POSTERITY MEASURES

China's inevitable growing pains

Wed, 29 Feb 2012 08:29:03 -0500

Best. Financial. Journalist. Ever.

This One Worked Well

Fri, 24 Feb 2012 23:06:00 -0500

I bought this US-listed Chinese stock this morning while having my first coffee and watched it appreciate over 30% before the closing bell. I’m going to hold it until it hits eight bucks or the end of May. Whichever comes first. I wrote a research note on it so you can make an informed decision on whether to get on the Chinese veggies wagon.

Le Gaga Holdings - LTD (ADR) - GAGA: NASDAQ
ADR Price (open 02/24/12) USD 4.19

Target Price (6 months) USD 5.63
P/E (ttm) - 5.92 vs. Industry average (ttm) - 8
Mkt. Cap - USD 241M, Annual Reported Sales (03/11) - RMB 406.20

GPM - 74.7%, NPM - 37.2%, US IPO: 10/10

Despite an outlook for tempered national economic output this year, fundamental indicators suggest certain large incumbent firms in China’s produce market will enter a period of robust growth. The consumer base has expanded rapidly and demand for low-pesticide produce is high.

China’s agricultural sector accounts for over 10% of GDP and the country grows nearly half the world’s vegetables by volume. The retail value of China’s fruit and vegetable market is estimated to be USD 150B. Next week, Le Gaga Holdings, one of the largest agricultural companies in the country by arable land coverage (1490 hectares) as well as greenhouse coverage (553 hectares), will report earnings for 3Q12. Management’s guidance for revenue in the quarter is RMB 145 (USD ~23M), representing y-o-y growth of 52%, and an increase from the previous quarter of 42%.

The real sweet spot for Le Gaga though, has been net profit which was RMB 84.34M on 09/30/11; nearly 150% above the previous twelve month average of RMB 34M. Farming is seasonal so this increase in net margin is tipped to taper but should remain relatively elevated. Le Gaga is projected to fortify its impressive operating gains through improvements including dispossession of less profitable farms and the curtailment of export-oriented crops which fall outside its core product line.

Chaoda (682 HK), China’s current largest produce grower and Le Gaga’s main competitor, lost access to Chinese capital markets in 2011 after fraud allegations by the net collective Anonymous and a public investigation. The result is that Le Gaga will likely increase market share and encounter less competition going forward. Combined with management’s focus on increasing revenue per hectare and effective farm management, the firm appears a favorite for the industry.

Upside
* With inflation down (4.5% y-o-y for broad and 10.5% for food [01/12] vs 6.5% and 14.8% [07/11]), there is a far lower risk of state-imposed pricing controls this year.
* R&D has totaled RMB 27M (USD 4.3M) since 2009 and greenhouse coverage as a proportion of arable land increased from 20% to 36% between 06/10 and 09/11. Biological assets and yield improvement technology remain priorities for the firm.
* With land prices falling in China, Le Gaga will likely acquire more arable property, with the goal of expanding into the populous Yangtze River Delta.

* Agriculture is a subsidized industry and tariffs are maintained on imported foods.
* For USD investors an appreciating CNY (up roughly 4.5% y-o-y) enhances yield.

Downside
* Caution is advised concerning the connections between Le Gaga’s board and the fallen Chaoda. Four Le Gaga directors are former Chaoda employees and VP Na Lai Chiu was a cofounder of Chaoda with her husband, the company’s current chairman Ho Kwok.

Conclusion

Based on sales growth of 35% and projected EPS of USD .26 and USD .30 for the next two quarters my 6-month P/E-based target for GAGA is USD 5.63 or an appreciation of 34%.

The Public Pension Paradigm

Fri, 24 Feb 2012 11:39:13 -0500

Timely article here on a subject that will be making front page headlines before long. Nobody wants to know what a $4tn dollar tidal wave of debt looks like when it crashes and gets sucked back out to sea.

