Category: News

“All you ever do is drone on and on about what to be worried about. But what should I actually do? And how will I know when it’s right to buy stocks again? And how will I know what to buy?”

That’s a small sampling of some of the questions your editor gets via email. We can’t answer them directly. But in today’s Daily Reckoning we’re going to do something a little different. We’re going to talk about how to buy stocks below their intrinsic value.

What?! Intrinsic value!? Is there really such a thing with stocks? Isn’t value solely determined through exchange, between the price at which two parties agree to conduct a transaction?

To help us with these questions-and more-we turn to Greg Canavan, the editor of Sound Money. Sound Investments. Greg is what you might call an old school value investor. We first met him when he sent us an e-mail a few years back. A scintillating discussion on the return on net tangible assets ensued.

It wasn’t boring at all. We were both after an investment edge: how can you as an investor find company managers who make the best use of shareholder capital and equity? How do you measure those things? And how do you turn them into buy and sell recommendations on Australian stocks?

When Greg came to us later with the idea of writing and researching a letter on deep value stocks in Australia we liked it so much we wanted to publish it. But he declined that deal. See our endnotes for the arrangement we agreed on.

In the meantime, with the Aussie market at a key point-and the whole credit bubble itself in purgatory–we hope Greg sells a lot of subscriptions. If he does it means a lot of people will be reading what he writes.

If you’re one of them that should help you become a better investor. The truth is that Greg is doing a kind of analysis on Australian shares that we don’t think individual investors will find anywhere else. We’re glad to publish it because it’s the sort thing that SHOULD be published for Australian investors. It can help you know what to buy and when to buy it, or what to sell and when to sell it.

More importantly, it shows you that there’s a difference between market price and value. Granted, not every investor agrees with this. But as a publisher, our job is to find smart investors with unique and well-researched ideas and publish them and let you decide.

After all, we have no idea who’s right. But you can tell who’s doing their homework and who is just making it up as they go along. As you’ll see below, Greg has done his homework. But as ever, we’ll let you be the judge.

Finding Intrinsic Value
By Greg Canavan
Editor, Sound Money. Sound Investments

The global economy is recovering and a new bull market is underway. You should be loading up on stocks, right? But wait.

What about all the bad debts still in the system from the GFC? What about the huge increase in government debt that was required to pull the global economy up off the floor? Won’t that pose problems down the track? This is just a bear market rally based on artificial stimulus, surely?

These are probably the two most dominant opinions in the markets right now. Consensus opinion thinks the worst is over and it’s off to the races for stocks. Others are suspicious about the size and speed of the rally from last year’s lows.

I believe we’re experiencing the last legs of an extended bear market rally.

Stock markets around the world topped out in late 2007 when the great credit bubble that had been expanding for more than 30 years ran out of momentum. If history is any guide, it will be many, many years before we see the 2007 highs again.

I think there is a reasonable probability that markets will experience large rallies and declines, but ultimately go nowhere, over the next decade. I think we will see a fundamental re-engineering of the international monetary framework that we have been operating under since the early 1970s, and that at some point the international system will return to a ‘sound money’ footing. (Hence the Sound Money part of the business name).

But let’s face it, it doesn’t really matter what I (or anyone else for that matter) think will happen over the next ten years. It’s all crystal ball stuff. And can you as an investor make money from such big picture predictions? No really…and certainly not consistently.

In such a challenging environment then, with so many conflicting signals about the health or otherwise of the global economy, how can you increase your odds of making consistent and relatively low risk profits in the stock market?

It’s a question I have asked myself plenty of times. And when I realised the answer was a pretty simple one, I decided to stake my career on it. So I set up Sound Money. Sound Investments.

Now, the ‘answer’ is not one of the fabled ‘secrets of investing’. There are no such things. The only place you will see these supposed secrets is on book covers.

Ben Graham, the father – or perhaps the grandfather – of value investing, gave us the answer many years ago. But for some reason, people are always ready to dismiss the wisdom of those who have spent a lifetime studying the markets. Not that Ben has been forgotten. Rather, he has just been ignored.

So what is it? What is this answer to making consistent profits in the market?

As far as I’m concerned, the most important insight that Ben Graham passed on, and the most important concept for any serious investor to grasp, is that there is a difference between a market price and a company’s intrinsic value.

If you take anything away from reading this, it is to understand, and believe, that point.

I’ll repeat. There is a difference between the price you see quoted everyday on the stock market and the real value of a company. Good investors, those who consistently make money, know this truth. They simply buy companies when the market price is below their estimate of intrinsic value.

So how do you estimate intrinsic value? I’ll get to that in a minute.

But first, I want to show you the benefits of knowing the difference between price and value. It’s all very well to say ‘buy low, sell high’, but let’s face it; very few people do it consistently.

Why?

Human Emotion.

Emotion and irrationality are your enemy when it comes to investing. In volatile markets unchecked emotions can do considerable damage to your portfolio.

How many times do you see panic selling at the bottom and panic buying close to the top? Such behaviour is a guaranteed way to lose money yet time and again you see people doing it.

Understanding the difference between price and value goes a long way towards taking emotion out of the picture. And once that occurs, you will be able to take advantage of other investors’ emotional flaws, rather than have others take advantage of yours.

Knowing what you are buying, why you are buying it, and how much the investment is really worth (its intrinsic value) is the key to making sure your emotions don’t cost you big time.

Ok, so how do you determine intrinsic value?

