NotaCompletePessimist

No One Saw This Economic Crisis Coming?

I think Hedge Fund manager John Paulson's name should be added t the list of individuals who saw this coming. However, he stands out in that he did something about. He took positions and wagered on what he saw. By all accounts he seems to have done well.

Dear World: Please Stop Lending the U.S. Money

You state you have a cash hoard...

Why hoard cash if the currency is on its way to being debased?

Dollar Strength: An Illusion

I think the concern has a certain validity. However, the US government does have the ability to raise taxes to start to address its fiscal imbalance. It also has the ability to reduce spending, if the political will requires it. While both these alternatives seem politically difficult, if not impossible, the reality is that the US government has recently shown itself to be very proactive in addressing the current credit / market crisis. Also it should be remembered that until recently the US even had a government (Bush 1 and Clinton) that showed the mettle necessary to create a positive fiscal balance, ruined by (who would have thought) a Republican administration.

While the will to purchase US govt. debt may have trouble at some point in the capital markets, it is more likely than not that people are willing to bet that the US will do more "right" than "wrong", in line with history.

Strangely, I think this may be at the source of why Obama stands a good chance of winning the presidency. I think its not just that he is a brilliant campaigner and politician, but he has correctly pointed out that the last 8 years of republican administration have been economically irresponsible and that he will change that, although the nature of the change has not been very well defined.

However, the US has historically been pretty good at producing historical leaders in these times of stress. Probably good enough to bank on the US doing it again.

Its difficult to envision how a broken US dollar, with its attendant consequences around the world would benefit any country or government that is concerned with improving the economic well being of its people. Its also pretty hard to envision a series of politicians in the US collectively making this worst case scenario happen. However, when the crap hits the fan, they have reacted pretty well, not perfect, but well.

Bottom line, I agree, there is a lot in place for the USD to exhibit some strong depreciation in the future. But its unlikely that policies to prevent a total USD meltdown won't happen either.

John Hussman: Has the Market Reached Final Lows?

So do you think the market has hit its lows or not??

1,238 Billion Barrels of Oil Reserves: Is This an Oil Price Bubble?

Excellent article. I am uncomfortable with trading around to it in the short term though.

1. I am not certain we can trust reported reserve numbers from some countries. (Bullish)

2. One of the few things I remember about commodity pricing from my micro economics classes is that commodity pricing tries to balance where marginal prices equal marginal cost to produce. So what is the marginal cost to FIND, drill and produce a new barrel of oil? Given the complexity of the calculation, I'm not sure anyone knows for sure anymore. Given the depths to which they are drilling these days, the fact that very little refinery investment for the sours crudes or bitumen that makes up an increasing percentage of reserves, its probably much higher than it used to be. Add to this the risk factor that oil is a political commodity and when it is found it is always at risk of some sort of expropriation or re-negotiation. (Bullish - too much uncertainty.)

I dunno, seems to me that there are grounds to believe that the price could come down hard. Also, there are pretty good grounds for thinking otherwise. Without a really big strike or increase in short term easy to use reserves or inventories, seems to me to be a dangerous trend to bet against. Just don't see the event for an inflection point yet.

If Thornburg Gets Its Funding, I'll Take Preferred Over Equity

Is it fair to say that you are no longer recommending the preferreds? Why did you recommend the C' and the D's and not the F's. My understanding is that only the F's have a conversion feature?

Thornburg's a Huge Bargain After Monday's Crash

I think the following article from the Wall St. Journal summarizes very well.

WSJ: March 7, 2008, 1:44 pm
Market Remains Irrational Longer than Thornburg Remains Solvent
Posted by David Gaffen

It gets worse for Thornburg Mortgage. The residential-mortgage REIT, which invests primarily in adjustable-rate mortgages, said it will have to restate financial results for 2006 and 2007, adding that it has doubts “about its ability to remain a going concern.”

That “going concern” phrase is never one anyone wants to hear. Somewhat counterintuitively, the stock rose a bit after the news was released, but it dropped off shortly after, lately down 16% on the day. Thornburg shares have been battered in recent days as short-term funding dried up and the company was forced into margin calls, which triggered defaults with other creditors. The stock has lost 85% of its value in a week.

