We had a very insightful meeting at On The Border. We had 5 attendees: (from left to right) RJ Tang, Ry Zamora, Jeff Harrington, Kevin Day, and VJ Arjan.
The Market and The Return of Housing
As mentioned in the last month's meeting, both Kevin Day and Jeff Harrington pointed out that things seem rosy over the next year. Most economic indications suggest that with the Fed's constant buying of MBS's (mortgage-backed securities) at the tune of $85 billion per month, there seems to be a Fed-induced rally in the works here as cheap liquidity continues to flood the market.
It is not surprising, VJ noted, that were are back to merger and acquisition mania with several large cap mergers and buyouts happening at this time, the largest of which occurred recently with the merger of American Airlines and United Air and Berkshire Hathaway's $28 billion buyout of Heinz.
VJ pointed out, however, that the future of quantative easing seems uncertain given the mixed signals we are receiving from the Fed. On the one hand, Janet Yellen, largely known to be the successor of Ben Bernanke, issued a statement that it is a virtual certainty that quantitative easing may continue to occur for the next 2 years; on the other hand, there is dissension among the FOMC members, particularly Dallas Fed president Richard Fisher and St. Louis Fed president James Bullard, on whether this is a policy that will do more damage at this point than good.
VJ posed the question regarding what may occur regarding quantitative easing and whether it is likely to continue. Kevin pointed out that given the still-shaky recovery we are enduring, it is likely that the Fed MBS purchases will continue until at least the end of this year.
In his view, the large-cap banks should continue to do better and better as the year goes on; in particular he mentioned Wells Fargo and JP Morgan Chase as potential investments in this sector.
Also upon being asked whether he sees a 1987-crash happening, he mentioned that given the enormous amount of money sitting on the sidelines, he does not think that this is likely at the moment.
Jeff has been saying for quite a few meetings now that he is seeing a recovery in housing and it looks like we are seeing his predictions unfold now. According to the S&P Case-Schiller index (provided above), house prices nationwide rose at an annualized pace of 7.3% during the fourth quarter of last year. Jeff also mentioned the economy is further bolstered by corporate profits that have skyrocketed; they are 30% higher now than in 2008.
The consensus has been for some time now, at our meetings, that the key to lowering unemployment is to kick-start housing, and, not surprisingly, this past Friday, the unemployment rate dropped down to 7.7%.
Of course, there will always be some cloud looming in the horizon that could lead to another crisis as the stability of the world economy, like the immune system of a cancer patient, is still very fragile.
China - A Different Perspective
RJ Tang, who is originally from China, gave the China bulls a totally different perspective that certainly led to contemplation about the perceived strength of the current and future world power. There is plenty of literature and news, not only on this blog, but all over the financial community about the rising tide of China.
In all fairness, Ry Zamora had been talking about these very same things in previous meetings, but this time we had more specifics and took more notice thereof.
According to RJ, however, he sees tremendous issues with this impression and he gave 3 principal reasons for this:
1. China has extreme political instability - In fact, he believes that it is conceivable that in the year 2024, there could be a civil war in China. VJ remarked that his understanding is that there is a large constituency in China from the old Communist days, who are primarily farmers, who feel totally disenfranchised by the rise of "capitalism" in China, which has taken center place on the world stage. If there is a civil war, it would be between these two factions.
RJ, however, believes that the reason for the civil war would have little to do with any of that and it would be more territorial and mostly about who controls what than anything else, in a sense like tales in the Chinese epic "Romance of the Three Kingdoms". He brought up the Bo Xilai scandal as proof of this kind of mentality, which he says is more rampant in China than is publicised in the West.
He also has reasons to believe that China will become increasingly more hostile to other countries and things will come to a head during the next 10 years. The reason for this is that from now until the next regime change that occurs in 2024, RJ has very little faith in the current Chinese General Secretary, Xi Jinping (successor of Hu Jintao), who is known for being very hostile and belligerent towards those who threaten Chinese interests. RJ also believes that there may be a potential military conflict between China and the US in the South China Seas, mostly regarding the oil routes that come from the Middle East to China.
He mentioned that even though it will be a skirmish that China may eventually win, he does not see China rising into a formidable military power, like the US is at the present.
2. China presents, at times, dubious investment opportunities - He believes that investors should be very cautious investing in Chinese companies that are considered small-to-mid-cap as the accounting standards of these firms are miserable, therefore rampant corruption is common.
He also believes, however, many of the large-cap companies are actual legitimate businesses and can present good investment opportunities for the investor as these companies are under much harsher scrutiny. These include the HSBCs (Hong Kong Shanghai Banking Corporation) and China Mobile's, etc.
3. It is time for a bear market in China - RJ mentioned that the Chinese economy has been in basically a bull cycle for the last 30 years and it is surely time that there is some reprieve to this movement. It may be that there may not be a sharp and sudden sell-off, but growth figures can certainly be much lower than the 8-9% we have come to expect from China.