It’s easier than you think. All you need is some common sense, some high school maths, AND a framework whereby you view investments as companies, not ‘stocks’.

The starting point is to view your investment as a ‘business’, not a ‘stock’. As Ben Graham said, “investment is most intelligent when it is most businesslike. …every corporate security may best be viewed, in the first instance, as an ownership interest in, or a claim against, a specific business enterprise.”

Warren Buffett reiterated this view in his famous ‘Graham and Doddsville’ speech given in 1984, when talking about those investors who had followed Graham’s principles over the long term. “While they differ greatly in style, these investors are, mentally, always buying the business, not buying the stock.”

Once we conceptually view potential investments as businesses, the next area of focus is on that businesses profitability. By profitability, we mean return on capital and more specifically, return on equity. Forget all the other measures that analysts blab on about. These are the most important.

This is because you, as a shareholder, are investing in the equity of a business. That’s why the stock market is referred to as an ‘equity’ market. The return on that equity matters and it determines a company’s intrinsic value.

I’ll show you a simple example.

You have some money to invest and have the choice between a term deposit, paying 6%, or company ABC. Company ABC earns a consistent 10% return on its equity. You know the option to invest in the company is more risky than the term deposit. To account for the risk, you want a higher return. So your required return to invest in ABC is 10%.

From here it’s pretty easy. You want a 10% return from investing in the equity market and company ABC generates a consistent return of 10%. Now you don’t just dive in and buy the company because its return on equity matches your required return. You need to determine its intrinsic value.

In this case, company ABC’s intrinsic value is the same as its equity value, because the return on the equity is 10%, the same as your required return. If you buy at or below the equity value, and the company performs as expected, you will achieve your required return of 10%.

How do you know you’re buying below equity value? Just make sure the company’s share price is less than the per share equity value of the company.

But, if you buy the company at say, 2x its equity value (and most companies in the market trade well above their equity value, so this happens all the time) your actual return will be 5%. You’ve paid twice the intrinsic value of the company, so you only get half your required return.

In practice it’s a tad more complex than that but if you can understand the argument, and the concept that there is a difference between a market price and an intrinsic value, you’re probably ahead of 90% of investors.

But because 90% of investors are out there bumping into each other…day trading, speculating, guessing, or trying to make their short term returns look good for the quarterly performance tables, most of the time the market is not interested in your assessment of intrinsic value.

You must be willing to accept that the market can make you look stupid in the short term. And here, another of Graham’s sayings comes to mind. “In the short term, the market is a voting machine, but in the long term it is a weighting machine.’

Patience and conviction (and thorough research) will always win out in the end. Successful value investors tend to have plenty of those two attributes.

This is the philosophy I follow in my weekly Sound Money. Sound Investments Report. I do have a big picture view, but it does not determine the stocks I recommend. The focus is always on value.

For example I think gold is in a genuine bull market. But even with the gold stocks I recommend I focus on return on equity to make sure I’m not buying financial duds. And gold mining is a very tough business…there are plenty of duds out there.

Right now, and for the past few months, I have been telling my Members that the market is overvalued and to take a very defensive portfolio stance. Market prices are well ahead of intrinsic values, meaning that poor long term returns will result from buying at these levels.

Just last week I showed a comparison between the prices of the top 20 stocks on the ASX versus their individual intrinsic values. On average, prices are around 16% above intrinsic value.

I am very confident that prices will come back to levels that represent good value. That may happen in one month or six months, it doesn’t really matter. Money is made in the buying, so patience is key.

And knowing a company’s true value will make it easy for me to recommend stocks at a time when 90% of other investors are selling…purely because they focus on price, not on value.

If you like the cut of Greg’s jib, you can sign up for a free trial of his report here. And you should know that in addition to knowing how to value a business, Greg turns out to be something of an entrepreneur. He was more interested in owning a business than being an employee, which we can respect. So we made a deal.

We agreed to make Greg an authorised representative under our Australian Financial Services License if he agreed to let us publish, from time to time, his investment analysis and insights. For the purposes of total transparency, yes, there is a financial consideration too. Every time Greg sells a subscription, he pays us a referral fee.

Naturally, we hope he sells a lot of subscriptions. In fact, we think the free trial offer he’s making is nuts. If you’re serious about investing and you understand what Greg is offering, you’re either interested or not. Either one is fine. But if you’re interested in thinking a little differently about how you manage your wealth, sign up for a free trial now.

Dan Denning
for The Daily Reckoning Australia

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Found under: BlackBerry, Pearl, RIM, 3G, 802.11n, Wi-Fi, Mobile, Smartphone, Video,

The new RIM BlackBerry Pearl 3G is the king of all BlackBerries with that 802.11n Wi-Fi built into its sexy innards you can expect this device to sell like hot cakes. Im no big fan of BlackBerries but what can I say I love the Pearl 3G if only for 802.11 it doesnt matter much to me.The video is short nothing much was shown but for all you BlackBerry fans lurking around Im quite sure you all would find something to like when you this.

