China to let Yuan Rise 5% against the US Dollar in 2011

According to a Chinese newspaper, China will let the yuan rise about 5 percent against the dollar in 2011 as it needs a stronger currency to combat inflation and avert asset bubbles.  I have favored Ben Bernanke's QE approach as it did help prevent a double dip, but more importantly, it pressured China to strengthen its currency.  When the US increased its money supply, through measures such as QE2, it also exported some inflation to China by forcing China to print more of its currency to purchase the new dollars created by QE2. 

Among other manipulative measures China has taken (hoarding precious metals and limiting the export of these metals), China has held an unfair advantage against the US with an extremely under-appreciated currency.  China has barely budged to appreciate its currency over the last 3 years and the Fed's QE2 decision has been the most successful method of forcing China to appreciate its currency.  The US can now focus on the bigger picture: Provide an accommodating environment for businesses to innovate and start planning for some fiscal discipline once the private sector has taken back the reigns.

Facebook Valued at $50 BILLION

Goldman Sachs is investing $450 million in Facebook at a $50 billion valuation, the New York Times' Dealbook reports.  Goldman's investment comes alongside a new $50 million investment from existing Facebook investor DST, the Russian investment firm that has also invested in Groupon and Zynga. And Goldman has the right to sell up to $75 million of its stake to DST, the NYT's Andrew Ross Sorkin and Evelyn Rusli report.  Also as part of the deal, Goldman will help raise up to another $1.5 billion for Facebook at that $50 billion valuation, according to the NYT…..

HAPPY NEW YEAR!!

I won't be posting until 2011, so I wanted to wish everyone a happy and successful new year! 

Postings, including some investment picks, will be back up after the weekend!

Best Wishes,
Mark

Foreign Investment in Poland to Rise 29.6% in 2011

Foreign direct investment in Poland will increase 29.6 percent to 12.7 billion euros ($16.7 billion) next year, the website Rp.pl reported today, citing a central bank forecast.  It is also noteworthy to mention that Poland is the 6th largest economy in the Euro-zone.  There will be vast amounts of investment opportunities in Poland, especially since many government owned businesses are being divested to conform to Euro-zone implementation rules.

VIX hits 3-1/2 year low of 15.40% (Perhaps Too Low)

The recent decline in the VIX (volatility index) to a 3-1/2 year low occurred because stock prices moved sharply higher in December and just posted a new 2-1/4 year high.  Stocks have performed well, primarily because of the improving economy, strong corporate earnings and the reasonable valuation level of the S&P 500 at 14.7 forward earnings (vs. the 5-yr average of 14.9x and 10-yr average of 16.7x).

However, there are four probable events that could cause some extreme volatility over the next 1-2 years:
1)  Geopolitical crisis  (War, Terrorist event)
2)  United States Fiscal woes unresolved/worsened
3)  Chinese economic slowdown leading to global slowdown
4)  Fear of U.S. inflation lead to high bond yields and pullback in stocks 

The Cost of Insuring Illinois Debt Against Default Now Costs More Than That of California

The cost of insuring Illinois’ bonds against default rose to the highest level in five months as the state headed for the new year without a plan to finance a $3.7 billion pension-fund contribution.  The cost of CDS (credit-default swap) insurance on the lowest- rated state after California has risen 16 percent to $330,000 to protect $10 million of debt, from $285,000 on Dec. 3, according to data compiled by Bloomberg. That’s the most expensive since July 12, when it reached $335,000.

Insuring Illinois against default now costs more than that for California, the lowest-rated U.S. state according to Standard & Poor’s. Covering the most-populous state’s general-obligation debt averaged $291,000 in December, Bloomberg data show. S&P ranks California at A-, its fourth-lowest investment grade, and Illinois at A+, two levels higher. 

State and municipal issuers have been seeing costs for their credit default swaps widen since banking analyst Meredith Whitney on Dec. 19 predicted “hundreds of billions of dollars” of municipal defaults during an episode of CBS Corp.’s “60 Minutes,” Schankel said. Those states in worse financial shape have seen their costs rise more, he said. 

