James Fallows’ China Airborne

China Airborne is a slight misnomer of a title — implying the usual indomitable success stories about China’s recent economic growth.  These are plentiful: gushing portrayals of new airports from Tom Friedman, warnings from Niall Ferguson or even Tom Siebel (part of this itunes lecture, admittedly given in darker US economic days of 2009.)

Fallows’ mixed work — it is repetitive at times and meanders too much around personal experiences in ways to my taste others such as Robert Kaplan do better — takes a different approach.  It wonders if Chinese economic progress may be capped by its controlled, state-centered approach.  Fallows is an avid pilot.  Is China capable of creating a high value industry such as the Airlines?  The question is treated at all levels: production of planes, placement of airports, training of pilots, control (now largely military) of Chinese airspace?

While he concludes that someone who answers authoritatively the question either knows much less or much more than him, the strong hints are he believes not.  The complexity of airplane development is one thread of the book, and sometimes comic state control from make work jobs to his own confrontations with police.

If you have four pages to read they are pages 92-96: “Apex Industries” and escaping the smiley curve.  The smiley curve represents a U shape of profit margins.  Brands and high value development are one, profitable edge of the “U” and high end retail and service are the other, where China is stuck at the bottom.   The compelling data is that trade deficits mask a lot of this phenomena – the entire iphone is represented as part of a Chinese trade deficit as a finished product but at best less than a tenth of the profit goes to China for example.

An Apex industry is drawn from biology’s “apex predator”: the lion on the savanna whose presence depends on layers of prey below them on the food chain.  If they’re there, the whole ecosystem is in good shape.  Aviation is obviously one of those apexes, biotech might be a natural other one.  Here the book tantalizingly ignores a more full investigation into the state of university systems (rampant cheating and poor if voluminous paper production in China has them nearly outside the global academic community.)  It also discusses the state firewall and gives anecdotes of the war against Google.  Had these been more fully explored the book might have made a greater impact than it did in publication this year.

The verdict on Boeing (BA $69) is unclear — though he provides a lens on the history of aviation one doesn’t find elsewhere, including early Chinese aviation pioneers in the Sun Yat-Sen era.  Several analysts discuss the enormous mistake Boeing has made in the outsourcing of much of the value chain — but this also hints at strong value to be found in General Electric (GE $23) engines; GE spends $2 billion annually on engine R&D he claims compared to $300 million in all of China.

Berkshire Hathaway Media Holdings 1977

Berkshire Hathaway has issued shareholder letters every year since 1977.  I was reminded by this of Joe Kraus’ investing tips which included the recommendation from David Siminoff to read all of Warren Buffett’s letters.   In 1977 the holdings (which you could have gotten for $131, preparing for your 1,000x return over the next 25 years) were surprisingly for me concentrated in media companies both on the content side (Capital Cities, Knight Ridder, Washington Post) as well as the agency side (Ogilvy & Mather, Interpublic Group); 5 out of effectively 7 investments that were publicly held.  Privately BRK owned the Buffalo Evening News as well.  Knight Ridder appears to be flipped the following year, and Capital Cities exchanged for ABC (well before the 90s takeover, I’m not sure what happened there).  Still as a window into the 20th century’s greatest investing mind it’s nice to see a strong window of support into media.

No. of Shares Company Cost Market ------------- ------- -------- -------- (000’s omitted)
    220,000    Capital Cities Communications, Inc. ..... $ 10,909   $ 13,228  
  1,986,953    Government Employees Insurance 
                  Company Convertible Preferred ........   19,417     33,033  
  1,294,308    Government Employees Insurance 
                  Company Common Stock .................    4,116     10,516
    592,650    The Interpublic Group of Companies, Inc.     4,531     17,187  
    324,580    Kaiser Aluminum& Chemical Corporation ...   11,218      9,981
  1,305,800    Kaiser Industries, Inc. .................      778      6,039
    226,900    Knight-Ridder Newspapers, Inc. ..........    7,534      8,736
    170,800    Ogilvy & Mather International, Inc. .....    2,762      6,960
    934,300    The Washington Post Company Class B .....   10,628     33,401
                                                         --------   --------
               Total ................................... $ 71,893   $139,081
               All Other Holdings ......................   34,996     41,992
                                                         --------   --------
               Total Equities .......................... $106,889   $181,073

Commodity Response to Jobs Report and Barry Sternlicht on Bloomberg

Soberlook.com had a thorough review of price movements on September 7, including the notable divergence between the 30 and 10 year treasury responses and makes me consider whether ZB is the better short than ZN (the former has lower leverage).


Barry Sternlicht of Starwood Capital was interviewed on Bloomberg:


Just got a construction loan on a multifamily property at 2.5%.  You have to have big margins of safety, looking for high cash yields up front.  Investments being made with a notion of what interest rates will be in years (Blackstone BLK 14.19 is not a real estate bet but an interest rate bet), but Fed commitment to lower rates reduces the urgency to invest now.   Toll Brothers getting “free money.”   (TOL at 33 now) Over 10 billion in loans for Starwood itself now and 1000 lenders.  Fed definitely inducing bad behavior, people including his mom chasing yield.

Just bought a billion dollars of malls.  “Death of the mall greatly exaggerated”  Hard goods already migrated to the web.  Clothing less so?  Taxing the internet is coming, congress will “wake up.” Have to vote for Mitt.

