Let’s just say what we really think about Barack Obama

An Open Letter from Donnie Drumpf to the American People


Dear Citizens of America,

In recent days, the media have played into my doubts about Barack Obama’s citizenship, his academic abilities, and more. But now I am thinking, “Why all this pussy-footing around? Why not just come out and say what we are all thinking?”

Barack Obama is a negro! Am I the only one who has noticed this? I referenced an anthropology textbook (just to be sure) and it is undeniable: he has big lips, a wide nose, and dark skin. He looks like a heterosexual version of Michael Jackson before he became white. Weren’t these people slaves just a while ago? How did we allow this to happen?

Obama has relatives in Africa, spent part of his life in Malaysia, and yet still speaks English more eloquently than I do. Do you know how annoying that is? Black people aren’t supposed to be good at English. They are supposed to say, “yassah, nossah,” and “You’s disrespectin’ me, Holmes.” Of course, there are other members of the blacks who sound like white people. I forgave Denzel Washington and Laurence Fishburne because they make good movies. But now a President? This is too much.

And that name: Barack Obama. What kind of name is that? “George Washington” is a good American name. “Abraham Lincoln” sounds a bit Jewish, but is still pretty good. “Barack Obama” sounds like the kind of person we look for in caves in Afghanistan.

We’ve tried labeling Obama as the anti-Christ, linking him to communists and racists, challenging his citizenship, and of course the general and sweeping comment that he doesn’t seem American. The whole time, he keeps smiling and saying, “We need to focus on the issues.” He talks about the economy, energy planning and health care - completely ignoring our requests for college transcripts. What is it going to take to get rid of this guy!?

Barack Obama is better educated than I am, obviously smarter, holds the highest position in the world, and even has a better beach body. What’s not to hate?

By the way, did I mention that I have the highest rated show on the Gonzo network? It’s a great show, with a great fan base. We have a great name. People would be impressed if they knew how much money I have. I’m important. Right?

Sincerely,

Donnie J. Drumpf®

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"Don't hate me because I'm beautiful."

Kelly LeBrock, 1980s shampoo commercial

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US Home Prices Drop Again

But is that bad?

In a story on CNBC, Home Prices fall for 8th straight month, David Blitzer, chairman of the Index Committee at S&P Indices, is quoted as saying, "There is very little, if any, good news about housing. Prices continue to weaken, trends in sales and construction are disappointing." When I read the same statement, I thought it was good news. Why the difference?

Everyone uses mental models in their daily life - whether they are aware of it or not. A mental model is a way of thinking, usually learned from the culture one grows up in, but often changed by education. A clear example is that in the West, most people believe that the mind/soul and body are separate. University educated individuals tend to use the scientific method to discover things, rather than logic or meditation.

Fictional character Sherlock Holmes famously uses “deductive reasoning” to solve crimes. Deductive reasoning is eliminating anything that must be false in order to find the last remaining item, which must be the truth. It is said that Sherlock Holme's author, Sir Arthur Conan Doyle, learned this technique from his university medical professor, who used it to diagnose patients.

Warren Buffett’s business partner, Charlie Munger, commonly uses “inversion.” Inversion is looking at every problem from the opposite direction from the normal one: for example, instead of asking, “How can we improve customer service?” Munger might ask, “How can we have terrible customer service?” The opposite of that answer is the way to have great customer service.

In Iraq, US soldiers and politicians often become annoyed because the Iraqis do not think of the relationship between cause-and-effect the same way we do. That is, they view the relationship between cause and effect as weak. If Iraqis take a day off to play cricket instead of building a new water pipeline, they don’t necessarily see the connection to having no clean water later that month. This difference in thinking is so frustrating for American troops that there is a whole series of military intelligence "lessons learned" documents devoted to it.