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The TIPA Awards have been run and won for 2010, meaning potential purchasers can make informed purchasing decisions backed by the collective opinions of 28 international photographic magazine editors. The big winners in the DSLR categories were the Nikon D3s (Professional) Canon EOS 7D (Expert), Canon EOS 550D (Advanced) and Pentax K-x (Entry). The Fuji FinePix HS10 took out best Superzoom, while Compact category winners included the Casio Exilim EX-G1 (Rugged Compact), Canon PowerShot G11 (Expert Compact) and Sony Cyber-shot DSC-HX5V (Best Compact). Significantly, the Best Expert Camcorder was…..
Continue Reading Technical Image Press Association names photography award winners for 2010

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Found under: Nefonie, WePad, Android, Google, Tablet, Videos, Open Office,

The Neofonie WePad is back in the news and this time there are 3 long videos showcasing this beauty in action unfortunately the video is all German so many of you might not understand what is being said. A quick look at the videos show that the device is not yet ready for release the touchscreen is laggy and has a few bugs that needs to be taken care of before hitting shelves.Another thing i find interesting is the availability of Open Office theres also what seems to be a Gnome tas

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When a 10-ton elephant plods through a village of grass huts, the big question on everyone’s mind is: which way is he going to turn next? With China, that fundamental question translates to guessing when Beijing will make changes to the value of the yuan. These decisions will determine the overall direction of the global economy, and will set the path that everyone must follow. Unfortunately, no Americans, even those who travel hat-in-hand to China, have a seat at the table where these decisions are being made.

At the risk of beating a dead horse, let me reiterate my central thesis with respect to currency valuation: just as it is always better to be rich than to be poor, it is always better to have a strong currency than a weak one. Although this simple maxim puts me into conflict with much of the economic establishment, I hold its truth to be…well…self-evident.

While I attended an economic conference last week in Shanghai, I found it notable – but not surprising – that two former Secretaries of the Treasury, John Snow and Hank Paulson, as well as current Treasury Secretary Tim Geither, and former President George W. Bush were then in the country at the same time. The fact that so many key American power brokers were in China simultaneously was no coincidence. In an overly indebted world, the $2.5 trillion that China holds in foreign reserves is acting as a center of economic gravity, inexorably pulling all market participants into its orbit.

The effect of current Chinese currency policy (which, despite Beijing’s protests to the contrary, is manipulation pure and simple) is to make the US dollar more valuable and the yuan less valuable. As a result, the benefits of manipulation accrue to Americans, not the Chinese. We get pay raises; they get pay cuts. Americans use their stronger dollars to buy products they would otherwise not have been able to afford. On the flip side, the Chinese people do without products that they otherwise would have been able to afford had their government not transferred their purchasing power to us.

The same effect is experienced with interest rates. In order to manipulate the dollar’s value higher, the Chinese government has gobbled up more than $1 trillion of them. The Chinese then loan the dollars back to the US through purchases of government and mortgage- backed debt, which reduces the cost of servicing our massive liabilities.

By the same token, if China were to stop manipulating the dollar higher, it would remove the props currently supporting our dysfunctional economy. American interest rates and consumer prices would soar, and our economy would suffer…perhaps dramatically so. Meanwhile, China would experience the opposite effect. Chinese consumer prices would fall, immediately raising living standards for average Chinese workers, whose higher real wages would finally allow them to fully enjoy the fruits of their labor.

What strikes me as particularly dangerous is that no one, not even the Chinese, appear to understand these fundamental dynamics. All of the Shanghainese with whom I spoke last week were unaware that a stronger yuan would be in their own best interest. The way most people see it, a stronger currency is a bullet that China must be prepared to take in order to save the rest of the world from further pain.

And so we watch the strange spectacle of China stubbornly resisting actions from which it would immediately and substantially benefit. In reality, an appreciating yuan is the bitter medicine Americans must swallow if our sick economy is ever to regain its health. (An allegorical explanation of this is contained in my new illustrated book, How an Economy Grows and Why it Crashes.)

When Beijing finally comes to it senses, the transition will be unavoidably disruptive. For China, the long-term growth would far outweigh the short-term shock. America, however, would face a much less certain outcome. There is no question that, for Americans, the immediate effects would be very painful, with the gains only developing with time and prudent decision-making. Still, that does not mean we should resist the process. For the longer it is delayed, the more severe the pain and the longer the road back to prosperity.

If you think China is important today, just wait a few years. For example, while the Chinese automobile market is now the largest in the world, 90% of Chinese car buyers pay cash. In contrast, only 15% of American car buyers do so. In other words, Chinese consumers can actually afford their cars, while most Americans cannot. Without huge car payments, Chinese consumers are in much better shape not only to trade up to newer cars in the future, but to purchase other products as well. This suggests huge future growth, not only in automobiles but also in other consumer products as well.

This eruption of consumer demand, made possible by pent-up savings, is creating historic opportunities for investors. When the Chinese start using their wealth to expand their own economy rather than to subsidize ours, infrastructure may well be a primary beneficiary.

Whenever the Chinese government decides to end the peg, the Chinese economy will benefit as a result. While as citizens we can hope that US leaders respond with the right policies to enable our economy to regain its former glory, as investors we should position ourselves to benefit from the more certain outcome.

Peter Schiff
for The Daily Reckoning Australia

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O Kia Soul foi o vencedor da categoria Minivan/Perua do Prêmio Automotivo 2010, promovido anualmente pelo jornal Diário do Nordeste, no Ceará. Para levar o título da categoria, o Soul registrou 35,32% dos votos dos leitores e internautas e esteve à frente dos adversários Honda New Fit, que obteve segundo lugar, Fiat Palio Weekend Locker e Nissan Livina.

Os vencedores de cada uma das categorias – Popular, Hatch, Sedan Pequeno, Sedan de Luxo, Esportivo, Minivan/Perua, Picape, SUV Médio, SUV Grande, Importado, Concessionárias, Marca de Motos, Marca Mais Admirada e Loja de Serviços Automotivos – foram escolhidos por meio de votos dos leitores do jornal, que durante 40 dias puderam preencher cupons encartados nas edições e também votar pela internet, em um hot site criado para a ocasião. Mais de 5 mil pessoas participaram.

