The Minsky Moment

Hyman Minsky, who died more than a decade ago, spent much of his career advancing the idea that financial systems are inherently susceptible to bouts of speculation that, if they last long enough, end in crises. At a time when many economists were coming to believe in the efficiency of markets, Mr. Minsky was considered somewhat of a radical for his stress on their tendency toward excess and upheaval.

Today, with the markets in turmoil, his views are reverberating round the globe as economists and traders try to understand what's really happening. Indeed, the Minsky moment has become a fashionable catch phrase on Wall Street. It refers to the time when over-indebted investors are forced to sell even their solid investments to make good on their loans, sparking sharp declines in financial markets and demand for cash that can force central bankers to lend a hand.

At its core, the Minsky view was straightforward: When times are good, investors take on risk; the longer times stay good, the more risk they take on, until they've taken on too much. Eventually, they reach a point where the cash generated by their assets no longer is sufficient to pay off the mountains of debt they took on to acquire them. Losses on such speculative assets prompt lenders to call in their loans. This is likely to lead to a collapse of asset values. When investors are forced to sell even their less-speculative positions to make good on their loans, markets spiral lower and create a severe demand for cash. At that point, the Minsky moment has arrived.

Little wonder why many analysts have agreed that we are in the midst of a Minsky moment, bordering on a Minsky meltdown. With more writedowns at the end of the year, be prepared for a nasty 2008.

Stocks & Discount rate

Many people dismissed the Fed Reserve cut on discount rate lending to banks in the middle of August as a "last ditch symbolic gesture". At the end of that day, many stocks markets around the world went up. New research by US academics shows that the rise could have been predicted. Even though the study was done in the US markets, there is plently one can learn from.

This report, available from the CFA institute shows that the discount rate is a good indicator of the direction of monetary policy. When it changes direction, it signals a shift between the expansionary and restrictive monetary policy.

A strategy would then be to buy defensive stocks when the discount rate goes up. These are sectors (resources, utilities and consumer staples) not highly sensitive to the overall economy.
When there is a rate cut, the strategy would then be to buy cyclical stocks (financials, technology).

From 1973 to 2005, this crude strategy would have beaten the market by 3.78% a year. As such, the discount rate seems to be a powerful signal tool.

Agape love

Probably the biggest reason the dog has become man's best friend is because we know that when it comes to love, a dog can always outdo us. The highest form of love, agape love, which is completely unconditional, is something that people often have to work at or grow into. Agape love seems to come naturally between parent and child, but it's more difficult between husband and wife, and harder still between friends. To love someone regardless of what wrongs they have done you is very difficult for humans.

A dog, however, is born with an endless capacity for agape love, and doesn't even have to work at it. You can be a complete grouch, ignore your dog, and refuse him your love. When you decide you're ready to be sociable again, your dog doesn't pay you back by ignoring you too. He's just happy you're there. More amazing still, is that the love that dogs and owners feel for each other lasts a lifetime. This is the ideal love humans strive for, but often fail at.

Learning to know somebody intimately is often the beginnings of dislike, sometimes even of contempt. However, dogs never lie about love. Among humans, love often does not survive a growing acquaintance, but in a dog, love seems to grow with acquaintance, to get stronger, deeper. Even when fully acquainted with all our weaknesses, our treachery, our unkindness, the dog seems to love strongly and this love is returned by most dog-loving humans. We, too, seem to love our dogs the more we get to know them. The bond grows between us and our dogs.

This is why we need dogs. They do something for us that rarely a human companion can do. No matter how much you mess up your life, or how much wrong you do, no matter how many mistakes you make or how often you make them, regardless of your looks, income or social standing, your dog never judges you. He always thinks you are wonderful and loves you with all his heart.

LMA - Caution needed

The price of LMA went to a low of $0.35 recently after the profit guidance announcement. For those who bought at $0.35, well done. I suppose there will be a rebound after the initial shock. However, i would urge caution for investors who feel that it is a good buy at current price due to low P/E or low price to cash flow or other financial ratios.

The point i want to make is on the qualitative aspect of the company.
1) For those who bother to read up on the IPO prospectus again, you will find that the IPO is actually an exit strategy for many of its pre-IPO investors. Nearly 90% of the shares offered are from the selling vendors. Ask yourself why the pre-IPO investors want to cash out from a company holding patents of a widely used product?

2) Potential Conflicts of Interest.
The relationship between Venner, Mr. Gaines-Cooper and Mrs. Gaines-Cooper are described in "Management—Arrangements or Understandings.” In addition, a number of our Directors are directors of companies which supply or manufacture our Products. Mr. Gaines-Cooper, Mrs. Gaines-Cooper and Mr. Curtis-Bennett are directors of Venner Trading and FMT. Mr. Gaines-Cooper is a director of Venner Singapore. The info above is taken from the IPO prospectus but they still exist till today.

3) Low sustainable competitive advantage in LMA's patent.
The original master patent relating to the basic design of the LMA-Classic™ airway device and the later single-use version of it, the LMA-Unique™ airway device, expired in December 2002. However, LMA hold or have applied for patents for features in their products.They include the aperture bars in use on the LMA-Classic™, LMAProSeal™ and LMA-Flexible™ devices and the LMA-Fastrach™ handle. Our aperture bar patent protection does not extend to the United States. In my opinion, the patents are not valuable as the competitors can always substitute the features will something else. In short, expiration of patents + low technology product will cause an influx of competitors. Sad to say, the airway product is no longer exclusive. It is becoming a commodity and thus, usually the company with the lowest cost will survive.

4) Over the years, LMA has spent a sizeable amount of cash to buy innovative products, intellectual property rights and distribution companies in its bid to boost the earnings. Please look at my earlier posting to understand why we should generally avoid companies with continued capital investments.

Cheers!

Quotes on statistics

Information is just signs and numbers, while knowledge involves their meaning. What we want is knowledge, but what we get is information. (Heinz R. Pagels)

There are two kinds of statistics, the kind you look up and the kind you make up. (Rex Todhunter Stout)

He uses statistics as a drunken man uses lampposts - for support rather than for illumination. (Andrew Lang)

Statistics, like veal pies, are good if you know the person that made them, and are sure of the ingredients. (Harvard President Lawrence Lowell)