Saturday, May 14, 2011

Reading List - May 14, 2011

YUM! bids for Little Sheep

YUM! (ticker: YUM) bids for Little Sheep.  Little Sheep is a "hot pot" concept restaurant based in China.  Customers essentially dip vegetables in boiling broth.  YUM has been betting on growth in the China market since the 1980's when introducing the Kentucky Fried Chicken brand to China.  The company has changed the image of its US brands to fit Chinese preferences and has been successful.  Simply, going to a KFC or Pizza Hut in the United States is completely different than going to one in China.

From a business standpoint, this makes sense.  Acquiring the brand completely gives the company increasing exposure to the Chinese consumer.  It can also bring the brand to the United States.  Asian style food is definitely on the rise of consumer preferences in the United States, as evidenced by brands like Panda Express or Flat Top Grills expanding.

U.S. Fast-Food Giant Yum Bids for Chinese Chain (click here)

Stocks vs. commodities

From CNBC:

Commodities have lost their luster for leading investment strategists on fears that global economic growth, particularly Chinese demand, may be lower than previously expected.

"While we would wait for a better entry point, we believe the cyclical bull market in equities is not over and would buy any summer weakness in stocks, Michael Hartnett, Merrill Lynch's chief global equity strategist, wrote in a report, in which he favors U.S. and emerging markets over Europe and Japan.

Defensive stocks are preferred to cyclical ones, JP Morgan said, arguing that the economic indicators show the global manufacturing sector is experiencing an inventory correction similar to the one seen around the middle of last year.

Defensive stocks are not the only ones that should perform well this year, according to Merrill Lynch. Companies with strong and stable profit growth are also expected to thrive as corporate earnings decelerate in general and the Federal Reserve prepares to reduce monetary stimulus, it said.

Time to Move Some Money from Stocks to Commodities (click here)

Tuesday, May 3, 2011

Reading List - May 3, 2010

"Negative Outlook" is not even close...

Martin Weiss, Weiss Ratings, appeared on CNBC.  According to Weiss Ratings methodology, the US sovereign rating should be 'C' or similar to a BBB rating given by either Moody's or S&P.  The 'C' rating is based purely on statistics and there are no qualitative factors considered.  The only way to get ourselves out of this mess it appears is to cut government spending (i.e. reform entitlements) and enact pro-growth policies.  No nation is history has taxed its way to prosperity.  According to Weiss on CNBC:

A 'C' is equivalent to approximately a triple-B on the S&P, Moody's and Fitch scales. It's two notches above junk and one notch above the equivalent of a single A," Martin Weiss, President of Weiss Ratings, told CNBC Tuesday.

Weiss was quick to add that while the rating seems weak, the debt situation is not in a danger zone that would trigger panic, noting that there was still broad market acceptance for Treasurys.

The grade reflects the U.S. massive debt burden, low international reserves and the volatility in the American economy, he said.

David Einhorn: The Fed's Policy is Backfiring

To quote CNBC:

A recent letter from Einhorn's Greenlight Capitol argues that fear of inflation is causing investors to sell bonds and avoid housing, leading both to slump.

Inflation fears are also driving up commodities prices, the letter argues.

From the letter:
Here in the United States, our fears that quantitative easing would be a net harm to economic activity appear to be playing out. The prices of things people actually pay for including food, energy and healthcare continue to go up at an accelerated pace ...
While Chairman Bernanke claims that quantitative easing has succeeded in raising stock prices, it seems that equities have gone up for the opposite reason he proposed. According to Mr. Bernanke, Federal Reserve purchases of government bonds were supposed to raise their price so that they would be less attractive than other investments, including housing and equities. Investors would note the disparity and “rebalance” their portfolio to buy more houses and stocks, which would appear cheap compared to higher bond prices. This would support the housing recovery and make the equity market rise.
Instead, it appears that in response to quantitative easing, investors now fear inflation and have sold bonds. Interest rates have risen and housing prices have declined further. The housing recovery has faltered, creating another negative wealth effect and putting additional strain on the banking system. The money that the private sector would have lent to the government, had the Federal Reserve not printed the money instead, has gone to other goods, notably commodities and stocks to the extent investors see them as a better inflation hedge than bonds. Though the Federal Reserve has produced “research” that purports to show that quantitative easing has not caused commodity prices to rise, many observers disagree. As the Bank of Japan put it in March, “[I]t is safe to say that globally accommodative monetary conditions are a key driver of the rise in commodity prices by stimulating both physical demand for commodities and investment flows into commodity markets.”
David Einhorn: The Fed's Policy is Backfiring (click here)
Full letter (click here)
Higher rates mean severe recession

According to this strategist, it may be time to end the ultra-low interest rate policy central banks around the world have pursued.  Recently, the economy has underperformed what should be expected out of the economy.  This strategist believes a slowdown will occur in the fall.  The difference between this slowdown and the last slowdown is central banks will be raising rates going into it which may make the recession that much deeper.

