Economist: School of thoughts – Austrian School

A forum friend has mentioned a website which I think is a great repository of Austrian School of Economics’ ideas and literatures.

Ludwig von Mises Institute
website

Some of the literatures (in PDF files) can give a glimpse of who are the Austrian School economists and their ideas.

Recommended these few PDF files for a start:
15 great Austrian Economists
PDF file
Method, Process and Austrian Economics
PDF file
New Directions in Austrian Economics
PDF file

Its daily articles are also good read, giving insights on other ways looking at same things.

Red flags in Bernard Madoff’s fund

Found 2 articles (see below) on red flags in Bernard Madoff’s fund.
We can get a glimpse of which portion of due diligence can uncover the red flags in Madoff’s case.

Some insights:
1. whether volatility, returns are tally with investment strategy claimed; backtesting using investment strategy and compare

2. "literature" study: whether others have due diligence check and result; news of feeder fund’s shutdown

3. trading records, regulatory filings to compare with trading (volume) claimed

4. corporate governance : comptroller, auditor of firm, feeder funds; independence of comptroller/auditor/compliance officer etc.

Article: The Red Flags In the Madoff Fund's Past (from CNBC)
link to CNBC's article
Who: Aksia, a firm that does due diligence on investment advisers
What: investigation for client
When: Apr 08

Red flags:
excerpt:
[1. The Madoff investment strategy, called "split-strike conversion," is known to be very volatile; it involves trading huge positions around options expirations. Despite that volatility, its returns over the past decade were an amazingly stable 8-10 percent.

2. Aksia discovered a 2005 letter to the Securities and Exchange Commission from a financial advisor who supposedly studied Madoff's operations. That letter asserted Madoff was running a Ponzi scheme. There was also a Wall Street Journal story at the time about one of the Madoff's associated "feeder funds" getting shut down in 1992.

3. Madoff's strategy was bizarre: He said he would move $13 billion in various trades at once, yet Aksia couldn't find traders who saw his trades. There were also no regulatory filings. And family members were running the firm.

4. The comptroller of the firm was based in Bermuda. Most mainstream hedge fund investment advisers have their comptroller in-house. Madoff's so-called feeder funds, meanwhile, were audited by respectable auditors. That gave the impression that Madoff had a professional operation. But the central investment action wasn't with the feeder funds, but in Madoff's New York City headquarters. And those activities were audited by a smaller, lesser known firm.

5. Madoff sent out accounting statements by mail. Most hedge funds email statements and allowed them to be downloaded via computer for easier analysis by investors.]
(but I haven’t figured out what’s wrong with this)

Advice:
[….warned clients not to do business with Bernard Madoff's investment fund.]

Article: European banks tally losses linked to Madoff (from International Herald Tribune)
link to IHT's article
Who: Société Générale
What: routine due diligence audit
When: early 2003

Some findings:
[…strategy consisted of balancing holdings in large Standard & Poor's funds with options to buy and sell shares, known as puts and calls;….. when Société Générale back-tested the strategy, it could not match the results that Madoff claimed to have produced.
…troubled by the fact that Peter Madoff, Madoff's brother, was the chief compliance officer.]

Advice:
[…..Société Générale immediately put Bernard L. Madoff Investment Securities on its internal blacklist, forbidding its investment bank from doing business with him, and also strongly discouraging wealthy clients at its private bank from his investments]

Investment Guru: Bill Gross

Bill Gross is PIMCO’s Managing Director.
He is an investment guru of fixed income/bond.
He is writing the monthly "Investment Outlook" article which can be read from PIMCO’s website.
His "Investment Outlook" articles are not only informational, they are very insightful.
website

Books by him:
1. Everything You've Heard About Investing Is Wrong!
2. Bill Gross on Investing
(but I don’t have these two books yet)
a book on him:
1. the bond king: investment secrets from PIMCO’s Bill Gross

Some examples of great insights I got from his "Investment Outlook":
November 08 article on "nuclear-like global financial system".
June 08 article on "authenticity of US inflation data".
Mar 07 article on "asset carry path" (10 little assets, much like Agatha Christie’s Ten Little Indians)

I also learnt from the "Investment Outlook" terms such as shadow banking system, deleverage etc..