Read more at:  http://www.bloomberg.com/news/2010-12-28/illinois-default-insurance-cost-rises-as-weak-states-punished-muni-credit.html

Job Market: Somewhere Between Thawing and Heating Up

The weekend WSJ reports on a positive economic development that might surprise some people: The increasing number of job offers:

“As the economy gradually recovers, some big U.S. companies are cranking up their recruiting and advertising thousands of job openings, ranging from retail clerks and nurses to bank tellers and experts in cloud computing.

Many of the new jobs are in retailing, accounting, consulting, health care, telecommunications and defense-related industries, according to data collected for The Wall Street Journal by Indeed Inc., which runs one the largest employment websites. It said the number of U.S. job postings on the Internet rose to 4.7 million on Dec. 1, up from 2.7 million a year earlier. The company collects listings from corporate and job-posting websites, removing duplicates. Its figures may under-count available jobs because some companies don’t post all listings online, an Indeed spokesman said."

The employment losses in the 2008-09 recession were much worse than previous contractions. The WSJ adds that “official payroll data so far haven’t shown signs of a big rebound in hiring.”

Online job posts tend to be light on farming, manufacturing and construction jobs, and heavy on computer and mathematical jobs.  The key for many of the available jobs is technical expertise; they are the jobs that are the most plentiful and have the fewest number of applicants per opening.

Other positives for the job market include:

• Government data shows a rising trend in openings. October 2010 had 3.2 million private-sector job openings versus 2.3 million from October 2009 (Source: Bureau of Labor Statistics.)
• Companies have become highly profitable and have built strong cash positions;
• Consumer confidence appears to be reviving; 2010 was the best holiday for retailers in 4 years;
• The economy should continue recovery gradually — and that will encourage more companies to hire

Read more: http://www.businessinsider.com/job-offers-no-rebound-2010-12#ixzz19L0uDTMR

Summary of This Week's Reading Material

• The bull market looks vulnerable to a fairly mean selloff  once the end-of-the year rally runs its course and the expected reinvestment surge early in 2011 exhausts itself.

• Margin Debt on the Big Board in October swelled to the highest level since Sept 2008, just before Lehman collapsed.  A forced unwinding in the market could be very ugly.

• Overpriced Stocks:  Restaurant stocks look expensive with High EV/EBITDA
• Chipotle (CMG), Panera Bread (PNRA), Red Robin Burgers (RRBG) 

• Overpriced Stock:  Netflix (NFLX):  Cost of acquiring content could increase in future due to Studios looking to prevent NFLX from reducing industry profits; Penetrating the subscriber market will be more difficult than in the past.

• High-Beta strategies may do well this year should you be projecting a strong 2011, as many economists have.

• Corporate earnings growth in 2011 will be much more difficult than in 2010. In 2010, companies were gauged against weak 2009 comparables.  Going forward, companies will be compared to the healthier 2010 earnings.  The Materials, Energy, Consumer Discretionary and Technology sectors are expected to have the strongest sector earnings growth.

List of 2010's Best Performing Commodities

• The S&P 500 returned 11.6% year to date.  Here's how some commodities fared:
• Cotton   98.6% return
• Silver     73.1%
• Coffee   65.7%
• Corn     43.9%
• Gold     25.9%
• Oil        10.9%

Do you know what "Austerity" is?

Dictionary company Merriam-Webster ranked "austerity" as its No. 1 word of the year for 2010 because so many people looked up the definition on the company's website when Europe's debt troubles exploded.  If you're from Europe, you are most likely familiar with the term as many of the struggling economies in the region have had to resort to Austerity.

Austerity is maintaining a policy of lower spending, deficit reduction and most notably, the reduction in the amount of benefits and public services provided.

At some point in the future, the United States will have to take some measures of reducing the significant debt overhang.  For now, the government is propping up the system with deficit spending to promote the U.S. economy.  Keep an eye out for this term to be used in conjunction with the term "United States," especially if the capital markets become concerned about the United State's long-term ability to reduce public sector debt, which currently stands at nearly 90% of Gross Domestic Product.