Higher Rates Mean Severe Depression (click here)

Jack Welch on "free money"

Jack Welch essentially believes the easy money policy of the Federal Reserve will cause problems, as "free money" in the hands of smart people causes problems.  To quote Welch on CNBC:

"Free money in the hands of very smart people for too long is going to create something that's not very pleasant," Welch said. "I don't know what it exactly is. But every time we get free money to lots of people who are very, very smart and know how to use it you end up with a bubble or a problem that we don't quite see in front of us."

'Free Money' About to Cause Big Problem: Welch (click here)

Stocks signaling inflation

Typically, stocks underperform when inflationary expectations increase.  This time around it is different.  As commodities prices keep rising, stocks are rising as well.  So, is economic theory actually playing out?

What Are Stocks Saying About Inflation? (click here)

Sunday, May 1, 2011

Reading List - May 1, 2010

Besides, I cannot believe it is already May, I have added some new articles of interest...


The Woodstock of Capitalism


Warren Buffett, annual shareholder meeting has been going on.  Highlights include:
  1. Buffett is taking a hard line against the David Sokol/Lubrizol incident.  He has said that he should have been more vigilant in knowing about Sokol's trades.
  2. His successor, although not named, is "straight as an arrow."
  3. Due to Japanese earthquake, Berkshire may have to incur the first underwriting loss in years
  4. The "elephant gun" is still loaded.  The Sokol/Lubrizol incident will not slow Buffett down and look forward to future deals.  Most likely, the deals will be overseas (i.e. India)
  5. Berkshire's value would go down if Berkshire paid a dividend.  It would signal to the market Mr. Buffett could not re-invest capital at a high enough hurdle rate.
Buffett Still Stands To Build Wealth for Shareholders: Gabelli (click here)
Berkshire Gets Tough With Sokol As Meeting Nears (click here)
Berkshire May Have Underwriting Loss on Disasters (click here)
Guessing Game Builds Over Buffett's Next Deal (click here)
Berkshire Stock Would Drop If Company Began Paying Dividend (click here)

Bernanke & inflation

I couldn't agree with this analysis anymore! From CNBC:

...But quantitative easing does seem to be doing a good job of creating inflation expectations. As Larry Kudlow pointed out yesterday, “inflation-sensitive market-price indicators — like rising gold, oil, and commodity indexes, and the falling dollar exchange rate — are trying to signal higher future inflation.”

I suspect that the cause of this breach between inflation expectations and reality is that we have so little experience with these unconventional policies. Markets understand pretty well how to anticipate the future consequences of the ordinary Fed policies like targeting interest rates. But the very newness of quantitative easing means that the outcome is difficult to predict...

The irony is that nearly everyone is misreading what has happened.
What Bernanke is worried about is not that we’ll get too much inflation—he knows he can just put a stop to inflation by hiking rates—but that anticipation of inflation will get out of hand. And that is something he cannot directly control.

Inflation Expectations and New Monetary Policy (click here)

Is the silver rally sustainable?

From marketwatch.com:

We have now entered just the beginning of the third [and final] phase of the bull market in precious metals” — the phase in which everyone has become aware of the bull market but aren’t yet engaged and involved in it, he said. The third phase is far from over but when it ends, “precious metals will become a bubble with heavy public participation...

...Karnani never expected, however, that silver would be near $50 by the end of April.
“I am not bearish on silver. I am only concerned over the pace of the rise of silver,” he said. “For long-term sustainability, silver prices must fall for a week and then rise. If silver prices continue to rise, then a bubble will be formed and silver prices can crash to $25 next year.”

$50 Silver Price Screams Caution (click here)

Weak dollar, strong stocks

Kudlow & Co. clip feat. Rick Santelli (click here)