US: Obama-Biden plan (1)

Obama-Biden plan from Change.gov (the Office of the President – Elect)
Obama-Biden plan link
However, whether it will exactly be the same may depend on how the crisis will further proceed.
It is better to get to this direct source for information on Obama-Biden plan.

But some questions remain:
How will it be modified ?
Will it be successful in lifting US from financial turmoil ?

Excerpt from the initial Obama-Biden plan:
(for details of Obama-Biden plan, refer to the website; updates may be available from its Newsroom)

plan to revitalize the economy
1. Immediate Action to Create Good Jobs in America

• A New American Jobs Tax Credit
  ($3,000 refundable tax credit for each additional full-time employee hired)
• Raise the small business investment expensing limit to $250,000 through the end of 2009
• Zero capital gains rate for investment in small businesses
• Save one million jobs through immediate investments to rebuild America's roads and bridges and repair our schools
  ($25 billion immediately available in a Jobs and Growth Fund)
• Partner with America's automakers to help save jobs and ensure that the next generation of clean vehicles is built in the United States
  ($50 billion in loan guarantees)
  

2. Immediate Relief for Struggling Families

• A tax cut for 95 percent of workers and their families -- plus seniors
  permanent tax cut of $500 for workers and $1,000 for families
  extend these expedited tax credits to senior citizens who are retired as a down payment on his plan to eliminate taxes for all seniors making up to $50,000.
• Extend unemployment insurance benefits and temporarily suspend taxes on these benefits
• Penalty-free hardship withdrawals from IRAs and 401(k)s in 2008 and 2009
  allow withdrawals of 15% up to $10,000 from retirement accounts without penalty (although subject to the normal taxes)
• Instruct the Treasury to allow seniors to delay required withdrawals from 401(k)s and IRAs
• Funds to counteract high heating costs this winter
  

3. Direct, Immediate Assistance for Homeowners, Not a Bailout for Irresponsible Mortgage Lenders

• Instruct the Secretaries of the Treasury and Housing and Urban Development (HUD) to use their existing authority to more aggressively modify the terms of mortgages
  HOPE for Homeowners Act
• Reform the bankruptcy code to assist homeowners and remove legal impediments to encouraging broader mortgage restructuring
• Enact a 90-day foreclosure moratorium for homeowners who are acting in good faith
• Provide $25 Billion in state fiscal relief to help avoid painful property tax increases
• Create a universal mortgage tax credit for homeowners
  10 percent refundable tax credit on the mortgage interest paid by hardworking American families who do not itemize their taxes
  

4. A Rapid, Aggressive Response to Our Financial Crisis, Using All the Tools We Have

• Be prepared, if necessary, for broader assurances for credit to banks
• Extend asset purchases to unfreeze other critical sectors
• Make credit available to small businesses and state or local governments
• Address the credit crisis facing our states and localities
• Address the credit crisis facing our small businesses
  two immediate steps:
  (1) a nationwide emergency lending facility for small businesses that could be run through the SBA's Disaster Loan Program, which helped thousands of businesses in the wake of 9/11;
  (2) temporarily eliminating fees on the SBA's 7(a) and 504 loan guarantee programs for small businesses, to help increase private lending for small businesses.

China 2008 additional investment plan

We can get a glimpse of which industry the investment will flow to from government’s stimulus package. If the amount is very big, it will give some breathing spaces or even a boost for the industry’s participants.

Wonder whether there is an online compilations of various countries’ stimulus packages in details.

