June 2005 Archives

I encourage you to read two housing articles: Amid Low Rates, Home Prices Rise Across the Global Village in the Wall Street Journal (subscription required), and The Trillion-Dollar Bet in the NY Times (free registration is required).

Amid Low Rates, Home Prices Rise Across the Global Village is an interesting article because it discusses how housing prices have risen across the globe with a few exceptions such as Germany and Japan, which have had -5% and -16% three year changes. But generally the low interest rates have been a worldwide impetus for increased housing prices. The three countries that have experienced the largest three year gains are South Africa, China (Shanghai), and Spain with 95%, 68%, and 63% respectively. By contrast, Canada and the U.S. are 31% and 29% respectively. But not all that goes up initially remains going up. Australia, despite have risen approximately 60%, has fallen back recently for three year gain of 56%. The worldwide gains are impressive.

The Trillion-Dollar Bet is also an interesting article because it discusses research by Deutsche Bank of New York concerning how some mortgage debt will soon be switching to adjustable payments. During the initial payments, payments are fixed, but once the fixed period has elapsed, homeowners will become subject to the vagaries of the interest rates. According to the article, by 2007 $1 trillion or 12 percent of the American mortgage debt will be switching to adjustable payments. Those who were just barely able to afford the current mortgage payments might find themselves struggling should rates continue to rise. On the left hand sidebar of the article is an interesting popup graphic. It shows the percentage of home loans greater than $360K that are interest only loans for the U.S. for 2001 and 2004. 2004 shows a very pronounced change, especially along the coasts.

I am seeing an increasing frequency housing articles warning of the inherent dangers should interest rates rise further. Housing is interesting from an investment point of view because so much of a family's wealth is tied up in their house. Should its value stagnate, or worse, decrease significantly, then how would that affect consumer spending patterns?

Housing prices should be on your radar screen.

Jeff Matthews wrote an excellent article in his blog Jeff Matthews Is Not Making This Up concerning the housing euphoria that exists today. When all the media is covering a phenomenon, it probably does mark the top, or at least very near the top.

Jeff's weblog is one of my favorite weblogs. You'll see his weblog mentioned in my favorite websites. Use the link on the sidebar to view my favorites.

I recently read Hot Commodities : How Anyone Can Invest Profitably in the World's Best Market by Jim Rogers. In his book, he makes a compelling bullish argument for commodities. To a large extent Jim Rogers bases his view that every thirty years or so there is a bull market in commodities that lasts for fifteen to twenty years. Supply and demand patterns change, which allows for a new bull market to emerge. In the 1980s and 1990s, we saw a bear market in commodities. The bear market led to an underinvestment in commodities related business, with the consequent lack of sufficient growth in productive capacity. As Asian economies, particularly China's, have gathered momentum, they have become voracious consumers of commodities. The necessary factors have set in motion another commodities bull market.

For investors, we note that commodities show a negative correlation with stocks and bonds. Commodities are liquid and are easily traded. Unlike stocks and bonds, commodities have no credit risk. And unlike stocks and bonds, commodities can't go to zero. Commodities are real assets that have generally outpeformed inflation. Moreover, commodities offer excellent portfolio diversification benefits.

For those who read and enjoyed Investment Biker : On the Road with Jim Rogers or Adventure Capitalist: The Ultimate Road Trip, you'll enjoy his latest book as well. He writes in the same style and he does draw upon his earlier experiences as he discusses commodities.

In this weekend's Barron's Magazine Sandra Ward interviews Ray Dalio, Chief Investment Officer, Bridgewater Associates, in an article Bipolar Disorder (subscription required). Paraphrasing Barron's, Dalio runs nearly $120 billion in institutional assets and his hedge fund has provided consistent returns of about 15%, after fees, on average, every year for nearly 16 years running. That's impressive.

Dalio supports Rogers' assertions that commodities will continue to be a strong asset class. He cites that world economies are late in the economic cycle and that there is a surplus of labor and a shortage of commodities. China and other emerging economies are growing and buying U.S. bonds. As long as China continues to grow rapidly, which seems very likely, there will continue to be strong commodity pressure as the rest of world benefits from lower cost goods. These are the same arguments that Rogers has been making for some time.

