Boo!!!

Party like its 1999

This week, Barron's did a piece on the Sky high valuation on Chinese stocks. What amazes me is the similarities to the Chinese market and the Tech run up we had back in 1999. Does anyone remember that one? Apparently everyone's ulcers have healed and they are ready for another "this time it is different" market environment. Don't get me wrong, bubbles are fun, except for the popping part, but maybe that won't happen in this new Chinese economy. They have this huge booming middle class that needs as much stuff as the world can provide, right? Well, yes, but not at a growth rate consistently over 10%. Anyone remember how much fiber optic cable we needed last decade? Not near as much as we got. I believe we will see the same outcome in the Chinese market that we saw in the US tech run up in the late nineties. When will it come? That is a much more difficult question. I expect the current run up to last through the 2008 Olympics, however, I play these positions very cautiously. If I can take 20% of a move I am fine with that. I have to have the risk to reward ratio in my favor. Therefore, I only buy these Chinese/Emerging Market type securities on pull backs into support levels. Be warned, we will overshoot the valuations significantly in these securities and the US markets will feel it.......

For Andrew Barry's take in this weeks Barron's...

IT'S TOUGH TO SAY WHEN THE CURRENT mania for Chinese stocks will end, but the potential for a significant decline is growing. China's benchmark index has shot up 109% this year, and major Chinese companies now are valued at steep premiums to their U.S. counterparts.

Warren Buffett urged investors last week to be "cautious" on Chinese stocks, adding that "we never buy stocks when we see prices soaring." Buffett recently sold Berkshire Hathaway's (ticker: BRK/A) 1.3% stake in PetroChina (PTR), China's largest company, based on its sharply rising share price. PetroChina is valued at about $440 billion, nearly double its midsummer capitalization.

The world's No. 2 company based on market value, it rapidly is closing in on ExxonMobil's (XOM) $508 billion valuation. PetroChina trades for more than 20 times estimated 2007 profits, or twice its historic price/earnings multiple, versus Exxon's P/E of 13 and P/Es of about 10 for other Western oil companies such as Chevron (CVX) and ConocoPhillips (COP). Some analysts and investors think the Chinese oil company deserves no premium to its Western peers, and is overvalued by 50% or more.......

For the complete text: China's Sky-High Valuations Don't Compute, Barron's, October 29, 2007

The subconscience release

I want to try and bring in occasionally some reference to my athletics. While my day (and sometimes evening and night) job is to navigate through the oft troubled financial markets, I do spend much of my free time running or riding my bicycle. Boulder is a fantastic place for both. I find that while trail running in particular (perhaps due to the diversion of oxygen to my screaming lungs and failing to make its way to my brain) I develop some of my best money management/ investing strategies.

For instance, yesterday, while running my pooches on the Mesa Trail, I came up with the idea of, in one certain instance, selling a new position (that was entered as a momentum play that failed to keep running) for a very small loss with the anticipation of buying the same position more closely to support. This little idea was brought out by my subconscience and can now be further developed in my conscience mind.

I find that while physically exerting myself I allow myself to open up my subconscience mind. This is akin to great thinkers coming up with ideas under the influence of ....(you fill in the blank). The point is to find that place where you are receptive to letting yourself go and allowing your subconscience mind communicate with your conscience mind. Always have a way to write or digitally capture your thoughts; you never know when one of your ideas will lead to something profound.

A bounce in New Home Sales? Look closer...

My favorite, no BS, no spin, economics blogger, Barry Ritholtz, consistently does a fantastic job of pulling apart the BLS (Bureau of Labor and Statistics) economic numbers. This government organization makes the reporters job much easier since most of them don't really understand statistics and typically pull a headline out and forget to double check and see if what the information they relay is truly valid. Barry points out that the new home sales number released today was up 4.8%, or an annual rate of 770,000. Nice headline but the margin of error is +/-10% which makes the number irrelevant (not much of a headline). However, looking at the 23% drop year over year with a statistical error of 8% is statistically significant. Bottom line is that the reported number has to be larger than the error or the number doesn't mean a thing. Good thing most people don't understand the magical powers of statistics. Remember the saying lies, damn lies, and statistics?

Visit Barry's site regularly, it will make you a much more informed person.
TheBigPicture

No, New Homes Sales DID NOT Rise . . .

Thursday, October 25, 2007 | 10:12 AM

in Data Analysis | Real Estate

Look, we have to stop meeting this way.

Some half-assed piece of data comes out, the markets spasm, then you want to understand what the data really means.

OK, let's look at New Home Sales.

