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Larry Cyna
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Mr. Cyna is an accomplished investor in the Canadian public markets for over 20 years, and has managed significant portfolios. He is a financing specialist for private and public companies, and has expertise in real estate and debt obligations. He has assisted private companies accessing the... More
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  • How Capitalism Works With Republicans Or Libertarians

    Libertarians are fiercely anti-government. They believe there should be no rules of commercial conduct and that every person should have the right to conduct themselves as he/she wishes. They believe that wrongful acts by anyone will result in actions by others to mitigate against those wrong acts. Just let people do what people do.

    Republicans are fiercely anti-big government. They believe that a person's individual rights supersede the powers of government and they believe that government should be restricted in its spending and its powers.

    Both groups agree that defense and affairs with foreign governments are the job of federal governments. Both groups fiercely believe in capitalism.

    Where Does Capitalism Come From?
    Before the invention of chartered companies in the 17th century, if you owned a business, you were personally liable for everything the company did, for everything the company owed. The businessman risked everything every day because he was liable for all of the debts and all of the actions of the business. It may help to remember that debtor's prison lurked for those unable to pay their just debts.

    The Economist, December 18, 1926 The economic historian of the future may assign to the nameless inventor of the principle of limited liability, as applied to trading corporations, a place of honor with other pioneers of the Industrial Revolution. The genius of these men produced …… the limited liability company - the means by which huge aggregations of capital required to give effect to their discoveries were collected, organized and efficiently administered. This was written in 1926.

    A limited liability company conducts business as if it is an individual. It borrows money; it sells goods; it is liable for its actions. Individuals are the directors of the corporation. So long as their actions are within the law, they are saved harmless from personal liability. Officers run the company under the direction of the directors, and so long as their actions are within the law, they are also saved harmless.

    The Rule of the Companies
    Under this invention of a "limited company" (in years gone by called a "chartered company"), commerce blossomed, employment blossomed, and with the advent of the Industrial Revolution, our modern world came into being. We prospered sufficiently to allow us to worry about more than a supply of shelter and food. The rights and freedoms of the individual come into focus.

    Government had to grow and adapt in order to deal with the corporations, which added an element of complexity to the role of government. In our modern age, many people look to the government to be sort of an overseer of the rights of the individual. Therein, the problem exists. As government seeks to moderate the powers of the corporations, it steps on the rights of the individual.

    The Power of the Corporations
    A good illustration of the need for government to be the balancing act, is the corruption of the corporations that caused the 2008 economic meltdown. Corporations lied to both sides of transactions, and the pyramid of debt grew until it collapsed. Without government enforcing rules of conduct, individuals would have little opportunity or freedom. So government is the balance to corporations, and both corporations and government are necessary as players in our society.

    The Rights of the Individual
    Now we have the Libertarian belief that all persons should be free. The fiercest proponents of Libertarianism are sole professional practitioners, small business owners, and people who believe that all government spending is wasteful. It is ironic that sole professional practitioners owe their vary existence to government regulation. Lawyer would not exist as a monopoly without government regulation. Dentists would face competition from every quack on every corner offering cheap services without government regulation, and so on. The very rules enforced by government gives needed economic benefit to these sole practitioners.

    Small business people, who fiercely resent government paperwork and enforcement, would not have the opportunity to be in business without government leveling the playing field. Large corporations would eliminate all competition.

    The Inefficiency of Government
    Government is incredibly inefficient, spends outrageous amounts of money, creates multitudes of lifetime government jobs to deal with every issue, hires employees to look after employees, and supervisors to supervise, and on and on. Private corporations are much more efficient, and much more productive and much more sensible. The only problem is, without government, all freedoms would be lost by economic dictatorship of those large corporations.

    What Republicans often forget, is that basic human emotions include greed, avarice, selfishness and multitudes of other emotions, only some of which are good and humane. Humans are a complex mix of good and bad emotions, and humans run both corporations and governments.

    Republicans are correct that too much money is being printed, that too much debt is being created, that too much new government has been created, but Republicans should remember that it was a Republican administration that started the printing presses, and used the printing presses in every economic downturn, and created what is now known as Economic Stimulus to keep the world from falling into a depression. The Democrats took this spending to new heights, in their attempts to deal with the economic crisis.

    We have government that is too big, too many government rules, too much debt, too much influence by big corporations and special interest groups. We have many problems.

