Tonight, I came across Prezi, a company that makes a new kind of presentation software. In some ways it resembles Microsoft’s Powerpoint, as the major purpose of the software is for making presentations in an interesting way. However, it’s also interesting to note that their software is also useful as a way to organize ideas, in much the same way as various mind mapping tools.
I played with the tool long enough to get a quick sense that going from organizing ideas to putting together one of these presentations is really not very hard.
So, great product.
The pricing model has three tiers. There’s a free service that allows you create presentations for public consumption, but if you don’t want your presentations immediately available you have to upgrade to the $59/year package. And if you want to be able to edit offline, that’s an upgrade to the $159 a year package. Perhaps their sales come mainly from corporate accounts, because these are steep prices for individuals. I can’t think of any other software that I would pay that much for on an ongoing basis.
Yesterday, I attended the San Francsico CFA discussion of commodities as investments in an inflationary environment. Naturally, I had a bunch of questions about gold.
One of the presenters made the point that Gold has been a lousy investment. I gave him my card, and in a follow up note, he wrote the following:
“… I checked our databases and since the US came off the gold standard in 1975, I found these historical numbers:
Gold in 1975: $140
Gold in 2008: $865 (up 518%)
Dow Jones in 1975: 852
Dow Jones in 2008: 8776 (up 930% in spite of the financial crisis)
US Dollar Index in 1975: 33.0
US Dollar Index in 2008: 96.1 (up 191% which has had a positive impact on the gold price as it’s in US dollars)
It’s true that gold is much higher now but that underlies the point I made that gold is a great trade but has proved many times to be a poor investment – end point sensitivity is pretty much the only way you can ever make gold look like a good investment. If you take random periods that are 20 years apart, gold is likely to look poor – stocks won’t. Additionally, gold doesn’t deliver income and has no intrinsic value that isn’t connected to subjective views as opposed to something more objective like earnings.”
My response was that I thought it was important to start the analysis with the beginning of the current global monetary system, which is with the abandonment of the Bretton Woods system by Nixon in 1971. I put these charts together based on some historical data that I found. From them, it looks like:
o The S&P has outperformed gold over the period, and by a significant margin thru most of the 1990s and 2000s.
o In 1 year time frames, gold has outperformed the S&P in about half of the years since the US went off the gold standard, including 8 of the last 10
o The correlation between gold prices and the S&P is low.
What I think is remarkable here is not that Gold outperformed the S&P, but simply that it was close. S&P returns are a function of business risk, credit risks, and leverage. By contrast, gold has none of those.
And yet, I’m not sure that comparing gold to the S&P is meaningful investment analysis. Gold is a store of value and a raw form of money, and its returns should be compared to those of other forms of money, such as currencies and certain other commodities. It is not an investment. Investing involves predicting future cashflows and assigning a probability to actually receiving them. A purchase of gold involves no such analysis. It’s simply a hedge against the debasement of currency.
The difference is that it’s easy to extract a yield from currencies by investing them, or from land, by farming it or renting it. But, for whatever reason, despite $4.5 trillion of mined gold in the world, there seem to be few avenues for borrowing and lending it. For centuries people have borrowed and lent gold as money, and yet today, earning interest on a gold balance is as difficult a concept as squeezing water from a stone, despite the high, uncorrelated, and unleveraged returns since 1971. I find this fact very odd.
Like the alliances that drew one country after another into World War I, a default by a single nation would send other countries tumbling. If that message was lost on anyone, there was a reminder last Tuesday when Standard & Poor’s downgrade of Spanish and Portuguese debt hammered stock markets everywhere, including in the United States.
The first domino is Greece. It owes nearly $10 billion to Portuguese banks, and with Portugal already falling two notches in S. & P.’s ratings and facing higher borrowing costs, a default by Greece would be a staggering blow. Portugal, in turn, owes $86 billion to banks in Spain; Spain’s debt was downgraded one notch last week.