NB: I’ve bought Blackstone in the past; maybe a great investment but you must be  true believer to go through the separate tax paperwork

The Market Timing of Citizen Saverin

When Eduardo Saverin gave up his U.S. Citizenship in September 2011 — and subsequent discovery thereof in April 2012 — he insisted the move did not have to do with taxation.   He would owe an exit tax on the value of the holdings as of the time of the renunication however.

According to (a neat interactive graph at) Second Market, Facebook was trading at $31.66/share in September.  Assuming he was obliged for 15% of the value (his cost basis being trivial), that would put $4.75 of his stake due to be taxed (whether California would get its 10.3% cut as well is another question)

Facebook now trades at $19.  With 2.14 billion shares outstanding and Saverin’s stake in IPO documents filed with the SEC at 53 million shares he would not be a 5% owner and may have sold in the window that just opened.

Assuming the entire stake was sold around $20 it’s hard to have “hard feelings” about netting 1.5 billion or so after tax (given earlier sales) but certainly isn’t the citizenship-dumping haul he may have been hoping for with the appreciation he had expected and looked to benefit from by Singapore citizenship.  The haul from Facebook may appreciate with other securities, in a zero capital gain environment but surely not what he hoped for.

The IPO debacle that has been Facebook is probably overstated — had they gone public as a midcap, then surged and then had a 50% retracement it would be akin to many other large cap tech stocks.  But Saverin’s renunciation was the original sin of the IPO process.

There remains the intriguing schadenfreude, that Saverin did not sell, and sits with the looming tax bill waiting for the stock to “bounce back” but it does not.  Are his shares among the 1.2 billion looming in December instead?  Clearly one of the most transformative companies of our era, Facebook doesn’t deserve a single digit stock price to punish one disloyal citizen, but if it were to happen and hold there it would be a deliciously cold revenge to see both the gains and his citizenship wiped out.

A Fun/Dangerous Hypothetical from David Swensen

Robert Shiller’s survey course on finance at Yale is available from both 2008 and 2011.  These lectures while sometimes basic for the experienced investor are chock full of gems and I should get around to putting my notes online.  Meanwhile one fun/dangerous note I feel like playing with from David Swensen’s guest lecture in the Spring of 2011:

I could take Yale’s $17 or $18 billion dollars and put it all in Google stock. If I did that, I’m not sure how long I’d keep my job. It might be fun for a while, but that would probably be damaging to my employment prospects. But if I did that, asset allocation would have almost nothing to say about Yale’s returns. It would be the idiosyncratic return associated with Google that would determine whether the endowment went up or down or stayed flat.

This comes from his elucidation to investment returns could come from stock selection but basically that is a very hard game.  Well, what if he HAD put $17 billion into GOOG on February 2, 2011 (assuming no market move from building in a Larry or Sergei-sized stake in GOOG)?

GOOG was $612 on Feb 2 2011 and $699 now; a 14.2% return just over 17 months.   Yale’s endowment report for 2011 (up to June 2011) had a 21% return that year (announced late September); but no fiscal 2012 results have been announced yet; will be fun to see and compare.

Chart forGoogle Inc. (GOOG)


Large Cap Tech LEAPS on August 31

The following is a list of the current base prices of AAPL, GOOG, MSFT and a few others for comparison including a possibly interesting play with HPQ as well followed by various January 2014 calls.

The mathematical dissection of which options have the best value compared to expected volatility I don’t think gives much of an incremental advantage in selection.  I’ve chosen for example 100 point increments in the strike prices of similarly priced GOOG and AAPL which demonstrates a bit more expected volatility in Apple than Google.

Apple, Google and Microsoft are in the very unusual situation of having immensely strong technological positions and insane amounts of cash.  Hewlett Packard anyone else with a scent of exposure to the PC market (DELL obviously) is also trading at historically low P/E ratios.  It is hard to imagine situations outside the more dire macroeconomic scenarios where both of these companies emerge as big losers (though a re-elected Obama administration that steps up taxation and doesn’t enable a repatriation of foreign cash holdings is sufficiently dire for them to wildly appreciate.)  The asymetric upside is good growth and increasing P/Es could lead to one or both doubling.

Of the three I would feel most comfortable with GOOG as a buy-and-forget play now which is of course an option.  Their market lock in feels strongest with the most innovative (most productive?  We’ll see) R&D and promising new fields to come.

One another play would simply be to get NASDAQ 100 calls.  The grossly undervalued large caps included the above named as well as CSCO and QCOM add up to approximately 50% of the index, though you get BIDU and WYNN and other plays that are not as salient to the thesis: do you feel lonely in the QQQ, Kraft Foods?   There are a number of companies in the index such as Amazon (3.5% of the index and IMHO grossly overvalued) The QQQ closed at 68.16 today; this idea train has already left the station this year but probably plenty of track ahead:

Chart for PowerShares QQQ (QQQ)

This looks a touch ahead of itself going into a volatile September; still, QQQ Jan 14 LEAPS now:

70 – 5.92

80 – 2.29

90 – 0.63

100 – 0.13

This strategy would have fallen short in companies like Microsoft and Oracle and others in the lost decade of stocks 2002-2012 but as the economy generally picks up and if Europe were to return from the brink would pay off big.  For my current positions short S&P if there is a steep downturn in September I would pull the trigger on a strategy such as this.

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