Now to examine David Blitzer’s comment: "There is very little, if any, good news about housing. Prices continue to weaken, trends in sales and construction are disappointing." Under normal circumstances, this statement would be perfectly logical. In a normal economic cycle, all these things indicate a weakening economy. David is inferring that low sales, low construction, and falling prices are bad – the traditional economist’s view. But is it truly bad? Or is David using a “fossilized mental model” – one that is not relevant for the situation?

The US had a housing bubble: that means there were unrealistic prices, oversupply, and sales to people who were not qualified. The remedy for a housing recovery is therefore lower prices, no new construction (until excess inventory is gone), and low new home sales (since foreclosures will be sold first). In other words, today's statistical weakness is exactly what the housing market needs to recover. At this point, strength in any of these numbers would be negative.

The banks can only release foreclosures onto the market at the same rate as the market is ready to absorb them. Since the banks control the flow of this inventory, new home sales and price stats are meaningless: any increase in market strength will be met by the release of foreclosures to match.

Prices are low enough that when the housing market does return, it will do so with a roar. Just like the bubble on the upside, the longer US housing numbers stay weak the more sudden and dramatic the recovery will seem.

Several months ago, I wrote that it was a good time to buy US real estate. Since then, in most cities home prices have fallen by about 3%. I do not apologize for this imperfection.

No one knows exactly when the market will recover, yet one thing is certain – buying quality real estate at a time of low interest rates and low prices will never prove to be a bad investment. Don’t try to catch the exact bottom.

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"Don't try to buy at the bottom and sell at the top. This can't be done - except by liars."

Bernard Baruch

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Trump or Palin for President!

Or, alternatively, “The US versus Italy”

In the battle for political amusement, it’s hard to say who has the upper hand. Italy has Cicciolina, the porn-star turned politician, who typically runs with a campaign platform of human rights and an end to world hunger. The US has Sarah Palin and Donald Trump. In this article, we compare the candidates based on their qualifications.


PERSUASIVENESS

Trump – Says he would force China to stop manipulating its currency by telling them nicely to stop. Later adds that he would implement a 25% tariff on all Chinese goods, despite the certainty that the World Trade Organization would overturn this decision and order the US to pay billions of dollars in compensation.

Cicciolina - In 1990, offers to sleep with Saddam Hussein in turn for the release of foreign hostages.

Winner – Cicciolina. Her plan had a chance of working.


FOREIGN POLICY EXPERIENCE

Palin - While in Alaska, watches US fighter planes flying around in the general vicinity of Russian airspace, and declares that this gives her foreign policy experience.

Cicciolina - Releases a song about “dicks” that becomes a hit single in France. Has also reportedly slept with American diplomats.

Winner – landslide for Cicciolina.



POLITICAL EXPERIENCE

Palin – Serves as Governor of Alaska for 4 years, then resigns.

Cicciolina - Serves as a member of Italian Parliament for 5 years, but loses her bid for re-election.

Winner – Cicciolina. And she didn’t give up.



BUSINESS EXPERIENCE

Trump – Owns a series of renowned hotels and casinos. Avoids bankruptcy by using structured settlements.

Cicciolina – Runs for mayor of Monza, Italy, with the promise of turning a prominent building into a casino, but is not elected.

Winner – Solid victory for Trump.



BEST SOUNDBITE

Trump – “You’re fired!” (from his famous TV show) and more recently, “Excuse me…” (said before answering any difficult question).

Cicciolina – “Do you want to sleep with me?” (name of her hit radio show).

Winner – Cicciolina.


Conclusion - I hope that “the Donald” does run for president. Or Sarah Palin. After years of complaining about political mediocrity, the US may finally have the opportunity to experience genuine incompetency.

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"You know, it really doesn`t matter what they [the media] write as long as you`ve got a young and beautiful piece of ass."

Donald Trump

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The US Federal Budget (and my 10th Grade teacher)

No, John Maynard Keynes was not my 10th Grade teacher. But it was in Grade 10, from my history teacher, that I learned about famous economist John Maynard Keynes.

It was Keynes who first proposed that markets move in cycles - in repeating booms and busts - and that the best way to lessen the impact of these booms and busts is to implement countermeasures.

