We had a thought-provoking and thoroughly enjoyable meeting at BJ's. We had 3 attendees: (from left to right) VJ
Arjan, Elena Swindull, and Ry Zamora.
Economy in Catch-22
 |
| (Protestors in Detroit) |
We
started the meeting discussing the differing opinions that exist within the
investor community about where the economy is headed.
A
recent Wall Street Journal article explained that the "U.S. economy is in
neutral". It went on further that unemployment
claims reports as well as clearly disappointing earnings from companies like
Microsoft (MSFT) and McDonalds (MCD) indicate not only slower growth, but also
soft consumer spending, and lagging job growth.
Not
to mention that over the last month Detroit became the largest city to file for
bankruptcy in American history. There
may or may not be a domino effect, as Detroit had it coming for some time
now. Bankruptcy was an
inevitability. Whether or not there will
be contagion, time will have to tell.
On
the employment front, VJ explained that the Bureau of Labor Statistics reported
payroll employment increases of 162,000 in the month of July. Economists estimate that there need to be
between 110,000-144,000 jobs that need to be created to keep pace with
population growth. So this increase in
employment is barely moving the unemployment needle downward. And this is after the Federal Reserve has
taken out their bazookas and gone on money-printing galore for the past 4
years.
Ry
added that a large part of the so-called increase in payroll employment
consists of part-time jobs and was quick to point that these reports can be
misleading as they do not report the income-levels of the jobs that were
created. In an interesting turn of
events, he continued, the older and now-unemployed workforce is competing for
jobs that were in many cases taken by teenagers in high school and
college. This increased
"competition" has meant that a large portion of the unemployed are
now under the age of 25.
Growing Problems in China
 |
| (Tianduchang, the Paris in China) |
There
has been a long-standing concern about the coming slowdown in China. Several of our attendees like Ry and RJ Tang
have mentioned that the investor perception and the reality of China are very
different.
It
has also been mentioned that real estate prices are approaching or have already
approached bubble like levels. Jeff
Harrington in previous meetings has mentioned that China has a vast network of
shadow-banking practices, which will only exacerbate the effects of the
slowdown.
For
another stark delineation and confirmation of this problem, one has only to
look at the city of Tianduchang. It was
intended to be the Paris,France in China.
It even has a replica of the Eiffel Tower and the apartments are
fashioned in typical Victorian architecture.
The
city of Tianduchang, which was built to house 150,000 people, today is a ghost town that has a mere 2,000 inhabitants.
Another
problem that very few people are discussing is the coming class warfare in
China. VJ mentioned that from his
researches the current class structure in China, although Communist on the
surface, behaves very much like the Confucian class system that was instituted
thousands of years ago. It is,
therefore, accepted that society be subdivided into class systems.
 |
| (Confucius) |
In
the 1950s, Mao heavily criticized this structure and several landlords were
executed during the Cultural Revolution.
Today,
there still exists the divide between the current "capitalist" and
"class-structured" Southern China, which is the industrialized and
urbanized part, and the Communistic, agrarian and rural Northern China.
This
may be another struggle that comes to a head.
It may not do so immediately, but a civil war may indeed be in the cards
in the near-term future.
The Buffett Rule
 |
| (Warren Buffett) |
Ry
after reflecting some more on his trip to Omaha, Nebraska to the Berkshire
Hathaway Shareholder's Annual Meeting shared a poignant insight with us.
The
real reason that no fund manager has been able to replicate Warren Buffett's
investment returns or his investment model is because the most important key to
this fortune has been that Buffett is an excellent judge of character and
maintains personal relationships with the managers at each of the companies
that Berkshire owns.
Interestingly
enough, although Berkshire owns the companies like Geico and Dairy Queen, he
does not directly manage the business, instead trusting the companies managers
to do that job for him. The most
involved he gets in the business side of things is to have a seat on the board.
It
sheds another component into what it takes to be a successful fund manager - a
great judge of people and their intentions.
It is, in Ry's opinion, this intangible that distinguishes, for example,
whether or not one can tell if a CEO is lying or is misleading investors during
a conference call.
The
value in the character of the people managing the business is enormous, as
Buffett's model has successfully shown.
Very few of his companies have frequent corporate restructurings and
constant shuffling of executives, etc.
Emerging Industries and the Evolution of Innovation
With
all the pessimism about how the sputtering economy, we discussed the incredible
and exciting things that will shortly hit the market. Here are some key insights on our
conversation about the emerging industries of the future.
