Are Markets Efficient?

David Booth thinks so, as explained in this FT article.  I tend to agree with a lot of what he says, especially quotes like this:

“If you look in the mirror and you don’t see Warren Buffett, you’re probably better off in an index fund.”                 -David Booth 

Week In Review

The week that was:

During a holiday-shortened week, stocks were mostly down as investors awaited Black Friday results from the retail sector.  In other news, European sovereign debt worries have resurfaced in recent weeks.  An agreement on aid to Ireland of about $113 billion is expected to be finalized later this weekend.  Portugal and Spain appear to be ready to take their turn in the sovereign debt spotlight next.  Spain’s funding needs are far larger than those of Ireland or Greece, as it is the fourth-largest economy in the euro zone.  Over the next three years, Spain will need approximately EUR 350 billion to roll over existing debt and fund deficits.

Expert network firms, which help investors do deep research by connecting them with consultants, have found themselves in the middle of a massive insider-trading investigation.  Federal authorities are conducting a criminal probe to find out whether inside information was passed along by consultants who work for these expert networks.  Major investment firms like Janus, Wellington, Citadel, and SAC have received subpoenas in the case.

According to the Labor Department, the number of U.S. workers making an initial claim for unemployment benefits dropped last week to a seasonally adjusted 407,000, the lowest level since July 2008.  The decline was considerably bigger than what analysts had expected.  The number of unemployed works who were already receiving benefits fell to 4.18 million, the lowest rate in two years.

Stocks:

The S&P 500 fell 10.33 points this week, or 0.86%, to 1189.40.  The Nasdaq Composite rose 16.44 points, or 0.65%, to 2534.56.  The Dow Industrials fell 111.55 points, or 1%, to 11092.00. 

• Bank of America (BAC) might be on the hook for billions of dollars because of mortgage-documentation problems it took on when it acquired Countrywide Financial in 2008 according to testimony from a recent lawsuit.  BAC stock was down 8.25% on the week.

Bonds:

End of week bond yields:

3 Month yield = 0.14%, up 3 bps from last week.

6 Month yield = 0.19%, up 2 bps from last week.

2 Year yield = 0.52%, up 1 bps from last week.

30 Year yield = 4.21%, down 3 bps from last week.

What to look for next week:

9:00 AM          Wednesday     ISM Manufacturing Index

9:00 AM          Thursday         Pending Home Sales Index

7:30 AM          Friday              ISM Manufacturing Index

International Investing with ETFs

Not to pat myself on the back, but after reading this post on Turkey's outperformance as compared to other emerging markets, I couldn't help but feel good about being right about this post from months ago.

Allright, enough with the back-patting.  The point is that TUR has had a great run and it might be wise to trim part of that position.  From a long-term perspective, however, TUR fits into the international equity portion of a portfolio nicely.  I am currently targeting at least 50% of my portfolio overseas.  I achieve that allocation through a combination of VEA, VWO, GWX, RWX, EWX, country ETFs like TUR, and ADRs.

Global Debt Levels

Here is an interesting graph from the Economist comparing debt levels worldwide from 1932 to 2009:

A Logistics Dream Stock-Pick

I have a friend who works in supply chain management.  This friend is quite fond of himself and often assigns himself nicknames to support his ego.  After finishing a project recently, he proclaimed himself to be "The Logistics Nightmare."  While self-proclaimed nicknames can often be humorous, the business of logistics is no laughing matter.  In an increasingly complex global economy, improvement in economic performance can oftentimes be directly attributed to improvements in supply chain management and logistics, which leads me to the topic of this post:  a leading company in the logistics space.   


Expeditors International of Washington, Inc. (EXPD) has benefited over the last year from a global rebound in freight shipping, but has further room to run and is well-positioned over the long-term as a global leader in shipping logistics.  The company is characterized by a high quality management team, a strong balance sheet, high free cash flows, high return on invested capital, and a sustainable competitive advantage.

EXPD is involved in the business of providing global logistics services.  More specifically, EXPD consolidates and forwards air and ocean freight, acts as a customs broker, and provides additional services like distribution management, vendor consolidation, cargo insurance, and purchase order management, and customized logistics information.

In the air freight and ocean freight areas of the business, EXPD acts as a freight consolidator/forwarder by purchasing cargo space from airlines and ships on a volume basis and reselling this space to its customers at lower rates than the customers could obtain directly from the airlines or ships.  EXPD does not own an asset-intensive fleet of ships or planes, and is able to focus on the complex task of modern international shipping.  Clients benefit from EXPD’s ability to tap into lower shipping rates negotiated by a large-volume broker.  Air freight services account for approximately 1/3 of revenues, while ocean freight services account for approximately 1/4 of revenues.

