Chris B

Strategic Hotels & Resorts: Only for Long Term Investors

Don't worry about dilution. If, for illustration, they sell 1M shares at a market price of $1 each, the company will be worth $1M more than it was before (cash from the sale of stock is added to the company's assets, or subtracted from liabilities) which exactly equals the dilution to existing shareholders for a net change of zero. Actually, if the prospect of bankruptcy was removed by the cash infusion, the "dilution" could cause existing shares to appreciate.

Why Isn't Microsoft's Strategy Working Anymore?

The comparison of MSFT to a utility is flawed because (a) utilities such as gas, water, and electricity are generally thought of as things that could not be innovated into obsolescence within a few years, (b) because utilities tend to have predictable and stable cash flows, and (c) because utilities are heavily regulated which makes them low-profit monopolies but also protects them from competition. The software industry resembles none of these attributes.

A more valid comparison might be to an old-school land line telephone company like Qwest (Q) or Windstream, which will eventually be wound down as demand declines. Demand declines because of the emergence of new technologies that make the wire lines almost obsolete.


On Jun 08 12:40 PM dybydx wrote:

> i agree with the non-innovator opinion from the author. although
> as someone else pointed out, MSFT is being bought as a utility company,
> not a growth stock. its low P/E of 12.5 is inline with many utility
> companies. (where as intc at 20, csco 16.5 and goog 32)
>
> although on the bright side i am glad that capital is being put to
> companies that CAN innovate.

Why Isn't Microsoft's Strategy Working Anymore?

3 reasons MSFT's business model is doomed:

1) Bureaucracy kills creativity-----

The technology industry = hypercompetitive innovation = creativity. A corporation the size of Microsoft simply has too many hierarchical layers, too many standard operating procedures and policies, too many forms to fill out, and too much management and bureaucracy to be a hotbed of creative construction and creative destruction. Every time a tech company gets this big, along comes a much smaller, more creative, faster, and more dynamic startup competitor who cleans their clock with a whole new paradigm of what technology can do. MSFT in 2009 is what IBM was in 1989 and what Yahoo! was in 1999 in that they are ignoring the emergence of a new competitive framework. While MSFT managers hold endless meetings to craft their new system for processing expense requests, somebody else is working on artificial intelligence, a more effective interface, or a superior file format.

If you wonder why Google offers on-site massage services, free meals, and 20% creative time to its employees, etc. this is why. Yet, I doubt that even these measures will be enough to maintain competitive advantage (see reason 2).

2) Tech encourages entrepreneurship----

Why did the founders of Google drop out of Stanford to start their own business rather than just graduating and getting a job at Yahoo? Because if you are a brilliant visionary, no company can offer you the rewards that starting your own company can offer. Had Yahoo! even realized what these kids were capable of, they might have been able to offer them a measly $2 million a year or so - and even that would cause a management uproar. In technology, there are few barriers to entry. You don't have to come up with millions of dollars in financing to build factories, etc. If you build a better mousetrap, or search engine, the world really does beat a path to your door. Why then should you sell your better mousetrap to another firm for a tiny fraction of what you could have made with your own business?

3) It's like selling canned air... stale air----

Alternatives to ALL Microsoft software is now available for free: Linux or Android for your OS, Open Office, Google Docs, Linux for your server, Linux apps like GIMP for graphics, Firefox for your browser, and the list goes on and on. This wouldn't be a problem if MSFT quality was so much higher than their free competitors that it justified a price. However, Windows chronic and inherent lack of security or stability means that is not the case. Similarly, MSFT's attempts to produce hardware like Apple have ended with low quality products like the Zune and Xbox. Everything they touch becomes low quality. Open source hobbyists working for free are somehow writing better and more secure code than the paid employees at MSFT. For an explanation of why, see (1) and (2).

Backing the Dollar

"China is faced with a “dollar trap” in that any decline in their buying of US Treasuries would undoubtedly reduce the value of their existing Treasury holdings as well as drive up the value of the Chinese yuan as the dollar weakens."
----------------------...
Wars fought to obtain global supremacy are also a well-known "dollar trap" yet that has never dissuaded an empire from pursuing them. China has purchased, through hard labor, the economic rights to cripple the US economy, control the world's new reserve currency, and become the dominant empire on the planet without a shot being fired.

The Chinese people won't mind if their government's rumored dollar investments lose value as long as their personal hoards of yuan keep increasing in value (remember their 50% savings rate?).

Americans might complain about becoming the next France or UK, except with lower living standards, but on the bright side nobody had to die in a war just to arrive at the same point.