O evento de premiação aconteceu no último sábado, dia 24 de abril, na cidade de Fortaleza. Criado há três anos, o Prêmio Automotivo 2010 surgiu por iniciativa de André Marinho, editor do suplemento Automóvel. O jornal Diário do Nordeste, sediado em Fortaleza, circula nos 184 municípios do Ceará, com tiragem média de 50 mil exemplares.

Fonte: Kia

Homebrew coder Actarus has recently released a new version of iDeaS, the ever-popular Nintendo DS emulator for Windows and Linux. The latest beta update of the homebrew includes is mostly a bug fix release to further improve

“The poor little girl saw her mother in the house, naked, with a man…”

The adobe houses that people live in up in the mountains are not very big. Usually just one or two rooms. There are not many secrets in family life.

“At least they could go outside, behind some bushes or something… You’d think this place is a paradise…”

In many ways it is paradise. The valleys are green. The sky is blue. The sun is hot. There are no traffic jams. No drug dealers. No TV. No stone-hearted tax collectors. No stone head politicians. No crackpot economists.

“But these children are not innocent…they’ve seen everything… Well, not the same things that kids in the city have seen…but they are not innocent. The problem here is that they don’t have families… Not all of them, of course. But a lot of the girls just have babies. First with one man…then with another… And sometimes they start as young as 12 years old. They see their mothers…and then they do the same thing.”

We had invited the entire local school over for an outing. Two teachers – Olivia and Lilliane – along with their 23 students. Lilliane, a slim, attractive woman in her 40s, with black hair pulled back in a bun and bright red lips, was telling us about the problems they face:

“I’ve been here for 26 years. We used to have twice as many students as we do now. But now the girls don’t have as many children. They know how to avoid getting pregnant. But they still carry on…

“And they’re bolder and naughtier than they used to be. I woke up one night and found one older boy had snuck into the school and was in bed with one of the girls. We had to make a rule…no one gets to stay in the school after they are older than 12. But even that doesn’t seem like enough. One night we found a boy of ten in bed with a girl of 11. They’re just too young for that kind of thing.

“Many of the children stay with us because they live too far up in the hills to go home at night. And some of them live so far away that they have to stay with us on the weekends too. We have 9 who stay with us on the weekends now.

“But it’s exhausting for us, because we have to keep an eye on them at night…we can’t trust the children to behave themselves.”

When the children arrived, they filed into the house quietly, timidly. Many of them had never been in a real house before.

“Have a seat…sit down,” we told them.

They sat down without a word. The house was silent. Our Spanish is not good enough to entertain a group of 23 children. In a flash of inspiration, we picked up the guitar and started singing the first song that occurred to us:

“Your cheatin’ heart…will tell on you….”

The kids giggled.

By the time we were finished the final verse, Elizabeth had brought in the pan casero (homemade, unleavened bread) with marmalade on it. They had brought their own cups, into which we poured mate cocido – a type of herb tea.

The kids seemed satisfied. When they were finished, they went out into the courtyard.

“Gimme five,” said Calvert loudly, to a group of boys. “Up high…down low…uh oh…too slow.”

The boys laughed. One by one, they tried to slap Calvert’s hand before he jerked it away. Then, Edward got out his soccer ball and the boys all played.

As for the girls, we don’t know what they were doing. But our Argentine friend, Maria, had gotten back to the house by then. She had been on a long ride on a short, uncomfortable mule. Maria plays the guitar and sings too, only people don’t laugh at her. She must have entertained the girls somehow.

Maria was the last to come back from our outing. We had left the house early in the morning to ride up to see Dona Ileena – an old woman who lives high in the mountains. Her husband, Felix, fell down a few weeks ago and hit his head. He was taken down from their lodge and driven to a hospital a couple of hours away. That left Ileena alone. No one had seen her in several days; we thought we should pay her a visit.

We don’t know how Maria ended up on the mule. But she was a good sport about it. On the way back, she switched mounts with someone else, but then went back to the mule.

The horses took up a steady trot for a couple of miles across the plain…up the valley…until they arrived at the pass. Then, they slowed to a walk to pick their way down the rocky road that led to the smaller valley below. It took 2 hours to reach the alfalfa fields. We dismounted for a few minutes, drank some water, tightened our saddle girth straps, and headed upstream. The river was dry at first. Then, a trickle of water appeared. We continued up the valley, making our way between thorn bushes, alamos trees, pampas grasses and the rock cliff wall on the side of the river. On the right, we passed two abandoned adobe houses. On the left, there were Indian ruins…the stone walls that once held small terraced fields.

After another hour and a half, Gustavo, who was leading this expedition, pointed up to the right.

“We have to go up there. That’s where Ileena lives.”

It was not obvious how we were going to get up there.

Gustavo didn’t hesitate. He found a path through the thorn bushes…that turned into a path through the rocks. The horses strained to get up the hillside. It’s amazing where they can go. Soon, they were on a green mesa, their riders still on their backs.

The pasture looked over-grazed, but we saw only one horse, tied up near the house, and two cows lying under a tree. Our horses stepped over a low stone wall, another relic of the Indian days. The place was naturally fortified. Steep cliffs guarded the access on three sides. On the other, the mountain went up rather than down. Over on the edge of the cliff was an enclosure of sticks and logs, where a herd of goats was kept; the enclosure was not meant to keep them from getting out, but to keep the puma from getting in. It must have been moved there from in front of the house, where there was about three feet of goat manure, forming a large circle.