Customs brokerage and other services account for the remaining 40% or so of revenues.  EXPD acts as a customs broker by helping importers to clear shipments through customs.  Specifically, it helps the importing firm by preparing documentation, calculating and assisting with duties payments, arranging inspections with governmental agencies, and arranging for delivery.  Clients benefit by not having to deal with these complex tasks.  Major customers include Cisco, Wal-Mart, Toyota, and Nike.  However, client concentration is low as no customer comprises more than 5% of revenues.

EXPD’s competitive advantage is derived from strong relationships with suppliers and buyers that have been developed over a long time period.  EXPD also benefits from its vast network, operating 255 sites on six continents.  Competitors seeking to copy the strategy will find it tough to replicate due to the necessity of high volume at each site in order to pay for the reach of the network.

Additionally, EXPD has a strong corporate culture and a high quality management team which has been able to implement the right incentive structure firmwide.  Every employee is treated like a salesperson, and is compensated based on the profitability of their regional office.

In terms of financials, EXPD has no long-term debt and holds a substantial cash cushion of $1 billion.  Return on invested capital has been greater than 30% over the past five years.  Market cap is around $11B currently.   

EXPD stock price has not been very volatile in the last year.  Due to this low volatility there have been few opportunities for entry at a cheap price, but I would suggest an entry at any price lower than $50 if possible.

In conclusion, investors with a long-term perspective should benefit from owning EXPD as part of a diversified portfolio.

Week In Review

The week that was:

The U.S. markets were beat back down to the lowest levels since the midterms elections.  Energy was the sole sector group to gain ground last week.  The Nasdaq was hit especially hard by Cisco’s disappointing outlook.  Stocks also fell on increasing concerns about European sovereign debt and China’s anticipated steps to curb its economy.  In my opinion, this action is healthy because the market has been overdue for a pullback.

A headline that caught my eye this week:  Credit rating agency Fitch sacked by Portuguese Banco Espirito Santo.  As I learned in the first week of footnote accounting class (30116), the firing of an auditor, or in this case a ratings agency, certainly merits a closer look under the hood.  I suspect there may be more problems in store for the bank. 

Stocks:

The S&P 500 fell 26.64 points this week, or 2.17%, to 1199.21.  The Nasdaq Composite fell 60.77 points, or 2.36%, to 2518.21.  The Dow Industrials fell 251.50 points, or 2.2%, to 11192.58.  This is the first weekly decline for the S&P in six weeks and the first weekly decline for the Nasdaq in five weeks.

• As of Friday, 458 companies in the S&P 500 have reported results for the 3^rd quarter, with the remaining 42 reporting over the next five weeks.  Wal-Mart and Home Depot report on Tuesday.

Bonds:

End of week bond yields:

2 Year yield = 0.50%, up 13 bps from last week.

3 Year yield = 0.66%, up 16 bps from last week.

5 Year yield = 1.37%, up 28 bps from last week.

10 Year yield = 2.77%, up 24 bps from last week.

30 Year yield = 4.29%, up 17 bps from last week.

QE2, combined with the re-investment of principal payments from their existing holdings of GSE debt and Agency MBS portfolio, will total roughly $110 Billion per month in Treasury purchases. The Fed expects to buy securities with various maturities, ranging from 1.5 years to 30 years with a weighted average target duration between 5 and 6 years. 90% of the purchases will be concentrated in the 2-10-year part of the curve. One of the more interesting nuances to their program was the decision to purchase very few securities in the 30-year part of the curve. By not intervening in the ultra-long end, the Fed can now accurately assess the markets’ true long-term inflation expectations, which it is trying hard to increase

What to look for next week:

7:30 AM          Monday           Retail Sales

8:15 AM          Tuesday           Industrial Production

7:30 AM          Wednesday     Consumer Price Index

• Expected to rise 0.3%

7:30 AM          Wednesday     Housing Starts

9:00 AM          Thursday         Philadelphia Fed Survey

• GM is expected to price its IPO on Wednesday evening.  The estimated price range is $26 - $29.  Post-IPO, the Treasury Department’s stake is expected to fall to as little as 41% from the current 61%.

Guide to ETF Investing

Here is a great starter's guide to ETF Investing.  The author glosses over some of the issues surrounding leveraged ETFs, but it is generally good.