“…most state pension plans are still based on the assumption that their investments will continue to generate annual returns of around 8 per cent or more, in the coming years; but with 10-year Treasury bond yields hovering around 2 per cent, that assumption looks over-optimistic by several hundreds of basis points.

Thus academics, such as Joshua Rauh of Northwestern University, think that if a more realistic rate of return were used, this would reveal that state pension funds are now underfunded to the tune of $3tn-$4tn. Other observers are even gloomier. “This $4tn figure is a lower bound,” argues Robert Merton, economics professor at MIT. “Liabilities as reported by state and local governments seem to creep steadily up with each report due to ‘actuarial losses’ or overly generous assumptions about mortality and worker behaviour. In recent years, these have added growth of about 4-5 per cent per year to total liabilities.” And, of course, the longer that US interest rates – and bond yields – remain ultra low, the worse this underfunding gap becomes.”

Bogle OWS

Mon, 20 Feb 2012 00:29:19 -0500

Another John Bogle winner.

Canadian Ties

Wed, 15 Feb 2012 15:22:56 -0500

This is an interesting and premonitory article. While there’s no denying a moral hazard implicit in the reality of having an NYC-based hedge fund trying to ‘improve’ a regional Canadian railway service, I can’t ignore the fact that CPR sought investment in public capital markets, presumably without taking into account that there are hidden contigencies in everything. Who did they think would buy their equity? The average sightseeing passenger?

I’m surprised there are no poison pill provisions allowed for this sort of event and suspect that will change as a result of this. As the US economy strengthens again, Canada is going to have a harder time trying to contain the same push for reduced capital controls that brought about NAFTA and the other free trade initiatives that were underway before the house collapsed down here.

Beware of flying beaver fur.

The Bee's Knees

Sat, 28 Jan 2012 13:50:00 -0500

Can’t believe I slept on this. Yesterday someone told me Mossad was employing robobees in recon missions so I did some online research. Couldn’t verify that claim but I came across the above which is equally impressive.

So does the disintermediation of the construction industry loom? Either way, I think a lot people would want to have one of these things around the house.

America's Pension World: Faulty Warehouse

Wed, 25 Jan 2012 13:39:00 -0500

America’s pensions are in a bad way. The math doesn’t add up and in as plain language as I can come up with, here’s why.

Think of a pension plan as a big shipping and receiving warehouse. It has assets (things it brings in) and liabilities (payments) which are the things it ships out. Many of the assets are bonds and the rest are stocks. Bonds are contracts between a borrower and a lender. The pensions in this case are the lenders and the things they bring in from the bonds are bags of money. Eventually those go out as payments to retirees. Easy right? Almost.

The thing about bonds is that they have a feature called duration. Duration sounds like it could be a complicated concept but all it represents is a bond’s sensitivity to changes in interest rates. Simpler still, it’s how much the value of the bond drops when the cost of borrowing goes up. And vice versa. This happens because old bonds (previously established contracts) are worth less compared to new bonds created with higher interest rates. Duration is measured in years. That is, it’s the average of the times when the cash flows from the bond are received by the lender. A bond without coupons has a duration equal to the length of the loan, because it doesn’t have payments along the way. Low duration means a bond is relatively insensitive to interest rate changes. So short term bonds or bonds with big coupons (regular payments) have low duration.

Now here’s the problem. Pension assets (the bags of money coming in) have a lower duration than pension liabilities (the bags of money going out). The average asset duration is between two and five years and the average liability duration is between 15and 20 years. So the liabilities are from 400 to 1000 percent more sensitive to changes in interest rates. When interest rates drop, liabilities skyrocket. That is, the amount that the warehouses clients want rises substantially but there’s much less coming in with which to give it to them.