So, he believes that China could go into a cycle wherein either there is a bear market or a sideways movement for a considerable period of time.
If there is any question about what China is about to do into, look at the droves of wealthy Chinese who are leaving or endeavoring to leave the country. Certainly, the country's insiders ought to know what is really going on and that could be a telling indication to us.
For big China bulls, this perspective certainly asks us to question our assumptions about China. Only time will tell, but certainly there are many aspects that could be re-examined.
Food Optimization
"Caveat emptor" - (Latin for "Let the buyer beware")
The next time you stop by the junk food aisle at your neighborhood grocery store, beware. For if you look closely you will see the profit-hungry wolves of the Food companies roaming about those aisles.
The amount of money and research that has gone into that delicious junk food, if one knew, is staggering and would be a clarion call to attention.
Attached is a link to an article in the New York Times that VJ had recently read. It is well worth a read, if one has not read it.
The gist of the article I have re-created in the excerpt below:
"In the process of product optimization, food engineers alter a litany of variables with the sole intent of finding the most perfect version (or versions) of a product. Ordinary consumers are paid to spend hours sitting in rooms where they touch, feel, sip, smell, swirl and taste whatever product is in question. Their opinions are dumped into a computer, and the data are sifted and sorted through a statistical method called conjoint analysis, which determines what features will be most attractive to consumers.
(speaking of flavorful foods) Consumers quickly grew tired of them. On the other hand, mundane foods like white bread would never get them too excited, but they could eat lots and lots of it without feeling they’d had enough.
This contradiction is known as “sensory-specific satiety.” In lay terms, it is the tendency for big, distinct flavors to overwhelm the brain, which responds by depressing your desire to have more. Sensory-specific satiety also became a guiding principle for the processed-food industry. The biggest hits — be they Coca-Cola or Doritos — owe their success to complex formulas that pique the taste buds enough to be alluring but don’t have a distinct, overriding single flavor that tells the brain to stop eating."
For your convenience, I have listed the link to the full article here: http://www.nytimes.com/2013/02/24/magazine/the-extraordinary-science-of-junk-food.html?pagewanted=all&_r=0
Sequester Soap Opera
Jeff brought up the scandalous haranging of the sequester issue by members of Congress, which indicates ad confirms to him the total disfunction that occurs there. Interestingly enough, the whole sequester issue is only a mere 2.3% of the federal budget and yet, unless one has been living in a cave, it has been a non-stop barrage about how big of a deal this is.
And yet - there are much greater issues that Congress can tackle and can address and these are compromised so that each party can go into power-mongering mode.
In his view, it is the ignorance of the citizens and the sheer force of the media to "feed their truth" that continues to perpetuate these circumstances. As an example, Jeff pointed out that regarding healthcare, it is a fact that 5-10% of all those who receive healthcare account for 85% of the costs, but most people would not know this.
Jeff feels that if this circus continues to proceed than most likely the skirmishes on the political field will have no choice but to spill over into the economic field and will lead to very dire long-term political and financial consequences. Like it is mentioned in Proverbs, "A house divided amongst itself cannot stand."
Apple - Where to from there?
Kevin Day posed the question regarding where Apple might be going from here and there were varied responses. Some members mentioned that due to the enormous amount of cash sitting on the sidelines, perhaps there may be indicative of limited growth opportunities for Apple. Others stated that, there was more to the iPhone and the iPad than just the vision of Steve Jobs and that it may be prudent to not underestimate the company's ability to innovate without its great leader.
At the end of the conversation, however, RJ mentioned that the real innovator during the next decade will not be Apple, in his view, but Google. Jeff mentioned to us that Google's greatest innovation so far has been to own the personal information on its users - this data is absolutely priceless and, in a sense, Google has as close to a first-hand account of understanding its consumers than most other companies. VJ mentioned that Google announced the release of its Google Glass, which is you haven't seen and haven't been blown away by it, it may be a good idea to see it for yourself (video provided below):
Potential Investments
Oracle (ORCL) - Kevin mentioned he had invested in this tech giant a couple months ago and it has done well for him, having gone up 10% within the last 2 months alone.
Wells Fargo (WFC), JP Morgan Chase (JPM), Financial Select Sector EFT (XLF) - Kevin has been a buyer of financials for some time now
Agilent Technologies (A) - Ry brought up this stock as a growth story in the biotech field.
3D Systems Corporation (DDD) - Jeff brought up this stock that manufactures with 3-D printers as a growth story.
Citrix Systems (CTXS) - VJ mentioned this stock as a potential growth play. The company creates virtual hard-drives that are being used by companies en masse.
The next meeting will be on Sunday, April 7th, 2013.
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