"New Normal"

A reminder from James Montier that there is no such thing as a "new normal":

Link here.

Invest for Kids Conference: Recap

On Wednesday of this week, I attended the Invest for Kids conference, a fundraiser for numerous charity organizations that operate for the benefit of local youths.  The event raised over $1 million for these local charities.  In addition to supporting some good causes, the conference provided the opportunity to hear investment ideas from some of the top names in investment management.  I was especially pleased with the program because it seemed that each speaker intentionally sought out an out-of-favor or contrarian investment idea to present.  Some of them were quite bold.  What follows is a brief summary of each speaker's idea(s):

•    William Browder of Hermitage Capital Management started his talk by paying respect to his late Russian lawyer, Sergei Magnitsky, who died less than a year as a direct result of his efforts to assist William in his business dealings in Russia.  Mr. Browder is currently blacklisted by the Russian government as a threat to national security.  He continued his talked with a brief overview of his macro thoughts.  In summary, he pointed out that the most recent financial crisis resulted in an unprecedented government bailout, which amounts to 23 times the size of the previous eight financial crises combined.  He is also not optimistic about QE and commented that "there is no good outcome to printing money."  He sees inflation on the horizon and because of this pitched two stocks with positive inflationary implications:  Koza Gold and Renhe.  Koza Gold is a Turkish gold mining company with a $1.5 billion market cap.  The company has no debt, a low P/E of 9x compared to other mining companies, and produces at the lowest cost in the industry.  Renhe is an operator of underground shopping malls in China that he feels is in a misunderstood business.  William went on to explain that each city in China is required to have an underground bomb shelter for wartimes.  Renhe has successfully persuaded the Chinese government to transform these existing structures into useful shopping malls with the understanding that in the event of a war, they will be converted back to bomb shelters.  Because they don't have to purchase property, Renhe's initial capital outlay is very low and they are very profitable.  Additionally, they currently pay an 8% dividend and trade at a 5.8x P/E, which makes them the cheapest real estate company in China.
• Brian Feltzin, of Sheffield Asset Management, pitched C&C Group PLC (GCC.ID).  C&C Group is an alcoholic beverage producer based in Ireland.  They are best-known for their ciders:  Bulmers and Magners.  Both are excellent in my opinion.  Brian argued that cider is an attractive growth category for a number of reasons, including the fact that it's one of the few unisex alcoholic beverages.  He also pointed to the fact that C&C is being turned around by a strong management team, has divested a large non-core business, is debt-free, and is a potential takeover target as further reasons for being bullish on the company.
• Bill Ackman, of Pershing Square Capital Management, presented a bullish case for perhaps the most out-of-favor asset class currently:  the market for single-family homes.  I first heard Bill's name as I was performing a valuation on Target (TGT) for Financial Statement Analysis class and have come to know him over the last few years as a tremendous shareholder activist and a guy who's able to create positive change in stagnant companies, so I was especially interested in hearing him speak.  His thesis centered around a few ideas:
• Home affordability is near an all-time high today
• Purchasing is cheap compared to renting
• Mortgage rates are extremely low
• Home purchases are the most emotional investment one can make, and are impacted to a great extent by human behavioral biases, even moreso than other investments.
• Bill half-joked that he was thinking about putting together a REIT for single family homes, since one currently does not exist.  I checked REITwatch and this is true.  It seems that the only close residential comparables are manufactured homes and apartment REITs, which are not that close.  Bill certainly made me think a little harder about purchasing my first home.
•  Josh Friedman, of Canyon Partners, made a very complicated argument for the securitized assets of Lehman Brothers.  He started by giving a history of bankruptcy reform in the U.S. and bankruptcy and distressed investing more generally.  He went on to discuss how the Lehman bankruptcy has been the largest and most complicated bankruptcy in history and because of this presents opportunities to pick and choose certain attractive assets for purchase.
• John Rogers, of Ariel Investments, pitched three ideas from the media space:  CBS (CBS), Viacom (VIA.B), and Gannett (GCI).  He feels that all three companies own great brands/franchises and have room for more upside growth.  He focused most of the presentation on GCI since it is currently out-of-favor in the market and down 16% year to date.  He went on to note that while GCI is mainly hated because it's main line of business is print media, print isn't as 'dead' as many think.  Local content still matters in the print space.  GCI also has a strong management team, with a solid balance sheet and the ability to generate positive cash flows.
• Meredith Whitney, of Meredith Whitney Advisory Group, presented a bearish case for state and municipal government finances.  I don't think this was a new idea to anyone in the room, but she reminded us of the dire straights of local governments across the nation.  Her talk also seemed to be a plug for her firm, who recently started a state ratings service.  She pointed to budgetary and pension issues looming large, with the potential for municipal defaults around the corner.
• David Herro, of Harris Associates, presented a bullish case for Japan generally.  He is of the opinion that, while Japan has experienced -6.2% annual growth over the last 20 years, they are bound to make a comeback at some point.  There has been a recent pickup in ROE generation among Japanese firms. Specifically, David likes Daiwa Securities, a company that is benefitting from the deregulation of the financial system and is currently trading below book value.  He thinks that Daiwa will continue to benefit from the movement of lazy savings in money market accounts to mutual fund products that Daiwa offers.
• Doug Silverman, of Senator Investment Group, presented a humorous case for the car rental industry.  The car rental industry, which currently has four major players, has seen a great deal of consolidation in recent years and has the potential for even further M&A activity in the near term.  Doug likes Avis Budget in particular going forward.

