MrB

Munger's recent diatribe on BYD, meaning more then two words per answer! ;D http://www.bloomberg.com/video/78807998/

Don't believe it is possible

30 year loan financed by 5 yr paper? That might be a problem. Furthermore, I know 30 yr mortgages are common, but whenever, I see 30 yr paper (be it mortgages, bonds or government paper) I always see a fella happily swimming along, with the only problem you (never mind him) cannot see the shore anymore. If you really want to make it easier on people, why tie them down with the Roosevelt invention of 30 yr mortgages? Why not take a tip from the financial gurus at Goldman Sachs and go for 50 yr paper (50 yr bonds issued in 2010), better yet, 100 mortgages should really cut home buyers (I forget, they are called owners) some slack. So, my point is, at what point does the length of a mortgage get ridiculous? Is this not just a different way of kicking the can down the road? Is the better option not to save and then buy? Is the perpetuation of the debt culture not the problem and is the mortgage culture not part of it? Does the benefit of buying a house while taking on debt for 30 years really outweigh saving and renting? My apologies for the dump Myth!

I'm sure you've all noticed Dalio's head shaking and I have not been following him for a long time, but is it my imagination or does it seem to be getting worse? Also, he lost me in the CR interview at times and I was under the impression that he was not as sharp as usual. Most likely just me being unable to keep up. Anyway, would be very sad to see such an obviously brilliant mind starting to slip.

I just don't see global leverage allowing anything more than flat real growth for at least a decade or more in the developed world. I am extremely worried about a double dip and things even worse, because I just see too many signs of it. The China property situation is very worrying. If you buy into the story of a China property/infrastructure bubble and the nexus between it Europe/Japan/Aus then how can the following not scare you? "In my sixteen years as a developer, this is by far the most challenging year I've ever had, in terms of what we could sell," Zhang, chief executive of Beijing-based SOHO, recently told reporters. "http://finance.ninemsn.com.au/newsbusiness/aap/8361291/china-credit-crunch-hurts-developers However, for investment purposes I don't feel comfortable making a call on that, so I like the approach to invest only when the bad news is priced in. Effectively, I then don't have to make a call on the economy. To invert; I certainly will not invest in a situation where I'm dependent on the economy to turn around in order for me to make a good return. Anyway, just another approach out there.

I saw that article this morning and it is a good one in the context of this discussion. If you use the painting on a canvas analogy then I suppose the economy can at best be the background music to which we listen to while we paint. If your research indicates a high enough probability that the CEO's words will ring true 3-5 years from now and the current valuation for Cummins offers good value then personally I would invest. I find CYD particularly interesting in this regard. PE of 3.7 v Cummins' 13 with most exposure to China and since it is the largest manufacturer of diesel engines in China one is exposed to construction and infrastructure spending which forms the largest block of GDP. In that vein and in terms of background music the following, http://www.bloomberg.com/news/2011-10-13/china-sept-passenger-car-sales-rise-8-8-to-1-32-million-units.html (focus on truck sales) http://www.ft.com/intl/cms/s/0/3ba4e690-f7ec-11e0-a419-00144feab49a.html#axzz1b2S7kFMh It think a hard landing is priced in at CYD and the only thing to worry about is opportunity cost. So, at the end of the day it all boils down to how much bad news is priced in.

Reminds me of the following. Def of a recession; if your neighbour lost his job Def of a depression; if you lost yours.

http://www.businessinsider.com/retail-sales-real-consumers-and-their-recession-level-spending-2011-10 Draw your own conclusions.

What I find both ironic and funny is that BYD (1211 HK) just filed the following, which is one of several documents listing measures to improve corporate governance. http://www.hkexnews.hk/listedco/listconews/sehk/20111013/LTN20111013497_C.pdf "The key word is “demonstrated”. A manager who consistently turns his back on repurchases, when these clearly are in the interests of owners, reveals more than he knows of his motivations. No matter how often or how eloquently he mouths some public relations-inspired phrase such as “maximizing shareholder wealth” (this season’s favorite), the market correctly discounts assets lodged with him. His heart is not listening to his mouth - and, after a while, neither will the market.” - Warren Buffett

Oct 3 Charlie Rose interview with Lewis http://www.charlierose.com/guest/view/1487