The house was made of adobe, with a low, mud roof and a few openings to let out the smoke. Off to the side was another low building, also of adobe, probably used for tools and storage.

No one came out.

“Ileena…” Gustavo yelled, urging his horse closer to the house. Still, no sound came from the house.

Then, a moment later, Ileena came out, dressed in a dirty, dusty, torn dress…a sweater, and a pair of cloth shoes, torn open at the toes. Her grey hair was pinned behind her head and her face was crossed by hundreds of wrinkles. She might have been 60…or 90…we couldn’t tell.

She smiled. We got down off our horses, and greeted her warmly with kisses and hugs. But we couldn’t understand what she said. Gustavo had to translate.

Then, when we were satisfied that all was well, we mounted up again for the long ride back.

“The Indians never left here,” Maria explained. “This place has probably been inhabited for 1,000 years. Nothing much has changed.”

This is not the first time we’ve met Ileena. She and Felix were often down in the valley when we visited. They always seemed to be in a good humor. Thin and spry, it looked like they would live forever. But now Felix is in a hospital with a head injury and no one is sure he’ll ever be completely right again.

Life goes on.

The following day, life went on some more. We rode up to the old reservoir. Uphill and down. Over rocks and streams. Among ancient Indian ruins…and saddle sores. The old reservoir is still there. Perhaps it too dates from the time of the Inca or even before the Inca – the Diaguitas – or even some more ancient group. A long time ago, after the hunter gatherers began settling down to plant corn and potatoes, people figured out that if they were going to live in this valley they had to find a way to store and direct the little water they had. Life needs water.

And there was not enough water falling from the sky to support much of anything.

We examined the old reservoir and then gave up. There is no way to get machinery to it. And it is too big to dig out by hand.

Riding back, we passed one of the adobe houses where “la gente” live. An old woman, short and fat, came running out. She had a handkerchief to her face, as though he had been crying.

“Jorge… Jorge…”

Jorge turned his horse around. He rode over to the old woman and spoke to her for a few minutes. Then, he rejoined our group…

“She told me my father died… She heard it on the radio. He lives in Salta. But they make announcements on the radio for the people in the mountains to inform them of important events.

“He was 85 years old…and sick… I’ll confirm it when we get back to the house. (We have a satellite phone for emergencies). If it is true, I’ll have to leave to go get the body…”

Life goes on…

Regards,

Bill Bonner
for The Daily Reckoning Australia

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Poor Ol’ Goldman…

Just trying to do ‘God’s work’…

And everybody treats it like the devil.

The Washington Post yesterday carried a front-page headline, portraying the firm as though it was Satan himself:

“Cheers at Goldman as housing market fell.”

Goldman executives were in a good mood for a good reason: they had bet against the mortgage market.

Of course, that was the only reasonable thing to do. Anyone could see that the housing market was in a bubble. And everyone knew that the bubble would blow up sooner or later. Nobody knew better than Goldman because the firm helped create the bubble…selling those delicious, but teeth-rotting, mortgage-backed securities all over town.

Goldman did the right thing. It bet against the mortgage market.

Naturally, Goldman execs were happy when their bets began to pay off.

But to hear the press tell the story, Goldman executives were like a devilish cabal…cackling about the fall of the mortgage market as if they were celebrating the sacking of Rome.

“Sounds like we will make some serious money,” said one exec in an email.

Serious investors should pay no mind to the Goldman story. The Wall Street firm did the right thing – it helped separate the numbskulls from their money. And now, the numbskulls are moaning and the SEC is trying to salvage its reputation by prosecuting Goldman for betting the right way.

As usual, the pundits are on the story too – kicking the poor Goldman crew when they’re down. And as usual, they are drawing all the wrong conclusions.

Roger Lowenstein, in the New York Times:

WHILE the Securities and Exchange Commission’s allegations that Goldman Sachs defrauded clients is certainly big news, the case also raises a far broader issue that goes to the heart of how Wall Street has strayed from its intended mission.

Wall Street’s purpose, you will recall, is to raise money for industry: to finance steel mills and technology companies and, yes, even mortgages. But the collateralized debt obligations involved in the Goldman trades, like billions of dollars of similar trades sponsored by most every Wall Street firm, raised nothing for nobody. In essence, they were simply a side bet – like those in a casino – that allowed speculators to increase society’s mortgage wager without financing a single house.

The mortgage investment that is the focus of the S.E.C.’s civil lawsuit against Goldman, Abacus 2007-AC1, didn’t contain any actual mortgage bonds. Rather, it was made up of credit default swaps that “referenced” such bonds. Thus the investors weren’t truly “investing” – they were gambling on the success or failure of the bonds that actually did own mortgages. Some parties bet that the mortgage bonds would pay off; others (notably the hedge fund manager John Paulson) bet that they would fail. But no actual bonds – and no actual mortgages – were created or owned by the parties involved.

Lowenstein’s point is that Wall Street has lost its way. It is no longer providing a useful service. Instead, it has turned itself into a casino.

So far, so good.

But his solution? More regulation!

Of course, the regulators were on the case the whole time. But, according to the news reports last week, while the biggest scams of all time were going on the SEC team was busy watching porn on its office computers! It missed Madoff. It missed Sanford. It missed the greatest bubble in financial history.