The numbers quickly mount. Ireland is heavily indebted to Germany and Britain. The exposure of German banks to Spanish debt totals $238 billion, according to the Bank for International Settlements, while French banks hold another $220 billion. And Italy, whose finances are perennially shaky, is owed $31 billion by Spain and owes France $511 billion, or nearly 20 percent of the French gross domestic product.
“This is not a bailout of Greece,” said Eric Fine, who manages Van Eck G-175 Strategies, a hedge fund specializing in currencies and emerging market debt. “This is a bailout of the euro system.”
Solutions are also not easily forthcoming. “In the end, we’re all saying we don’t know how to deal with it,” said Dirk Hoffmann-Becking, a bank analyst with Alliance Bernstein in London. “We don’t know how the channels work, or where the problems will pop up next.”
I thought the OECD data about retirement ages across countries that Paul Kedrosky posted was interesting, so I put it into a nice graph.
My prediction: retirement ages will rise over the next twenty years, as mushrooming retirement costs and debt overhang force governments to curb deficits by raising the retirement age.
In looking for the original retirement data that Paul Kedrosky posted, and I describe above, I discovered some OECD medical data from 2000, which though old, I found quite interesting.
The music industry blames digital piracy for the decline in sales of CDs. The data below shows that decline in CD sales quite clearly. It also shows the ramp in sales of music singles. TorrentFreak, the publisher of this data makes the argument that music piracy isn’t as big a deal as the music industry makes it out to be, because the portion of the music industry that would be most likely to be hit by piracy is booming.
If digital piracy is such a problem one would expect that it will mostly hurt digital sales, but these are booming instead. Many younger people don’t even own a CD-player anymore, yet the music industry sees digital piracy as the main reason for the decline in physical sales. Strange, because digital piracy would be most likely to cannibalize digital sales.
I have a different perspective.
For one song, it’s not worth the bother to go searching and try to steal a decent copy. It’s much easier to spend the 99 cents and buy it from iTunes. For a whole album, the price isn’t 99 cents. It’s ten bucks online, or fifteen to twenty for the CD. At some point the incentive to steal increases. And many of the files available on torrent sites are labeled “discography”, which is everything an artist ever recorded. So, a fan might buy the latest Coldplay single for a buck from iTunes. But, since albums are a very small percentage of digital music sales, if that same fan wanted the latest Coldplay album or discography, the fan would probably be more likely to “find” it online.
TorrentFreak quotes the RIAA, who have a different perspective. “We’ve always said there are multiple reasons for the decline of the industry during the past ten years: Competition for the entertainment dollar. Diversification of music consumption and access. But we also think people being able to steal music online is the primary reason. Not the only, but the primary.” On this, I think the RIAA makes a good point.
A couple years ago, oil prices rose dramatically to about $150/barrell, and then collapsed. When they hit about $50/barrel, I wondered how to go about locking in that low price by hedging with one of the exchange traded funds that track oil. The results were less impressive than I had hoped. As the price of a barrel of oil nearly doubled, the price of my investment in the ETF OIL rose only modestly.
I bought OIL on December 8, 2008 at $25.49, and it closed yesterday at 27.55. The graph below pretty much captures the performance.
Michael Johnston’s article on Seeking Alpha is an excellent description of OIL, the ETF that I bought, and USO, the other ETF that is supposed to track oil prices.
With the summer driving season just around the corner, surging GDP growth around the world, and another earnings season off to an impressive start, more and more investors are taking a closer look at oil markets. As OPEC begins to once again flex its collective muscle and demand from emerging markets continues to build, some see crude prices surging in coming months, perhaps teasing the $100 per barrel level last touched in September 2008.
Historically, investors looking to make a play on rising oil prices did so through equities of energy companies that often enjoy a jump in profitability when crude prices spike. But the rise of the ETF industry has changed the way many investors approach commodity investing, bringing many securities that were once available primarily to institutional traders within reach. While exposure to spot oil prices still isn’t readily available, the development of futures-based commodity products allows more direct exposure to one of the world’s most widely-used resources.