Prior to Keynes, governments taxed less and spent more during good times (when they could afford to do so), and taxed more and spent less during bad times (when they couldn't). It all seemed very straightforward. After the Great Crash of 1929, for example, the US government cut back on myriads of projects and social services in order to save money.

Keynes argued that such seemingly sensible measures only worsen recessions. Instead, he argued that in bad economic times we need to cut taxes, cut interest rates, and increase government spending in order to “stimulate” the economy back to life. Then, in boom times, we need to increase taxes and curtail spending (since the economy is sustaining itself), and pay back that debt.

My 10th grade teacher pointed out that Keynes was foolish and that his ideas would never, ever work. The problem was not with Keynes' theory, but rather that his plan ignored human psychology and the reality of politics.

In bad economic times, people enjoy having their taxes reduced and interest rates cut, even though this leads to the large government deficits that these same people become angry about (rather like being pleased to receive expensive presents from your wife, then complaining that she spends too much).

As the economy improves, it gets even harder for the government to implement Keynes’ ideas. Despite being angry about large government deficits (“debt for our children!”) people are nonetheless unwilling to pay more in taxes to reduce it.

In the United States, any proposed tax changes are complicated by the remarkable fact that low-income earners have been led to believe that rich people need lower taxes, but that they personally don’t need them! Yes, only in America, prefabricated home owners and squirrel hunters can actually be seen protesting against higher taxes for the rich, even if that results in higher taxes for themselves.

The US budget promises to be a Frankenstein-like creation. The US Democratic Party hits walls of opposition because they propose ideas that only economists can appreciate. The US Republican Party is politically successful because they propose simple and intuitive economic ideas, no matter how unworkable those ideas may be.

Like John Maynard Keynes, Barack Obama expects people to be as logical and practical as he is – except that they aren’t. Even my tenth grade teacher knew that.

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"The avoidance of taxes is the only intellectual pursuit that still carries any reward."

John Maynard Keynes

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For an example of the class divide in America see:


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Stocks I Like - Nevsun Resources

Hitting new highs, gold is once again making headlines.

Hedge fund managers love gold, since it the easiest thing in the world to sell – gold is shiny, pretty, used to make expensive jewelry, and is great during currency devaluations and other disasters. Gold is easy to sell because it appeals to both greed and fear at the same time.

The problem with gold is that it’s impossible to determine its intrinsic value. Like tulip bulbs, gold has practical purposes but is primarily worth whatever someone is willing to pay for it. Gold doesn’t pay dividends. Gold doesn’t increase revenues. I would never recommend buying physical gold when it is trendy to do so.

Having said all that, I’m not at all against buying companies whose product is gold. One such company is Canadian-based Nevsun Resources.

Among other things, Nevsun Resources (stock symbol: NSU) owns a copper-gold-silver-zinc mine in Eritrea, East Africa. The Eritrean government owns 40% of the mine’s shares, 10% of which was mandated and 30% of which was purchased by the government in the market. In other words, the government has full reason to protect and encourage its investment.

Nevsun’s flagship Bisha mine just began production in January of this year, and is expected to have a thirteen-year mine life. Over those thirteen years it is expected to produce more than 800 million pounds of copper, 1 billion pounds of zinc, 1 million ounces of gold, and 11 million ounces of silver. Promising additional sources of these metals are also being explored in the region.

Despite a newly-completed, fully-functioning mine with enormous reserves, Nevsun shares are trading at only $6.05 CDN per share, giving it a low forward P/E of 7.4 and a great Current Ratio (debt safety measure) of 3.8. Surely there must be a downside, right? Of course there is!

Like many countries in Africa, Eritreans and their neighbors despise each other. The Canadian government’s official warning: "The political situation is highly instable, due to ongoing tension between Eritrea and neighbouring countries, and could become violent at any time.” This is in addition to the street crime, lack of reliable communications, and border area landmines common to this part of Africa. As a poignant example of the dangers, it is fitting to remember that during a geological mapping expedition in 2003, one of Nevsun’s geologists had his throat cut and his four-wheel drive vehicle set on fire.