Below is China 2008 additional investment plan:
今年新增1000亿元中央投资计划
link to China 2008 additional investment plan

Excerpts:
一是廉租住房建设、棚户区改造等保障性住房建设100亿元。

二是农村沼气、饮水、通路、通电、通邮工程、重大水利工程等农村民生工程和农村基础设施建设340亿元。

三是铁路、公路和机场等重大基础设施建设250亿元。

四是基层卫生、计划生育服务体系、中西部农村初中校舍改造等医疗卫生、教育、文化社会事业发展130亿元。

五是城镇污水、垃圾处理设施建设、重点流域水污染防治等节能减排和生态建设工程120亿元。

六是自主创新和产业结构调整项目60亿元。

summary:
low cost housing: 100亿元
village infrastructure: 340亿元
railways, roads, airports: 250亿元
health, education, culture: 130亿元
cities sewerage, waste treatment, pollution prevention, conservation project etc. : 120亿元
innovation, industry structural change: 60亿元
Total: 1000亿元

OPEC (Organization of the Petroleum Exporting Countries)

OPEC (Organization of the Petroleum Exporting Countries)
website
OPEC website is a great resource for oil-related industry.

I find its publications below very useful:
World oil outlook (annual):
This is a great industry analysis report. It started of with main assumptions.
Oil supply and demand outlook is analysed.
The report also covers oil downstream industry.

OPEC is using OPEC World Energy Model (OWEM) and World Oil Refining Logistic Demand (WORLD) model to analyse the energy industry and oil downstream industry.
The portion "major data source" tells where to get your information if you want to do your own research.
I prefer industry analysis that comes with assumptions, models used and data source/reference.

monthly oil market report (monthly)
Publishing schedule of monthly oil market report is available.

The report highlights many important components related to oil industry:
crude oil price, oil futures, commodity markets, world economy, world oil demand/supply, product markets and refinery, tanker market, oil trade, stock movements etc.

In the future, if we wish to analyse on oil industry, at least these components need to be analysed. The "world economy" portion is also useful for economic analysis, in the point of view of oil industry people.

OPEC bulletin
This OPEC bulletin has write-up on the industry.

The latest of these publications available on date of this post:
World Oil Outlook 2008
link
December monthly oil market report
link
OPEC bulletin (Nov-Dec 2008)
link

Other information that I find useful:
OPEC upstream investment
OPEC downstream capacity
OPEC oil reserves
It is like a "pipeline" – from oil reserves, upstream, then downstream, then to customer.

China’s document regarding ideas of using finance to boost economic growth (1)

国务院办公厅关于当前金融促进经济发展的若干意见

On 13 December 2008, China government releases a document "国务院办公厅关于当前金融促进经济发展的若干意见"(the document is dated 8 December 2008).
document

a 9-sections; total 30-points document.

On my previous post on China's fiscal stimulus, some lingering questions are on how will it be implemented, where will the fund comes from and flow to.
This document probably answers some of those questions. It covers monetary policy, credit, capital, insurance, company’s fund, foreign funds management, financial services, taxation, risk management etc..

Its 9-sections are:
一、落实适度宽松的货币政策，促进货币信贷稳定增长

二、加强和改进信贷服务，满足合理资金需求

三、加快建设多层次资本市场体系，发挥市场的资源配置功能

四、发挥保险保障和融资功能，促进经济社会稳定运行

五、创新融资方式，拓宽企业融资渠道

六、改进外汇管理，大力推动贸易投资便利化

七、加快金融服务现代化建设，全面提高金融服务水平

八、加大财税政策支持力度，增强金融业促进经济发展能力

九、深化金融改革，加强风险管理，切实维护金融安全稳定

This is interesting.. Wish to explore and learn on these..

Laws of Malaysia

Legal protection and regulations are one of the important aspects of investment and business.
Without laws especially those governing investment and business aspects, markets cannot function well, if even function at all.

Changes of laws and regulations are also important to valuation of companies.
Modification of laws and new laws can create, boost or even destroy an industry.
Functioning of a country’s legal system is also an important intangible when doing country analysis.

Website of Attorney General’s Chambers (Jabatan Peguam Negara) of Malaysia is a good resource for laws in Malaysia.

