Many people have read or watched the movie the Big Short, the author Michael Lewis wanted to know who made money on the housing crisis? In investing you can make money when the market goes up, down or sideways. In the book Boomerang written by Michael Lewis published by W.W. Norton & Company, New York, 2011 Mr. Lewis examines countries outside the United States and how they were affected by the housing market collapse. Mr. Lewis picked  4 countries – Iceland, Greece, Ireland and Germany all countries which had made the news prior to 2008.

Iceland for a time the value of everything in Iceland was rising, the stock markets, the real estate and eventually it crashed. The Iceland banks were promising high rates of return and money was flowing in from Britain and Germany and the banks were buying assets around the world at increasingly higher prices. The higher prices meant asset prices rose and everything looked rosy. It is one thing to buy assets at high prices, it is another thing to ensure maximum profits to pay high rates of return to keep money flowing.

In theory it can be done, however the roots of Iceland are is geothermal energy and the fish industry. Mr. Lewis points out a research paper called The Economic Theory of a Common Property Resource: The Fishery written in 1954 by Indian University economist H Scott Gordon. The question to be answered is why are not fisherman wealthy, despite the fact that fishery resources are the richest and most indestructible resource available to man? The problem is fish are everybody’s property, they are nobody’s property. There are no barriers to entry so anyone can fish and fish up to the point where fishing becomes unprofitable. There is the hope in fisherman of the lucky catch or winning the lottery or they are gamblers and over optimistic.

Overconfidence leads to impoverish not just themselves but also the fishing grounds. Simply limiting the fish caught will not solve the problem, it will just heighten the competition and drive down profits. The goal is to catch the maximum number of fish with minimum effort. To attain it, you need government intervention.

The government issued paper entitling fisherman a percentage of the total number of fish to be caught without damaging the long term health of the fishing industry. If you did not want to fish, you could sell your quota. If you can sell your quota, you can take it to the bank to borrow against it as the banks assigned a dollar value to your share. The fish had not only been privatized, they were securitized. This act allowed Iceland to enjoy wealth and now everyone did not have to be a fisherman. They could do other things such as being investment bankers.

Linking to dividend paying stocks, with all government policies there are unintended consequences. In Iceland, the fish were commoditized which create wealth and that was good. What were people to do? The men went into investment banking and bought assets but they should know all assets go through cycles it takes good management to keep gaining value from the assets. As you go through your investments, remember the people managing the assets still matter.

There are more questions than answers, till the next time – to raising questions.

If you think of Brexit and the end of December, you would likely be thinking of patience. At times that is the correct decision, but it also meant some asset values fall further than normal. A French company called Vinci which runs 45 airports in 12 countries, so hopefully they had done their homework and had a list of airports they would love to operate. One of the airports on the list was Gatwick which is Britain’s second busiest airport.

Vinci will buy 50.1% of the shares for $5 billion. The President of Vinci Airports Nicolas Notebaert said a few months ago we could not have dreamed of acquiring an airport in the London area for less than 20 times core earnings. The airport is located 48 kilometres or between a half hour to a hour south of London and serves 228 destinations in 74 countries and is a major base for EasyJet and British Airways.

Last year in London, there were 170 million passenger journeys, in top place was Heathrow,  Gatwick handled about a quarter or 46 million passengers. Gatwick is an efficient airport so do not expect many changes.

Vinci is buying shares from existing shareholders – Global Infrastructure will sell half of its stake to own 21%; Abu Dhabi Investments will own 7.9%; California Public Employees Retirement System 6.4%; National Pension Service of Korea 6% and from Australia Future Fund Board of Guardians 8.6%.

Vinci has airports in France, Portugal, Britain, Sweden, Serbia, Cambodia, Japan, United States, Dominican Republic, Costa Rica, Chile and Brazil. In 2017 more than 180 million people went through the airports.

Linking to dividend paying stocks, every country in the world wants and has airports to move people around, when there are consistent flows of people that means there should be a consistent flow of revenues. Planes, people, and then add on- shopping, hotels, and sometimes living quarters. As long as people are going from place to place – a consistent revenue source is available which makes a good investment.

There are more questions than answers, till the next time – to raising questions.

 

Just before Christmas, the Secretary of Treasury released a message to the press that he had contact the big 6 financial banks and asked them about liquidity problems, as the stock market had gone down. The effect of the Secretary’s press report was to send the market down further.

The reason is the Treasury Secretary has a great deal of information about how the economy is doing and one hopes, in this case it is he, has good relations with the big banks in regards to their important part of the economy in granting credit. The banks always have to balance the giving of loans enough to receive their money back plus interest and to ensure the risk of not receiving their money back. Generally as economies tend to tighten because of risk of recession or too much growth, the banks will ease back on their credit granting. In simple terms: credit makes the economy work.

In a down market, everyone is looking for a reason why it should go down further or is it at the bottom and you should be selectively buying opportunities. When the release came from the Secretary the context was missing, rather than saying the given the change in banking rules since 2008, the Treasury Secretary called the big banks to ensure the status quo or there were no problems with liquidity and the status quo remains. If the press report had said that, no reaction because there is no reaction to it. The press report noted the Secretary had talked to the big banks and when contacted by the financial press, the banks were unsure why the Secretary had called. This lead to uncertainty of does the Treasury see something everyone else does not see?