Those who have studied economics will recall reading about “political risk” - the possibility of losing your investment due to negative political events. Eritrea is an example of political risk at its harshest.

For any investment in Nevsun Resources, the political and also ethical risks must be weighed against the ridiculously wonderful economic potential. Having considered all, I believe an investment in Nevsun Resources is indeed worth it. Supporting this idea is the fact that construction of the Bisha mine (which began in 2008) was completed on time, under budget, and without incident. The locals are apparently completely onside with the positive attributes (ex. non-military jobs, electricity and health care) that have resulted from Nevsun's presence.

As with all stocks I recommend on this site, I own Nevsun shares.

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"If you want to make peace with your enemy, you have to work with your enemy. Then he becomes your partner."

Nelson Mandela

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For more information, see:

Nevsun Resources Main Page

Nevsun Resources - Social Responsibility Page

US Gov't Eritrea Travel Warning

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Disclosure

Do not buy stocks, or take this or any other financial advice without doing your own analysis; including, but not limited to: reviewing business models, financial statements, management style and philosophy, recent developments, market macroeconomic analysis, and chart analysis. If you do not know how to do these things, you shouldn't be buying stocks in the first place. Seek the advice of professionals, as appropriate.

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China's Housing Bomb

keeps burning, though the fuse is getting shorter.



In an recent article (Year of the Hot Rabbit) I related the news that property purchase restrictions have been introduced in more than 40 of China’s major cities, in an effort to deflate their massive property bubbles.

In Beijing, for example, a property purchaser must prove residency status to purchase in that city, and is restricted to owning one primary residence and one additional property. The days where a non-resident investor could buy 20 or 30 properties is - at least according to the rules - over. For the moment, these rules seem to be working. In fact, they are working too well, and could potentially obliterate the bubble rather than deflate it slowly.

According to China Real Estate Index System (CREIS) statistics, home prices sank in most of China’s largest cities in March. For instance, prices in Shanghai dropped 7.6% in that month alone: an annualized rate of 91.2%! Most of this titanic drop occurred in the final week of March, where prices sank 5% (260% annualized). These large nationwide drops occurred despite very high volumes in “home trading” (their words, not mine).

Following the lead of real estate spokespersons throughout history, Zhu Zhongyi, Vice Secretary-General of the China Real Estate Association, said he predicts a “modest decline” in prices, adding that a large decline in real estate prices is “not quite possible.” He said this quite seriously, as if saying it seriously makes it true.

Nonetheless, not everyone has given up hope on one of the greatest booms in real estate history. Lin Lei, in charge of marketing for 21 Century Real Estate (not to be confused with Century 21, despite the libelously similar name), said that the market would drop only “if restriction policies were carried out strictly.” In other words, he hopes that if real estate prices continue to drop, government officials will simply ignore the new rules. Red "gift" envelopes are likely to fly off store shelves.

And the bubble continues...

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“Having a third party sign a mortgage loan contract on behalf of another person is a serious offense, and banks and financial institutions have to examine their own operations and investigate to find out who is responsible for such offenses.”

The China Banking Regulatory Commission, March 2011
(Showing that already, Chinese citizens are trying to get around new regulations that home buyers in a city must be residents of that city).
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For further information, see:
China's housing prices expected to drop, but not sharply, in second quarter

The Worldwide Business Search Engine

At the top of this blog, you may have noticed what appears to be a regular Google search bar with the title, “WORLDWIDE BUSINESS SEARCH ENGINE.” Since many readers have not taken advantage of this little beauty, let me take a moment to explain what it is.

The first problem with regular Google is what I call “regionalization.” Many of The Frost Report’s readers are from the United States, where Google has particular drawbacks. Specifically, if you do any kind of search from the US, the results are likely to all come from US news organizations. Sadly, most American news sources are rubbish for investors.

