Web Links-Nov 7th 2013

More reading goodies to share! Here’s what’s good from what I’ve read over the last couple of weeks. Enjoy!

Economics

  • This is a brief article on why QE may not be behind the bull run as much as some people say it is. It argues that rising earnings and the bottoms hit in early 2009 are also big contributing factors, among other things. In saying this, the article is arguing against statements made by the likes of Michael Cembalest, Chairman of Market and Investment Strategy at JPM. It also contains a very interesting graph mapping the S&P to the various QE measures over the last few years.
  • FT Alphaville has a detailed article by Cardiff Garcia on the downsides of QE and why, despite these risks, he is still in support of QE. Long read but well worth it.
  • This is a very interesting post by Antonio Fatas, of the INSEAD Business School, on how southern European countries in the Euro-zone would’ve weathered the financial crisis had they not been tied to the Euro, and followed Bernanke monetary policy. He also looks at how capital flows, asset prices, and interest rates would’ve reacted to ECB policy in the US, had the US been a small European country (with American problems). His conclusion: “One of the biggest costs of Euro membership was the bubbles that the Euro facilitated in the years before, not so much the inability to adjust once the crisis exploded”.

  • William Gross, MD at PIMCO, chimes in on much needed tax reform in the US to address growing wealth and income inequality. He talks about how wealth has been created for the fortunate riding the credit boom over the last three decades, “where those who borrowed money or charged fees on expanding financial assets had a much better chance of making it to the big tent than those who used their hands for a living”. He then discusses how, even with low growth in sales, corporations have grown earnings and earnings per share. This is indicative of companies cutting expenses to send ever higher proportions of their sales to the bottom line. He then compares QE to a share-buyback program and how that is increasing inequality and detracting from the effective functioning of the US economy. Overall great read- would highly recommend.

Markets

  • This is an interesting article on whether you should enter the market now, or stay away given the incredible bull run we’ve had. Again, my take is it depends on what kind of investment you are making. If you are a value investor and find a good business to invest in, everything else considered, you should most likely invest it if it is underpriced and you have a sufficient margin of safety. If you’re a short-horizon index investor (Graham might call you a speculator), you may want to read the article and see what it says. Key takeaways: S&P usually has 10% pull-backs annually, hasn’t had one since Dec 2011, commodity stocks may be the way to go (depending on your macro outlook) as they’ve taken a beating.

Commodities

  • This article discusses an interesting report on the gold and silver mining sector published by Citigroup. Using a spot gold price of $1,320/oz, the report finds that  up to 98% of gold companies are cash flow negative. Over the last year, cash cost per ounce has grown by 11.8% on average. The report paints a gloomy picture for gold miners. I also want to add that we had a hedge fund speaker come in who specialized in the mining industry and who talked about all the creative accounting tricks gold mining companies use to hide their true costs and to show paper profits. That’s why looking at cash costs is even more important. Many of his other claims are also substantiated in this report, and it made for a pretty good read overall.

Investing

  • I cannot overstate the usefulness of this post on Wall Street Oasis. It is a detailed description of the due diligence process by a hedge fund analyst when picking a business to invest in, with links to several other resources. I personally will keep coming back to this post and I’d highly recommend bookmarking it.
  • Pretty short article on the dangers of investing as a hobby. It links to several other articles as well which talk about it in more detail. Key takeaway: Don’t leave your good sense behind. True words for any investor, but hard to stick to without hard-earned discipline. As the saying goes “Be humble, or the market will humble you”.

Miscellaneous

  • Want to know the thoughts of all three generations of the Buffets on their philanthropy work? This link leads to a transcript of an interview with Warren Buffet, his son Howard G Buffett, and his grandson Howard W. Buffet discussing their book on hunger, farming, and poverty and their efforts to do what’s good. They discuss the inefficiencies in global agriculture, the impact of technology on farming, and how value investing compares to philanthropy. I am tempted to buy the book after reading this.
    BONUS: Video of the three Buffets on Bloomberg. Watch the video for quotes such as:

    “And we’re not – how you came out of the womb has really nothing to do with what kind of person you are. You decide what kind of person you’re going to be. It does decide whether maybe you never have to do an item of work in your life and maybe determine whether you’re fighting uphill all of the time, but where in my life, in my eyes is we’re all created equal, and but we don’t all have an equal opportunity by a longshot.”

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