    Capitalism & Democracy
    We also have an amazing invention called Capitalism, and an amazing political system called Democracy. These amazing parallel systems will gradually right the ship, and life for everyone will continue and be better.

    The views expressed in this blog are opinions only and are not investment advice. Persons investing should seek the advice of a licensed professional to guide them and should not rely on the opinions expressed herein. This blog is not a solicitation for investment and we do not accept unsolicited investment funds.

    Feb 10 10:28 AM | Link | Comment!
  • The China Game Continues

    An Examination of China's Reality as Compared to Media Reports

    The information coming out of China continues to confuse and obstruct what is truly important, which is the gradual improvement in economic numbers coming out of the US. The US is the economic engine of the world, and as the US recovers, so does the rest of the world. However, analysts and fund managers continually scan the news for information that will allow them to see what the future holds. The most favorite subject has been and continues to be China. In a misguided belief, China watchers think that what happens in China will determine what next happens in the economic world. We comment in this article on some of the misleading and confusing information being published in the news.

    What follows starts with what appears to be economic good news, and is followed by the treasure trove of misleading information out of China.

    China's Numbers Look Promising
    China's January HSBC Flash PMI rises to 51.9 from December's final read of 51.5. It's the fifth-consecutive rise for the index, which now stands at its highest level in two years. "Despite still-tepid external demand," says HSBC, "The domestic-driven restocking process is likely to add steam to China's ongoing recovery."

    What on earth a "Restocking Process" means is beyond me. It sounds like the "double speak" described in the book "1984″. Presumably we are to believe that no-one in China saw that the shelves were emptying and no-one thought to reorder merchandise. The result is that now there is economic momentum from "re-stocking". Does this sound convincing? I think not.

    This report from Credit Suisse Chief Economist for Non-Japan Asia Dong Tao, goes on to infer that this economic activity will confuse the central government as to the true state of the economy, and the government therefore will not embark on a needed economic stimulus. All of this confusing advice makes me wonder what to believe.

    Trying to interpret misleading economic reports from China, leads me to the next misleading report.

    More Shenanigans With Chinese Rare-Earth Export Statistics
    In the last day or two it has been widely reported that the total quantity of rare earths exported from China in 2012 was 16,265 t, per statistics from "Hong Kong-based China Customs Statistics Information Service Center", with this figure representing "a drop of 3.5% compared to the year before", i.e. 2011.

    This would mean that the 2011 figure for total rare-earth exports from China was 16,855 t. The problem with that is that last year, the vice-director of the Chinese Ministry of Industry and Information Technology indicated that the figure for 2011 was 18,600 t, and this figure was also widely used and reported by other sources throughout 2012 - even as recently as last month, in the same article that I criticized recently for getting the smuggling numbers wrong.

    So, which is it? 16,855 t or 18,600 t? If it is the latter, then the actual drop from 2011 to 2012, assuming that the figure of 16,265 t is accurate (quite an assumption, I'm now thinking), is closer to 12.6%, not 3.5%, as the newer value being implied for 2011 would suggest. A simple error? Deliberate manipulation? Who knows, but it is yet another discrepancy in a long list associated with these statistics.

    It is disappointing to see industry and other commentators re-publishing these types of numbers once published by Chinese media sources, without doing the simplest of basic fact and number checking - or remembering the contents of pieces they re-published or quoted from just a month before.

    More Information on Trying to Understand What is Happening in China
    We now republish parts of a report from Phoenix Capital Research in which they detail how Caterpiller among others misread China. The following is only an excerpt of a larger article

    January 23 2013
    Is China an Economic Miracle or a Government Sponsored Fraud? Pt 2
    A few months ago, we asked, "is China an economic miracle or one giant government sponsored fraud?" Our views were the latter with corruption as one of the key driving forces for wealth creation and economic growth in China.

    Consider the following:
    1) In 2010 alone, 146,000 cases of corruption were launched in China (that's 400 PER DAY).
    2) Of the 14 cases that were actually reported in the Chinese media, the average amount stolen was 18 MILLION RMB (for perspective, the average college graduate in China earns 2,500 RMB per year).
    3) Between 1991-2011, it's estimated that between 16,000-18,000 Chinese officials fled China taking 800 BILLION RMB (roughly $125 BILLION) with them. Bear in mind China's entire GDP was just 2.1 trillion RMB in 1991.
    4) It's estimated that on average bribes comprise 5-10% of a given project's costs in China today.