Behavioral Finance: Avoid these Traits

BEHAVIORAL FINANCE is a new (relatively speaking) and trendy topic in the Investment World.  By avoiding many of the mistakes discussed below, you should be able to minimize a loss on your investment.  In the investment world, emotions and psychology can prevent investors from being rational (As was the case within the last year when investors pulled massive amounts of money from the markets).

1)   OVERCONFIDENCE:  When people are overconfident, they set overly narrow confidence bands.
                                       They set their high guess too low, and their low guess too high, thus they are
                                         surprised more often than expected.

2)  ANCHORING & ADJUSTMENT (CONSERVATISM):
                                         Analysts start out with info that leads them to their initial beliefs.
                                         They then respond too conservatively to new information, not revising enough.

3)  REPRESENTATIVENESS: Judgement based on stereotype (thinking a good comp is a good investment)
                                             "Winner-Loser effect"- Past 3-yr loser stocks do better than 3-yr winners.

4)  LOSS AVERSION:  People take on more risk when they're at a loss, because they hate to lose
                                   People exhibit "Get-Eventitis" (Get Even)

5)  HOUSE MONEY:  People think of their stock gains as "House Money"
                                They tend to take more risk with that money since they don't think of it as their own

6)  REGRET:  Emotion experienced for not making the right decision.
                    If you experience regret intensely, you'll have regret minimization (try to avoid possible losses)
                    However, this may not be appropriate for your ABILITY TO TAKE RISK

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The Great Reflation- By Boeckh (SUMMARIZED)

RATING:  5/5 (Great Book)


The book describes the Government’s massive Monetary and Fiscal stimulus program created to abort a potential Depression (caused by the recent credit crisis) and to generate an Economic Recovery.

During the crisis, US citizens were deleveraging (saving more, decreasing their spending, trying to sell their illiquid assets). This is very DEFLATIONARY

If the Government and Federal Reserve did not step in to fill in the holes created by the Debt Deleveraging, collapsed asset values, and excessive savings, the private sector’s efforts to get liquid would have caused a self-feeding downward spiral in the Economy. They ultimately saved the system from total collapse (however they were also responsible for the bubbles that created the issue).

However, the Monetary and Fiscal stimulus plans have triggered an avalanche of money - Efforts at Monetary Easing through asset purchases caused the monetary base to double in a matter of months.

Authorities like to reflate asset prices after a crash b/c it helps repair people's Balance Sheet. This has given fear of INFLATION. During the recession, the banks just held money in reserves and didn't borrow it, thus the Velocity of Money was much lower than it had been historically (almost neutralizing the potential impact of the Fed's action.) (It’s noteworthy to mention that the Velocity of Money has been recently rising)

Authors Concern: Once the process of reflating asset prices starts, the next mania is around the corner.

MY OPINION:  I think this book is very relevant in discussing what is occurring in TODAY'S economy, NOT YESTERDAYS, as most econ books tend to discuss the past too much and not focus on future implications.  I'd say this would be a good book for someone who has an intermediate-to-advanced understanding of Economics.

Recommended Reading List

PUBLICATIONS:

Barron's (Discusses Market Activity, Undervalued Companies and Mutual Funds/Hedge Funds with above average performance;Available weekly on Saturdays)

The Economist (Discusses Macro events)

Investor's Business Daily (To stay current on market events)



BOOKS:

The Great Reflation - By J. Boeckh (Describes the massive fiscal and monetary stimulus and future impact)

One Up On Wall Street - By Peter Lynch (Great investment insights from a legend)

Investment Analyis - By Frank K. Reilly

Economics in One Lesson - By Henry Hazlitt (See the world the way Austrian Economists do)

VALUE INVESTOR PRO Version 1.0

Welcome to Value Investor Pro!

This blog will discuss relevant market events, macro themes, secular themes, top-down analysis, security valuation utilizing EV/EBITDA and Free Cash Flow models, the CFA program, CFA Level 3 study tools, Austrian Economics, and suggested books and publications.