JEast

As an interesting statistical view, I heard on a recent Consuela Mack episode that the 90-day Treasury Bill has outperformed the S&P 500 every quarter since 1997. If true, wow! At the current rate of about 0.17%, that streak may be about over. Or is it? Cheers James

Aberhound - 'discusses how capital flight based on confidence drives values' That is a fine point and was the case only a few years ago when nearly everyone was bashing the US Government and talking up the Euro and a new middle east currency. Those thoughts now appear to have been ephemeral in nature and flows are now back to where ingenuity and patent laws are fairly protected. Packer16 - 'there will be de-basement of dollars versus other assets who retain their value (good businesses)' Indeed and given some of the more well run US large cap stocks, this area appears to be the place to put capital for the longer-term irrespective of de-basement or not. Side note: I thought you were from Montreal, but your tone is US centric now. Another good article on the inflation/deflation debate in Pension & Investments by Jeffery Gundlach. http://www.pionline.com/apps/pbcs.dll/article?AID=/20100614/REG/100619957&crit=doubleline Cheers James

- markets will not re-act until a trigger/tipping point is reached - Could the tipping point be a recognition of 'debt deflation'? - It would be interesting to hear Hoisington's reactions to Niall Ferguson and Reinhart and Rogoff's historical points - Surely they are aware of the historical points, and have written about them consistently. We have discussed this topic in previous posts about inflation/deflation and the debasement of the currency. My retort to debasement has been compared to what? I assume most in the inflation camp would agree they are comparing debasement to gold only. If this is so, are the inflationistas placing 50% of their portfolio in gold? I suspect not, so the question still remains compared to what. As for inflation/deflation, I ask where is the pricing power for inflation to pop its head out. I still see housing prices decreasing, and more in the US after the tax credits expired. From a US perspective, it would seem very difficult to have inflation with little, to possibly negative, labor pricing power. Who is going to pay more when they do not have a job? Mark me down for a least in the non-inflationista camp. Cheers James

We do not live in a North American vacuum. If you are a pension fund or a central banker, which would you rather own. A Euro bond, an African nation bond, an Argentina bond, an Indonesia bond, or even a Japanese bond. Given your choices, it seems reasonable that US bonds look better comparatively and part of the reason for the drop in yields. Also, if you are in the debt-deflation camp, rates may even go lower. From Hoisington Investment Management, With excessive levels of debt and contractionary monetary and fiscal policies in place, inflation will continue to moderate, thereby driving long term treasury yields lower. The path to lower rates will not be smooth as volatility will arise from heavy sales of U.S. government debt and occasional transitory improvements in economic activity. However, patient investors will be significantly rewarded. Cheers James

Interesting article in Bloomberg about Seaspan considering for a listing in Shanghai if approved. If so and over the next few years, it would support capital raising in the future. http://www.bloomberg.com/news/2010-06-26/lse-seaspan-seek-shanghai-stock-listing-on-investor-demand-yuan-outlook.html Also noticed that charter rates have risen nearly every month since February and have doubled since the beginning of the year. http://www.tradewinds.no/liner/article562051.ece Cheers James

I finished reading two very fine books by James Montier of Grantham, Mayo, Van Otterloo & Co. (GMO). The first is the 'Little Book of Behavioral Investing' and the more lengthy and in depth version is 'Behavioral Investing: A Practitioners Guide to Applying Behavioural Finance'. The 'Little Book' series has become a great library of value investing principles and this recent addition is a great contribution to the collection. Both books cover the many mental traps we face such as Empathy Gaps, Fear/Risk Aversion, Overoptimism, Authority Respect/Overconfidence, Anchoring, Information Overload, Reason Respecting, Conformational Bias. http://www.amazon.com/Little-Book-Behavioral-Investing-Profits/dp/0470686022/ref=cm_cr-mr-title http://www.amazon.com/Behavioural-Investing-Practitioners-Applying-Finance/dp/0470516704/ref=cm_cr-mr-title Cheers JEast