    Indeed, things are so corrupt in China, that as soon as the new Government stated it would crack down on corruption, a fire sale of luxury properties began as corrupt officials sought to dump their illegal holdings. Thousands of Chinese communist officials have been panicked into a fire sale of their illicit properties and billions of pounds have been smuggled overseas as the country's new leaders intensify a campaign to root out corruption…

    It said the volume of deals had intensified by "a hundred times" after Xi Jinping, the incoming Chinese president, warned that corruption could kill the party and put one of the country's most vigorous and resolute politicians, Wang Qishan, in charge of stamping out graft…

    This sort of fraud and corruption is systemic in China but it doesn't show up in the GDP or other economic figures the country posts. After all, if a poorly constructed bridge collapses China can always build another one and count it twice for GDP growth. And since the Government controls the media, no one is the wiser.

    As a final example of how the China story will likely turn out, consider the following:
    Caterpillar Inc. believed acquiring China's Zhengzhou Siwei was a way for the U.S. company to boost its fortunes in a lucrative but challenging market. Siwei's sales and profit growth were surging. And the company offered access to China's mining industry, where domestic companies were prospering. Siwei, which sells mine-safety equipment, also boasted an American pedigree. Its controlling shareholders were James E. Thompson III, the scion of one of Asia's most successful expatriate families, and Emory Williams, a former head of the American Chamber of Commerce in China. Caterpillar paid about $700 million in June for Siwei's parent, ERA Mining Machinery Ltd.

    Caterpillar, known for bulldozers, excavators and wheel loaders, will have to write off about $580 million over alleged accounting misconduct at a Chinese maker of mine-safety equipment it bought in June. The WSJ's James T. Areddy talks about what this means for the big U.S. industrial company.

    But now, the purchase has dealt a blow to Caterpillar's already lackluster performance in China. The Peoria, Ill., construction-machinery maker on Friday said it would write down ERA's value by $580 million, blaming "deliberate, multiyear, coordinated accounting misconduct" that was designed to overstate profit at the unit before the deal. The accounting surprise contributed to the departure of a senior Caterpillar executive, a person familiar with the matter said.
    Phoenix Capital Research

    How To Understand China
    The bottom line here, is that investors should invest where they understand the rules of the game and everyone plays under those same rules. The USA has been the place to invest, and will continue to be so.

    Don't be misled by industry reports and advices urging you to diversify and put your money in other markets.

    The views expressed in this blog are opinions only and are not investment advice. Persons investing should seek the advice of a licensed professional to guide them and should not rely on the opinions expressed herein. This blog is not a solicitation for investment and we do not accept unsolicited investment funds.

    Jan 29 10:58 PM | Link | Comment!
  • Irrational Investing - Behavioral Finance Understood Under Adaptive Markets Hypothesis

    An Interesting Commentary on How Investment Decisions Are Made
    The following is a reprint of an article that goes into some detail on how investment decisions are made. It seems appropriate today. It is a bit long and a bit wordy, but investors should always be better investors if they understand what prompts their own investment decisions.

    The following piece makes one think about how their own investment decisions are made, and if you as an investor understand why you choose one investment over another, your decisions can be vastly improved. I urge you to take the time to read this.

    Financial Post - David Pett Apr 27, 2012
    In the late 1960s, when Arnold S. Wood was an equity analyst trainee at a large bank in Boston, he walked into an investment committee meeting one day with a recommendation to buy Ford Motor Co. shares. After finishing his presentation, the head of the committee thanked Mr. Wood for his thorough analysis, but said he would not be taking the advice. The reason: His wife recently bought a Ford that was nothing but trouble.

    Mr. Wood couldn't believe his ears. At the time it was widely accepted that investors act rationally when making decisions and, based on his research, Ford's lemon rate was one of the best in the industry.

    "I had done all this work and it put a prick in my balloon," said Mr. Wood, recalling the incident. "I thought: This is not the way you should make investment decisions."

    But Mr. Wood, now the CEO of Martingale Asset Management and trustee of the research foundation of CFA Institute, has learned all too often over the ensuing years that investors are easily misguided by their irrational biases, beliefs and preferences.

    It's a conclusion shared by many other market participants. As a result, retail investors, financial advisors and professional money managers are increasingly employing the tenets of a different investing practice called behavioral finance as a way to better inform their decision-making.

