the mistake of investing when the lion is hot on the chase; most people, however, don’t see the imminent end of the market rally and the cooling of the lion until it is already too late. The current market environment can be equated, therefore, to the position of a calm and dormant lion; let people say what they will about the market, but it will move one day and most people will not catch it.
Obamacare – Pros vs. Cons
We spoke about President Obama’s initiative to nationalize healthcare – a touchy topic for the whole nation at this point. Kevin Day spoke to us about the nationalized healthcare in Austrailia, where he is originally from, in a place called Ballerat. He related to us how 5 or 6 of his childhood friends have died because the hospitals in Ballerat did not have enough doctors or beds to treat patients, especially those with terminal chronic diseases. Perhaps the stories about bureaucratic inefficiencies are true for healthcare in Germany, the United Kingdom, France, and Canada. We discussed how the government cannot take the place for the irresponsible choices of others; instead of having multiple cell phones or cable television, people should sacrifice those to pay for health insurance. Kevin spoke further that is would be a dream for the Obama administration to think that they can provide healthcare at the very high level it is right now to everyone without bankrupting the nation. When our President was campaigning he captured the hearts of millions with his message of hope and change, but change does not always mean an improvement. Civil unrest will ensue as this landslide of debt continues to mound.
However, the government’s efforts may not be hopelessly inefficient as it may seem. Jeff Harrington spoke about the returns on government initiations in healthcare and education are meant to pay off approximately $2-5 for every $1 invested. If the 47 million uninsured in America get access to health insurance, people will take less sick days, will earn more and, therefore, consume more, circulating more money through the economy. Also, the government, along with its string of failures, has had its strings of successes as well as a regulator of public industries. A case in points, continued Jeff, was the government subsidization of thousands of acres of land to the railroad companies in the 1880s, which may seem like a heck of a bargain for the railroad companies. What did the government ask in return? Only free access to use the railroads for free for the next, oh say, ONE HUNDRED years! So the government programs of the past have been successful, and this may be the case for the Obamacare Health Plan as well.
Will China Sell the U.S. Treasuries on its Books?
In one word, No. Selling U.S. Treasuries would wreak asset values for Chinese companies significantly. Also, China cannot afford to put tens of millions of Chinese workers out of jobs, as this action would certainly result accordingly. However, when China can sustain a self-standing economy and its military might can parallel those of industrialized nations, they may seek a greater rate of return with Eurodollars rather than the pitiful rate provided at the moment by U.S. Treasuries.
Problem of a World Currency
Recently, China’s Finance Premier, Wen Jiabao, expressed in a public statement the possible need to create a world currency so as to avoid the recent fluctuations in the yuan, which is pegged to the rapidly depreciating U.S. dollar. There is principally one problem with this thesis. Let’s take the case of the Euro: The United Kingdom is a member of the European Union, but it is not participating like the other European counties in issuing their currencies into Euros. The reason is that when two countries combine currencies, there is a transfer of wealth from the rich to the poor countries. This is, of course, a situation a country like the United States would object to, so it probably would not happen, except as a result of some economic calamity that left the world no other option.
The Fall of the American Empire
Phil Garcia explained that no matter how far in history you go from the Egyptians to the British, empires have risen and fallen, and the American empire is going to be no different. In fact, this country is already giving indications of a fall: mass printing of our currency, $1.2 billion of credit card debt, $13 trillion government deficit, etc. Tommy Schultz also added that most people, in general, are concerned with short-term gains, and do not take in the long-term consequences of their actions. This prevailing attitude is always what wrecked empires of the past and will lead to this nation’s eventual downfall as well.
The Up and Coming Indo-Chinese War
The emerging superpowers of China and India do not bode well for either. Their proximity by land and water makes for some potentially dangerous encounters. The Indian navies control the Bay of Bengal while the Chinese navies control the South China Seas; the two bodies meet on the Southeast Asian peninsula. Shelley Gomez, a native of India, noted that India has always worried about China more than Pakistan, as China has more power than Pakistan and is also close allies with it.