At first, there were very few board members that seemed interested in Seaspan Corporation. However and as there now appears to be some interest, I thought it appropriate to start a new thread with a bit of an interesting development. Most of the investment community has been worried about the global economy (justified) and Seaspan's capital funding for the remaining fleet (partially justified). The interesting development is that Seaspan just recently has been able to acquire a 4250 TEU newbuilding on favorable terms from Zhejiang Shipbuilding in China. Though the time charter to United Arab Shipping Company is for only two-years, it indicates that our management team is still in the game and following thru with their plan. http://ir.seaspancorp.com/releasedetail.cfm?ReleaseID=476502 Cheers JEast

Last month I posted a topic to continue our friendly debate on either non-inflation, or inflation titled 'Where is the pricing power'. I bring this topic up again as major currency fluctuations this year appear to be influencing this issue considerably. Of only 6-9 months ago, many were calling for the death of the $US dollar, but over that time frame the $US dollar is up significantly in currency terms. True this may be temporary, but people and companies are making long-term planning arrangements on what they see today. As per Partner16 indicated previously, I would to agree strongly with this statement. However and to counteract this outlook, most of all my previously laid off colleague and acquaintances are now starting to be hired again as the job market is slowly coming back, at least in the Southeast region of the US. Reference: http://pragcap.com/a-deflationary-red-flag-in-the-u-s-dollar Cheers JEast

I am a little surprised that the board members are taking the authors to the shed. As we have been discussing Hoisington's letters for several years now, this is just the same theme as in the past. Nothing really new, as the same points of no pricing power, Irving Fisher Debt Deflation, lower interest rates heading our way, quarterly commentary. However, I guess you are either in their camp, or not. I would suspect that nearly 80% of the investment community is on the other side of this theme. Time will tell. Cheers JEast

dealraker, I think your friend is living in 'hope', not reality. We all know that laws can change and contracts can be broken. Just take a look at GM where the government broke the bond debenture contract or the lawmakers have (or attempting to) break employment contracts. Another example from my home state of Florida. A good friend of mine works for the county/state and they just changed their retirement plans, retroactively! This was due to a shortfall in, you guessed it, state revenue. I would not be surprised at all that in the next several years we will start to hear an uproar of the slashing of state pensions. The biggest elephant out there is in California. Time will tell though. Cheers JEast

To continue our friendly debate on non-inflation, or inflation, and the subsequent implied interest rate risk - Where Is The Pricing Power? As reported today in the WSJ, Wal-mart deflates again and continues its deflating juggernaut. http://online.wsj.com/article/SB10001424052702304198004575172271682347064.html?mod=WSJ_Heard_LEFTTopNews Someone please show me some inflation 'out in the ether' so I can get off my high horse :) Cheers JEast

Welcome aboard Newbie. As you will learn over time, this board rarely hedges hurricane risk but buys into it. From an investment view only, not from an human devastation perspective, we value investors mostly welcome hurricanes and earthquakes as it strengthens the market. Cheers JEast

As our Fairfax pre-annual meeting dinner night at Joe's has always been enjoyable and the conversations educational, there still has been one nagging problem. That problem is we seem to always run out of time :) For a few that arrive early, I invite you to join me for a pint to expand our conversational time. Location is the Barristers Bar located in the Hilton Hotel property on the corner of Richmond and University around 5:00pm. It is 5 blocks from Joe Badali's Restaurant, so within easy walking distance. Barristers has a casual atmosphere perfect to unwind with a pint, or cocktail, after a long day of planes/trains or automobile. I will be easy to spot as I will be wearing my Fairfax hat! Cheers JEast

