Friday, October 24, 2008

Any more guesses on oil price?

The survey in this blog on oil price shows that most people did not predict the sharp fall of oil price in recent weeks. It is currently at US$70 whereas it was above $140 only a few months ago. Snowball, are you going to have a new oil price survey, now that we are closer to year end?

US dollar’s elusive path


When the US government announced the passage of the legislation authorizing the US$700 billion bailout plan in September, most people thought that the US dollar would fall because of the consequential increase in supply of US dollars. To their surprise, the US dollar strengthened sharply against Euro and many emerging market currencies. However, it strengthened against the yen, as can be seen in the following graph.

Why did the US dollar strengthen against Euro? Perhaps because Europe is looking weak also and ECB is signaling it will cut interest rate. But if they do not cut faster than the US, there should be no change in interest rate differential. Hence, the strengthening of the dollar vs. Euro may reverse if the market has priced in a faster rate cut by ECB compared with US than what is going to be actually realized.

Why did the US dollar strengthen against emerging market currencies? The general thinking is because investors sold assets considered more risky and change the proceeds back to US dollars, investing in US treasuries instead. It seems that the selling of foreign equities has been the case, for example, with Indian stocks, and then Indian Rupees. But the Philippine stock market is so small that even with massive withdrawal from the stock market, the impact on the pesos should not have been as strong as has happened. Furthermore, with the peak remittance season coming soon, I am doubtful that the US dollar can maintain its strength against the Philippine pesos.

Why did the US dollar weaken against Japanese yen? The interest rate differential theory also seems applicable here. The interest rate of yen is so low that there is probably no room for any rate cut. When US cuts interest rate, then keeping money in yen does not look much worse than keeping money in US dollars. Japanese investors may have simply converted their US dollars back to yen, creating demand for yen and strengthening its exchange rate as a result. Any body out there has data that supports or refutes these theories?

Some interesting discussion on the main exchange rates can be found in : http://www.learncurrencytrading.com/fxforum/usd-jpy/13858-discuss-usd-jpy-dailyfx-analyst-124.html

Wednesday, October 15, 2008

Buffett style Investing Shines (Inquirer)

Buffett-style investing shines
By Ma. Salve DuplitoINQUIRER.netFirst Posted 21:04:00 10/12/2008