As anyone who’s looked at the laughably low interest in their savings account or considered trying to get a mortgage knows, interest rates have fallen to and stayed at historically low levels. The result is that pension liabilities have ballooned in excess of assets. This has happened with the backdrop of constrained growth for the corporations that support the pensions. Also, new regulations dictate that corporations have to declare their pension shortfalls on their public filings or as one bond manager put it, “they have to wear it on their shirts.” Companies with big pension obligations will therefore have a significantly harder time raising money from the investing public. Rightfully so. But still, these have to be high pressure times for pension managers.

You know that saying, ‘fool me once, shame on you; fool me twice, shame on me?’ Pension managers do. Especially those managers who could lose their jobs like everyone else who earns a salary in this economy. If pension funds take another big dump right as the boomer wave retires, heads are going to roll. So these days the managers are muttering the ‘fool me’ proverb as they modify their investment strategies (by matching assets to liabilities) to prevent further losses by locking in the current ones. The problem with this strategy is that it negates the possibility of realizing gains when rates rise again. It’s a confirmation that the certainty of misery is better than the misery of uncertainty (that would come from hoping rates rise again).

The end result is that companies are going to have to make greater cash-out-of-coffers contributions to their pension plans. This means less money for research and development and less money to be reinvested into the companies themselves. It will also mean lower wages and lay-offs for current workers. Which will constrain the economy further and make things even harder for the under 30s.

The bigger they come, the harder they..['re hated]?

Fri, 20 Jan 2012 11:23:00 -0500

It’s a hard time to be a big offline corportation. My view on this is that these are companies that haven’t realized the power of online commerce and are in a defensive mode because their business models are failing. Maybe that’s too simplistic. BofA should’ve never told the public that it was going to charge fees for ATM usage.

Red curtains?

Tue, 17 Jan 2012 12:02:00 -0500

Funny how there are certain things that make headlines, stealth photo-wise. Middle Eastern weapons facilities (or doctored photos thereof right Colin?), people shoplifting, and now, Chinese ghost cities / industrial parks. The connection, I guess, is that the perps didn’t consider that they’d be broadcasted.

Maybe this photo was taken on the weekend. Either way, it’s starting to feel like China’s going to eat it. If only because the Western press says it is.

Generational money management issues

Mon, 16 Jan 2012 09:16:00 -0500

Will Silicon Valley go for Wall Street?

How much does Obama know about finance?

Tue, 10 Jan 2012 09:12:00 -0500

If the President knew more about markets and the theory behind the financial capitalist system in which we live, would he be better equipped to make independent decisions about how to handle the fall out from two decades of irresponsibility?

Was he too dependent on his advisors that are better schooled in the ways of banking in ‘08 and ‘09?

How can a politician talk about finance without alienating people who know less about it and regard it as an elitist arena?

More of this, please

Tue, 10 Jan 2012 08:49:00 -0500

There’s a lot to think about here.

Morality and Abstractions

Sat, 07 Jan 2012 23:36:00 -0500

Good article.

And a MUCH better reply. A call to action, even.

The Wisdom of Will Rogers

Sat, 07 Jan 2012 23:10:00 -0500

“Every guy just looks in his own pocket and then votes. And the funny part of it is that it’s the last year of an administration that counts. [A president] can have three bad ones and then wind up with everybody having money in the fourth, and the incumbent will win so far he needn’t even stay up to hear the returns. Conditions win elections, not speeches.”

But politics is still a total circus and so like Altucher says, wake me up when the election is over.

The highly correlated world of the endowment investor

Tue, 03 Jan 2012 20:32:00 -0500

The highly correlated world of the endowment investor:

And a nifty illustration accompanies it.

Jobs or the credit rating?

Tue, 03 Jan 2012 17:39:19 -0500

The other day Krugman put some worthwhile stuff out about how dithering over the debt is the wrong priority for DC.

Here’s El Arian saying the national credit rating should be a top objective. I would be more inclined to agree if the ratings agencies had more legitimacy.

I tend to subscribe to the version that the comatose labour market, not the perception of our future financial solvency, should be immediately addressed.