Results are out. Total shares outstanding 2,253,204,500 Non Independent shareholders Golden Link 1,481,700,000 BF Trust Ms Li Ke 8,602,000 Mr. Sun Yi-zao 5,797,000 Mr. Wu Jing-sheng 8,602,000 Total BF 23,001,000 Note:BF Trust votes the shares in Gold Dragonfly, which holds 168,300,000 shares in total. All the beneficiaries of the Gold Dragonfly shares are BYD Elec employees, but only the above mentioned people are directors and are therefore considered non-independent. So apart from the 23m, 145m of Gold Dragonfly are voted by BYD Elec company employees, which are considered independent. The results were as follows, Total entitled to vote 748,503,500 Total votes cast 411,622,698 For 21,343,547 Against 190,279,151 Observations:Only 55% of shareholders bothered to vote when one third of their company's market value was at stake. This is of course not uncommon. 54% of the votes cast voted "For". 50% was needed for it to pass. Also, if you assume (conjecture on my part) that all the votes by Gold Dragonfly that were entitled to vote, were cast and voted "For" then the results would have been as follows, 266m total votes cast (only 36% of eligible votes!) 76m "For" (only 29% of elible votes) 190m "Against" (71%) If BYD shareholders cannot even be bothered to get off their asses to vote then I suppose they should not complain if their company's capital is miss-allocated? "The key word is “demonstrated”. A manager who consistently turns his back on repurchases, when these clearly are in the interests of owners, reveals more than he knows of his motivations. No matter how often or how eloquently he mouths some public relations-inspired phrase such as “maximizing shareholder wealth” (this season’s favorite), the market correctly discounts assets lodged with him. His heart is not listening to his mouth - and, after a while, neither will the market.” - Warren Buffett Phantom value stock! >:(

I've recently touched on this topic in another post, but wanted to run a poll to hear what people think. My first, so hopefully I do this right! The following piece give you my version of events and I attached a Word document which contains foot notes with all the sources. I would appreciate it if you will be so kind to vote and of course any thoughts are welcome. Fire away! How concerned should BYD Co Ltd (1211 HK) and BYD Electronic International Co Ltd (285 HK) shareholders be about the recent capital allocation decisions at BYD Electronic Co Ltd? I was surprised when I was unable to track down any news coverage on the recent announcement by BYD Electronic (285 HK) regarding management’s intention to lend RMB 1 billion to its parent company BYD (1211 HK). Not even one single article or blog post. The proposed loan agreement still needs to be approved by independent shareholders (excluding BYD’s 65% vote) on 14 Oct 2011, but the fact that management is prepared to put this forward has me worried. Background You can find the details of the proposed loan here http://www.hkexnews.hk/listedco/listconews/sehk/20110909/LTN20110909546.pdf, but the gist of it is that BYD Electronic is lending RMB 1 billion to its parent BYD for three years at 7.3% per annum. BYD, which owns 66% of BYD Electronic is using its shares in BYD Electronic as collateral. BYD Electronic’s management thinks the deal makes sense for BYD Electronic shareholders, because the 7.3% yield compares favorably with that which can earned from a regular savings account. Questionable capital allocation decision On the face of it the above argument makes sense, but not when you consider the following. BYD Electronic is currently valued at about RMB 3.5 billion , it has net cash of roughly RMB 2.5 billion , which gives it an enterprise value of RMB 1 billion. Therefore, the RMB 1 billion loan makes up almost 30% of the current market value! Apart from the fact that RMB 1 billion in itself is a big number; in context it is equally significant. Furthermore, BYD Electronic’s share price decreased by over 80% from HKD 10.75 , since its IPO in 2007 to around HKD 1.90 today. Neither is the company paying dividend nor is it buying back shares. Why not? Maybe management does not think BYD Electronic is trading below its intrinsic value. However, if management does not consider BYD Electronic International Co Ltd ’s shares undervalued when trading on a PE of 3.3, an EV/NI of 1.1 or a P/BV 0.46 then at which valuation would management consider it undervalued? How can management be comfortable with lending excess cash out at 7.3%, when it can equally well repurchase shares which would yield 30% (inverse of PE of 3.3) obviously it is not practical to apply all of the RMB 1.1 billion this way, but what about a special dividend to ALL shareholders? BYD needs capital The real reason seems obvious; BYD needs the cash, because it is a company in need of capital. It had mixed success in raising some with Bloomberg reporting the June 2011 equity raise of RMB 1.42 billion being 35% below target. The same article goes on to say BYD recently received shareholder approval to sell as much as RMB 6 billion of bonds. It has RMB 16 billion of bonds and loans outstanding with a RMB 15 billion term loan maturing next year. Borrowing costs for the bonds are estimated to be at least 8.89%. In itself it should not necessarily be of concern, but what should have the alarm bells ringing is that it APPEARS management of BYD Electronic is willing to raid the piggy bank to help BYD borrow at 7.3%. Consider Buffett’s view on share repurchases. BYD does not seem to miss an opportunity to capitalize on its most famous investor’s name, Mr Warren Buffett. Management even referred to Mr Buffett in the regulatory filing announcing the intended RMB 1 billion loan. It is interesting to note what Mr Buffett wrote in his letter to shareholders in 1984 about management’s behavior in the context of share repurchases. I highlighted the last paragraph, which I find particularly instructive. “The companies in which we have our largest investments have all engaged in significant stock repurhases at times when wide discrepancies existed between price and value. As shareholders, we find this encouraging and rewarding for two important reasons - one that is obvious, and one that is subtle and not always understood. The obvious point involves basic arithmetic: major repurchases at prices well below per-share intrinsic business value immediately increase, in a highly significant way, that value. When companies purchase their own stock, they often find it easy to get $2 of present value for $1. Corporate acquisition programs almost never do as well and, in a discouragingly large number of cases, fail to get anything close to $1 of value for each $1 expended. The other benefit of repurchases is less subject to precise measurement but can be fully as important over time. By making repurchases when a company’s market value is well below its business value, management clearly demonstrates that it is given to actions that enhance the wealth of shareholders, rather than to actions that expand management’s domain but that do nothing for (or even harm) shareholders. Seeing this, shareholders and potential shareholders increase their estimates of future returns from the business. This upward revision, in turn, produces market prices more in line with intrinsic business value. These prices are entirely rational. Investors should pay more for a business that is lodged in the hands of a manager with demonstrated pro-shareholder leanings than for one in the hands of a self-interested manager marching to a different drummer. (To make the point extreme, how much would you pay to be a minority shareholder of a company controlled by Robert Wesco?) The key word is “demonstrated”. A manager who consistently turns his back on repurchases, when these clearly are in the interests of owners, reveals more than he knows of his motivations. No matter how often or how eloquently he mouths some public relations-inspired phrase such as “maximizing shareholder wealth” (this season’s favorite), the market correctly discounts assets lodged with him. His heart is not listening to his mouth - and, after a while, neither will the market.” Mr Wang Chuan Fu We hear very little from majority shareholder and chairman of BYD and director of BYD Electronic, Mr Wang Chuan Fu, but the talk we are getting from notable backers like Mr Charlie Munger , David Sokol and Mr Buffett is remarkable. However, it is not the talk, but the walk that matters. What is Mr Wang Chuan Fu “demonstrating” to his shareholders at BYD Electronic? Is he, to paraphrase Mr Buffett, turning his back on repurchases? Based on the previously low market multiples how can one not come to that conclusion? This of course raises many questions. Can BYD Electronic shareholders expect all future cash flows to be conscripted to BYD? Is this a harbinger of what BYD shareholders, including Mr Buffett, can expect from the hands of Mr Wang Chuan Fu? It will be interesting to see which way the independent shareholders vote on 14 Oct. BYD_Electronics-news__coverage.doc

