JPMorgan’s magical numbers

JPMorgan has just announced that its hedging losses that CEO Jamie Dimon had previously said were a “tempest in a teapot” are now $5.8 billion, up $3.8 billion from the previous announcement. “At most” he says, “any additional losses will be limited to another $1,7 billion from the bad credit trades.”

Happily, all this bad news coincides with what would have been the bank’s best quarter ever. The announced earnings per share (EPS) of $1.21 compares well with the previous record of $1.34 earned in Q1/2007. The effect of the hedging losses taken in the second quarter are $0.69. So without that extraordinary trading loss, the EPS would have been a record $1.90. Now that’s a happy coincidence.

After making the announcement of the increased loss and the quarterly profit JPMorgan’s shares rose by almost 6%.

Now we do know that in the next quarter there’s going to be another charge of up to $1.7 billion. But, if these numbers are real, then in the quarter after that, the business is going to be very profitable.

So the share price should have jumped a lot more.

Perhaps there are other people who are a little skeptical about the numbers.

More at:
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How to make money

People in the finance industry are very good at making money – for themselves.

Take a look at the hedge funds, which have a fee structure called “two and twenty”. The two is 2% of the capital invested, and the twenty is 20% of the profits. When one does the maths, it works out that, as a client, it’s quite difficult to make money. If the return on investment is 5%, then the “twenty” gives the hedge fund 1 of the 5% and the “two” gives them another 2 of the five, which is 60% of the return. And it appears that’s a generous example. An insider, with access to the data, calculates that hedge fund managers have kept 84% of the returns, and their clients have got the other 16%. It’s a good deal for the managers.

Of course, it’s the clients who carry all the risk. It’s really not a very good deal for the clients.

Now the funny thing is that it’s not really all that complicated making money on the stock market. One of the best books on the subject “Security Analysis” has been around since 1934. Its most successful proponents is Warren Buffett. Another is Seth Klarman who, like Buffett, has made extraordinary returns for his investors. Klarman is also the author of the book “Margin of Safety: Risk-Averse Value Investing Strategies for the Thoughtful Investor” which is now also considered to be an investment classic.

Value investment is the term given to the strategy. Briefly summarized, it’s proponents argue that it makes sense to buy something worth a dollar, if you can find it at 40 cents. They argue that the markets often react emotionally, and then sometimes going against the market makes sense, especially if you know that there is something special about the business. That’s how one finds the dollar for 40 cents.

Let’s use the example of Olympus. Last year there was a lot of bad news about the company. It had been hiding losses, and the share price crashed from a peak of ¥2,773 on 08/1/2011 to a low of ¥424.00 on 11/11/2011.

Olympus makes cameras. The camera market has become quite challenging as phones have captured the point and shoot market. So the market is shrinking to the professionals and dedicated amateurs.

Olympus has just introduced a new model that is changing that market. The new model replaces it’s clunky SLR predecessors. The new camera matched to similarly svelte high quality lenses is going to give the dominant players, Nikon and Canon, something to worry about.

If Olympus was only about cameras, buying their shares would be a great value investment, even with the market as it is. Unfortunately, they make a lot of other products, and not knowing enough about those makes the investment less certain.

Certainly worth investigating though.

Legal note: This article does not constitute financial advice. If you follow any of the suggestions contained herein, losses are for your own account. Profits are to be shared on 1% and 20% basis.

More at:
Olympus Corp (7733:Tokyo)
The Superinvestors of Graham and Doddsville
Notes to Ben Graham’s Security Analysis
Security Analysis – What did Benjamin Graham really say?
Margin of Safety: Risk-Averse Value Investing Strategies for the Thoughtful Investor
Security Analysis: Sixth Edition, Foreword by Warren Buffett
Margin of Safety: Risk-Averse Value Investing Strategies for the Thoughtful Investor
Hedge funds
Mastered by the universe
The Oracle of Boston
Figuring it out

The wealth trap

When one looks at a balance sheet, the value of the business attributable to the shareholders is the difference between the assets and the liabilities, the net asset value (NAV). The market value (MV) of a listed company is the value attributable to the shareholders. For companies that are growing, profitable, and high-tech the MV is usually a lot higher than the NAV.

A large proportion of the difference is a function of the growth, and when that starts to drop off, even though the company is still very profitable, the MV drops.

So the senior executives cannot afford for growth to drop off, otherwise the shareholders lose money and that makes them unhappy.

High growth is normal in the early stages of a market. The same is true for a company with a smart idea coming into an established market. As the market becomes saturated and the smart company starts to dominate, growth naturally tails off. After that growth is dependent on price increases, which at some point starts to chase customers away.

When executives start running out of ideas to keep the growth going they sometimes resort to dishonesty.

There have been a few examples recently: Barclays and the other banks manipulating LIBOR. GlaxoSmithKline paying $3 billion fine for committing healthcare fraud.

One company’s growth falling off is an unhappy event. Many companies sharing that fate is a crash. That mythical wealth is what underpins the stock markets.  As long as we keep believing the myth, we’ll be fine.

Just don’t stop.

More at:
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Afghanistan – what happens after 2014?

It’s a question that comes up often.

A comprehensive report prepared by the Congressional Research Service (CRS) covers the issues and outlines the challenges.

It doesn’t say that when you throw money at a problem, often the result is an expensive problem plus corruption. To date America has contributed $68 billion, and the rest of the world another $25 billion. In 2005, the first time it was surveyed, Afghanistan was 117 out of 159 on Transparency International’s corruption index. By 2011 it was 180 out of 183.