More regulation? Forget it!

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The Wall Street Journal says its time to load up on commodities. The price charts seem to agree.

“Portfolios that add commodities after the Federal Reserve tightens the discount rate, perform better than portfolios that don’t,” observes Journal writer, Carolyn Cui.

The Fed raised the discount rate in February and seems likely to continue raising rates. Therefore, says Cui, investors should be increasing their commodity exposure. She bases her observation on a new study to be published in the Journal of Investing. The authors of the study researched data from December 1970 through August 2007.

Cui explains the process: “The researchers added a basket of commodity futures tracking the S&P GSCI Commodity Index to five types of stock portfolios: value, small-cap, momentum, growth and large-cap. The commodities added to the returns of all five equity styles during periods when the Fed tightens the discount rate.”

Interestingly, most commodity prices bottomed out in mid-February, which is exactly when the Federal Reserve hiked the discount rate to 0.75% – the first increase in the discount rate in more than three and a half years. From its February lows to the present, the CRB Index of commodity prices is up 8%. The CRB’s advance is not just an “oil thing.” Most commodities are advancing, including the long-slumbering agriculture complex.

Several price indices are validating these recent inflationary signals coming from the commodity markets. The Producer Price Index is up 6% year over year; import prices are up 11.4%, and the ISM’s Prices Paid Index has more than doubled during the last 12 months.

Perhaps these price trends are inspiring the Fed to begin “tightening” – i.e. raising interest rates. Whatever the Fed’s exact motive, it has begun to raise rates…and that’s enough of a reason to begin buying commodities, according to the study Cui cites.

“The strategy is pretty simple to follow and doesn’t require much trading,” says Cui. “During the 37 years the study covered, the Fed changed the discount rate 113 times, but only 18 of those moves represented directional changes – meaning investors would need to get in and out of commodities only 18 times.

“So how can investors take advantage of the latest Fed rate-tightening cycle?” Cui asks. “First, they must decide how much money they want to devote to commodities. The study modeled allocations of 5%, 10% and 15%, and found that the 15% dose produced the best results.

“Next,” she says, “investors need to decide what to buy… There are commodity mutual funds and exchange-traded funds like the iShares S&P GSCI Commodity Indexed Trust. Investors also can make more-targeted bets with single-commodity funds: The SPDR Gold Shares tracks gold prices by holding physical bullion; US Commodity Funds LLC runs a suite of ETFs tracking prices of crude oil, natural gas and gasoline.”

A basket of commodities is probably the best approach for the long-term investor.

Eric Fry
for The Daily Reckoning Australia

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William Rastetter wrote:

1. Build clusters of excellence. Single companies have a tough time in isolation!

2. Provide meaningful ownership incentives to all employees. Share the big picture with every employee, often. Establish, communicate frequently and live a concise, coherent set of Corporate Values—”walk the talk.”

3. Embrace change as a constant. Know how to evolve your company and its strategy in response to outside competitive forces. Stagnation around outdated concepts and “staying the course” can be your enemies.

4. Build your companies on “three-legged stools:” First is innovative technology with strong intellectual property. Second, you need a strategy that gives you competitive advantage despite your small size and high cost of capital. Third, new companies need excellent people.

5. Don’t even start if your “stool” has only two legs!

[Editor’s note: To help launch Xconomy Detroit, we’ve queried our network of Xconomists and other innovation leaders around the country for their list of the most important things that entrepreneurs and innovators in Michigan can do to reinvigorate their regional economy.]

UNDERWRITERS AND PARTNERS

And once again the world is humming. World steel production hit a new all-time record in March, according to the World Steel Organisation. Global steel mills cranked out 120.3 million tonnes of steel, an increase of 30.6% from the same time last year. The WSO adds that capacity at mills in the 66 countries surveyed for its latest report is at 80.2%. That is well up from the low 58.1% in December of 2008 at the height of the credit crisis.

The task of today’s Daily Reckoning, then, is to ask if the rebound in global industrial production means the Global Financial Crisis is well and truly over. If that were the case, you’d want to be long commodities. As Eric Fry mentions in a note below, new financial research shows that commodity markets tend to bottom as the Federal Reserve begins tightening the discount rate.

And it’s not just rising U.S. rates that might do it. For example, later today the Australian Bureau of Statistics reports the March producer price figures. If those figures show rising producer prices, it gives the Reserve Bank of Australia more ammunition to raise Australian rates. But according to the study to be published in the Journal of Finance, that means now might be the best time to add commodities to your portfolio.

According to the Journal article, the study compared five types of portfolios: value, small-cap, momentum, growth and large-cap. It then determined how each portfolio would perform if it added commodity investments. “A 10% dose of commodities would have boosted a small-cap portfolio by the most: 1.67% per year during the restrictive period. That helping of commodities would have added 1% to the momentum portfolio, the least among the five.”

But which commodities and how much? “The study modeled allocations of 5%, 10% and 15%, and found that the 15% dose produced the best results, while 5% didn’t change the results significantly.” And the investment vehicles ranged from managed futures with an adviser to mutual funds, exchange traded funds, or index tracking funds.

All of this would seem to be very bullish. And we know that Kris, Alex, and Murray will be glad to hear this. In one form or another, all of them have recommended investments related to rising commodity prices or impending bottlenecks. Like late 2008, it seems like there’s never been a better time to be an Australian resource investor (or speculator).