Julian Robertson Bets the Farm on Inflation

Keep in mind, there are dozens of hedge fund managers making the opposite bet, but they are not mentioned in this article. Of course, comparing the past performance of various hedge fund managers with their positions today might be too blatant an example of expecting past results to predict future returns.

Suffice to say, no market theme or perspective endures forever, and chasing heroes is a good way to go broke.

How Can We De-Risk the Economy?

De-Risk the Economy?

Easy.

Reinstate the Glass-Steagal Act. Separate the banks that lend money to consumers and businesses from the banks that flip investments for a living. Then we'll never again have a credit crunch that is caused by the investment side of the bank losing money, therefore curtailing commercial lending. Commercial banks would be responsible for their own loans again, and the FDIC would just do their routine changeover if they were mismanaged. As for the investment banks, once they cannot threaten the availability of credit in our economy, they are not too big to fail. Note that this plan builds in protection to some extent, against financial monopolies or oligopolies.

The pre-1999 banking system also has a history of over 60 years of world-leading stability to its credit, which is a lot more convincing than any TV or internet pundit's opinion.

Greg Reid: Geothermal, the 'Sleeping Giant'

bpickard,

You're right. That's one reason I own LSB Industries (LXU). While everyone's attention is on centralized energy harvesting from large geothermal installations, the biggest economic gains are available from heating and cooling structures using the dirt around them instead of expensive gas and electricity.

The downside is that most home buyers are more still concerned about paint colors than how many tens of thousands of dollars they will spend heating and cooling the place. That's why code-minimum HVAC units and insulation prevail in new construction.

I'm betting that ignorance will change. If not, there's always LSB's chemical and fertilizer businesses to fall back on, plus their solid balance sheet and cash flow.


On Apr 23 03:57 PM bpickard wrote:

> Another aspect of 'geothermal' is available for residential construction
> today, and delivers a better ROI than any large plant. Systems that
> make use of the differential between the ground temperature and ambient
> temperature exist now, are proven, are reasonable in cost to build,
> have a positive ROI, and a cash-pay-back of much less than 5 years
> over a conventional heating system. In areas across the northern
> latitudes where differences in temperatures are higher (on average)
> these systems can make the difference in the avoidance of the construction
> of new power plants.

Greg Reid: Geothermal, the 'Sleeping Giant'

"One notable misconception is that a lot of people think that geothermal is a more expensive form of energy, but the reality is it’s more expensive than some other things up front, but when you look at it over the life of the plant, the operating costs are low and there’s no fuel price risk, so it’s actually at least as cost competitive or better than a lot of other energy sources. On that front, one of the major banks in the U.S. recently put out a report looking at the levelized cost of various energy sources and they said even with the existing incentive schemes in the U.S. with production tax credits and no carbon taxes, geothermal was the lowest cost of all energy sources—even better than coal and gas."
----------------------...

This quote gets to the essence of it. Geothermal is expensive to build, but once built you don't have to buy a bunch of expensive fossil fuels for the next 50 years to run it. How much do you think those daily train loads of coal cost to purchase - each?

It's sort of an investor's dilemma: pay high upfront costs to yield higher returns over time, or pay low upfront costs and high daily costs to achieve a low return. Most conventional energy investments tend towards the later - especially since rising fossil fuel prices can generally be passed on to customers rather than crimping margins.

However, if a large base of wind/solar/geothermal energy is installed, it will become harder for the fossil fuel generators to pass on the risings costs of their fuels. That's when things get interesting.

Chrysler confirms it's reached an agreement with its largest creditors to cancel $6.9B in debt in exchange for $2B in cash. CEO Bob Nardelli also says the company has made progress in its talks with Fiat over a proposed alliance.

Good ole Bob Narelli. Most of us mere mortals can only aspire to oversee the collapse of ONE iconic American corporation in our lifetimes, but Bob has just begun to build his legacy.

The Obama Effect: Is Clean Energy Outperforming the Market?

Your observations on Beta and Alpha are spot-on. However, like you, I do best identifying trends rather than companies that individually will outperform.

The source of Alpha is often the winning of a contract, and unpredictable technological breakthrough, or the best marketing mix in the sector. Those of us who do not work full time as sector analysts would be hard pressed to identify the best of class. Then, even if we did pick the best companies in each sector, our investments would have still lost half their value in the past 1.5 years due to the bursting bubbles and resulting credit crunch.

Why not seek positive Beta then? In hindsight, the one thing that could have saved us from the 2008-09 bear market would have been awareness that the housing and commodities bubbles were about to collapse. The warning signs were all there - skyrocketing prices, euphoria, the entrance of ameteurs in real estate and futures trading. Trend watching Beta seekers should have done better than Alpha seekers, presuming they weren't afraid to sit in cash for a year or so and weren't romanced by individual companies.

