When is the news discounted? Search for the marginal seller






When you read about weakness in emerging market and commodities AFTER 50% price drops, there might be a chance of the news ALREADY in the the pricing structure.



There is a joke that illustrates the value of optionality

An investment banker and carpenter are sitting next to each other on a long flight. The investment banker asks the carpenter if she would like to play a fun game. The carpenter is tired and just wants to have a nap, so she politely declines and tries to sleep. The investment banker loudly insists that the game is a lot of fun and says, “I will ask you a question, and if you don’t know the answer you must pay me only $5. Then you ask me one question, and if I don’t know the answer, I will pay you $500.” To keep him quiet, she agrees to play the game.

The investment banker asks the first question: “What’s the distance from the earth to the Saturn?” The carpenter doesn’t say a word, pulls out $5, and hands it to the investment banker.

The carpenter then asks the investment banker, “What goes up a hill with three legs and comes down with four?” She then closes her eyes again to rest.

The investment banker immediately opens his laptop computer, connects to the in-flight Wi-Fi, and searches the Internet for an answer without success. He then sends emails to all of his smart friends, who also have no answer. After two hours of searching, he finally gives up. The investment banker wakes up the carpenter and hands her $500. The carpenter takes the $500 and goes back to sleep. The investment banker is going crazy from not knowing the answer. So he wakes her up and asks, “What does go up a hill with three legs and comes down with four?”

The carpenter hands the investment banker $5 and goes back to sleep.

Go find bets like that!

A Trading Parable

Once upon a time, a man and his assistant arrived in a very small town and spread the word to the townspeople that the man was willing to buy monkeys for $100 each. The people knew there were many monkeys in the nearby forest and immediately started catching them. Thousands of monkeys were bought at a price of $100 and placed in a large cage. Unfortunately for the townspeople, the supply of monkeys quickly diminished to a point where it took many hours to catch even one.

When the new man announced he would now buy monkeys at a price of $200 per monkey, the town’s resident’s redoubled their efforts to catch monkeys. But after a few days the monkeys were so hard to find that the townspeople stopped trying to catch any more. The man responded by announcing that he would buy monkeys at $500 after he returned with additional cash from a trip to the big city.

While the man was gone, his assistant told the villagers one by one: “I will secretly sell you my boss’ monkeys for $350, and when he returns from the city, you can sell them to him for $500 each.”

The villagers bought every single monkey, and they never saw the man or his assistant ever again.

Irredeemable Currency Collapse

Dollar black hole

Talks on our monetary system

more: Leveraged Bubbles


Question: Inevitable Currency Collapse?

Premise 1: All dollars are borrowed into existence.  The Fed, for example, creates dollars to purchase government bonds, which, in turn, are paid in dollars, but those dollars are backed by debt.  Around and round we go.

Premise 2. The debt can’t be extinguished, so debt grows while the marginal utility of debt declines.  You borrow $100 from the bank, then repay your bank with $100 then your cash declines by $100 and the bank’s loan balance declines by $100.   But what happens to the $100 used to buy a tool for your business. Now the tool maker has the $100.

Can the debt be paid back out of current income?  When the marginal utility of debt reaches zero or a negative number, then the dollar has to collapse since the value of the debt will have to decline until collapse.   Ernest Hemingway, said, “We go broke in two ways. First slowly and then suddenly.”

How does the dollar die? It drowns in debt.  The money supply may even be decreasing as debt defaults, but the value of other debt collapses and thus the dollar. Remember that all dollars are backed by the balance sheet of the Federal Reserve.

I am not saying that the dollar will collapse tomorrow but what will stop the inevitable?   Since all other currencies are a derivative of the reserve currency, the US Dollar, you will see greater stress in foreign currencies before the dollar shows the same level of decline.

Question 2: legal tender laws were eliminated and people could choose their own money, would interest rates remain LOW and  S T A B L E?  How would rates fluctuate?


Hint: note how relatively stable interest rates were between 1880 and 1913.  What set the rate of interest?

Question 3: Does a long-term decline in interest rates hurt businesses? How? What adjustments would you make as an analyst in such an environment?

Prizes to be determined.
The end game?

I will send out the Value Vault keys as promised to the folks who have made requests over the past week.