Linking to dividend paying stocks, all dividend paying companies have a press department often times it is part of investor relations. The writers of the reports are not first time writers and know each sentence means or does not mean something. If the market is searching for stability, the press reports have that theme. If the market is searching for growth, the press reports have that theme. Press reports are read for what is in them and what is not in them, understanding the elephant in the room needs to be covered.

There are more questions than answers, till the next time – to raising questions.

Infrastructure is a wonderful thing for an investment bank because it involves government guarantees and large commissions for raising money which taxes can pay back. Many times around the world, the infrastructure is actually done or much of it not including cost overruns. Sometimes, government officials at the President or near him get very greedy and that has happened in Malaysia. The government set up the fund 1 Malaysia Development Berhad or 1MDB which raised $ 6 billion and Goldman Sachs received a $600 million in fees. This was considered a good thing at the time. Unfortunately, the fund became a front of corruption for people close to Najib Razak who was the Prime Minister and Jho Low who provided directions of where the money needed to go and very little went to infrastructure. Two former Goldman bankers who were lead bankers to Malaysia have been charged.

The only good news is the new Prime Minister and Attorney General are trying to recover the money, although much of it went to lifestyle living.

Linking to dividend paying stocks, if you buy a company which does infrastructure except once in while there will be scandals with the company. It is often too easy to have over runs, however once the infrastructure is built the fees or tolls or revenue from the operations are generally healthy for a long time.

There are more questions than answers, till the next time – to raising questions.

In the book Autonomy – The Quest to build the Driverless Car by Lawrence Burns and Christopher Shulgan published by HarperCollins, NY, 2018. The author Mr. Burns worked  as Senior Vice President for Research Development for GM and throughout the book, although he saw shifts in how the public views vehicles, his company did not.

The reality for most of us, we park our vehicle in the driveway, we drive to work and park or the usage of the vehicle is parked most of the time. If there was a different or better way, would we still own a vehicle? If driverless cars were available at relatively inexpensive ways would we own or use them similar to taxis or Uber? Mr. Burns modeled the idea and he believes if driverless cars were the norm, perhaps 75% of vehicles would be off the road, because we would have a different relationship to the vehicle. Would you need to own one? maybe yes or maybe no.

In the book, Mr. Burns asks why Google and people in San Francisco could see the future but in Detroit lead by GM could not? Similar to most things in life there are a combination of factors:

One of the problems was is the big auto companies are located in Detroit and did not pay a great deal of attention to what was happening in the Bay area.

Another problem is the testing process – Detroit likes to test in secret often times in remote ultra secret locations. To test a driverless car you need to test them on the public roads.

Another issue is culture. It is very hard for a big companies to disrupt themselves. Google did not have a product in the area but its founders were interested it the process of driverless vehicles. The company could figure it out as they went. One of the elements to success is maps for the vehicle to determine where it is going. At Google they could and did work on the solution which turned out to be Google Maps, which helped them in their advertising which helped them make money to continue to do driverless vehicles. The auto companies had no real way of making money from map making.

The auto companies define risk differently. There are places where you wish to take a risk and those that you do not. Designing a brake system or a plant, you do not want to take a risk because of the safety factors. The culture of the company which allows very good design and being safe does not lead itself to doing a prototype or testing a different business model.

The car companies make hardware which they do a very good job at – the hardware can be used in all conditions.

Self driving cars is essentially a software and mapping problem. It requires writing lots of computer code which is not a car company’s strength. The automaker’s looked at Google’s self driving car project, they saw a future in which the automobile because the latest example in a trend that already afflicted 2 other software-heavy devices. personal computer and smartphones. Early in the onset of the personal computer revolution the hardware makers had all the power – the Texas Instruments, the Commodores and Hewlett-Packards. Then the power shifted to the software what was inside the computer and the Microsofts  and Apples rose up. The same thing with the smartphone – it is the apps that you can receive and use not the maker.

A prime reason the auto industry was slow to driverless vehicles was that they did not have a bone deep understanding of digital technology or the full capability of computers and big data. They did not understand cutting edge communications technology. They tended to believe their business was about manufacturing and selling cars – when actually the real value creation amounts to helping people get from one place to another.

Linking to dividend paying stocks, these companies have a monopoly or near monopoly and have had the ability for a number of years. It takes good management to keep it unless it is government mandated. When you invest, you always want to know what is the value proposition in the company – and do you think they follow it?

There are more questions than answers, till the next time – to raising questions.

 

 

There are many people who if they could would not worry about driving the vehicle to work or to visit as the vehicle would drive itself. The driverless vehicles may come to that, but the reason why people have put money and resources towards doing it is war. In the middle east, a convoy of trucks is moving supplies from one place to another and  an IED explodes hurting or killing a solider. Would it be great, if the trucks were driven by robots so no one is injured? The generals who ran the Defence Advanced Research Projects Agency or DARPA wondered could it be done? Universities which have a program in robotics stepped up to see if it could be done. The answer turned out to be yes it can be done, but the downturn of the economy put everything on hold.