List of laws that are related to investment, business in Malaysia:
website

They are classified into:
Banking and Finance Laws
Commercial Laws
Corporate and Business Laws
Constitutional Law
Custom Laws
Development Corridor Laws
Dispute Settlement Laws
Employment Laws
Environmental Law
Immigration Law
Industrial Laws
Insurance Laws
Intellectual Property Laws
Land Laws
Local Government Laws
Promotion of Investment Laws
Securities Laws
Shipping Law
Taxation Laws

Cool..This is quite a surprise. I didn’t expect there are laws like Development Corridor Laws, Promotion of Investment Laws etc..

For investment, those laws under Banking and Finance Laws, Securities Laws are particularly relevant.

List of laws (with PDF files) in Malaysia:
link

We may not need to know in details these laws to start investing, but it’s good to know where to look for the information when needed.

Investment analysis: company analysis, industry analysis, economic analysis

I just realise I have posted twice on "Laws of Malaysia".
(Wonder what is wrong with the system)
So I edit one of the two posts to this post. :-)

You may see that I have posted more on economy recently.
It is just my personal preference to explore more on economy during this period of turbulence (or financial tsunami). During this period of time, many of the market/business/investment participants are in a "jittery" mode. Many stimulus/rescue packages, businesses asking for rescue, retrenchment, downsizing, debate of economic ideas/policies, volatile reactions, more fear, more greed…. the list goes on.

It is a good time to brush up on economy and economic theories.
However, for investment analysis, it is not only economic analysis.

For investment analysis,
company analysis, industry analysis, economic analysis are all important.
However, their relative importances are debatable.

If we proceed in sequence of company -> industry -> economy, it is called "bottom-up" approach.
If we proceed in sequence of economy ->industry -> company, it is called "top-down" approach.

My personal preference:
I place more importance on company analysis and industry analysis; but I didn’t ignore economic analysis. Need to know effects of economic situation/policies (exchange rate, interest rate change, credit situation, fiscal/monetary policy, state of economy etc..) to the company’s financial position, competitive position, etc. and effects on customers.

I didn’t strictly follow either "bottom-up" or "top-down" approach.
I proactively pick up bits and pieces of information on company, relevant industries (supplier, current industry, customer’s "industry") and relevant economic data;
add on to the "database";
decide based on the "database"..
More like when the three (company, industry, economy) clicks, then I buy or sell.

Company analysis is a must (but is quite a routine task, though may have pitfalls here and there);
I like industry analysis the most :-)

Economist: Robert Shiller

On previous post, I have compiled blogs/websites of some world renowned economists like Mr. Zhang Wuchang, Gary Becker, Richard Posner, Nouriel Roubini, Paul Krugman and Joseph Stiglitz.

Add in one more today.

Robert Shiller
Robert Shiller's website

This is an informative website on Robert Shiller: his papers, his books and links to his columns in Project Syndicate and New York Times.
We can also access the course he teaches from Open Yale (link included in the website).
Also, the Stockmarket Confidence Index and S&P’s/Case-Shiller Home Price Indices.

Knowledge@Wharton

Knowledge@Wharton
website

Knowledge @ Wharton is a great website linked to Wharton School of University of Pennsylvania.

Many business function related articles are available.
The section "Finance and Investment" is particularly useful for investment.
link

Wharton finance professor Jeremy Siegel frequently writes insightful articles about finance/investment.

Again, email newsletter is available. This reduces "searching cost".

McKinsey Quarterly

McKinsey Quarterly
website

Currently it is subdivided into different sections:
Functions
Industries
Regions
Big Ideas
Multimedia
Outside Voices

I particularly like the subsections Functions, Industries and Outside Voices very much.
On "Functions", we can learn about different aspects of businesses :
Corporate Finance,
Economic Studies,
Governance,
IT,
Marketing,
Operations,
Organization,
Risk,
Strategy.

On "Outside Voices", we can learn a lot from its "interviews" with industrial participants/experts and "surveys". Cool !

Email newsletter is available. This reduces "searching cost".