Packer16 -- You must be spying on my web searches :) As for IPPs, I am of the belief that there are indeed some interesting value candidates in the arena currently. However, as you are probably aware, NRG was a takeover candidate not too long ago. Outside the takeover aspect to NRG, I think time is well spent on other higher quality participants in this group. If you look at the adjusted book values of some of these higher quality companies, you will see that they are near or only slightly above book value but have very respectable ROE numbers and payout an increasing dividend. I have been buying, but do not have a full position yet as I have not finished my DD yet. Side note - Nice insight on your radio call and I have been buying there too! Cheers JEast

Its really borrow in Japan AND invest OUTSIDE of Japan. Yes, and reason for the original carry trade reference for many Japanese companies. I am not attempting to 'sell' anyone on the Toyota Industries idea, just using this example in an attempt to 'invert' my thoughts about a company specific carry trade idea with low costs of capital. Of specific interest to Toyota Industries though, Toyota Material Handling Corporation is the #1 market leader for fork lift sales in North America with Toyota and Raymond. In addition, with BT Industries and others, they have about a 20% world market share. I suspect the key question is whether one believes the planet with drive more cars and/or produce more 'stuff' over the next 5-10 years. If the answer is yes, then this would answer the question why Toyota Industries is now building a plant in Brazil in partnership with Denso Corporation. So if your revenue is truly global like many mulit-national companies, will your local currency valuation help or hurt your company. Is anyone willing to take a position that the Yen will depreciated before the Euro in the next 3 years? Cheers James

One would have to agree when investing globally that you are also taking a currency position. As such, there has been much work done on whether to hedge, or not, (See Tweedy, Browne Company comments) ,and in general, if you are long-term (3+ years) then hedging costs you. Also with respect to a Japanese currency devaluation, one has to ask the obvious question of a possible devaluation compared to what? Many are saying the same for the US currency, yet it is now rebounding. Given the amount of reserves that the BOJ has, and that domestically they can fund their own debt, I find it a higher probability that the Yen does not devalue against especially the Euro, or the US dollar, which I am based in. However, if you are 'Loonie' centric, then maybe you have cause for concern. Rates may indeed increase at some point in Japan, but I am currently not buying Doug Kass' thesis even given the aging population and a high Debt/GDP. I will give him the benefit that he is smarter and has more resources than I, and that he will probably make money on shorting the debt. However, we are talking specific companies here and the ingenuity that their management and employees have, or do not have. Would you not think that management is also aware of the possibility of a deflation? Cheers James

I have been studying the ‘lost decade’ of Japan for the last several years and its potential implications it may have for us in North America. As such, I just returned from a trip in Northern Japan. The trip was mostly a holiday excursion, which was wonderful, but did spend some time on the research front trying to understand the deflationary aspects of the culture as it now stands. My view, (though cursory), somewhat backs up the conventional wisdom that the country is indeed getting older. This is implied by the contrast of my touring South America extensively with that of Japan. In South America, there are children and babies almost everywhere you go. In contrast, the babies and small children I saw in Japan were far and few in between in over 8ookm of back road touring of many cities, restaurants, and just normal observation. With that introduction, many shy away from Japanese stocks and for good reasons over the last 20+ years. However, even if Japanese companies have low ROE, they also have a very low cost of capital. Is this not like just having a simple carry trade, except that it is a company versus a Goldman Sachs currency trade? As I indicated in an earlier post, I had the opportunity to discuss very briefly the Toyota Industries investment by Third Avenue Funds with Marty Whitman back last year in 2009. I asked him at that time if Toyota Industries was not a value trap. His response, to paraphrase, was that as long as the balance sheet was strong and it was cheap, there is no such thing as a value trap. As the fallout from the Toyota Motors recall tainted Toyota Industries, I pulled the trigger as Toyota Industries fell below $2500¥ since my analysis indicated that a conservative book value was roughly $3700¥. In addition, I like the fork truck aspect which nearly 40% of the business. ?? Can one make money with a low ROE, if the cost of capital is low. ?? Are all of us value folks delusional and Japan is indeed a value trap. Cheers JEast