Richard Driehaus, Larry Robbins, and Sam Zell also presented at the event, but my notes didn't cover those speakers.  All in all it was a great event for a great cause.  Many thanks to Ron Levin and Ben Kovler for organizing.  I will be back next year!

Gross in the News

Bill Gross, co-founder of PIMCO, has been in the news a great deal over the past week or so.  Yes, even moreso than he normally is.


He released his monthly letter last week in which he took aim at the Fed's plan for quantitative easing.  He likened the anticipation of the Fed's announcement on QE to "a turkey looking forward to a Thanksgiving Day celebration."  Here is a nice summary of the letter from Fortune.com and an excerpt:

He sees the diners at this inflationary feast as "financial asset classes more adaptable to inflation such as stocks or commodities, or perhaps the average American on Main Street who might benefit from a hoped-for rise in job growth or simply a boost in nominal wages, however deceptive the illusion."

From my point of view, I understand why the Fed is embarking down this road, but I am extremely skeptical that expanding the balance sheet will be constructive in the mid-term or long-term, while the equity markets may appreciate it in the short-term.  Over the past 28 years the Debt/GDP ratio has more than tripled, yet GDP growth has slowed.  I don't think more debt is the answer.


I also came across this article in Reuters today, where Gross warns that QE will cause the dollar to drop by 20% over the next few years.  This is obviously what the Fed is trying to do, in an attempt to revive the economy.  A weaker dollar means U.S. exports are cheaper for foreign consumers.  But will this cause a continuation of currency warfare?  Other governments have printing presses at their disposal as well and are similarly eager to devalue their currencies in order to remain competitive in the global marketplace.


PIMCO representatives were on campus recently for recruiting and I attended their corporate presentation.  They highlighted PIMCO's expansion into other asset classes, which is certainly timely given that, in his monthly letter, Mr. Gross called the end of the 30-year-long bull market in bonds.  PIMCO and Gross have been some of the biggest beneficiaries from this long bull market in bonds.  It will be interesting to see if they can be nearly as successful in asset classes outside of Fixed Income.

Emerging Market Debt in Your Portfolio

The CFA Emerging Market Conference was held in Boston on October 19th.  While I did not attend the conference, I was able to view/read a number of the presentations on the CFAI website.


Tina Vandersteel, from GMO's global fixed income group, had some valuable insights/warnings on emerging market debt:

• When you invest in local emerging market debt, you face the “roach motel risk” of “you can check in, but you can’t check out.” Sometimes currencies can’t be converted.
• “You are picking up pennies in front of the train” when you invest in certain kinds of emerging market debt.
• Invest in emerging market debt for value and diversification, not for “safety,” betting against the U.S. dollar, or an inflation hedge.

I have used iShares JPMorgan Emerging Market Bond ETF (EMB) for emerging markets debt exposure in my own portfolio.  The sole purpose of this fund in my portfolio has been for diversification.  My interest in the asset class has increased more recently as I realized that most emerging market nations have low debt levels, which decreases the chance of default, and are more attractive relative to traditional fixed income asset classes at the present time.  EMB has a 0.60% expense ratio which is higher than most bond ETFs, but is considered a fringe asset class so this is to be expected.  The current yield on the fund is 4.86%.

A Man From A Different Time

I recently came across this summary piece on James Montier, a self-described "man from a different time."  Montier is a member of GMO's asset allocation team and is a name you need to know.  I have thoroughly enjoyed his writing on behavioral investing and would recommend it for anyone interested in that subject matter.