You! http://thenewamerican.com/economy/sectors-mainmenu-46/9011-federal-reserve-to-bail-out-european-banks-again

"Furthermore...did not catch exactly what was said, but on Bloomberg TV it was reported today that apparently no new corporate bonds were sold over the last two 1/2 months in Europe. Apparently a record. Cannot find a source though." Just caught that snippet again. "No conventional bond sold by a European bank in the last 2 1/2 months...a record"

http://www.lesechos.fr/investisseurs/analyse_seance/investir_00381612-le-cac-40-en-forte-baisse-tous-les-secteurs-touches-222892.php Use Google Translator if you cannot read Ffrench .... EADS drops 5.93% to 21.34 euros. French banks have stopped funding aircraft purchases because of their difficulties in raising finance in dollars, wrote Les Echos. Airbus would be more affected than its rival Boeing, whose access to credit in the United States is easier, the newspaper said... Furthermore...did not catch exactly what was said, but on Bloomberg TV it was reported today that apparently no new corporate bonds were sold over the last two 1/2 months in Europe. Apparently a record. Cannot find a source though.

Myth, I think this one is a marathon, so the BS is it; started in 2007 and we're most likely not even halfway. We probably need to get used to it. The good news is I once had a long chat with someone from Orbis (http://www.orbisfunds.com/performance.aspx Japan - 5.9% annual USD return since 1998) and the discussion focused on how they were able to maintain positive returns in Japan over the last decade. The answer; good old fashioned value. I would prefer you being right on this one though. Would be great if this could be over in 6 months, but unless we have a significant meltdown I don't see it happening. Too much that needs to deleverage and nobody anymore that can gear up. Maybe the whole world can follow Japan into a 200% Debt/GDP?

Tnx for sharing. The more I read about Dalio, the more I like the guy.