Another good source of information concerning the markets and commodities is Fleckenstein Capital website. Bill Fleckenstein is extraordinarily bullish on commodities and expresses the same and other concerns mentioned by Rogers and Dalio.

Rogers makes a compelling case why investors should have some capital allocated to commodities. If you don't own any commodities or commodities related stocks, you should purchase Jim Roger's book "Hot Commodities" to learn more about commodities. His book is not technical nor difficult. Rather, Rogers provides a fundamental basis for you to do your own research as you learn more about commodities before making your investments.

Quoting from today's Wall Street Journal Online article Kerkorian Boosts Stake In General Motors to 7.2% (subscription required) ...

Tracinda said Wednesday that about 18.9 million shares have been tendered at $31 apiece, boosting its ownership to about 41 million shares. While marking a big jump in Tracinda's holdings, it fell below the stated target of acquiring 28 million shares, which would have put its total holdings at 50 million shares, or 8.8% of the total outstanding.

I note that the stock is up $1.29 or 4.2%. That's a good showing by GM, expecially on a down day in the markets.

I am curious to see what happens next.

I remain short GM stock.

GM is in a difficult position. It's situation is made even more interesting by Kirk Kerkorian's recent tender for 28 million shares at $31. Note too, that Kerkorian hired former Chrysler Corp. Financial Officer Jerry York as a consultant. In its SEC filing on the May 9th, Kerkorian's investment company Tracinda Corp claimed that it was acquiring shares for investment purposes.

Tracinda is acquiring the shares for investment purposes and does not have a present intent to acquire or influence control over the business of General Motors. We may, from time to time, subsequent to the expiration of the Offer, acquire additional shares or dispose of some or all of our shares or may continue to hold the shares, depending on business and market conditions, our continuing evaluation of the business and prospects of General Motors and other factors. Tracinda does not have any current plans, proposals or negotiations that relate to or would result in: (1) any extraordinary transaction, such as a merger, reorganization or liquidation involving General Motors or any of its subsidiaries; (2) any purchase, sale or transfer of a material amount of assets of General Motors or any of its subsidiaries; (3) any material change in the present dividend rate or policy, or indebtedness or capitalization of General Motors; (4) any change in the present board of directors or management of General Motors including, but not limited to, any plans or proposals to change the number or the term of directors or to fill any existing vacancies on the board or to change any material term of the employment contract of any executive officer; (5) any other material change in General Motors' corporate structure or business; (6) any class of equity securities of General Motors to be delisted from a national securities exchange or cease to be authorized to be quoted in an automated quotations system operated by a national securities association; (7) any class of equity securities of General Motors becoming eligible for termination or registration under Section 12(g)(4) of the Exchange Act; (8) the suspension of the General Motors' obligation to file reports under Section 15(d) of the Exchange Act; (9) the acquisition by any person of additional securities of General Motors or the disposition of securities of General Motors; or (10) any changes in General Motors' charter, bylaws or other government instruments or other actions that could impede the acquisition of control of General Motors.

However, given that Jerry York has been brought aboard, I find this "investment claim" somewhat specious. In fact, quoting from Wall Street Journal online article (subscription required) GM Plans to Cut 25,000 Jobs As Part of Turnaround Plan, "Mr. Wagoner said GM won't necessarily know the results of the tender offer from investor Kirk Kerkorian's Tracinda Corp. to increase its stake in GM to 9%. The $31-a-share offer was set to expire later Tuesday. Mr. Wagoner said he believes Mr. Kerkorian wishes to remain a passive investor in GM." Specious indeed.

As I read through GM's press release and various articles in the press regarding today's meeting of stockholders, I was left with an general impression of no signficant change in strategy. Just more of the same with hope of a different and better outcome in the future.

I don't know how GM is going to get the public excited again about buying GM cars without massive rebates or incentives. Nor do I know how GM will be able to reduce its health care obligations and get the unions to cooperate.

And then you read articles about the Chinese car manufacturers having massive surplus capacity. To me, it just spells more challenging times.

I would sure like to know why Kerkorian tendered for the additional shares. I don't see many positives for GM in the near term. But then maybe that explains why Kerkorian is a self made billionaire and I am not.

It should be an exciting few years to watch how this plays out. I've got a front row seat to watch the action.

As a matter of disclosure, I am short GM stock and have been for a while.