The CRS report mentions the challenge that is corruption and it indicates that there are government institutions dedicated to eradicating malaise, but fails to mention the election fraud that occurred in the 2009 presidential election. It does mention the fraud in the 2010 parliamentary election, which the beneficiary of the 2009 election fraud objected to. Apparently he resented that his techniques had been so effectively copied.

Until the corruption is sorted out, legitimate businesses won’t want to invest in Afghanistan.

Of course, the illegitimate businesses love Afghanistan. It’s the World’s biggest producer of poppy.

Mention is made of the need to develop the economy. Donor aid represents 95% of the country’s GDP. The best case scenario predicts a 13% decline. The worst case scenario has the GDP falling by 41 percent. At a recent conference in Tokyo, the donors pledged $16 billion over four years. That won’t help until the corruption is sorted out. Proof, if it’s needed, can be seen in the way South Africa’s economy has slid down Africa’s financial rankings, matching it’s decline on the corruption index ranking.

In the agreement signed between America and Afghanistan on May 2, 2012, under the heading of Economic and Social Development, the United States commits to:

help strengthen Afghanistan’s economic foundation and support sustainable development and self-sufficiency, particularly in the areas of: licit agricultural production; transportation, trade, transit, water, and energy infrastructure; fostering responsible management of natural resources; and building a strong financial system, which is needed to sustain private investment.

Perhaps we can send Deloitte to repeat their success with Kabul Bank.

Transport is also an important challenge. Let’s hope that there’s more commitment to that than in 2010 when the lone Department of Transport attache was tearing out his remaining strands of hair.

A lot of people are pessimistic about Afghanistan’s future after 2014. It’s not easy to contradict them.

More at:
Corruption Perceptions Index 2005
The United States’ “New Silk Road” Strategy: What is it? Where is it Headed?
Afghanistan Beyond the Fog of Nation Building: Giving Economic Strategy a Chance
U.S. Strategy for Pakistan and Afghanistan
Economic Transition in Afghanistan: How to Soften a Hard Landing
Next Steps in the War in Afghanistan?
Pakistan termed biggest stakeholder in post-2014 Afghanistan
Afghanistan: Post-Taliban Governance, Security, and U.S. Policy
Afghanistan: Politics, Elections, and Government Performance
Afghanistan: U.S. Rule of Law and Justice Sector Assistance
United Nations Assistance Mission in Afghanistan: Background and Policy Issues
Afghanistan Opium Survey 2011
Pakistan – U.S. Relations
Afghanistan aid: Donors pledge $16bn at Tokyo meeting
U.S. advisers saw early signs of trouble at Afghan Bank

The hand that feeds

Making things worse

People from the developed world, trying to impose their values on developing countries, have no idea how much damage they sometimes do.

Let’s take the example of biometrics. In developing countries bureaucracy and corruption are the bane of ones existence.

In Kabul registering a vehicle, or simply replacing a stolen licence disk, can take months, standing in queues and paying bribes, often required because there is no formal mechanism to prove who you are.

There is no social security number. No utility invoices. No birth register. To prove who one is requires authentication from people who can prove who they are, usually government employees, who unless they are friends require payment. Even when one official accepts the authentication, another won’t, so yet another person has to attest. It can run to hundreds of dollars.

Afghanistan has been putting together its National Identity Card (NID) for a number of years, doing it properly. The Afghan government started in 2006 after they had agreed with the international donors that Afghanistan needed a reliable voters register. Biometric identification was seen as the cornerstone of ensuring the system was reliable.

Then the US military who had been providing some technical guidance to the Afghan government started trying to take ownership. In an article in the New Yorker, the vice admiral in charge of obtaining the biometric data from Afghan detainees claimed that he was helping to:

issue identity cards, with biometric data such as fingerprints, to every person in the country over the age of fifteen.

He linked the NID to an ambition to hold the Taliban accountable while protecting the innocent from false accusations using his project.

The biometric identity card project in the UK was cancelled in 2010, shortly after the Tory government came to power, wasting the £294 million that had already been spent. Worse yet, the government lost between £500 million and £1.2 billion in annual efficiency savings that the system would have generated.

The London School of Economics produced a report in 2005 warning the government that unless the increased efficiency benefits to members of the public and government were highlighted, there would be a backlash against the system. The Labour government took no notice, promoting the system’s ability to track down criminals and terrorists. Voters reacted, believing that it was in intrusion on privacy, and the Tories used that as a tool to win votes.

In a recent article in the Economist, the emphasis is on how this is an effective weapon against the insurgents. It quotes Jennifer Lynch, a lawyer at the Electronic Frontier Foundation, a group based in San Francisco that keeps a watch on how digital technology encroaches on civil freedoms, who questions the quality of the data. She fears that scans done quickly in the field, or by inexperienced technicians, could lead to cases of mistaken identity.

Digital technology does not encroach. People encroach. Biometric data acquisition is fraught with problems. That’s why the Afghan government specified technologies that prevent inept and inexperienced operators from compromising data quality. An inexperienced (or careless) person just takes a little longer to do the job.

Ms Lynch’s comment also shows no understanding of the mechanics. If biometric data is bad, it very rarely matches to the wrong person, it just makes it difficult to match to the right person.

And in the meantime this interfering lawyer, who has certainly never been to Afghanistan is preventing the Afghans from improving their lives.

Perhaps after she’s spent a bit of time standing in the queues at the licensing department in Kabul she’d have a better understanding of what’s important to Afghans.

More at:
The eyes have it