Unemployment Report
We started by discussing on the unemployment report released on February 3rd by the Bureau of Labor Statistics. The main thrust of the release was that the official unemployment figures dropped from 8.5% to 8.3%. VJ Arjan bought a copy of the report and summarized the main points:
- Non-farm payroll employment grew by 243,000 with the largest gains occurring in the professional and business services, leisure and hospitality, and manufacturing industries
- An interesting note, over the last 2 year, the country has added 418,000 jobs in manufacturing.
The market rallied on that day reaching fresh near-term highs.
This was not, of course, what was expected. What was expected is that the loss of seasonal employment during the holiday season would have led to a much more conservative figure. It turns out season employment remained relatively unaffected.
So comes the question, is the U.S. economy surfacing out of the woods at last?
Kevin thinks that these reports, although an additive to investor confidence, are very unreliable and are estimates at the very best as the report does not count the levels of income. For example, we have all known many people who, having no choice, took a 50% paycut from the job they were recently laid off. In other words, the levels of income, which is not accounted for, is also an important factor in the recovery, and this, ultimately, is difficult to glean a report that only counts whether one is or is not employed.
Here is the direct link to the report: http://www.bls.gov/news.release/empsit.nr0.htm
Eurozone Circus Act
The crisis in the Eurozone was long in coming as Kevin recounted his days as managing partner in several European enterprises. He recalls particularly how the executives of an Italian firm had little care about the meaning and repayment of debt and as a consequence lived lavishly with little “net worth”. Their attitude was that they did not need to worry about their debts because that was the bank’s job.
Furthermore, the corporate culture in Europe has worked for many years on the good ‘ol boys network in which it is the connection rather than the merit of a person that enables one to move up or down the ladder.
It is easy to see how the trickle-down effect of this attitude might occur to the rest of society and how the sovereign debt problem we are seeing today had its inception several decades ago.
Ryan then brought up several insights from Michael Lewis’ The Boomerang in which the author describes the so-called “arduous professions” like a hairstylist, barbers, and writers who are entitled to receive retirement benefits as early as 50-55 years.
In addition, Germany may partly be to blame for the excessive debt levels of the PIIGS. As it has a very large manufacturing base, it has for decades been a net exporter to other European countries, in turn creating a trade imbalance in the importing nation. As it is, Germany may have turned a blind eye when other sovereign entities abused their credit so long as Germany was not directly economically threatened by it.
As the fortunes of these countries are inextricably tied, it is not surprising that Chancellor Merkel is willing to be the captain that goes down with the ship. For if these countries crumble, so will Germany.
The question is how will the Union be saved? Jeff mentioned that Greece may become the Bear Stearns of the Eurozone and become the example of how other struggling nations will be treated.
Obama-Clinton 2012
“One falls upon one’s sword.” - Plutarch
Kevin re-iterated that if President Obama’s position continues to be threatened by the coming GOP candidates, as not doubt he will be, then Secretary Clinton may, for the good of the party, put herself on the ticket as the vice-presidential running mate.
Kevin mentioned that she has relayed, conveniently, that she will not re-run for the Secretary of State position. She has, no doubt, done a phenomenal job as Secretary of State and that ticket would be unstoppable.
The strength of the contest will be the object of our watch.
The Dying and Emerging Industries
VJ discussed his epiphany about the decline of the print and paper industry. As content continues to reach its audience electronically, soon there will be a time when business and leisure are conducted online. This spells a major blow, possibly the death knell for the print industries, not to mention the effect on the ink and lumber industries. The proliferation and super-low cost production of LCD screens, and soon flexible-glass LCD screen that can be rolled up with will only hasten this trend.
Also, another trend which looks like will continue is the increased sophistication of artificial intelligence. This is inevitable as the force behind texting-and-driving is probably going to just get worst. All it will take is for a visionary individual to lead a team of engineers to create a smart-car, in other words, a car that drives by itself and can even communicate with other cars to avoid accidents, etc.
Already, the large healthcare companies are experimenting with nano-bots that can be released into the bloodstream to tackle issues like cholesterol and heart disease.
There is emerging technologies that can map neural pathways and translate them into commands. The implications of this technology are that, in the future, it will be our thought rather than a remote control that the TV will respond to.
Jeff pointed out that there have been new breakthroughs made in the ability to grow organs as a way to replace inorganic prosthetics.
Bottom line, for those doom-and-gloomers, there are ways to innovate ourselves out of this trench; the machine of capitalism and innovation has not yet come to a rest.
Interest Rates
Jeff pointed out the government’s extension of easy monetary policy until 2014-2016. They will do this by selling long-term and buying short-term treasuries making the yield curve slope upwards.
As a result, he also pointed out that there is a sense of optimism at least for the near-term future of the US, however, he is afraid that the quantitative easing will help improve the country’s income statement while leaving its balance sheet in shambles.
Alternative Energy: Bet On Natural Gas
Nuclear energy has been discredited, at least for the near-term, by the fiasco in Japan last year.
The only viable remaining players are wind and geothermal, the latter which, for the moment, cannot be transported.
So that leaves natural gas as a very viable option and Jeff anticipates that the great quantities of natural gas resources in the US, which is stuck in shale, will be tapped in the next few years to meet the “hungry-for-energy China” and the other emerging markets’ demand for energy.
Emerging Markets and the China Bubble
We discussed whether or not the Emerging Markets still pose as good investment opportunities given that they have not fared well during the past year. It seems that the ‘Emerging Market crowd' will look at what is occurring in China for their opinion and there are definitely some uncertainties about the near-term future of the Chinese economy.
Kevin and Jeff mentioned one of the great issues in China at the moment is that Chinese investors cannot invest abroad and can only be re-invested in Chinese companies, effectively leading to a bubble regarding asset prices. This is one reason why many of the wealthy Chinese are leaving China to escape the coming of this bubble.
Jeff noted furthermore that the Communist Part in China will tie its hopes to the prosperity of the country’s economy and should it sputter, like it may well do soon, it will lose its credibility to the people, which may signal the challenging of a one political party system.
Of course, over the very long-term, China and the emerging markets, who are net exporters, are expected to do well, but there may be some rough bumps in the short-term.
I.O. U.S.A
If you are not still convinced of the total seriousness of the U.S. sovereign debt issue or are looking for more clarity on the subject, the following video is a very instructive documentary.
Just like The Roman Empire and the British Empire, it will be the abuse of credit and not the threat of any foreign invasion that will lead to the collapse of the American Empire.
Lesson Learned: How To Watch For Accounting Fraud
VJ Arjan was discussing the horrible investment he made in AgFeed, a hog manufactory in China, that is probably going to declare bankruptcy soon. It turns out that although a good market story (hogs are 40-50% of China’s meat consumption), it could not run profitably, even as revenues increased and finally succumbed to “cooking the books” or engaging in potential accounting fraud.
He asked Jeff and Ryan what they do to recognize accounting fraud in their investments and they mentioned the following things:
- Use Altman’s Z score – traditional tool for assessing bankruptcy percentage
- Use M score – tool to detect earnings manipulation
- Be careful in reading revenue recognition methods the firm is employing – more transparency is better, and it is usually a concern when management is not totally open with its company’s shareholders
- Listen to company conference call – this is a more “gut instinct” procedure, one can often pick up the vibe from management in the call
The next meeting will be on Sunday, March 4th, 2011.
For those who have not attended a meeting, but would like to attend, please email your wish to VJ Arjan at scarletkings@gmail.com
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