Howard Simons at Bianco Research in Chicago says you should narrow your commodity search to those sectors where capital spending shortages have placed a limit on how fast output can grow. He likes the base metals. Alex likes coking coal and the platinum group metals.

Exercising some discretion about which commodities to invest in, and how, seems like a good idea. But in the big picture, the story is simple: China and India. The International Monetary Fund’s latest World Economic Outlook says that between the two of them, China and India will account for 40% of world GDP growth. China will grow faster than the rest of the G-7 combined, according to the IMF. And India will outperform the European Union.

This then, is the basic “stronger for longer” thesis in commodities that reigned in June of 2007, when Bear Stearns began quietly imploding. The “stronger for longer” theme is back. Even the Chairman of the Reserve Bank, Glenn Stevens, has caught a whiff of the optimism in the air. At a speech in Toowoomba last week Stevens said that, “Demand for natural resources has returned and prices for those products are rising. We have all read of the recent developments in contract prices for iron ore. As a result of those and other developments, Australia’s terms of trade will, it now appears; probably return during 2010 to something pretty close to the 50-year peak seen in 2008.”

Would a technician or a chartist call that a double top?

Any time you make a 50-year peak in anything, you have to ask yourself what is going. Stevens says that, “As usual with these things, we cannot know to what extent this change is permanent, as opposed to being a temporary cyclical event. However, the fact that we will have reached that level twice in the space of three years suggests there is something more than just a temporary blip at work.”

What is that “something?” Is it the industrialisation of three billion people in two of the world’s most ancient civilisations? Or has the super cycle in paper money created the mother of all commodity booms?

Either way, our deep and abiding suspicion is that the global financial system – which aids and abets leverage in the commodity markets – is as unstable as ever. The first phase of the GFC came about with a collapse in U.S. residential housing. A second stage of collapse in that sector is still possible. And there are many other risks (residential real estate and sovereign debt) to bank collateral.

But for now, none of that seems to matter. While our other colleagues have the one side of commodities trade covered – how to profit from it – we’ll take the other: how to profit from it if and when it blows up. This week we’ll be working out what the other side of the trade is. Until then…

Dan Denning
for The Daily Reckoning Australia

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We’re all waiting for the Planck map of the cosmic microwave background (CMB), which should become the definitive map of the early Universe for the foreseeable future. While we’re on tenterhooks, the Planck team has been feeding us tidbits to keep us occupied. The first was a gorgeous map of the dust. Now they’ve released some images of a stellar daycare. Planck’s key science goals have to do with mapping the CMB, which is an image from the far edge of the Universe. All the foreground stuff in between (like our galaxy, and all its dust and stars) is a nuisance, and need to be removed. Most of the Planck team would be just as happy if no stars existed at all. In that case the images of the CMB would be pristine and spectacular, and the whole mission would be a lot easier. Of course, it’d be pretty cold and lonely Universe, since there’d be no Sun, and no Earth, and no Planck team, and (shudder to think) no blogs.

For better or worse, there are dusty regions in our galaxy, filled with newly-born stars. Planck has been specifically designed to map out these annoying foregrounds, so as to be able to remove them from its images. The trick is that stars generally form in these regions, because it is precisely this dust which collapses to form stars. But this same dust obscures our view of what’s happening, at least at optical wavelengths. At microwave wavelengths, one can image the dust directly, and Planck observes at multiple frequencies precisely to do this. It makes detailed maps of stars and dust, just to subtract them off. But in the process, we get these lovely pictures.

The image is of Orion. The right panel is a composite image, while the left shows the three individual color bands: red corresponds to synchrotron emission from hot electrons in our galaxy’s magnetic field, green corresponds to hot gas (presumably heated by the stars), and blue corresponds to cold gas (this is the stuff that collapses into stars). The giant red circle in the image is from a star which exploded roughly 2 million years ago, and blew out its surrounding dust (inhibiting further star formation in that region). We’re seeing the aftermath of the birth (and death) of a star! The details of how stars are born, live, and die are pressing astrophysical questions, and these images show us the process as it unfolds. Whatever. Enough with the distractions. Planck has now imaged the entire sky in at least three frequency bands, and it looks like the data is good. Hopefully the full-sky CMB maps aren’t too far behind!

The Privacy Rights Clearinghouse has put up a pretty interesting chronology of data breaches (via Guardianista) detailing leaks in the US since 2005 that resulted in the loss of people’s personal info. They’ve totaled up the figure over the past five and a bit years, and it’s a staggering 358.4 million records lost. Keep in mind that 358.4 million is just a minimum, since there are plenty of leaks that have lost an unknown number of records (like the one from a closed-down Hollywood Video store in Nevada, where customer records were thrown in a dumpster then scattered by the wind). Still, you may be thinking that you don’t hear about record-breaking data breaches much these days, but that’s not because they’ve stopped — it’s just that they happen so often, they’re really not all that newsworthy any more. A lot of lip service gets paid to clamping down on fraud, but it really doesn’t seem like much goes on to stop data leaks, since the penalties for the leaks are toothless and are cheaper than any real prevention.

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by Julian Ku

What should South Korea do if it confirms the responsibility of North Korea for the sinking of a South Korean naval vessel?  This article quotes a Korean law professor offering three options:

Writing in JoongAng Daily, Kim Hyun-soo, professor of international law at Inha University, said Lee has three options if he wishes to avoid risking all-out war on the peninsula. He could demand concerted action by the UN security council; he could take his case to the international court of justice; or, failing that, he could impose a maritime blockade, as the US did against Cuba in 1962.

