Arohan’s investing life

At the first blush it appears that as goes the US economy, so goes the world market. If the hiccups in the US economy can have such an effect on the markets elsewhere, than it would appear that the markets are now highly correlated. Does this mean that there is no value in diversifying internationally?

I would say that is not true. What we are seeing is how the markets act on a daily basis. True, that over a short horizon, the markets may be correlated. After all, we now live in a global economy where many companies are traded on exchanges in many different countries. However, over a longer term, each market performs based on its own fundamentals. Many emerging economies are growing today based on the fundamental changes in the business processes and political environment. Unless there is a drastic change in these, which I do not see happening any time soon, these markets will continue to do well

At the same time, do not write off the US economy. There have been countless such cycles in the past. It is true that the baby boom factor may not be present anymore, but the US economy is now driven by innovation, risk taking, and generally sound economic principles. These are still here (although one may question the soundness of economic principles involved in the subprime situation, but that is just a small component of the economy, it will probably do some damage in the short term but it will soon pass)

Regardless of the macro-economic picture, the basic value investing credo of finding value at a cheap price has stood the test of time and will likely continue to yield market beating results over a long investing horizons

Buffet is buying 60% stake in the Marmon group, currently a Pritzker family holding, with the remaining 40% to be acquired over the next few years at future business valuations. Also a point to note is the before this acquisition is completed, the Marmon group will make significant cash distributions to the selling shareholders. The 60% stake was valued at 4.5 Billion

Buffet is doing what Buffet does best. Buying business that deals in the nuts and bolts of the global economy. Easy to understand (despite Marmon being made up of about 125 different operating businesses), generating significant cashflows, with tremendous tangible assets.

Much has been said about the futility of operating as a conglomerate. Focus on the core competency has become a buzz word within the academia. However, there are companies that do this right, Berkshire Hathaway being one of them, Marmon being the other. It is not surprising to see the allure Buffet found in Marmon

OPEC left the oil production target unchanged, apparently suggesting that the demand is holding steady and so there is no need to raise production.

Who are they kidding?

A $90-$100 oil is not in the OPEC’s best interest over long term. This level of pricing make the alternatives to oil economical and while there is a lag in the development time, the alternatives are coming. In old times, OPEC would have increased supply many many price points ago to keep these alternative energy development process at bay.

Me thinks the reason they did not raise the production targets is they do not have the capacity to produce much more any longer. There reserves are being depleted and they do not want to raise the target and then having to come back and announce to the world that they were not able to meet the target (given the OPEC members’ propensity to cheat and over produce, under production to the quota will be a big news indeed)

Oh, and by the way, here is another news story that came out today that indicates how attractive the alternative oil sources are looking to the majors now

On a separate note: one of my associates received a call yesterday touting an investment opportunity in Texas. Apparently for 20K he would get an interest in 6 natural gas wells undergoing ‘re-completion’ (I have to check this word out to know what it means) and it is expected that for a 20K investment, he would be making about 42K per year in his share of the profits. The caller was just an intern and did not know much detail but the CEO happened to be sitting right next to him at that time and could answer some of the questions we had. We found out that most of these wells are not producing yet and the projections are based on a hope and a prayer (or as they say, speculation)

As I write this, US markets are still in doldrums, today spooked by Goldman Sachs’ downgrade of Citigroup. Specter of more writedowns at some of the banks are depressing the prices. The entire financial sector seems to be unable to pick itself up let alone carry themselves with any dignity.

Many of these financials are the Giants of the industry, the bedrock upon which the Capitalist system is built. It may be right for the investors to be afraid. But consider this: Goldman Sachs is likely to pay out about $17 Billion in bonuses this year.

(Aside: Quite stark when you look at the Bear Sterns market cap: 13.62 Billion)

Okay, so my point exactly is what?

The point is that even though the sub-prime fiasco is a blip, a significant blip, the future for financials is not as hellish as today’s stock prices show. Does the scale of GS bonus pool not show that atleast Goldman is confident in the long term health of the industry? Good solid banks like Bank of America, while they did have some exposure to subprime markets, will do well over a long term as long as they exhibit solid management and execution. The stock price for these well managed banks are attractive today. While they have been impacted by the current asset writedown, the future of these banks has not clouded.

And the banks re-structure, re-invent, etc. They know money. And the world economy needs them. A recession in US will only slow them down, but with other parts of the globe quickly climbing the value chain, the demand for these bank’s services will only increase. This is not end of the world. Not even for Citigroup. If your investing horizon for good solid companies is, like me, forever, you should look at banks (do your dd before you buy)

Disclosure: Own BAC and WM

Looks like Mr Market has presented us with a great opportunity to scoop up some financial names. With subprime issues and CEO resignations at Merrill Lynch and Citigroup even some of the strongest names have taken a battering. If you, like I did, felt that Bank of America (BAC) was cheap before, now it is almost a no-brainer.

Hmmm, where in the market will you find a strong franchise like BAC, with reasonable growth prospects, recent one-time writedowns notwithstanding, with a mouth-watering-CD-busting 5.75% dividend yield, and a long long history of dividend growth

The problem as I see it, and why the investors are not rushing in, is the uncertainty in general surrounding the financial names. This is a valid reason. However, the investors need to take into account BAC’s low exposure to sub-primes as well as its appetite to make opportunistic investments a la Countrywide and a management team that is generally well regarded. This together with its continued focus on growth (acquiring LaSalle, for example) in underrepresented markets does show that the company is sticking to its way of doing business

It also has a vote of confidence from Mr Buffet