Monday, February 10, 2014
The Frackers: The Outrageous Inside Story of the New Billionaire Wildcatters
Link
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Book: The Frackers: The Outrageous Inside Story of the New Billionaire Wildcatters
[H/T ValueWalk]
Nassim Taleb interview with the BBC
Link to: Nassim Taleb Sits Down To Record A Podcast About Economics, Luck, And Life On A Fine Evening In Paris [It looks like this took place last month. The BBC link is HERE.]
Hussman Weekly Market Comment: Double Trouble
Link to: Double Trouble
Economic Notes
One of the seemingly confusing aspects of Friday’s employment report was the increase of 638,000 jobs in the household survey, which contrasted with the rather disappointing 113,000 jobs in the more widely followed payroll survey. What many of the talking heads called a troubling difference can be explained by a footnote in the report from the Bureau of Labor Statistics: “household survey data for January 2014 reflect updated population estimates.” The civilian labor force itself was revised higher by 523,000 individuals.
Here’s how these revisions work (from Business Statistics of the United States, Strawser, 2012): “Official [current population survey] data are characterized by periodic discontinuities, which occur when benchmarks for Census measures of the total population are introduced. These updates take place in a single month – usually January – and the official data for previous months are typically not modified to provide a smooth transition… Such discontinuities occur throughout the history of the series.”
One of the more notable examples of this is was in January 2000, when the household employment figure jumped by 2,036,000 jobs, while the civilian labor force jumped by 2,090,000. By comparison, the total non-farm payroll figure (establishment survey) increased only by 233,000. The nearly nine-fold difference between the household and establishment figures wasn’t some gross aberration or cause for alarm in the field of economic analysis. It simply reflected standard practice in adjusting the household data for changes in estimated population.
Similarly, in January 2003, the household employment figure surged by 991,000 jobs, while the civilian labor force figure jumped by 871,000. In contrast, the total non-farm payroll figure increased by only 89,000 jobs. This simply reflected standard practice. There are certainly times when true inconsistencies in payroll figures can be informative, but where January benchmark revisions are concerned, there’s really nothing out of the ordinary here.
Sunday, February 9, 2014
Asking the right questions...
A great comment from Mike Novacek on Charlie Rose in a segment on the American Museum of Natural History. This is from about the 15-minute mark:
One student asked me: What do you think is the biggest challenge for a graduate student? That's a good question for an applicant. And I told her that I think the big challenge is the moment, kind of the eureka moment, where you go through this metamorphosis, like an insect that suddenly sheds one skin and takes on another, where you move from...the fact finding mode of mental attitude to ones that's creative, one that's curious, one that makes inquiry, one that asks the right questions. And that's a fundamental transformation that's required.
Friday, February 7, 2014
Talent...
My friend Shane over at Farnam Street posted an interesting interview excerpt with a quote by Kirby Ferguson about talent that I thought was interesting, and that matched well with a Malcolm Gladwell quote I had posted previously. Both quotes are below.
Kirby Ferguson:
I wish the earlier me understood work and practice more. Just the repeated concerted effort to get better at things. I wish I didn’t have the notions of talent and genius I had back then. I thought, “Oh, these other people, they just have something that I don’t have.” When really, they are just people who work more.
I wish I understood work. Work is the key to anything you want to do. If you want to play the guitar—anybody can learn to play the fucking guitar—you can be good at it. Maybe you won’t get to be a genius but you could be good.
You can be good enough to write good songs or make a good film or whatever. There’s no such thing as not having enough talent to get to that level. I mean, persistence is talent, really. Just sticking with it. Talent is not stopping.
Malcolm Gladwell:
Talent is the desire to practice. Right? It is that you love something so much that you are willing to make an enormous sacrifice and an enormous commitment to that, whatever it is -- task, game, sport, what have you.