In the book Autonomy – The Quest to build the Driverless Car by Lawrence Burns and Christopher Shulgan published by HarperCollins, NY, 2018 the quest for DARPA included who wants to be involved – the race defies prevailing technology, and many hold that the challenge prize is unwinnable in our time. The date was 2003.

If you consider, the tools that society did not have from google maps to increasingly small chips, yet we had people to rise to meet the challenges they faced. It took years of trial and error to come close to doing what the military wanted, but then the race was  stopped. In the aftermath of the race, the people who run Google were interested and they asked one of the top designers who said driverless cars were too far in the future, what is a technical reason for it can not be done? Not a societal reason, but a technical one?  The designer could not think of one and the folks at Google started the new phase. Have a driverless car drive in California over 100,000 miles.

From this exercise came Google maps and the use of GPS, which helps society and Google. As one can image everytime you drive there are things to react to, through all types of climate conditions and driving conditions. Ensuring the programming of the car to drive safely is a continuing challenge, but possible.

Linking to dividend paying stocks, the American dream is about finding people who believe something could be better. It takes research and development, it takes money and it takes people for all types of reasons see the benefits. Often most of us do see the benefits for example most driverless cars will tend to be electric – to build an electric vehicle fewer parts than an internal combustion engine vehicle. If sales increased to millions of units sold, that changes many aspects of the economy. There is always good with the bad.

There are more questions than answers, till the next time – to raising questions.

On February 14, 2018 a shooter went into a high school in Florida and shot students and teachers. That school was called Marjory Stoneman Douglas High School in Parkland, Florida. Two of the students have written a book called #Never Again by David and Lauren Hogg, published by Random House, NY,  2018. The book is dedicated to the Parkland 17 and to victims of gun violence everywhere.

The good news from reading the book, if every high school across the US was equal to or half as good as the Marjory Douglas High School, the US would be in great shape for the future. David and Lauren discuss their lives and their studies and there was wonderful stories of the young people getting the correct education for the changing economy.

The skill set which was set by the school and learning how the real world works on issues it like and dislikes, helped the March for Our Lives be able to move into the helping make the issues important including voting.

Linking to dividend paying stocks, as the economy continues to do well, there is pressure on filling the jobs and the new crop of young people. Sometimes one wonders, other times you need to be impressed with the young people. It should not be that people need to die seemingly for nothing that evokes change, but it is good the young people are both cynical and able to discuss the issues and solutions.

There are more questions than answers, till the next time – to raising questions.

In mid December, the shares of Johnson & Johnson or J&J fell 10% because of a report in Reuters the senior management of the company knew that cancer causing asbestos lurked in the Baby Powder. In an article by Saumya Joseph of Reuters, the 10% decline in the price of the shares was worth a drop of $40 billion from the market capitalization of the company.

There are two aspects to the story, the company said, baby powder does not contain asbestos and the company would continue to defend itself on the safety of its product.  As a rational person, you would be inclined to believe the company and JPMorgan analysts noted even if there was law suits won the amount would be less than $40 billion.

The second aspects is although J&J is a health and consumer health company, the image of the company stems from the J&J Baby Powder. If mothers around the US decided to buy another brand, the goodwill would take many years to recover. If you can not trust the baby powder, do you trust the shampoo? band-aids and drugs? The story is there was asbestos in talc, the company dominate the talc industry for years, but of the $76.5 billion the company generated, talc was 0.5% of its revenue.

Linking to dividend paying companies, all dividend companies have goodwill around their companies that for years they have done the right thing and expect to continue to. If the goodwill goes, then the company is a great trouble. For J&J the company is likely oversold and every once in a while it was to deal with asbestos and talc, but it is very small piece of their business. J&J promotes itself as a caring company, what would a caring company do and should do? if you do not see it, look for alternatives.

There are more questions than answers, till the next time – to raising questions.

The package business has changed shopping and deliveries and we have all heard that, in an article by David Porter of the Associated Press, he finds out why Amazon has to partner with the police.

E-commerce sales have grown faster than sales at bricks-and-mortar retailers for several years and on line sales were expected to grow 14.8%  to $124.1 billion in November and December, according to Adobe Analytics.

The US Postal Service expects to deliver 900 million packages and UPS forecasts it will handle 800 million parcels between Thanksgiving and Christmas.

Amazon in partnership with the Jersey Police department have left empty parcels on porches of homes equipped with GPS and a camera. The Insurance-Quotes.com surveyed a thousand people and suggested 1 in 12 Americans had a package stolen from their home.

Linking to dividend paying stocks, it is good when companies make things easier for consumers to spend money on their goods and services. The second part of the equation is security whether it is cyber security or security to deliver and receive the goods. Companies who have been in business for a time, try to minimize the losses on both sides of the equation. Although we would like to think people are good, if there is easy money, somewhere there has to be security.

There are more questions than answers, till the next time – to raising questions.