Dalio interview. Good comments on Europe http://www.bloomberg.com/video/75534426/ Transcript http://www.scribd.com/doc/65310046/Ray-Dalio-Bloomberg-50-Sept-15-2011-Transcript

http://www.bloomberg.com/video/75534426/ Transcript http://www.scribd.com/doc/65310046/Ray-Dalio-Bloomberg-50-Sept-15-2011-Transcript

"The subtext of this fiscal crisis is the horrendous financial meltdown that sovereign defaults could trigger. The government bonds are held, in large part, by European banks. Many of them would be insolvent today were they marking the bonds to market. But, as the International Accounting Standards Board just confirmed, these lenders are booking this junk at much higher prices than the market will pay." Speaking of triggers. The Achilles heel of the Australian property bubble are the European banks. Aus households are more leveraged than the UK and US and are very dependent on offshore wholesale funding, which are provided by? You guessed it, European banks. More than 80% of global derivatives ($580T notional) are in interest rate and currency derivatives and in the case of the US (about $280T) more than 90% of it sits with 5 banks. The EU is large enough to to upset that apple cart. However, the risk or lack of it is unknowable. So it could be the mother load or it could be nothing. As for the reference to "booking this junk at much higher prices than the market will pay" Correct and I would add the lenders know and they have a fair idea of what is going on in other lenders' books. Hence TED is back in da house. http://www.ft.com/intl/cms/s/3/c0ed02a4-de0d-11e0-a115-00144feabdc0.html#axzz1Xrrpxu9d However, despite all the gloom, if I see a cheap stock I'm buying. Also, we are entering the stage now of trading existing holdings for better value or similar value, but higher quality. I find that very tough to do, but it has always been very rewarding. Finally, we have to ask ourselves what it felt like for a Japanese portfolio manager, investing in domestic stocks, over the last decade. Maybe something like this? For more than 10 years? Phew, that will wear me out. Anyway, just a few thoughts...

Would anyone like to share their opinion?

Prasad, “Greece is a whole different ball of wax” Based on what? What are the main facts that sets Greece apart from PIS? Myth, “I dont see what the South gets out of this” Money! The Greek government is running a deficit. If Greece does not get € 8Bn at the end of this month then it cannot pay its bills. If it defaults then the biggest losers will be the Greek banks>Greek financial system>Greek economy and finally the average Greek. The same goes for the other countries. In general it is also a case of the devil you know. Currently the main issue being played up as the critical issue, is Greece and folks e.g. Germany, can gauge potential costs with a reasonable amount of certainty. However, they do not know what waits for them beyond the Greek default door. If you study historical defaults (IMF data) then you will find that western nations had Debt/GDP ratios of 55% BEFORE it defaulted. That ratio was 85% for the Euro area at the end 2010 according to official data, which means in reality it is probably higher. Which countries came in below the 55%? Poland, Finland, Latvia, Norway, Denmark, Slovakia, Sweden, Czech Republic, Lithuania, Slovenia, Romania, Luxembourg, Bulgaria and Estonia. I acknowledge that one cannot use one ratio in isolation, but it serves the purpose of making the point that Greece is not the main problem and considering that its GDP makes up 1.7% of the EU and its debt 2.8% of EU debt it does not deserve the airtime it is getting. So it begs the question, why is it getting all this airtime? From the list of countries mentioned above you will note that all the main commentators in the current debate is absent from that list. So this looks more like a case of let’s focus on the other guy’s problem in order to shift it away from my problems. The big boys all know this. They know Greece is not the real problem and that they ALL have a problem and they are in effect trying to deleverage slowly, but they are losing control. This ultimately just serves to prove the point yet again that the main danger with debt is that it takes your flexibility away. Excess reserves are like shock absorbers in a car. If you take reserves out and add debt you are taking out the shock absorbers, which you might fail to notice while cruising on the QEW or the M25 or the I95. However, never ever go “off-roading”! Don’t underestimate the incentive to save Greece. Not only in light of the above, but also considering the point that Myth just made, which is the incentive that Germany has to keep it together because it is an export nation that currently enjoys the benefit of a weak currency. Personally I think that is the pivotal point for Germany and Germany is arguably the most important player to watch in this debate. So, the probability of Greece not defaulting might be low, but it is not Zero. Greek govies anyone?

Furthermore... http://www.bloomberg.com/news/2011-09-10/g-7-ends-without-objection-to-yen-action.html

Ditto on the dollar. If all of the above comes to fruition then the dollar will run and in the absence of a meaningful QE3 it will even outperform gold in the short to medium term. However, it is still a case of pick your poison!

Parsad, And then...? How should they deal with Portugal, Spain and Italy?