Carl Icahn Speaks About Our Market Train Wreck

Billionaire activist-investor Carl Icahn gives an interview on FOX Business Network's Neil Cavuto show in New York in this February 11, 2014 file photo. Icahn said October 9, 2014, Apple Inc's shares could double in value and urged the company's board to buy back more shares using its $133 billion cash pile.  REUTERS/Brendan McDermid/Files (UNITED STATES)

Billionaire activist-investor Carl Icahn gives an interview on FOX Business Network’s Neil Cavuto show in New York in this February 11, 2014 file photo. Icahn said October 9, 2014, Apple Inc’s shares could double in value and urged the company’s board to buy back more shares using its $133 billion cash pile. REUTERS/Brendan McDermid/Files (UNITED STATES)

Carl Icahn Speaks

Carl Icahn is becoming a DC activist just in time to help stimulate congressional talks on corporations being able to repatriate money to America at a lower tax rate, he told The Post.

Icahn — a day after GOP presidential front-runner Donald Trump unveiled his economic plan, which included corporate tax relief for repatriated funds — released a 15-minute video Tuesday titled “Danger Ahead,” giving his views on the US economy. Icahn also endorsed Trump for president.

The billionaire investor dedicated much of the video and a corresponding interview with The Post to the taxation rate of repatriated profits.

“We want to make sure companies have the ability to bring their funds [$2.2 trillion in overseas profits] back,” he told The Post.

“Repatriation [tax rate] should be 7 or 8 percent.” Presently, companies pay taxes in countries where they make the goods, and then a 35 percent rate when bringing the money back to the US.

Icahn said he had been in touch with Sens. Charles Schumer (D-NY) and Orrin Hatch (R-Utah) and Rep. Paul Ryan (R-Wis.), “and everyone wants to see a [reduced rate] bill” by December.

“I think Schumer, Hatch and Ryan want to see this happen,” Icahn said.

If they don’t succeed, Icahn said, the repatriation effort will stall in the 2016 presidential election year and the US will see more balance-sheet cash remaining overseas, out of Uncle Sam’s reach.

Icahn’s biggest stock position, meanwhile, is his stake in Apple, from which he would benefit greatly if the company can repatriate some of its $200 billion at a lower tax rate.

“Repatriation would be viewed as massively positive for Apple,” Friedman Billings Ramsey Capital analyst Dan Ives said.

Icahn Enterprises, the investor’s publicly traded vehicle that is a proxy for his investments, is down 28 percent this year and 37 percent over the past 12 months. The company took a $373 million loss last year, largely on energy stock declines.

Another top 10 Icahn holding is Herbalife, which, as of June 30, had 48 percent of its $750 million in cash overseas.

The foreign cash repatriation talks in Washington could use some help, a well-placed Senate source told The Post. “I think it’s a long shot it gets passed this year.”

The main problem is key Democrats want to spend the new proceeds collected from repatriation on a long-term highway funding bill.

But key Republicans are uncomfortable with that idea because they are concerned that once repatriated money slows, Congress may have to raise taxes to pay for continued highway funding.

Not all business interests, especially big tech companies, are for repatriation at lower tax rates as they now have an excuse to not bring back foreign profits. So Icahn calling senators and being vocal on the subject makes a difference, the source said.

Icahn in the video explains why he is for repatriation.

“If that money came back, it would [be used] for jobs.”

“That money is given to somebody who will invest in this country. As opposed to taking the money in Europe and investing in Ireland or somewhere like that.”



Brazil EM

Friday, September 25, 2015

No Mas, No Mas! The Vale Chronicles (Continued)!

Some of my Brazilian readers seem to be upset that I used “No Mas”, Spanish words, rather than Portuguese ones, in the title. To be honest I was not thinking about language, but instead about a boxing match from decades ago, where Roberto Duran used these words to give up in his bout with Sugar Ray Leonard.

I have used Vale as an illustrative example in my applied corporate finance book, and as a global mining company, with Brazilian roots, it allows me to talk about how financial decisions (on where to invest, how much to borrow and how dividend payout) are affected by the ups and downs of the commodity business and the government’s presence as the governance table. In November 2014, I used it as one of two companies (Lukoil was the other one) that were trapped in a risk trifecta, with commodity, currency and country risk all spiraling out of control. In that post, I made a judgment that Vale looked significantly under valued and followed through on that judgment by buying its shares at $8.53/share. I revisited the company in April 2015, with the stock down to $6.15, revalued it, and concluded that while the value had dropped, it looked under valued at its prevailing price. The months since that post have not been good ones for the investment, either, and with the stock down to about $5.05, I think it is time to reassess the company again.