I know most, if not all, of us have been following the Deep Capture chronicles and the naked short story for some time now. However, I have not seen any posts on the stock in sometime. Irrespective of the stock aspects, I shop at Overstock and have experienced excellent customer service when needed. Since they have gone international now, I thought some may be interested in even a better shopping deal. Since I pinch nickels if I can, attached is a view of how you can get an extra 5% off at Overstock even above their already low prices. Shop thru the Discover Card portal. Cheers JEast

Though the question below probably needs a new message thread, I will ask it here. For the existing small AUM managers out there, have any considered the associated costs with a single year audit versus the normal comparative years audit? My understanding is that the comparative years audit will increase your costs for the entire audit $1-$2K ($US). I ask because I keep hearing Warren and Charlie's voices in the back of my head saying do not pay extra for aesthetics. Any comments? Cheers James

Parsad and other managers, We do our calculation each month. So all of the income is distributed at the end of each month. If a partner joins say April 1st, then they do not receive any portion of the gains realized or unrealized from the previous month. They would only receive their proportional income from April 1st onwards during their holding period. Does this monthly calculation not drive up your audit costs for under $10M Funds? Why not do it like a Mutual Fund and if you buy on April 1st or December 1st, you get the same amount of distributable income, short-term, long-terms gains on or around December 15th. The GP usually advises the investor coming in of the tax issues and the GP can always provide a fair deal for the LP, and all partners, by adjusting the NAV when a new LP comes in. This view is from a small fund perspective as costs are key. Cheers JEast

Just keeping tabs on our growing investment in India. http://www.punjabnewsline.com/content/view/23009/143/ Cheers JEast

Read another very good book over the weekend. If you are a fan of Munger's Mental Models, than you will love "The Little Book of Behavioral Investing". The `Little Book' series continues to produce good work as this 10th installment is an exceptional introductory to our mental traps and pitfalls we tend to repeat. The book is a quick and enjoyable read and is very clear with only the minimal amount of psychology jargon. This book comes highly recommended for any bookshelf on how to invest better and make better decisions. Though there are seventeen chapters, a sample of the first few chapters and mental traps and potential solutions are as follows: Chapter 1 - Paralysis/Pre-Commitment Chapter 2 - Fear/Risk Aversion Chapter 3 - Overoptimism Chapter 4 - Authority Respect/Overconfidence Chapter 5 - Anchoring Chapter 6 - Information Overload/Checklists Chapter 7 - Reason Respecting Chapter 8 - Conformational Bias http://www.amazon.com/Little-Book-Behavioral-Investing-Profits/dp/0470686022/ref=cm_cr-mr-title Cheers JEast

Just for specifics on Toyota Industries based on the latest quarterly report, book is around 3700 vs. roughly 2500 today. (The 3700 number includes their large holdings of marketable securities.) Even if you remove the goodwill of roughly 300, it is still under book. However, one could argue that goodwill is understated based on relationships and name brand, but that is up for debate. Falling knife? Maybe. Screaming buy? Not yet. Solid company with a good balance sheet to weather the storm? Yes. Cheers JEast

Briefly, but we have talked about 'Toyota Industries' on the board previously. It is my belief that the better deal is played their as they are essentially selling very slightly below book when you consider their tremendous amount of marketable securities on the balance sheet, of which is 6% of Toyota stock. I had the opportunity to talk to Marty Whitman last summer about this stock and asked if he thought it was a 'value trap'. His reply is long as it is cheap and safe, it is never a value trap, just opportunity cost. Anyway, I have been buying Toyota Industries this week. Cheers JEast

Worthy of any value investor's library shelf, but with a little more gravitas, let me quote Seth Klarman "Calandro's clever application of value investing principles to corporate decision-making could transform how businesses operate and what business school students are taught. This thought-provoking work takes value investing to the next level." http://www.amazon.com/gp/product/0071628185/ref=cm_cr_mts_prod_img Cheers JEast