The first option seems no problem, except that it is hard to get the Security Council to do anything.  The second option is a problem since, well, North Korea has not accepted the compulsory jurisdiction of the ICJ.  The third option seems the most interesting, but it is also the most complicated one legally.  The Koreas are in a state of cease-fire.  But blockades, at least in theory, are not permitted under the U.N. Charter except when authorized by the Security Council (see U.N. Charter Art. 42). The 1962 U.S. “quarantine” of Cuba was carefully not called a blockade to avoid this legal problem.  I suppose South Korea could end the cease-fire, initiate hostilities, and institute the blockade as part of its right of self-defense.  Now that would be legally defensible, although it would probably start an all out (maybe even nuclear) war. So let’s hope they go with option 1.

The classic Nintendo 64 console can now really get along with the times, thanks to this handheld mod by Bacteria. It’s practically the whole thing crammed into one delectable piece of portable N64 heaven, complete with speakers

In tomorrow’s New York Times, I take a look at a new way of finding disease-related genes: search their ancient evolutionary history. Scientists can find genes involved in blood vessel growth in yeast–which have no blood. They can find genes that help build human embryos in plants, where they sense gravity. It’s a twist on a twist on Darwin’s great insights descent with modification. And I’m pleased to see that University of Chicago evolutionary biologist Jerry Coyne, a tough audience if ever there was one, is swayed by the piece. So check it out!

My friend and colleague Jim Vreeland writes over at The Vreelander about the tragedy of the Greek bail out:

So here it is: the long-awaited, much anticipated bail out of Greece. Was there really ever any doubt? I guess there was a little – that’s why Greek bond yields went up. But the break-up of the Eurozone? Com’on – wasn’t gonna happen.

So why has this been such a tragedy? Why the bickering back and forth about whether Greece will get a bail-out and who will do the bailing?

The answer has to do with “moral hazard” and “conditionality.”

Moral hazard rears its ugly head any time actors are insured against a risk.

Imagine how people would drive if they were completely insured against any damage to their cars – answer: a little more recklessly.

The auto-insurance industry deals with potential moral hazard with lots of institutions: deductibles, higher premiums for folks with poor driving records, different rates for different types of cars and drivers.

Imagine the kinds of risks that banks might take if they were completely insured against risk by the government… hmmm… Imagine – it isn’t hard to do.

Why, they’d take risky bets, lending to people who had little chance of repaying – and then when the loan repayments didn’t come, well, they’d just get bailed out by the government.

So, how do we address this kind of moral hazard? This one is tougher. See, if the big banks fail, we all suffer. That’s what “too big to fail” is all about – we don’t have a credible commitment to let them fail… unless we are willing to allow the whole financial system to fail – that is, none of us eat. Since we don’t want to go hungry, and the banks know this, they understand that they are just too big to fail.

Congress is trying to figure out away to deal with this moral hazard. Their solutions have to do with passing preemptive laws. One law could be to require banks to lend less and keep more money in their vaults (this is what “deleveraging” and “capitalizing” are about). Another law being considered is to keep banks small. The financial system can survive if small banks collapse. so we’ve got a credible commitment to let them fail. Knowing this, the small banks will not take undue risks.

Now, imagine how governments would act if they were completely insured against the risk of defaulting on loans. Why, they’d borrow and borrow and borrow… and they’d never worry about paying anything back… Yeah – imagine that. Well, this is what Germany has been imagining lately… it’s been a nightmare thinking about the signal it sends when Greece is bailed out. Portugal, Spain, Italy – they’ll all realize that they can borrow and spend without limit, and in the end someone will bail them out. How, then, can Germany deal with this kind of moral hazard?

The answer: Conditionality. Conditionality is just a quid pro quo. You want loans? You’ve got to change your ways. We’ll give you a li’l slice of the loan upfront. But before giving you the next slice in a few months, we’re going to check your policies. If you’re still misbehaving – eating more than your earning – we’ll hold up the next installment of the loan. And that will be ugly. You won’t be able to pay government workers or deliver public services. Investors will run scared from your country, and no one else will be willing to lend to you. You won’t eat.

Note that conditionality attacks a country’s very sovereignty. The “conditions” of the loan have to do with government taxes and spending – the very essence of politics. It is as though the lender has suddenly entered into a country’s political arena. And when taxes go up while spending goes down, there are lots of people who lose – people who won’t be very happy about conditionality.

So who’s going to impose conditionality?

Germany & the Eurozone have the money to lend to Greece. And they likely have the credibility to crack the conditionality whip. But this is dirty work. Germany would be seen as the bad guy in Greece – indeed throughout Europe – if it were dictating to the Greek government how to run Greece. If only there were some kind of smokescreen that Germany could use… where they call the shots, but make it appear that someone else is cracking the whip.

That’s where the International Monetary Fund (IMF) comes in. See, the IMF has been doing conditionality for years and years. And while the United States is the largest single vote-holder at the IMF, the combined power of the Eurozone easily surpasses American might. So, the Eurozone will be calling the shots. Bickering amongst Eurozone members like France and Germany can take place behind the secret doors of the IMF Executive Boardroom. And whatever emerges will be IMF policy.

So, be on the look out for protest signs in Athens bashing the IMF in coming months. Some will surely see through the IMF facade, realizing that Germany is really calling the shots. Others will see that Greece really sacrificed its sovereignty the day they gave up the drachma in favor of the euro. But the real devil here is moral hazard. And the solution conditionality.