Links for Thought -- April 13, 2012

Speech Notes: Howard Marks at NYSSA (Distressed Debt Investing) -- Hunter from DDI gives us a great summation of a recent Howard Marks speech.  Marks' highly successful Oaktree Capital recently IPO'd on the NYSE and in this speech, Marks shares some of the wisdom that underlies his success.  One of the key points to take is that contrarianism is essential for long term investment success, but it ain't easy.  In order to be a contrarian investor, one must master both analysis and emotional management.

The Tail Wagging the Dog (the JETS blog) -- The Jets Blog digs in to the fact that Woody Johnson is running the Jets for profit first, football second, whereby economic concerns are driving football decisions.  There's an important message here to extrapolate to investment and corporate management: it's a good product that drives good business, not good business that drives a good product.  If the Jets want to make more money, the answer is simple: get better at on the damn football field!

Craft Beers Get Ahead (The Daily) -- Craft brews enjoyed a 15% jump in revenues during 2011, and in my opinion, this trend is only beginning.  Even the big boys are getting into the action, with Budweiser having bought Goose Island in the past year.  I've been thoroughly enjoying the proliferation of high quality craft brews, and look forward to the acceleration of this trend.  In fact, I will be enjoying a fine craft brew (or two, or three...) this evening.

Lunch with the FT: Larry David (Financial Times) -- Larry David gives in and gives us a good little interview, with a couple of humorous quips.  He also gives a pretty thorough answer to the representation of George Costanza and Larry on Curbed in relation to his real life personality.  Hint:people can think certain things but should never say them (you hear that Ozzie Guillen???)

Why a Housing Recovery Could Happen Sooner than You Think (Washington Post) -- Evidence is growing on multiple fronts that a housing recovery is either underway already, or very near.  This particular link takes a look at the mortgage applications and loan-to-value element.  I have spoken much of the rent-buy equilibrium lately, and here is a look from Calculated Risk that adds further conviction to my belief that renters are being forced into buying.  Even the homebuilders are enjoying a huge sales spike.  

One Big Reason to go Public that Nobody Ever Talks About (Business Insider) -- These days many young tech companies are foregoing the IPO while enjoying increasingly liquid private markets and staying away from the macrovolatility that plagues stock picking amongst public market equities.  Here is a compelling argument for why young tech companies should ignore the concerns about volatility and use the platform (or bully pulpit) of the public equity forum to grow their business.

New York Pre-Concrete Jungle

As I've mentioned several times already, I am thoroughly addicted to TED Talks. I just watched a particularly cool one by Eric Sanderson, where he goes back and reconstructs a visual model of what the island of Manhattan looked like when Henry Hudson first sailed into New York Harbor and the river that bares his name, including an analysis into the topography, geography and robust ecosystems of the island.  

Often I find myself in awe of the natural element to New York, these days even far more so than the gigantic buildings that make up the city's renowned skyline.  Yes the big buildings are impressive, but to me, they have become so natural that there is a deep internal apathy to its effect.  As time evolves, I have started to marvel more at the actual topography of the lands around me, from the Harbor down by the Battery, to the cliffs opposite Washington Heights, to that large still seemingly natural swath of land we call Central Park in the middle.  The Hudson River itself is so large and powerful that it has crafted one of the most unique systems of tidal pools, straights, estuaries and meadows in the world.

I can't help but wonder when on a boat with the following view, what would this look like sans concrete, steel and people? 

Or when on a rooftop looking West over New Jersey, what the river, transitioning to meadows, growing into forests and ultimately mountains would look like compared to what is there today:

It's always fascinated me how the geography of Manhattan specifically allowed for the city that is today New York.  Eric Sanderson gives an amazing glimpse into the original nature behind the island itself, beyond just the geographical location, which enabled New York to become the city that it is today:

My Media Consumption Habits with the iPad

I want to skip over reviewing the device, because its awesomeness has been acknowledged a million times over, with little unique to say.  Instead I’d like to jot down some notes on how the iPad 3 has impacted my web browsing and media consumption.  Over the course of the past month, there are some notable changes in my long-term habits that I have developed, which I think portend at least a little about the future of technology and media.  Please note, none of these points are supposed to be right or wrong, they are simply observations about how my personal habits have changed.

iPad and Video

By far the most impactful shift has been my embrace of web video.  I always watched the occasional video, and with my GoogleTV, I started watching a bit more online video content.  Now with the iPad, web-based video has chopped my TV viewing time in half, and has eroded a decent chunk of my web reading time allocation as well.  In fact, reading has been a far more significant loser since getting the iPad than anticipated.  Reading had always been the means through which I pursued my primary interests and my self-enrichment time, while video was primarily my escape time.  Even between cable, on demand and DVR, I didn’t have nearly enough video content that was “smart” and crafted for my desires.  Now with the iPad it is far simpler than ever before to seek out and consume interesting and informative content that meets my tastes. 