VANDERMIR C.T. SAY started investing when he was 12 years old. That was 22 years ago. He recalls picking stocks the way he would play darts. Not anymore. For the last decade or so, Vandermir has become a Warren Buffett-follower, investing only in good companies at good prices and buying them for the long haul.
In the last couple of months, amid cascading losses in markets all over the world, Buffett’s value investing philosophy has attracted.
The fact that Buffett, the world’s richest man according to Forbes magazine, has emerged as Wall Street’s knight in shining armor after injecting funds into Goldman Sachs and General Electric a week ago has most likely upped the ante significantly on value-style investing.
And if the sale of Buffett’s first and only authorized biography “The Snowball: Warren Buffett and The Business Of Life” written by Alice Schroeder (editor of Berkshire Hathaway’s layman-friendly annual reports) is any indication, the interest is just heating up. Just days after it hit bookstores in Sept. 29, the book has claimed a top spot on Amazon’s best-selling book list.
Say, the Chartered Financial Analysts of the Philippine’s new president, explains that value-style investing is based on very simple principles. “All we look for are good businesses at good prices,” he says.
What makes a good business? One that you’re absolutely sure will make good money in the next, say, 20 years and run by highly capable management with high integrity. That means you only invest in businesses you understand -- a trademark Warren Buffett philosophy.
In this day and age of extremely volatile markets, the value investor is unfazed because he buys and holds for as long as he needs the investment. He is not concerned about fluctuations. His life is relatively simpler and less harried because for him, Wall Street can wallow in its own toxic securities.
Contrast that with an investor who makes money from trading stocks or bonds and who had to watch his portfolio drop more than 20 percent in the last couple of weeks, asking himself every morning, “Is this ever going to end?”
In fact, Say says, some value investors he knows who have the extra cash are now revving up for acquisitions. After all, prices are low and whether in good or bad times, a good business is a good business.
“In general, what is happening is good for us because the crisis is pushing down prices. My job now is to look for good businesses,” Say says.
Whether in stocks and bonds, Say says good opportunities in the market are starting to emerge. He declines to say what are good buys, but gives tips: Look for businesses that are managed by people with high integrity and find companies that respect the rights of minority shareholders. Those two criteria alone will shorten the list of good bargains out there in the market, he says.
“Right now, Buffett can buy almost anything in the market, but look at companies that he is buying. Goldman and GE, companies that are being run very well … Integrity is important, the goodness of a person is important. What if you meet some guy with no integrity but you can probably make $200 million, you should say no. Why go through all that stress? There are better ways to make money,” he adds.
These may sound like dreamy principles in a day and age where everything is measured by money and returns. But it also uncannily explains why Wall Street is tottering like a drunken lunatic in a suit: Greed is the root cause of the subprime mortgage problem. Even more greed by investment bankers and hedge fund managers blew that out of proportion through derivatives instruments disclosed in legalese language very few understood.
“Buffett and Charles Munger (Buffett’s business partner) have attacked derivatives three or more years ago. Munger said comparing derivatives to a sewer is an insult to sewers. Now in this crisis, what is the value of his advice? Multibillion dollars because what are the key to the problems now? Derivatives,” Say explains.
That said, Say doesn’t see the popularity of value investing to stay for long. “It is the flavor of the year, but if you are asking if it will generally be much more popular than before, I would guess not. Buffett learned from Benjamin Graham more than 50 years ago. It is not a secret; it has been around for a long time. But it has never been a popular style,” he says.
Reading annual reports and understanding what makes a business tick takes a lot of patience. It’s based on analysis, and not a quick tip to make a quick buck by flipping a stock or bond. Adhering to those principles and being disciplined is the hardest part, says Say, because old habits die hard.
“There are a number of value investors here in the country. They are in the minority, as well as with any other market, even in the US,” he says.
And do they make more money than the flippers? Say knowingly smiles, and says, yes, they are wealthy.
The 32-year-old investor tries to emulate Buffett not just in investing but also in the way he lives. Buffett, the shy billionaire who is also called the Oracle of Omaha, still lives in his house in Nebraska that he built more than 50 years ago, doesn’t have a driver, is brand loyal, and highly values integrity. Say uses an old model mobile phone and says his passion is helping people live better lives.
“My clients have been calling me about the book (Snowball) when it came out, and they were very excited about it. It’s like our Harry Potter,” he says with childish excitement.

Friday, October 3, 2008

The role of rating agencies in the US Subprime crisis

For those still in the mood of looking at someone to blame for this financial mess, here is one target that you should not miss : the rating agencies. Bloomberg has two excellent articles explaining how S&P and Moody's put profit ahead of their professional integrity and underrated risky derivatives such as Subprime mortgages backed CDOs (part 1 and part 2).

Another very important article giving a broader perspective on the effects of the dominance of the financial sector in an economy, and includes an explanation of the subprime mortgage crisis as well as a description of the role of the rating agencies, is this article by John Bogle, "Black Monday and Black Swans", an abstract of which can be found in the August issue of CFA Digest. It is a must read for any one who is interested in the root causes of the subprime mortgage crisis.

Wednesday, October 1, 2008

capital market : more regulation or less?

In the midst of the worst financial crisis in the world leader of capital market, a debate is going on as to whether the solution should include more regulation of the capital markets or less. Those who argue that there should not be more regulation cited the negative effects of the Sarbanes-Oxley Act enacted in 2002 in the aftermath of the Enron scandal as a reason for opposing more regulation.

In my view, the evidence of this current crisis speaks clearly for itself. The more regulated commercial banks were allowed to trade heavily in unregulated financial products, while the lightly regulated investment banks were allowed to trade freely with the commercial banks. Even though the commercial banks were more regulated, because of their heavy dealings with the investment banks, the end result was both needed to be rescued. Of course, lax supervision, which is a problem with execution rather than legislation, allowed banks to lower lending standards. Regulators were at fault in believing that just because banks claim that they would immediately pass on most of the risks of the dicey mortgages to a third party by selling mortgage backed securities to pension funds and other non-bank financial institutions, banks should be allowed to lower their lending standards. More regulations, specifically in respect of trading of derivatives and the intertwining of business dealings with non-bank institutions, should be required, as well as better implementation of existing regulations.