Jim Grant: The world Has Never Seen The likes of China’s Credit Frenzy
Via ValueWalk:
HERETOFORE UNIMAGINED The world has never seen the likes of China’s credit frenzy. From year-end 2008 through the third quarter of 2013, assets on the balance sheets of Chinese banks grew by $15.1 trillion to $24.3 trillion. That growth in assets is greater than today’s $14.6 trillion stock of assets at American commercial banks. For further perspective, China’s GDP is reported to sum to $8.9 trillion, America’s to $16.7 trillion. (U.S. national income data should be taken with a grain of salt; for China’s, empty the cellar.) China’s bank footings represent 33.1% of world GDP, though China’s economic output amounts to just 12.2% of world GDP. In 1994, when Japan had the world on a string, Japanese output peaked at 17.9% of global production; in the same year, Japanese banking assets topped out at 27.3% of world GDP. Nineteen years later, Japan’s share of earthly GDP has shrunk to 6.8%, its banking assets to 11.8% of that all-in figure.
Seth Klarman on EBITDA
From Margin of
Safety:
It is not clear why investors suddenly came to accept EBITDA as a measure of corporate cash flow. EBIT did not accurately measure the cash flow from a company’s ongoing income stream. Adding back 100% of depreciation and amortization to arrive at EBITDA rendered it even less meaningful. Those who used EBITDA as a cash-flow proxy, for example, either ignored capital expenditures or assumed that businesses would not make any, perhaps believing that plant and equipment do not wear out. In fact, many leveraged takeovers of the 1980s forecast steadily rising cash flows resulting partly from anticipated sharp reductions in capital expenditures. Yet the reality is that if adequate capital expenditures are not made, a corporation is extremely unlikely to enjoy a steadily increasing cash flow and will instead almost certainly face declining results.
It is not easy to determine the required level of capital expenditures for a given business. Businesses invest in physical plant and equipment for many reasons: to remain in business, to compete, to grow, and to diversify. Expenditures to stay in business and to compete are absolutely necessary. Capital expenditures required for growth are important but not usually essential, while expenditures made for diversification are often not necessary at all. Identifying the necessary expenditures requires intimate knowledge of a company, information typically available only to insiders. Since detailed capital-spending information was not readily available to investors, perhaps they simply chose to disregard it.
Some analysts and investors adopted the view that it was not necessary to subtract capital expenditures from EBITDA because all the capital expenditures of a business could be financed externally (through lease financing, equipment trusts, nonrecourse debt, etc.). One hundred percent of EBITDA would thus be free pretax cash flow available to service debt; no money would be required for reinvestment in the business. This view was flawed, of course. Leasehold improvements and parts of a machine are not typically financeable for any company. Companies experiencing financial distress, moreover, will have limited access to external financing for any purpose. An over-leveraged company that has spent its depreciation allowances on debt service may be unable to replace worn-out plant and equipment and eventually be forced into bankruptcy or liquidation.
EBITDA may have been used as a valuation tool because no other valuation method could have justified the high takeover prices prevalent at the time. This would be a clear case of circular reasoning. Without high-priced takeovers there were no upfront investment banking fees, no underwriting fees on new junk-bond issues, and no management fees on junk-bond portfolios. This would not be the first time on Wall Street that the means were adapted to justify an end. If a historically accepted investment yardstick proves to be overly restrictive, the path of least resistance is to invent a new standard.
Thursday, February 6, 2014
GMO's 4Q 2013 Letter
Link to: Year-End Odds and Ends and
Divesting When Discomfited [free registration may be required]
GMO's 4Q 2013 Letter includes Jeremy Grantham’s “Year-End Odds and Ends,” which includes a new series entitled “Investment Lessons Learned” as well as Ben Inker’s “Divesting When Discomfited.”
Grantham:
Investment Lessons Learned: Mistakes Made Over 47 Years
1) Inside advice, legal in those days, from friends in the company is a particularly dangerous basis for decisions; you know little how limited their knowledge really is and you are overexposed to sustained enthusiasm.
2) Always diversify, particularly for your pension fund.
3) Fraud, near-fraud, or colossal incompetence can always strike.
4) Don’t buy stocks yourself if you’re an amateur: invest with a relatively rare expert or in a low-cost index.
5) Investing when young will start your brain turning on things financial.
6) Painful errors teach you more than success does.
7) Luck helps and finally…
8) Have a convenient mother to be the fall guy.
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