Sunday, October 14, 2012

Hard work > over-arching ideology

The only way that problems get solved in real life is with a lot of hard work on getting the details right. Not by some over-arching ideology that somehow magically makes things work. --Linus Torvalds

Thursday, October 11, 2012

Charlie Munger: Stock market as a pari-mutuel betting system

The model I like to sort of simplify the notion of what goes o­n in a market for common stocks is the pari-mutuel system at the racetrack. If you stop to think about it, a pari-mutuel system is a market. Everybody goes there and bets and the odds change based o­n what’s bet. That’s what happens in the stock market.

Any damn fool can see that a horse carrying a light weight with a wonderful win rate and a good post position etc., etc. is way more likely to win than a horse with a terrible record and extra weight and so o­n and so on. But if you look at the odds, the bad horse pays 100 to 1, whereas the good horse pays 3 to 2. Then it’s not clear which is statistically the best bet using the mathematics of Fermat and Pascal. The prices have changed in such a way that it’s very hard to beat the system.

And then the track is taking 17% off the top. So not only do you have to outwit all the other betters, but you’ve got to outwit them by such a big margin that on average, you can afford to take 17% of your gross bets off the top and give it to the house before the rest of your money can be put to work.

Original article: Art of Stock Picking - Charlie Munger

Friday, September 14, 2012

Gary shilling : Time to be careful

S&P 500 Profit Margin
  • Three factors make corporate profits very vulnerable:
  1. Foreign earnings,exports or international operation, if the dollar continues to strength, That's translation losses. Foreign earnings translate to less dollars. 
  2. global recession, pushes down the top-line, means less revenures. 
  3. A huge margin improvement pushed profits in the last three years,it's the ability to cutting cost.Pricing power was nonexistent , volume increase was very limited. Profit margin as share of national income hit a all time high in Q1 because of this. I's getting tougher and tougher to cut cost. They are not getting the factors they were getting at 09 into 10,in terms of  productivity improvement,carrying declining labor unit cost and increasing margin.
  • Us economy is going nowhere, same is true with europe, China seems to head for a hard landing. Chinese government now is deciding they are going for fiscal stimulus, they can't do bank lending again because there is too much debt. When you see these reactions, what you see is the reactions to the reactions. Copper rallies because the monetary authorities, in case of china, the fiscal authorities are coming in, it's not fundamental improvements, the reason they are in there is because the private economy is so week, the deleveraging in the private sector is so strong that they are forced to try to do something, the something was not right in the economy in the last four years. 
  • If the only people has is a hope you are going to get a monetary stimulus here and abroad, that's pretty lousy reason to invest.
  • Markets can remain irrational a lot longer than I can remain solvent. I think that's true for most investments. Our market stance is a risk off trade, short stocks, long treasury, long the dollar,and short commodities. 
  • Three things in favor of treasury right now:1) global recession  2) safe heaven  3) increasing concerns about deflation
  • German balance sheet backs ECB financing, if german yields go up, that could be indication that ECB is reaching limits.
  • Euro could go to parity with dollar, even without european break up.One of the reason euro is held up now is because of the repatriation of money back into Europe. European banks have to shore up its balance sheet domestically, they have to sell US and other assets and converting back. Banks are under a lot of pressure to cut back their leverage. S&P500 has approximately 50% sales outside US.

In the short term, deflation is the main concern.

While the bulls  are cheering now, bears think as long as central bankers keep printing money, volatility will continually  be suppressed , I however remain skeptical. And I thought the historical lessons we learnt about government intervention is Japan, not Zimbabwe. Government kept propping up zombie banks while private credit continues contracting. While the debt grows bigger, the whole economy slips into balance sheet recession, which is very different from a currency collapse/region change scenario, deflation pressure dominants as dependency ratio rises.

Austrian economics also teaches us government intervention always have unintended consequences, the longer volatility is suppressed by government, the more violent it becomes when next time it spikes.

Central bank balance sheet as percent of nominal GDP. ECB,FED,BOE,BOJ
monetary base (that is, currency outstanding plus bank reserves) relative to GDP for four countries.

M2/Monetary Base
US 10 cities /Japan, Tokyo

Thursday, August 30, 2012

J.K. Rowling on failure

Failure gave me an inner security that I had never attained by passing examinations. Failure taught me things about myself that I could have learned no other way. I discovered that I had a strong will, and more discipline than I had suspected; I also found out that I had friends whose value was truly above the price of rubies.
The knowledge that you have emerged wiser and stronger from setbacks means that you are, ever after, secure in your ability to survive. You will never truly know yourself, or the strength of your relationships, until both have been tested by adversity. Such knowledge is a true gift, for all that it is painfully won, and it has been worth more than any qualification I ever earned

J.K. Rowling -  Harvard commencement

Wednesday, August 22, 2012

Time to significantly increase HSI puts

There are several critical indicators suggest here is a good opportunity for shorting:
Low risk sell opportunity on HSI weekly chart . (bear emotion exhausted)
ECRI recession call. (people will realize before year end)
VHSI at historically low level. (cheap option price)
China inverse dependency ratio reaches turning point. (Japan US relevence)