Two of the most popular exchange-traded commodity products available to U.S. investors offer exposure to crude oil. The iPath S&P GSCI Crude Oil Total Return Index ETN (OIL) and United States Oil Fund (USO) had aggregate assets of more than $2 billion at the end of the first quarter, and are two of the most popular ways to gain exposure to oil prices. While the risk/return profiles presented by these two ETPs are generally similar, there are both subtle and not-so-subtle differences that can potentially have a big impact on returns and volatility.
Structure
The biggest difference between USO and OIL is in the structure of each. OIL is an exchange-traded note (ETN), meaning that it is a senior, unsubordinated, unsecured debt security that is linked to the total return of a market index (in this case, the S&P GSCI Crude Oil Total Return Index). The benchmark to which OIL is linked is a sub-index of the S&P GSCI Index and reflects the returns that are potentially available through an unleveraged investment in West Texas Intermediate (WTI) crude oil futures contracts plus the T-Bill rate of interest that could be earned on uninvested cash.
USO, on the other hand, seeks “to reflect the changes in percentage terms of the spot price of light, sweet crude oil…as measured by the changes in the price of the futures contract for light, sweet crude oil traded on the [NYMEX].” To accomplish this goal, USO invests in NYMEX futures contracts and cash (the daily holdings are available here). So since USO actually holds the assets from which the returns of OIL are derived, the returns will generally be highly correlated, but not identical. Continue reading OIL vs. USO vs. the Gasoline that you put in your car
According to VisualEconomics.com, the misery index, which is defined as the sum of the inflation rate and the unemployment rate is higher than it has been in 20 years. The idea is that these two metrics are an overall indicator of the health of the economy. I found the below chart that they produced very interesting.
And yet, I wonder if an independent third party, one without billions of dollars hanging in the balance on each point of movement, would gauge inflation considerably higher than our official numbers. In which case we’d be even more miserable.
Then again, if we had unemployment bonds that paid higher distributions as the unemployment rate rises, our unemployment rate might not be double digits.
The U.S. Treasury has only been issuing Treasury Inflation-Protected Securities (TIPS) since 1997. It’s interesting that during the 1970s, an era before inflation indexed bonds in the US, witnessed annualized double digit inflation rates (CPI) in 1974, 1979, and 1980. According to the Treasury, we’ve only had 28.6% compound inflation over the last TEN years. It certainly feels like more than that to me. You’d have to go all the back to the 1950s to find another ten year period with inflation as low as what has been reported.
I’ve long felt that equity investors tend to overlook key aspects of leverage when evaluating companies. Investors look to P/E multiples, without adjusting those multiples for the amount of leverage used in the business. In this report, D.E. Shaw describes some good ideas about how to analyze leverage.
Like Buffet’s Squandersville and Thriftsville, Charlie Munger’s recent piece in Slate will go down as a classic.
http://www.slate.com/id/2245328/
Basically, It’s Over
A parable about how one nation came to financial ruin.
By Charles Munger
Updated Sunday, Feb. 21, 2010, at 3:30 PM ET
In the early 1700s, Europeans discovered in the Pacific Ocean a large, unpopulated island with a temperate climate, rich in all nature’s bounty except coal, oil, and natural gas. Reflecting its lack of civilization, they named this island “Basicland.”
The Europeans rapidly repopulated Basicland, creating a new nation. They installed a system of government like that of the early United States. There was much encouragement of trade, and no internal tariff or other impediment to such trade. Property rights were greatly respected and strongly enforced. The banking system was simple. It adapted to a national ethos that sought to provide a sound currency, efficient trade, and ample loans for credit-worthy businesses while strongly discouraging loans to the incompetent or for ordinary daily purchases.