We should be asking... what trends can be predicted now? If recovery is around the corner, we'll want to be in high beta stocks as they are predicted to rise faster than the market rises. If you switched from low beta to high beta stocks at the bottom, you would make money off a V or U shaped recovery (go down 1X and up 2X for example).

Unfortunately, most individual investors are doing exactly the opposite - moving to low beta stocks now that their high beta shares have lost so much.

Death of the Asian Development Model: Exporters Chasing a Failing Strategy?

The historical average consumer savings rate is 10%. Since the 1980's this rate has declined rapidly. In 2005, we hit negative one percent as consumers took out credit card and home equity debt to buy merchandise - much of it made in China. That was obviously unsustainable. Now the savings rate is back up to 4% and rising.

The baby boomers who were driving so much of that spending find themselves just a few years away from retirement with their 401(k) savings slashed in half (not that they were saving enough even before this crisis!). They face 20-30 years of poverty if they don't save every last penny during their few remaining working years.

The rise of the savings rate from -1% to +4% over the past 3 years was associated with a decline in Asian exports, despite rapidly rising Chinese supply. I suspect that 10% marks the sustainablility point for the consumer savings rate, because savings rates around this number persisted for several decades before the 1980's. At 10%, people are saving just enough for a modest retirement and to handle life's emergencies without going into debt. Consumer savings rates below that point will eventually result in an inability to retire.

Consumers from the baby boomer generation now have a savings and debt emergency on their hands. To an extent, so does generation X. They'll have to kick their savings into high gear to undo the damage of a decade building up debt while saving next to nothing.

The first things on the chopping block will be Asian exports, which tend to be entertainment, electronics, toys, and other discretionary purchases. Food, rent, utilities, clothing, communications, and healthcare, in that order, will be the new priorities. 50" LCD televisions will not.

South Korea and Australia might be OK. South Korea (EWY) exports less discretionary items like cars, ships, and steel. Australia (EWA) exports minerals.

Swine Flu: Why You Can Ignore the Hype

Imagine it was 1988 and you somehow obtained the knowledge that by 2008, AIDS would become an epidemic responsible for the deaths of tens of millions of people around the world.

Would you have panicked?

Is China the Next Great Bubble?

China has the advantage of starting from scratch. Their brand new cities have extensive subway and rail connections. Their living patterns are urbanized, not suburban or exurban. They are building massive alt-energy projects and solar panel factories.

Peak oil will devastate the US because we will refuse to adapt our lifestyle to this reality. The Chinese, on the other hand, are planning for the future and can see what's coming. They have a proactive attitude towards the challenge, while we have a defensive attitude and in some cases a denial attitude. We cannot accept the notion that we will be living like the Chinese one day out of economic necessity.


On Apr 24 12:17 PM ThatGuyInTheBack wrote:

> >Chinese population's rising standard of living can go on for the
> next thirty years.
>
> You forget that pesky physical limitation called "peak oil." Even
> poor countries run on relatively cheap petrol. Make that expensive
> enough (and over 30 years, it will become *much* more expensive),
> and you will see everyone's living standards fall like a rock, including
> China's.
>

Is China the Next Great Bubble?

China remains very dependent on exports, particularly to the US. However, I suspect that US purchases of Chinese exports are about to slow for the long term. This is the trend China-watchers should really be concerned about.

We're not going back to the days of 0% savings rates and home equity loans being used to buy Made In China furniture, toys, and 42" plasma screens. The US consumer savings rate is currently 4+% and rising towards its historic level of 10%. It might actually surpass 15% as baby boomers make one last effort to pay off debt and save for retirement. Younger workers face incomes that have been stagnant since 2000, with a declining amount of discretionary income due to the rising cost of healthcare. Plus, younger workers are starting to save more due to chronic job instability.

Where will the first of these spending cuts come from? Rent? Utilities? Food? More likely, Chinese-made merchandise, most of which is discretionary (e.g. plastic garden gnomes, toys, electronic gadgets, fashion).

As China's revenues slow or decline, and as internal spending demands increase, Chinese demand for US treasuries will decrease even as supply increases. This will push down prices on treasuries, increasing their yields. That's just one reason I bought TBT, shorting long-term US treasuries.

Chrysler Bankruptcy: Why Car Buyers Might Not Notice

Chrysler deserves to die. Even the govt., which is trying to prop them up, admits that they have "inferior quality." Their market share reflects that fact that consumers are noticing the 3-5 year old Chrysler products on the road blowing smoke out the tailpipe, missing plastic body panels, and peeling their paint off.

When's the last time you saw a Dodge Neon - on the road - that was 5 years old or more?