Now, I spend about 30 minutes a day watching TED Talks on different rewarding topics, and an additional 30 minutes of select YouTube content, ranging from old interviews, to lectures from some great thinkers, to cool videos of nature.  Altogether, I find that the video watching I do on the iPad is distinctly different from what I watch on TV, therefore it has only cut out of my mindless TV time, rather than my entertainment TV time

(Slight digression: to me, mindless and entertaining are distinct types of consumption. Mindless are those channels I put on because there is no other option, just to clear my head, while entertainment is the content that I am thoroughly addicted to seeking out.  Mindless TV for me is watching a Seinfeld rerun for the millionth time, while entertainment TV is watching the latest episode of Mad Men). 

To that end, the amount of mindless time I spend watching actual TV has shrunk substantially (i.e. watching something just for the hell of it, when there is little else to do, like the 45 minutes while in bed before sleep), and has been replaced predominantly with much smarter content.  I feel better for it at the end of the day too.  All this helps further confirm my belief that YouTube will be a big winner in the future of video.

iPad and my Computer

One of the biggest changes is on the bigger level, about how I use my computer.  My computer has become my exclusive domain for productivity functions, while the iPad, although not monopolizing consumption, has become the primary outlet through which I consume content.  It’s just so easy to read and watch on the iPad, while still relatively difficult to coherently build something.  I have used it in a complimentary role for my stock research, mostly as a 2^nd screen and an easy way to visually see something that I am manipulating in either Excel or Word. 

There are two important observations here.  First, while the iPad is great for consumption of information, it really isn’t all that good for productivity functions.  For this reason, I think all those who fear the imminent demise of the PC are overlooking the obvious—people use computers to both use stuff and to do stuff, and doing stuff isn’t going anywhere anytime soon.  For data analysis and writing, the iPad simply cannot compete with a computer, and there is no reason as of yet to make that transition.  Second, the iPad is much easier and more efficient for consumption, not because the screen is so shiny and pretty, but because the combination of finger flicks and taps is much simpler, smoother, easier and more fun than a keyboard and track pad, especially when making words out of buttons (aka typing) just is not necessary.  The simplicity and fun combined are a powerful force in driving said consumption to the iPad. 

The Future

The iPad alone brings cord cutting much closer to reality.  One of the real consequences is that quite a bit of my personal cable-watching time has shifted to the web, and that trend will definitely continue to accelerate.  With apps for each of the major networks, covering the majority of the shows I actually watch, the only real missing link continues to be live sports.  As soon as the day arrives that sports are available for streaming on the web (note to the cable companies: you can only fight the inevitable for so long) my cord will be cut and cable will be in my past.

Links for Thought -- April 6, 2012

Disruptive Innovation: Can Health Care Learn from Other Industries? (HealthAffairs.org) -- This is a great conversation with Clayton Christensen on the impact that disruptive innovation can have on the health care industry.  Christensen gave us THE essential mental model for understanding innovation, and it's important to understand how this model will impact health care over the coming years.  One of my biggest critiques over the health care cost concern is that the entire conversation assumes the past growth rate will continue forward in perpetuity.  Meanwhile, right now there are rapid deflationary innovations sweeping through the industry that I think will not just mitigate, but realistically will drive down the cost of medical treatment over time.  In order to understand this, one needs to know the distinction between something that is merely an innovation, and something that is a DISRUPTIVE innovation.

Important Read on Franchise Investing and Investing "Gurus" (CS Investing) -- Important read is definitely the best way to describe this post.  Here CS Investing gives us a look at what a competitive moat is and what the concept means.  Plus we get a great glimpse into how some of the most prominent investment gurus, including Warren Buffett, analyze moats when making their own investments.

Keynes: One Mean Money Manager (Wall Street Journal) -- Jason Zweig takes a look at the investment track record John Maynard Keynes and wow was it fantastic.  Despite Keynes being a macroeconomist, his successes in investment were primarily driven on the micro level, combined with an understanding of the behavioral element to investing.  This closely aligns with the value investing school of thought on markets, that alpha is possible with scrupulous fundamental analysis.  

Climate Change Isn't Liberal or Conservative: It's Reality (Boing Boing) -- In all seriousness, the title of this article should go without saying.  I first learned that climate change was real when the family swimming pool, which had frozen every summer as a child for me to play hockey on, just stopped freezing enough to skate on.  This started happening in the late 1990s, but now things have been taken to a whole new level.  I am increasingly frustrated and sickened by the "questions" raised over this very real issue.

Cutting A Star Out of the Picture (Wall Street Journal) -- Speaking of my childhood days playing hockey, this article is about the Islanders severing ties to Pat LaFontaine.  I grew up a rabid Isles fan, and even bigger Pat LaFontaine fan.  Pat is one of the all-time great Islanders and a model citizen.  Charles Wang once again demonstrates why he is a despicable person.  While we're on the topic of Pat LaFontaine, go check out his Companions in Courage website to learn about (and perhaps contribute to) some of his charitable initiatives.