And herein lies the peril of mark-to-market accounting. The company says “difficult market conditions that have resulted in a significant deterioration of prices of mortgage-backed collateral.” Market strategists have pointed out often that the assets in question being held — in Thornburg’s case, adjustable-rate mortgages with high credit ratings — are being priced at levels that reflect the expectation of a higher rate of defaults than most expect.

Thornburg CEO Larry Goldstone signs on with this view in its release, saying “the mortgage financing market’s complete inability to differentiate and appropriately value superior AAA-/AA-rated mortgage securities from all other mortgage assets is as unprecedented as it is frustrating,” said Mr. Goldstone. “Quite simply, the panic that has gripped the mortgage financing market is irrational and has no basis in investment reality.”

And herein it seems time to remember the words of John Maynard Keynes, who said that the market “can remain irrational longer than you can remain solvent.”


For TMA's sake, I hope this doesn't serve as an epitaph. I think many of us forgot that a market in crisis can ignore good fundamentals or make them irrelevant. Certainly seems the case here.

Buffett: The Impossible Expectations of Stock Performance

It would appear that you do not recommend equities, without actually saying so. What do you therefore recommend?

China Yuchai International: An Undiscovered Jewel

Adding an old article on CYD taken for the Motley Fool Web site. It discusses CYD's ownership structure. Has this situation been corrected?
======================...
Chinese Diesel Torture
By Stephen D. Simpson, CFA March 10, 2005

0 Recommendations

When is a value stock not a value stock? How about when you can't understand who's really in charge of the freakin' company!

On the surface, China Yuchai (NYSE: CYD) looks like it should be a slam-dunk stock for those wanting a little China in their portfolio. After all, the underlying business of diesel engines is profitable, growing, cheap, and well-positioned to take advantage of the growth in the Chinese heavy-truck market.

So why, then, does the stock trade for only six times earnings? Why do institutions have virtually no interest in it at all? Why are more than 10% of the company's outstanding shares shorted? Shouldn't this be the next Cummins (NYSE: CMI) or Daimler Chrysler's (NYSE: DCX) Detroit Diesel?

Dig deeper and you begin to see why the stock trades at the level it does. Oh, and get ready for some confusion.

When you buy shares in China Yuchai, you're not exactly buying shares in a Chinese diesel engine maker. What you're buying is shares of a Bermuda company that owns upwards of three-quarters of the stock of a Chinese diesel maker, Yuchai. China Yuchai itself is more than 20% owned by Hong Leong Asia (HLA), and HLA has a "golden share" that allows it to do pretty much whatever it pleases, including controlling the board of directors.

That remaining 25% or so of Yuchai is the sticky part. It's owned by an entity called the State Holding Company, which is basically the Yulin city government -- Yulin is where Yuchai is located. What's more, Yulin, through Coomber Investments, owns almost 25% of China Yuchai.

Got all that?

Wait, there's more.

Even though China Yuchai owns a huge chunk of Yuchai, it's more or less in the position of a nonoperating partner. That is, it doesn't (and, frankly, can't) make any day-to-day decisions about the company or its financial structure, including dividends or capital expenditures.

Recently, this has been a problem. The Chinese management of Yuchai and the management of China Yuchai have not been seeing eye-to-eye on matters. Not only have dividends been withheld from China Yuchai but also Yuchai has attempted to pull stunts such as not permitting board meetings to be held, not implementing board decisions, and even attempting to give a sweetheart loan to another Coomber-controlled company.

When China Yuchai began to complain about these goings-on, the State Holding Company tried to bring the whole thing crashing down by having China Yuchai's ownership stake declared illegal. This is a time-tested practice in China -- if the foreign partner gets a little too big for his britches and doesn't let the locals do what they please, the government tries to pressure him with threats of invalidating the whole shebang.

To its credit, China Yuchai tried to resolve the mess in a July 2003 agreement (called "the July 2003 agreement") whereby both groups essentially pledged to play nice and cooperate. Well, it's been 18 months, and the agreement has yet to be implemented. What's more, the CEO of Yuchai, who is essentially a State Holding Company ally, threatened in December 2004 that the agreement may not be implemented at all. And then in February, Coombers again asserted that China Yuchai was in violation of various Chinese laws and was interfering in Yuchai's operations.