U.S. Census Bureau and the Department of Housing and Urban Development releases New Home Sales each month. The data contains three elements that contextualize what they mean, and how much significance they have, beyond the headline number.

First, we see the headline number. This month, September 2007 sales of new one-family houses were up 4.8%, at annual rate of 770,000 (SA).

Second, we look at the year-over-year data, which in this case was 23.3% below the September
2006 estimate of 1,004,000.

Third, we look at margin of error. The monthly gain of 4.8% was within the "estimated average relative standard errors" of ±10.3%. This means the data point was "statistically insignificant."

The year over year number however, at 23.3% -- ±8.0% -- is greater than the margin of error, and therefore is statistically significant.

Note: These aren't my opinions; these are simple mathematical facts that the Commerce Dept. notes in the footnotes of its release.

Next, we look at the revisions: For the month of August 2007, the original sales report was for 795,000 new homes built (annual rate). This was adjusted downwards this month to 735,000. An apples-to-apples comparison (original release to original release) shows a decrease, not an increase in new homes sales. Comparing the original (but soon to be revised) September data to the revised August data presents a misleading picture.

Lastly, we need to consider Cancellations. The Census Bureau does not make adjustments to the new home sales figures to account for cancellations of sales contracts. As we have seen, the Cancellation rates of Home Builders have been huge:

Firm . . . Cancellation rate for Quarter
Centex (CTX) 35%
MDC Holdings (MDC) 57%
KB Homes (KBH), 50%
Lennar Homes (LEN) 32%
D.R. Horton (DHI) 48%
Beazer Homes (BZH) 68%
NVR (27%)

So, you can further discount the reported data by some amount relative to the above cancellation rates . . .

Thanks for trying to keep us honest....

A subprime outlook for the global economy

I try and read the bi-weekly postings; "Thoughts from the Frontline" and "Outside the Box", both from John Mauldin. I always find his articles insightfully written and will always make your brain smoke as you try and understand the context. This week I found the article especially enlightening. The article written by Stephen Roach, ex-Chief Economist for Morgan Stanley and current Chairman of Morgan Stanley Asia, outlines many of my concerns going forward. A portion of the text is below, for the full text follow the link at the bottom of this post.

A Subprime Outlook for the Global Economy
By Stephen S. Roach


After nearly five fat years, the global economy is headed for trouble. This will come as a surprise to policy makers and investors, alike-most of who were counting on boom times to continue.

At work is yet another post-bubble adjustment in the world's largest economy - this time, the bursting of America's massive property bubble. The subprime fiasco is the tip of a much larger iceberg - an asset-dependent American consumer who has gone on the biggest spending binge in the modern history of the global economy. Seven years ago, the bursting of the dot-com bubble triggered a collapse in business capital spending that took the US and global economy into a mild recession. This time, post-bubble adjustments seem likely to hit US consumption, which at 72% of GDP, is more than five times the share the capital spending sector was seven years ago. This is a much bigger problem - one that could have grave consequences for the US and the rest of the world......

Don't Count on Global Decoupling

A capitulation of the American consumer spells considerable difficulty for the global economy. This conclusion is, of course, very much at odds with notion of "global decoupling" - an increasingly popular belief that depicts a world economy that has finally weaned itself from the ups and downs of the US economy.....

A Subprime Dollar

This constellation of forces could prove especially vexing for the US dollar. Currencies are, first and foremost, relative prices - in essence, measures of the intrinsic value of one economy versus another. On that basis, the world has had no compunction in writing down the value of the United States over the past several years. A broad dollar index, which measures the US currency relative to those of most of America's trading partners, is off about 20% from its early 2002 peak......

The Failure of Central Banking

The recent chain of events is not an isolated development. In fact, for the second time in seven years, the bursting of a major asset bubble has inflicted great damage on world financial markets. In both cases - the equity bubble in 2000 and the credit bubble in 2007 - central banks were asleep at the switch. The lack of monetary discipline has become a hallmark of an unfettered globalization. Central banks have failed to provide a stable underpinning to world financial markets and to an increasingly asset-dependent global economy....

For the complete text, which I highly recommend

A subprime outlook for the global economy
courtesy of Investor Insight and John Mauldin

So Cal Fires

Our thoughts and prayers are with you all. Google has an amazing overlay to their map program that helps up keep up to date on the changing events in this area of California.

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CNN's Impact your world

Oct 19, 1987

Very cool interactive chart from the WSJ of the terrible ride the Dow took on Black Monday and Terrible Tuesday, October 19-20, 1987.