Book Value

We were surprised to find out about this deep value opportunity in France, bastion of European bureaucratic policies and socialism.

• Attorneys Known for Large Civil Settlements Line Up to Sue GM Over Company's Handling of Defective Ignition Switches (WSJ)
• Pakistani Taliban attack airport in Karachi, 27 dead (Reuters)
• U.S. Official: Sgt. Bowe Bergdahl Has Declined to Speak to His Family (WSJ)
• Ukraine Gas Talks Resume in Brussels to Avoid Cut-off This Week  (BBG)
• China's Central Bank Flexes Muscle (WSJ)
• China says Vietnam, Philippines' mingling on disputed isle a 'farce' (Reuters)
• World Needs Record Saudi Oil Supply as OPEC Convenes (BBG)
• Kraft Raises Prices on Maxwell House, Yuban U.S. Coffee Products (BBG)
• United Continental: One Sick Bird (WSJ)

In this difficult market, and confusing - for traders, and everyone else - environment, what are the three main questions posed by Goldman's clients had? According to David Kostin, "Three questions dominated our investor dialogue this week given the lack of meaningful data releases.

1. Interest rates: The recent decline in ten-year US Treasury yields to 2.6%, the forward path of interest rates, and implications for equity valuation;
2. Capex: the outlook for corporate capital spending in 2014; and
3. Rotation: The potential for the momentum drawdown of the past two months to reverse and vault high expected sales  growth companies back into a market leadership position.

I got into a Twitter debate with Marc Andreesen of Netscape (the inventor of the commercial web browser) and Andreesen Horowitz (the VC fund that financed Facebook, Twitter, Skype & Zynga) fame.

He spit out what was mostly common sense, yet still flew in the face of what is taught in school, most text books and by most B school teachers. Here's how it went down...

1/A few common fallacies about valuation of public and private technology companies:

Most Buy Side managers have no idea about the disparate business models of the four largest US banks by assets. 

Over the weekend, Nigeria’s government made an accounting adjustment in how it calculates its GDP statistics. By changing the base-year in GDP calculations from 1990 to 2010, Nigeria increased the reported size of its economy by 89% over the weekend. So with a stroke of a pen, the West African nation leapfrogged South Africa to become the continent’s largest economy. And in doing so the country’s debt-to-GDP ratio fell below 20%. Of course, the US government does exactly the same thing… often conveniently leaving out huge portions of its total debt such as the non-marketable securities it owes to the Social Security trust funds. It’s all about maintaining a false sense of confidence at all costs, no matter what lies they have to fabricate, no matter what fraud they have to commit.

South Korea stands out as a buying opportunity amid the indiscriminate emerging markets sell-off.

Gold Equities are on their way to a parabolic rise

For those who follow folksy Uncle Warren, here is the breakdown of Berkshire's Q4 and full year results, as well as his latest letter to investors.

• Yellen's first test (Reuters)
• Let weak banks die, says eurozone super-regulator (FT)
• Yellen, Carney Face Explaining Policy as Benchmarks Near (BBG)
• Commerzbank Said Seeking Debt Buyers in $6.8 Billion Spain Exit (BBG)
• Junk Yield Premiums Soar on China’s Looming First Default (BBG)
• Millions Trapped in Health-Law Coverage Gap (WSJ)
• Mandel Tops Best-Earning Hedge Funds for Clients in 2013 (BBG)
• Swiss Brace for Sour EU Relations After Immigration Vote (BBG)
• Detroit Bankruptcy Talks to Resume (WSJ)

The point isn't that "the Fed can't do that;" the point is that the Fed cannot create a bid in bidless markets that lasts beyond its own buying. The Fed can buy half the U.S. stock market, all the student loans, all the subprime auto loans, all the defaulted CRE and residential mortgages, and every other worthless asset in America. But that won't create a real bid for any of those assets, once they are revealed as worthless. The nuclear option won't fix anything, because it is fundamentally the wrong tool for the wrong job. Holders of disintegrating assets will be delighted to sell the assets to the Fed, of course, but that won't fix what's fundamentally broken in the American and global economies; it will simply allow the transfer of impaired assets from the financial sector and speculators to the Fed.

The decay of the "build it and they will come" model of commercial real estate is gathering speed for a simple systemic reason: the decline is self-reinforcing in several critical ways. Before we start the analysis, let's ask a basic question: How much of the stuff and services purchased at retail outlets, malls, strip malls, etc. is absolutely necessary and how much is excess consumption? Conventional "Growth by any means" Cargo Cultists such as Paul Krugman never ask this basic question, because the answer (very little is essential, most is excess consumption) undermines the entire narrative that all growth is good, even the most marginal, unsustainable, wasteful and fiscally imprudent. I've captured the essence of retail in America with this photo:

As a result of this, the financial sector remains rife with fraud and impossible to accurately value (how can you value a business that is lying about its balance sheet?).

When it comes to the topic of China's epic credit bubble, we have beaten that particular dead horse again and again and again and, most notably, again. However, since in China the concept of independent bank is non-existent, and as all major financial institutions are implicitly government backed, by the time the "big" bubble bursts, it will be time to hunker down in bunkers and pray (why? Because while the Fed creates $1 trillion in reserves each year, and dropping post taper, China is responsible for $3.6 trillion in loan creation annually  - yank that and it's game over for a world in which "growth" is not more than debt creation). But just because the big banks can continue to ignore reality with the backing of the fastest marginally growing economy in the world (inasmuch as building empty cities can be considered growth), the same luxury is not afforded to China's smaller lender, such as its peer-to-peer industry. That particular bubble seems to have just popped: "The main reasons are the intense competition in the P2P industry, the liquidity squeeze at the end of the year and a loss of faith by investors," said Xu Hongwei, chief executive of Online Lending House. He estimated that 80 or 90 per cent of the country’s P2P companies might go bust. Oops.

What's not to "Like"?