China’s Acquisition of Raw Materials
China has been scrambling to acquire raw materials by becoming close allies with resource rich countries like Angola, Sudan, Myanmar (oil), etc. In regards to the recent ethnic riots in China involving the Urumqi the Chinese government flooded the area with Han Chinese to take advantage of oil and coal reserves there.
The Era of Unreasonable Returns
Phil Garcia went through the last century and detailed us on the changes in perception of a reasonably good return on investment.
- After the Great Depression a 7-15% rate of return was fantastic
- A change occurred from 1997- April 2000, greed factor heightened returns and it was not uncommon to expect 100% - 1000% returns per annum
- A second bubble occurred from 2001 to July 2007 with the real estate crisis
All this turmoil has led the investors to become very scared of the market and to sell good, solid companies vastly under true values.
Peter Lynch was and IS still right!
“Buy companies that your friends are using.” – Peter Lynch
Some potential plays include the following:
- Kodak (EK) at $2.84
- American Airlines (AMR)
- Merck (MRK) – Dividend yield of 5.7%
- The Big Three (Banks, not Autos) – JP Morgan Chase (JPM), Bank of America (BAC), Wells Fargo (WFC)
- Chinese Healthcare Companies (with consumption of meats, cigarettes, fast food, and pollution people will be getting sick)
- China Construction Bank (CCB) – large insurance companies and Prince Alwaleed Bin Talal have taken large blocs for themselves
- China Mobile (CHL) – Dividend yield of 5%
- Pepsi (PEP) – Dividend yield of 2.2%
Gold and Silver – What Will Happen Next?
Phil Garcia talked about gold forming a bullish pattern and rearing to break through the $1,000 price resistance mark. Kevin added that silver will probably outpace gold in terms of percentages as it is selling at historically low ratios to gold. Below is the chart for gold:
For your hearing, below is a link of the audio recording of the meeting. Enjoy!
http://rapidshare.com/files/255191224/July_12th__2009_Meeting.mp3
Simulated Portfolio
| Date | Security | Entry | Current Price | Profit/Loss |
| July 12, 2009 | FXI (iShares FTSE/Xinhua China 25 Index | $25.16 | $36.87 | $1,171 |
| July 12, 2009 | ILF(iShares S&P Latin America 40 Index) | $26.60 | $32.41 | $581 |
July 12,2009 | EWZ(iShares MSCI Brazil Index) | $37.69 | $49.35 | $1,166 |
| July 12, 2009 | PBJ(PowerShares Dynamic Food & Beverage) | $13.27 | $12.95 | -$32 |
| July 12, 2009 | GUR (SPDR S&P Emerging Europe) | $29.74 | $27.96 | -$178 |
| July 12, 2009 | FCX (Freeport-McMoRan Copper & Gold Inc.) | $29.06 | $46.64 | $1,758 |
| July 12, 2009 | WLT (Walter Industries – metallurgical coal) | $38.75 | $36.04 | -$271 |
| July 12, 2009 | RIO (Companhia Vale do Rio Doce – gold mining) | $13.12 | $16.12 | $300 |
| July 12, 2009 | GVA (Granite Construction Inc.) | $35.67 | $30.59 | -$508 |
| July 12, 2009 | MT (Arcelor-Mittal ADR) | $26.25 | $29.70 | $345 |
The next meeting will be on Sunday, August 2nd, 2009. For those who have not attended a meeting, but would like to attend, please email your wish to VJ Arjan at scarletkings@gmail.com
OBAMACARE
ReplyDeleteYou write that one participant "spoke about the returns on government initiations in healthcare and education are meant to pay off approximately $2-5 for every $1 invested."
Unfortunately, government programs usually end up costing much more than government officials planned.
* * *
You continue: "If the 47 million uninsured in America get access to health insurance, people will take less sick days, will earn more and, therefore, consume more, circulating more money through the economy."