To make matters even more interesting, it appears as though Coombers has been contemplating an increase in its holdings of China Yuchai -- perhaps in an effort to throw off the ownership structure in such a way that HLA would loose its "golden share" and therefore lose control of China Yuchai. But then, you expected that, right?

If anybody has followed this far and doesn't yet have a headache, they're a stronger person than I.

While I really love the inherent idea of China Yuchai -- a growing Chinese maker of diesel engines that trades at a single-digit price-to-earnings ratio -- the reality would give me nightmares if I tried to own this thing. True, the squabbling hasn't really hurt the operations of the underlying company yet, but there's just too much turmoil here for my comfort

China Yuchai 2007 EPS Likely to Exceed $1.50

Adding an old article on CYD taken for the Motley Fool Web site. It discusses CYD's ownership structure. Has this situation been corrected?
======================...
Chinese Diesel Torture
By Stephen D. Simpson, CFA March 10, 2005

0 Recommendations

When is a value stock not a value stock? How about when you can't understand who's really in charge of the freakin' company!

On the surface, China Yuchai (NYSE: CYD) looks like it should be a slam-dunk stock for those wanting a little China in their portfolio. After all, the underlying business of diesel engines is profitable, growing, cheap, and well-positioned to take advantage of the growth in the Chinese heavy-truck market.

So why, then, does the stock trade for only six times earnings? Why do institutions have virtually no interest in it at all? Why are more than 10% of the company's outstanding shares shorted? Shouldn't this be the next Cummins (NYSE: CMI) or Daimler Chrysler's (NYSE: DCX) Detroit Diesel?

Dig deeper and you begin to see why the stock trades at the level it does. Oh, and get ready for some confusion.

When you buy shares in China Yuchai, you're not exactly buying shares in a Chinese diesel engine maker. What you're buying is shares of a Bermuda company that owns upwards of three-quarters of the stock of a Chinese diesel maker, Yuchai. China Yuchai itself is more than 20% owned by Hong Leong Asia (HLA), and HLA has a "golden share" that allows it to do pretty much whatever it pleases, including controlling the board of directors.

That remaining 25% or so of Yuchai is the sticky part. It's owned by an entity called the State Holding Company, which is basically the Yulin city government -- Yulin is where Yuchai is located. What's more, Yulin, through Coomber Investments, owns almost 25% of China Yuchai.

Got all that?

Wait, there's more.

Even though China Yuchai owns a huge chunk of Yuchai, it's more or less in the position of a nonoperating partner. That is, it doesn't (and, frankly, can't) make any day-to-day decisions about the company or its financial structure, including dividends or capital expenditures.

Recently, this has been a problem. The Chinese management of Yuchai and the management of China Yuchai have not been seeing eye-to-eye on matters. Not only have dividends been withheld from China Yuchai but also Yuchai has attempted to pull stunts such as not permitting board meetings to be held, not implementing board decisions, and even attempting to give a sweetheart loan to another Coomber-controlled company.

When China Yuchai began to complain about these goings-on, the State Holding Company tried to bring the whole thing crashing down by having China Yuchai's ownership stake declared illegal. This is a time-tested practice in China -- if the foreign partner gets a little too big for his britches and doesn't let the locals do what they please, the government tries to pressure him with threats of invalidating the whole shebang.

To its credit, China Yuchai tried to resolve the mess in a July 2003 agreement (called "the July 2003 agreement") whereby both groups essentially pledged to play nice and cooperate. Well, it's been 18 months, and the agreement has yet to be implemented. What's more, the CEO of Yuchai, who is essentially a State Holding Company ally, threatened in December 2004 that the agreement may not be implemented at all. And then in February, Coombers again asserted that China Yuchai was in violation of various Chinese laws and was interfering in Yuchai's operations.

To make matters even more interesting, it appears as though Coombers has been contemplating an increase in its holdings of China Yuchai -- perhaps in an effort to throw off the ownership structure in such a way that HLA would loose its "golden share" and therefore lose control of China Yuchai. But then, you expected that, right?

If anybody has followed this far and doesn't yet have a headache, they're a stronger person than I.

While I really love the inherent idea of China Yuchai -- a growing Chinese maker of diesel engines that trades at a single-digit price-to-earnings ratio -- the reality would give me nightmares if I tried to own this thing. True, the squabbling hasn't really hurt the operations of the underlying company yet, but there's just too much turmoil here for my comfort