Socially Responsible Investing

Nice concept. Stupid, but nice.

Socially responsible investing is the art of investing in companies that are morally upright: no arms manufacturers, no tobacco companies, no companies that have questionable labor practices or pollute the environment, nor companies whose employees surf pornography at lunchtime.

The problem with investing in socially responsible companies is that they don’t actually exist. Medium to large companies, no matter what their field of interest, eventually end up with some kind of litigation against them. Human nature says that if you have 500 employees, not all of them will be angels.

Years ago, when I was in the military, I remember the surprise we all felt when we saw the manufacturers of our equipment: “Don’t they make Barbie?” asked one soldier when examining a trademark on his machine gun. “Hey!” said another, “this landmine is the same brand as my cell phone!”

Since the terms “ethical,” “moral,” and “socially responsible” mean different things to different people, the investment choices of your moral mutual fund may not provide you with the peace of mind you were looking for. In the top-ten holdings of your socially responsible mutual fund you will likely find oil & gas companies, pulp & paper manufacturers, mining companies, banks, breweries and property developers. Wal-Mart famously sells semi-automatic rifles but not pornography: which, if either of these do you consider ethical?

The other major issue with socially responsible investing is, of course, the returns. Finding nice companies that stay nice takes a lot of time and effort, and therefore a lot of stock switching (causing high taxation) and high management fees. My $200 socially responsible mutual fund, purchased when I was in high school, has yielded an annual return of about -.02%. The only reason I don’t sell it is because I couldn’t be bothered to pay the transaction fee. And besides, it amuses me to see it there, performing pathetically.

My recommendation is to stop trying to find “clean” companies, and instead choose your vices carefully. If you drive a car, consider purchasing oil stocks. If you wear jewelry, consider a gold or diamond mining company. If you use a computer, consider an electronics manufacturer. If you use fertilizer in your garden, consider a chemical manufacturer.

You are directly supporting these companies anyway – you might as well make money with them.
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“If you pretend to be good, the world takes you very seriously. If you pretend to be bad, it doesn't. Such is the astounding stupidity of optimism.” Oscar Wilde

Sell the Chinese Market SHORT!

China has been making headlines recently with its amazing economic numbers.

Production, capacity, exports etc. are all up and the economy looks fantastic. It appears to be an economic marvel. Why then, would anyone of sound mind want to sell it short?

In fact, I believe that although the Chinese economy appears to be a roaring bull, it is in fact a bloated, sickly beast. And, the Chinese stock market may soon become of the single greatest short-selling opportunities in history. Here are five reasons why:

5) Social Security – The Chinese are gambling with their social security funds (worth $102 billion US), in the stock market and risky ventures. In 2009, the rate of return on social security investments was 16.1% (a ridiculously high rate for someone’s life savings), prompting Vice Premier Zhang Dejiang to call for “prudence” and “stronger management” (Xinhua, March 15th 2010).

4) Inflation – According to a recent poll (Xinhua, March 16th 2010), 51% of Chinese consumers feel that prices are “unacceptably high,” the highest percentage to say so since the survey began in 1999. Despite this already unacceptable level, inflation continues to escalate, with the Producer Price Index on track to rise 5.2% year on year.

3) Overcapacity – Like Japan after their economic collapse (where stimulus building included lining rivers with concrete blocks), the Chinese have built massive amounts of currently unusable infrastructure. The problem, according to many, was that once a project was announced it could not be cancelled, since any cancellation would cause local officials to lose face. So, projects went ahead, even if it was clear from the beginning that the capacity would not be used.

The result is unoccupied office blocks, newly built factories producing unwanted goods, and toll highways with no traffic. According to Government officials, the areas where the most overcapacity exists are iron and steel, cement, glass, coal chemical, solar energy materials, and wind power equipment – although 17 industries are listed in all.

2) The Housing Bubble – There is almost an unlimited number of things I could say about this one, but I will keep it simple. Housing prices are out of reach for most every Chinese citizen, and prices keep rising even while large housing projects remain virtually unoccupied (since so many units are owned by speculators). In Beijing, housing prices nearly doubled in 2009 alone. The Government’s attempts to stop the problem (including measures to prevent house flipping, and implementing lending restrictions to developers) have all failed.

The situation has gotten so severe that in March, China’s banking regulator simply said that Chinese banks "should not extend loans to home buyers who intend to use the money for speculative purposes," or unless they make a down payment of 40% or more and are charged higher interest rates to compensate for the risk (Xinhua, Mar 15th 2010). One recent headline (April 3rd 2010, Xinhua), simply read, "Collapse predicted, welcomed as housing prices continue to skyrocket."

1) The Chinese Government– The people of China are not Communist, but their Government is. China’s wonderful economic numbers are at best misleading, and at worse inaccurate or simply wrong. As worrisome as some of these facts are, the real ones are probably worse.
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Crisis: "Danger and opportunity" (literally translated from Chinese).

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Disclosure
Do not buy stocks, sell short, 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.

Canadian Consumers – Spending ‘til it Hurts

Canadian consumers are confident – really confident.

The credit crisis, which caused home prices to plunge and unemployment to soar in the U.S., was merely a blip on the radar screen in Canada. It isn't that Canadian homes weren't overpriced, or that debt levels weren't high: it's just that low interest rates re-inflated the bubble before it ever had a chance to pop.

Since the credit crisis began, the Bank of Canada has been playing good-cop-bad-cop with consumers. While stating clearly that the reduction in interest rates was intended to stimulate the housing market & related purchasing to help pull the country out of recession, the BOC has been simultaneously warning Canadians not to stretch themselves financially by taking on too much debt.

In Dec 2009, Bank of Canada Governor Mark Carney warned Canadians so bluntly about the dangers of debt that it garnered the headline, "Bank of Canada warns of debt peril" on CBC news. In January 2010, with the housing recovery well under way, David Wolf (on behalf of Bank of Canada’s Timothy Lane) noted that “the current rebound in the housing sector is taking place in tandem with a very rapid rise in household indebtedness.” In February, Finance Minister Jim Flaherty issued another strong public statement, warning Canadians about using their homes as ATMs and against the dangers of variable rate mortgages. The advice made headlines for a few days before being confidently ignored.

Instead, like cattle running to the slaughterhouse, Canadian consumers are engaged in a “buy now before its too late” real estate shopping frenzy. Terrified of being priced out of the market - or of missing today's low interest rates - consumers are buying whatever they can (barely) afford, as quickly as possible. They do so knowing full well that the properties they are purchasing are expensive or even overpriced, yet with confidence that prices will further soar.

The short-lived recessionary ride convinced Canadians that their economic system is better, their banks superior, and real estate investing acumen greater than the rest of the world - and that therefore “it can't happen here.” The rise of the CDN$ relative to the USD has only added fuel to the fire.

In short, for Canadians the credit crisis has inspired a sense of economic godliness. Consumers have been aptly warned, but, due to fear and greed, have chosen to put on their rose-colored glasses and continue shopping.
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http://www.cbc.ca/money/story/2009/12/10/carney-financial-system-review.html
http://www.bankofcanada.ca/en/speeches/2010/sp110110.html
http://www.financialpost.com/story.html?id=2547222
http://www.fin.gc.ca/n10/10-011-eng.asp
http://research.cibcwm.com/economic_public/download/feature3.pdf
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"Living a life of simplicity is not simple. Rather, trying to simplify one's life is a constant challenge to embrace discipline - to edit out unnecessary items and to minimize desires that fuel their acquisition." Sri Chinmey