This claim assumes incorrectly that lacking health insurance is the equivalent of lacking medical care.
Out of this 47 million people, 38 percent are uninsured voluntarily. They earn enough income to pay for health insurance but choose not to pay for it. For them, paying for their medical care out of pocket is less expensive.
The remainder of this 47 million people are involuntarily uninsured. They are young or a high-school dropout or unemployed or illegal. They routinely obtain medical care in clinics and emergency rooms. And they frequently don't pay for it.
SUBSIDIZING RAILROADS WAS A BAD IDEA
ReplyDeleteYou also write, "the government, along with its string of failures, has had its strings of successes as well as a regulator of public industries. A case in point ... was the government subsidization of thousands of acres of land to the railroad companies in the 1880s ...".
The example of railroads actually illustrates the mess the government creates when it provides subsidies. As Burton W. Folsom, Jr, explains, "While some of this rush for subsidies was still going on, James J. Hill was building a transcontinental [railroad] from St. Paul to Seattle with no federal aid whatsoever. Also, Hill's roads were the best built, the least corrupt, the most popular, and the only transcontinental never to go bankrupt. It took longer to build than the others, but Hill used this time to get the shortest route on the best grade with the least curvature. In doing so, he attracted settlement and trade by cutting costs for passengers and freight" (pp.17-18, The Myth of the Robber Barons, 1987).
Folsom, Jr., continues: "Hill criticized the grab for subsidies, but here is the ironic twist: those who got federal aid ended up being hung by the strings that were attached to it. In other words, there is some cause and effect between Hill's having no subsidy and prospering and the other transcontinentals' getting aid and going bankrupt. First, the subsidies whether in loans or land, were always given on the basis of each mile completed. In this arrangement, as we have seen, the incentive was not to build a quality line, as Hill did, but to build quickly to get the aid. This resulted not only in poorly built lines but in poorly surveyed lines as well. Steep gradients meant increased fuel costs; poor building meant costly repairs and accidents along the line. Hill had no subsidy, so he built slowly and methodically. 'During the past two years', Hill said in 1884, 'we have spent a great deal of money for steel rails, ballasting track, transfer yards, terminal facilities, new equipment, new shops, and in fact we have put the road in better condition than any railway similarly situated that I know of ...' Hill, then, had lower fixed costs than did his subsidized competitors.
"By building the Great Northern without government interference, Hill enjoyed other advantages as well. He could build his line as he saw fit. Until Carnegie's triumph in the 1890s, American rails were inferior to some foreign rails, so Hill bought English and German rails for the Great Northern. The subsidized transcontinentals were required in their charters to buy American-made steel, so they were stuck with the lesser product. Their charters also required them to carry government mail at a discount, and this cut into their earnings. Finally, without Congressional approval, the subsidized railroads could not build spur lines off the main line. Hill's Great Northern, in contrast, looked like an octopus, and he credited spur lines as critical to his success" (pp.29-30, Ibid.)
The major lesson of the railroads is this: "If the government had not subsidized a transcontinental, then private investors like Hill would have built them ... Hill's achievement shows that it would have been done, only at a slower (but more efficient) pace" (p.31, Ibid.).
Because the government did subsidize a transcontinental, the nation incurred the following costs. First, "the loss of shipping with an inefficent railroad was permanent" (p.31, Ibid.).
Second, "the giving of subsidies to one established a precedent and resulted in the giving of subsidies to many" (Ibid.).
Third, "the granting of all this land, and money too, made for shady business ethics and political corruption" (Ibid.).
And, finally, "the publicizing of shoddy construction ... angered consumers; and angry consumers pestered their Congressman to regulate the railroads. Much of the regulating, however, had unintended consequences and made the situation worse" (p.32, Ibid.).
Jason - As usual your level of scholarship and thoroughness in laying out your arguments is amazing. Thanks you for the insights and I will probably use some of your comments to insert into the blog as valid counterpoints to our arguments...
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