John Chew: At least the author has a process to reassess his investment.  I believe the critical flaw in his analysis (easy to say in hindsight) was not noting the massive mal-investment due to distorted credit markets caused by central bank policies. To normalize iron ore prices you would need pre-distortion prices going back twenty-five years.

Read more: No Mas!

A Mr. Market Lecture


Chapter 20_Margin of Safety Concept

A Short Selling Primer


For the millions of investors in buy and never sell strategies today who look at the values on their statements today, trusting that the Federal Reserve will always cut rates and always flood the system with more cheap debt as though this were some sacred rite of passage for the American investor, I can only say two words. Wake up! Read more: BMI_TheBigNastyDWordIsHere_Sept22.15

no easy fed helps stoks You may not wish to become a short-seller due to the asymmetrical risk and reward, but you can certainly improve as an analyst to become more skeptical by taking on the viewpoint of a short-seller. Riders on the Storm or Short Selling  An overview and primer. The best book yet that I have found: short selling Bear market  For those who wish to learn what a REAL BEAR MARKET is like then:

miners horrific

The Secret to Success: Being Ridiculed on Social Media; Hedge Fund Analyst Quiz; The End


Jesse Felder, a Contrarian Trader   Listen to the podcast and explore The Felder Report

Hedge Fund Quiz

The only way to win a date is to become a hedge fund analyst.  Your interview process requires you to analyze a real estate/mining company.

You look first at the balance sheet (Thanks Mr. Graham).   You notice that this mining company bought claims under a ski resort (Park City, Utah) where it bought acres in 1907 at five dollars an acre.

Then you notice that the company issued 20-year corporate bonds when interest rates were 9% for AA corporates about fifteen years ago.  Now similar companies can issue bonds at 5%.

How would you conduct your analysis? Good luck.

Interest rate decline

The End

So how will it all end? Dollars are created by computer key stroke when the Fed buys bonds, but the dollar is backed only by bonds (and a tiny bit of gold) and the bonds are payable in Federal Reserves Notes (the dollar) or just another form of debt. So debt is created to buy debt which, in turn, is payable in debt. Whoa?! No way this could ever be a problem. It’s magic. One thing bothers me, though, why do we need legal tender laws TO FORCE people to use dollars? I got a bad feelin’ on this.

But WHAT if more and more debt creates less and less “GDP” (let’s pretend it means something–govt spending creates economic growth, Ha Ha.) until each dollar of debt creates 0 or negative GDP growth. The Fed has to print to pay interest on the debt or the tail consumes the tiger.

Hemingway: We go broke slowly, then suddenly!

Anyone using CPI to gauge reality needs a reality check. You are a fool to buy gold as an “investment against “CPI inflation.” You own gold as a form of money to store wealth IF you lack confidence in central planning. So when it all comes down is when gold goes into permanent BACKWARDATION in gold. Holders of gold go NO BID on dollars. But don’t worry, the dollar derivatives like the Yen and the Euro will be earlier casualties. Meanwhile hope that the dollar rises against in order to buy more ounces. For others, Pray.
Now those who read the above my disagree, but know exactly fiat currencies do NOT go to 0 (or NO BID).

Commodity Markets

2015sep8crb1Commodity declines leading to stresses in emerging markets like Brazil.

Brazil 10 year

While the marginal commodity seller is selling.

glencore panic


Glencore Chart

Glencore is the marginal seller–another sign of the beginning of the end of the emerging markets’ declines.

Emerging markets and commodity producers are another area to search for values.


MBA Class on Valuation Begins

@AswathDamodaran Aug 24

Looks like my upcoming Fall 2015 Valuation class will be framed by a market meltdown. You are welcome to join in:

Supplement your class with books and best value blogs:

What you should not miss

Jim Rogers on Life

“I always thought I knew, from a distance, that business school was more or less a waste of time but then I actually taught at a business school so I’m pretty convinced it’s  waste of time and money”

“Skepticism is something I try to teach my children”

“The largest creditor nations in the world are now in Asia … you have to have savings and investment to build an economy … even Karl Marx knew the importance of building capital “