Commodities Supercycle or Bursting Bubble? (Pragmatic Capitalism) -- This has been my question of the week, and led to today's post on our country's subsidy for commodity speculation.  It's an important question, because the answer has serious implications for the global economy.  Give this a read to help prepare for a conversation on this blog in the coming months as to whether the commodities bull is a monetary policy phenomenon or an emerging market growth story (or a little bit of both).  

I typically conclude this weekly links post with a nature picture, but for a second week in a row I will depart with a twist.  Here is Van Morrison with The Band performing Caravan at The Last Waltz, rock out for the long weekend, and happy holidays to all:

Why Subsidize Speculation in Commodities?

If you follow me on Twitter @ElliotTurn, you know that commodities have been a big point of interest of late.  I’ve been spending some time trying to distill whether the driver of the commodities bull market for the last decade has been US monetary policy or China’s rapid acceleration in growth.  The answer to that question has significant implications for several different types of investments today, and is really just an interesting and important point in understanding today’s macroeconomy.  But today, with commodities a hot-topic and tax day quickly approaching, I want to take a glimpse at commodities through a different lens entirely.  With oil prices rising quickly in the face of our largest build in crude oil inventories since 2008, there are obvious questions being raised about the impact of speculation in commodity markets (see here for a good look at the question).  After all, how can something go up in the face of an overabundance of supply?  Rather than try to answer the question of how much of a premium in commodity prices is driven by speculation, to this too, I want to take a different angle altogether.

Whether one agrees or disagrees with speculation being a factor in commodity markets, I think we can all agree that such activity should not be subsidizes no matter what.  Yet, that is exactly what our tax code does—it incentivizes speculation in commodities over speculation in any other market.  Even more, speculation in commodities is a great way to guarantee a lower tax rate than the general income tax, when compared to any other profession in America.  There is a hot debate over carried interest, yet this loophole is at least as egregious. 

Broadly speaking, we are in a state of heightened global macroeconomic volatility, and that alone does yield way to increased volatility in demand and pricing for resources; however, that does not explain some of the radical swings in commodities ranging from oil to palladium to gold in recent times.  Since the 2003 Bush Tax Cuts, long-term capital gains are taxed at a 15% rate, while short-term capital gains are taxed as general income, at a 35% rate.  These capital gains apply to most forms of investment income; however, they do not apply on gains in futures contracts–the principle way in which commodities are traded.  Futures contracts, as prescribed by Section 1256 of the tax code, are taxed with a blended rate of long and short-term gains: 60% long-term capital gains and 40% short-term.  The blended rate results in an effective tax rate of 23% on income derived from futures/commodity trading (check out this site for more information on trading taxes).

In essence, the tax code promotes short-term speculation in commodities markets, and it does so in several ways.  People who are speculating in commodity future markets are inherently short-run, and care far more about the discount on the short term capital gains tax rate than they do the increased cost of long-term commodity ownership.  Whereas a short-term equity speculator is taxed at the general income rate, a commodities/futures speculator is taxed at 23%.  The consequences of this are two-fold: first, there is an economic incentive for speculators to ply their craft in commodities markets as opposed to equity markets, and second, speculators desire volatility in the short-run in order to maximize their capacity to make money, such that there is a serious misalignment of incentives between speculative market participants and the purpose of commodity markets. 

The goal of commodity futures markets is to provide a venue through which buyers and sellers of raw materials can share some of the risks in price fluctuations and both can secure some sort of certainty for longer-term budgetary purposes.  Fundamental commodity market particpants are not necessarily trying to make money on each transaction, but rather their aim is to gain security in price on both sides of the equation in order to more efficiently plan and manage their business.  Because this is the existential purpose of commodity markets, it should be noted that volatility poses dangerous risks to the players who need smooth functioning in these markets most. 

Meanwhile, short-term transactions that result in realized gains in commodity markets are not done with the intention ever taking or giving delivery of the underlying goods themselves.  Rather, these transactions are done for the purpose of realizing a gain off of changes in price.  These transactions require inefficiencies between supplier and buyer PLUS volatility in order to generate a profit.  In seeking volatility, such transactions promote yet further volatility.  Because of this fact, volatility and market dislocations lead directly to more opportunities for speculative gains.  Pushing such actors into commodity markets creates a situation where volatility becomes a self-fulfilling prophecy for the benefit of a significant portion of market participants, but a detriment to society at large. 

Speculative traders do play an important role in that they provide liquidity for the true suppliers and consumers of commodities; however, there is no reason for the government to provide a direct subsidy in inducing speculators to prefer commodity rather than any other market.  And there’s really no reason that speculators who engage in these markets for a living should pay a lower tax rate than any other hard working American.

Since markets like these are zero-sum, where one actor must inherently make money at the expense of another, there is unquestionably at least some coefficient of a speculative cost in the price of commodities.  No one these days is seriously concerned about a lack of liquidity in commodity markets, if anything we as a society acknowledge the abundance of this liquidity between the proliferation of commodity-based ETFs.  While we can’t necessarily weed out all speculation from these markets, we can realign the incentive structure to be symmetrical with every other profession in our country.  This is a question to which both Democrats and Republicans should be able to find some common ground.