The sage speaks

Tue, 03 Jan 2012 16:56:00 -0500

Being married to someone who graduated from Harvard, you don’t hear heaps of Yale praise around the home. That said, I regard Shiller as being in a class of his own so I’m looking forward to this.

Interested parties ought to take his Financial Markets class through the Yale Open Courses. It’s also available on iTunes U.

Real stats

Tue, 03 Jan 2012 14:50:00 -0500

The other night I had a friend from Shanghai over for a pizza and some beer. I asked him about the recent bump in the Chinese PMI and he said he doesn’t believe the numbers. That must be frustrating, I thought, to live in a place where you have to question what’s behind the economic data releases.

This coming Friday the Department of Labour will provide December’s (un)employment numbers. Obviously there’s a seasonal consideration, but it’s likely that the latest 8.6 will shed a bit. But how much of that can WE believe? One thing’s for certain, if you’ve fought for the country, you’re (statistically) worse off.

If anyone can provide me with a plain English guide to unemployment numbers and criteria, please do. Otherwise, I’ll write one myself.

Guest post: Whither the pound?

Mon, 02 Jan 2012 10:42:00 -0500

2012 will surely be another ribald year in the currency markets. This article is by Andrew Hallett of Consumer Focus in London.

Whither the pound?

Sterling enjoys a renaissance, of sorts.

Britain is not used to coming third at anything (it is not even in the top five economies on most measures anymore) but economic prestige can be measured in other ways. Certainly the pound’s position as the world’s third most held reserve currency is something to cling to in these testing times for the UK economy.

Last year 4% of all currencies held by the world’s central banks were dominated in Sterling, up from just 2.8% in 2000. Despite Japan’s considerably larger economy Yen holdings have not hit such a level since 2003. Undoubtedly this is due to London’s disproportionate influence as a financial hub and the spill-over effects from Eurozone-proximity. It also reflects a belief that Britain is fundamentally a nice boring economy that can pay its way, despite recent budgetary indiscipline.

Does this mean anything for British business and consumers? Certainly it helps the trade balance, enabling UK plc to buy any commodities listed in sterling at a small advantage compared to countries that do not issue such large quantities of reserve currencies. This should please the UK Chancellor, George Osborne, who has made increasing net exports a key plank of his economic policy. A bigger plus is the borrowing latitude such reserves also permit Britain, essential at a time of still high budget deficits; the resultant lower yields also help with credit and economic growth.

Interestingly Mr Osborne (via the Bank of England) is also keen to build-up Britain’s own bank of reserves of other currencies; partly to hedge against future financial troubles and partly to imply that his Labour predecessor let things slip. Other countries buying sterling may have similar, political motives – Oman, for example, a former protectorate of Britain, holds more than 5% of its reserves in pounds, presumably also motivated by anti-US feeling and so ill disposed to the dollar.

Other friends of the pound are the central banks of Eastern Europe, both inside and outside the European Union. The increasingly strong Polish central bank holds more than 10% of its foreign reserves in sterling, a percentage that can only increase if and when that country joins the euro zone. In comparison to the turmoil in that bloc the UK is a model of economic stability and predictability.

There is, however, some possible worry attached to the sterling’s increasing popularity. The last time monetary authorities around the world started holding more pounds with such keenness was the early 1990s, a decision based on Britain’s entry into the European Exchange Rate Mechanism (ERM). That experiment in currency fixing ended in national humiliation, and billions of pounds down the drain, when Britain crashed out in 1992, unable to maintain sterling’s artificial value against the mighty Deutschmark. This time investors are banking that the pound can justify all the money invested in it, and it is Britain’s continental neighbours, if anyone, who will suffer from economic hubris.

Interesting AMZN valuation debates

Sun, 01 Jan 2012 23:48:00 -0500

Heather Bellini at Goldman says Amazon’s in for pain.

Doug Anmuth at JPM says it isn’t so.

I’m more with the latter.

Amazon at $200+ by March? I think yes.