    "There is a growing realization that people are not entirely rational and that emotions play a key role in how markets function," Mr. Wood said.
    The long-held wisdom that markets are efficient and investors are rational was first introduced when modern portfolio theory was developed in the 1950s. The theory was that portfolio returns could be maximized without additional risk through owning a diversified basket of stocks and bonds.

    The efficient markets hypothesis then emerged in the 1960s, stating that security prices at any given time fully reflect all available information, making it impossible for investors to do better than the overall market. While these traditional investment paradigms have become the cornerstone of standard financial planning practices, they have not been immune to criticism over the years. They have come under particularly heavy scrutiny from all corners of the investment community since the financial crisis of 2008.

    "[They] seem woefully inadequate," said Andrew Lo, a professor at the MIT Sloan School of Management in an article published in the Financial Analysts Journal. "But simply acknowledging that investor behavior may be irrational is cold comfort to individuals who must decide how to allocate their assets among increasingly erratic and uncertain investment alternatives."

    In order to reconcile behavioral biases with basic finance principles, the adaptive markets hypothesis has emerged as an alternative. The theory recognizes that investment decisions are made using logical reasoning, but also physiological mechanisms - such as the fight-or-flight response - that are inherent in all animal species and that can result in highly disruptive behavior.

    'There is a growing realization that people are not entirely rational and that emotions play a key role in how markets function'
    "When being chased by a tiger, it is more advantageous to be frightened into scrambling up a tree than to be able to solve differential equations," Mr. Lo said. "From a financial decision-making perspective, however, this reaction can be highly counterproductive."

    Complicating matters is that investment decisions are impacted by the psychology of groups as well as an individual's psychology, Mr. Wood said. Adding this group dynamic can make investors even more or less confident than is otherwise warranted.

    For instance, they may create unwarranted expectations for themselves by selecting data or opinions from so-called experts not because they are right, but because they support investors' own previously held convictions. On the other hand, they might also see patterns in random occurrences, which further skews their confidence.

    Investors also assume the more information they have, the better decisions they will make. But people have limited, selective memory and storage capacity, something that in psychological circles is known as bounded rationality. Put simply, the ability to process information and calculate its utility is lost beyond a certain point, a point that is different for each person, Mr. Wood said.

    By recognizing these behavioral shortcomings, behavioral investing theorists believe investors can develop more effective ways to allocate assets and manage their investments.

    For instance, it has never traditionally paid to engage in "tactical shifts," Mr. Lo said, because timing the market was thought to be virtually impossible and therefore an ineffective strategy. But the adaptive markets hypothesis implies that investment policies must be formulated with the knowledge that market efficiency is not an all-or-nothing condition, but a continuum. During periods of extreme fear or greed, traditional approaches to asset allocation and diversification may no longer be effective because they may not provide adequate rewards for the risks taken.

    "Diversifying one's investments across 500 individual securities - for instance, the stocks of the S&P 500 Index - used to be sufficient to produce relatively stable and attractive returns over extended periods of time," he said. "However, in today's environment, these 500 securities are so tightly coupled in their behavior that they offer much lower diversification benefits than in the past."

    For his part, Mr. Wood thinks investors' success - or failure - is not based on their ability or skill, but on the choices they ultimately make. The best way for investors to improve performance, therefore, is to acknowledge any behavioral shortcomings, such as undue worrying or excessive optimism that undermines their ability to make rational financial decisions, and work to narrow the "emotional pendulum" related to market swings.

    "If people find themselves warming to a particular investment idea, they should ask the question, 'What can go wrong here?'" he said. "People need to sleep on their ideas a little bit, just to make sure they are not being fooled by themselves."

    Investors might miss the start of a true rally or downturn, but they likely won't get burned in the long run from making a hasty decision

    Examine Your Own Thought Process
    The foregoing is highly logical and well thought out. While it is written from an educational and research point of view, it does point out how most of our every day investment decisions are made. Making a short checklist that you must answer or "tick off" before actually making an investment, might force the investor to apply a logical and rational decision-making process to an investment decision. The checklist would be easy to create and would involve asking 3 or 4 'yes' or 'no' questions taken from the above article.

    Good investing.

    The views expressed in this blog are opinions only and are not investment advice. Persons investing should seek the advice of a licensed professional to guide them and should not rely on the opinions expressed herein. This blog is not a solicitation for investment and we do not accept unsolicited investment funds.

    Jan 29 10:56 PM | Link | Comment!
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