The US media market demands constant action, sound bites and screen movement – and the results are predictable. The typical daytime “expert interview” on CNBC lasts less than 4 minutes. And, US citizens clearly love to be told what to think. After the last presidential debates on CNN, a panel of experts was ready to explain for us what was just said, what it means, and who won (there is no point wasting brainpower when someone can think for you). Famously, US media outlets such as FOX News and MSNBC casually mix facts with commentary, not even worrying about possible misrepresentation. All of this results in exciting and highly entertaining news that is of no use to rational investors, whose strength comes from being calmer and more logical than everyone else.

A second problem with regular Google or Bing is that far more than just investing news comes out of a search. For example, if I type “African Real Estate” into Google, the result is marketing websites, real estate agency websites, property developers and more. And again, most of the sites do not even originate from Africa.

The Frost Report’s “Worldwide Business Search Engine” eliminates many of the aforementioned problems. First, it filters out the more sensational news organizations from the listings. Second, it gives precedence to local news: a search about real estate in Africa will result in African sources. Whenever possible, news comes directly from the source rather than being an interpretation by a 3rd party; thus, a search about the latest Federal Reserve speech will likely pull up the Fed’s website directly. Finally, most of the sources are proven and reliable business news agencies. I say “most” are reliable because I intentionally included some unreliable sources - such as the Russian Pravda and DPRK news sites – because they are culturally important.

Give the search engine a try…you will find the results to be far different from what you are used to, and hopefully more insightful.

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“Is there any other industry in this country which seeks to presume so completely to give the customer what he does not want?”

Rupert Murdoch, owner of The News Corporation Ltd.

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The Berkshire Soap Opera

Earlier this week, Warren Buffett’s Berkshire Hathaway issued a surprising press release: one of their longstanding top executives, David Sokol, had resigned.

Here’s the gist of the story… Warren Buffett and his partner Charlie Munger make all the major acquisition decisions for Berkshire Hathaway. Executive David Sokol recommended to Buffett a company called “Lubrizol,” mentioning at the time that he owned some shares of it himself. Buffett was not particularly impressed with the idea of acquiring Lubrizol. About a week later, David Sokol spoke with the CEO of Lubrizol, and based on that conversation spoke with Buffett again, further recommending it as a good purchase. As a result, Buffett changed his mind and purchased Lubrizol, sending its stock price soaring.


What David Sokol had neglected to point out was that when he said he owned, “some shares” of Lubrizol, he actually meant 10 million dollars’ worth (more than 96 thousand shares). In just one day after the Berkshire purchase announcement, Lubrizol stock jumped from $104.50 to $133.80, earning David Sokol a cool 2.8 million dollars.


Was what David Sokol did illegal? Probably not. Was it unethical? Somewhat. Was it honest and open? Not at all.


On July 26th, 2010, Buffett wrote a letter to all Berkshire Hathaway managers (including Sokol), saying that reputation and honesty are of paramount importance to Berkshire’s business. For example, Buffett wrote: “We must continue to measure every act against not only what is legal but also what we would be happy to have written about on the front page of a national newspaper in an article written by an unfriendly but intelligent reporter.” At the end of the letter, Buffett reminds everyone that “there’s plenty of money to be made in the center of the court. If it’s questionable whether some action is close to the line, just assume it is outside and forget it.” Clearly, Sokol didn’t think that any of this applied to him.


Does this mean that Berkshire’s internal controls are weak? Does it mean that you should sell Berkshire stock? Of course not. Berkshire’s internal controls remain amongst the best in the world.


David Sokol didn’t do anything explicitly illegal. But, he did play too close to the line – and he knows it.

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“Somebody is doing something today at Berkshire that you and I would be unhappy about if we knew of it. That’s inevitable: We now employ more than 250,000 people and the chances of that number getting through the day without any bad behavior occurring is nil.”

Warren Buffett, July 2010

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Berkshire’s press release regarding David Sokol’s resignation is available at:
David Sokol Press Release