Elena
started out with the personal flying jet pack.
A company in New Zealand called Martin Jetpack has built and will
shortly be selling personal flying jet packs. If anyone has not seen this remarkable video,
it would be well worth the watch. The
possibilities are staggering.
Ry
mentioned a device called Leap Motion which enables the user to control an
interface using just his/her hands or fingers.
It is very much like in the movie Minority Report. See the video below.
VJ
mentioned a BBC documentary called "Tomorrow's World" in which there
were several emerging industries such as the uses of graphite for strength and
conductivity, genetically modifying cyano-bacteria to produce
environmentally-friendly ethanol, and inserting nanobot polymers that can
deliver medication to a specific section of the body and then dissolving itself
completely.
In
"Tomorrow's World", it is explained by numerous innovators that the major
inventions of tomorrow will most likely be by collaboration rather than by
individual efforts as tomorrow's inventions will required experts in multiple
fields. With the advent of the internet,
such complex problems like cleaning up the BP oil spill, were successfully
solved by freely sharing knowledge with several experts in various fields around
the world to come to elegant and simple solutions.
In
fact, even governments will end up collaborating and contributing to this innovating
process. As large as the government has
grown and as much ineffectiveness (and even disdain) we at the Scarlet Kings attribute
the government agencies for, there are certainly some positives that have come
as a result of public funded projects.
For
instance, although people commonly give Steve Jobs his fair share of credit in
popularizing the iPhone, most people either do not know or do not give due credit
to the fact that many of the technologies that the iPhone and other smartphones
rely upon were first funded by the Central Intelligence Agency (CIA) and the
Department of Defense (DOD) like the internet, GPS, microchips, multi-touch
user interface, etc.
The Concept of Shame
 |
| (Toyota executives after a major auto problem recall) |
As
a student of the world and the cultures and the histories that make up its
various people, VJ has long had an interest in foreign films which are windows
into these worlds.
He
recently watched a very fascinating movie called Tokyo Sonata, which made very clear what is and is not considered acceptable and
what values are important for the Japanese culture.
It
is a fascinating and humorous story about a man, Mr. Sasaki, who becomes
unemployed and about his quest to hide this fact from his wife and family
because the shame is too much to bear for him.
Every
day, even though he does not have a job, Mr. Sasaki wakes up early in the
morning and gets dressed pretending to go to work, all the while malingering
all day at the employment offices and standing in charity lines for food.
It
showed how closely the Japanese valued their self-pride and dignity, especially
in regards to their working occupation. Even
though the Japanese work some of the longest hours in the world their occupation
provides them with a sense of identity.
Assuredly
so, there must be such values in every culture and it would be prudent to be
mindful of this reality.
Potential Investments
Iridium
Communications (IRDM)
Ry mentioned this stock as a growth play. It is a provider of mobile voice and data
communications that especially services government satellites. Ry suggested that should it secure a large
contract that is in the pipeline, it should jump to $12 a share, in his
estimation. It also might not be a bad
idea to buy a put on the position as a fail safe.
Tesla
Motors (TSLA)
VJ mentioned an Barron's article that criticized the high battery
cost in Tesla Motor's electric cars that can become a sore thumb for the company's
future profits. Although they declared a
profit that blew away analyst expectations, it is currently trading at a
Price/Earnings of 103. May be a
candidate for a short once the buying momentum stops.
Teva
Pharmaceuticals (TEVA)
Ry mentioned this as a growth play in the
pharmaceutical industry.
Biotechs
- Elena and VJ had a conversation recently with a mutual friend of ours who
works in the biotech field who mentioned that the majority of biotech start ups eventually fail. Individual biotech companies can be a good candidate for short positions once the initial euphoria
has run its course.
Good Reading Sources
We
all discussed where we can get additional "non-CNBC" and
"non-Mad Money" good sources of economic news. We came up with the following list; feel
free to leave comments with your own sources:
-
Fast Company: http://www.fastcompany.com/
- Euro-nomics: http://euro-nomics.com/
-
The Big Picture: http://www.ritholtz.com/blog/
-
Reformed Broker: http://www.thereformedbroker.com/
-
Caixin (Chinese news feed for people foreigners): http://english.caixin.com/
The
next meeting will be on Sunday, September 8th, 2013 (due to the Labor Day holiday
on the week preceding).
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 it seems 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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