C&G Industrial Holdings:Cash more than Share Price?
The latest quarterly report wasn’t very favorable to C&G Industrial Holdings, but are investors in C&G smart to dump it or are we sensing something amiss?
Here are some key notes from the quarterly repot:
- Revenue fell by 7.2% compared to previous period in 2007
- Sales were affected due to snow storm in early 2008
- Normal yarn products with lower margin were not manufactured or outsourced since Feb 2008.
- Selling price were reduced.
- Huge increase in expenses up 362%. This is the reason why net profit is lower
- The increase in administrative fees was mainly due to the increase in consultancy fee for research and development of RMB 14.7 mil and other necessary expenses to support business expansion.
- Profit fell from RMB 43 mil to RMB 14 mil, down 66.5%
- The balance sheet looks ok. Solid as ever
- Depreiciation and amortisation is higher from 5.4 mil to 9.9 mil
- This was mainly attributed to 2 new plants coming online.
- Operating Cashflow was lower, due to lower profit, but still positive
- Capital spending was RMB 9 mil compared to 5 mil.
- Overall Free Cashflow is still positive at 8 mil.
Business Outlook:
The Group has begun the construction of a new plant for the manufacturing of industrial bi-component fibre.
The new industrial bi-component fibre was invented by Chisso Japan in the 90’s, as a critical raw material for environmentally-friendly manufacturing of adhesive-bonded cloth. Adhesive-bonded cloth is widely used in healthcare and personal care products. SARS, Avian Flu, Foot and Mouth disease have spurred rapid demand on disposable adhesive-bonded cloth, which is projected to grow at 8-10% per annum globally. Besides healthcare and personal care products, the new industrial bi-component fibre can also be used as a critical raw material for the manufacturing of non-adhesive synthetic cotton, which are widely used in textile apparels, bedding and home appliance, with its distinctive environmental benefit of zero formaldehyde emission.
Moving forward, the Group will focus on product safety and environmental-friendliness, given the increasing importance modern consumers place on these factors. A prime example will be the new industrial bi-component fibre. The plant will take about 18 months to build, and the new industrial bi-component fibre is expected to contribute to the Group’s financial performance by 1Q09 with its annual production capacity of 20,000 tonnes.
PTA, MEG, PEG, PSF and SIP, the main raw materials used in the production of our products, are all petrochemical products. Any fluctuations in global crude oil prices, a global commodity, have an indirect impact on the prices of our main raw materials.
I must say they are really keeping mum on the future outlook for this company. While we hope that the consultancy charges are a one time thingy, the same cannot be said for falling revenue. It looks like cost of goods on raw materials is not such a big problem for C&G Industrial.
The outlook for oil looks to be challenging going forward, so we will see if this affects C&G through this period.
Since the release of this result share price have fallen from 24 cents to nearly 14 cents. So where is C&G in terms of valuation.
- PE is 2 times
- PTB is 0.40 times
- Enterprise value is negative (!):-90 mil RMB
- EV/EBITDA is -0.48 times
Is it for real? By buying a company now, you are like paying cash for cash + plants and production. Sounds a pretty good deal.
In this bear market, we get bargains like this, but you do have to be careful. Such a low PE indicates probably that going forward earnings is going to be highly unpredictable. I don’t like the sound that the company don’t sound out that the industry aren’t doing well as well.
Next up, my calculation is based on last full year profits.
Last years operating cashflow stands at RMB 188 mil. It is highly unlikely that we are going to hit it this year. The half year operating cashflow stands at RMB 88 mil. if we think it will be worse in the second half we add RMB 40 mil to 88 to get 128 mil, predicting that each quarter the cashflow will be 20 mil compared to 40 mil.
The revised figures are as follows:
- PE is 2.8 times
- EV/EBITDA is still negative no matter how u put it since Enterprise value is negative to start with.
Unless the management is damn corrupted, i don’t see why we shouldnt punt on thsi one.
Introducing my Dividend Stock Tracker
How it came about
It started off with a frustration that i had whenever i use my excel sheet to keep track of my dividend stocks and other not-so-good dividend stocks. The frustration was that whenever i see a stock that was sold down pretty badly, i had to find the stock price and key it into my excel sheet, then i need to find the current market cap so that my excel sheet would just compute.
I got abit frustrated about it, and at the same time i think its a good time to learn abit php and web programming by coming out with a little project.
So what is it
Dividend Stock Tracker tracks a list of dividend stocks that are listed on the SGX. They can be:
- Business Trusts
- REITs
- Utilities and Infrastructure stocks
- Telecommunication stocks
- Blue Chips
- Others
The prices of these stocks will be updated daily at the end of each day. The data will be recomputed and the new ratios and yields will be displayed.
Some of the fundamental data covered are:
- Operating Cashflow
- Dividend Yield
- PE and Earnings Yield
- Operating Cashflow Yield
- Price-to-book ratio
- EV/EBITDA
- Return Premium
- Debt/Asset
- % Payout
- % Cash holding of Assets
You may have observed that not all are displayed on the main table, thats because i can’t put everything into a small table.
Clicking on the name of each stock will display more detail information.
Moderating Dividend Payout
You would have notice that some of the yields are quite different from what brokerage houses display. This is because the yields are moderated by me. One time special dividends and dividends that seems unsustainable are moderated downwards so that it doesn’t give people an impression that if you buy now your yield will be that much.
So that is why Courage Marine’s payout is much less than what they paid out last year. I used an average payout for that.
Currency
For Stocks whose balance sheet data are in USD or RMB for example, i will use an exchange conversion. Most of the balance sheet data are thus like what they display in their annual report. E.g. Hongwei’s Total assets in this case is in RMB.
Balance Sheet Data
Balance Sheet Data are updated annually except for assets and debts which are updated quarterly.
Will I be adding more stocks to it?
Definitely, though i will need to control my addition since the more i add the more problematic i will be when updating these information annually and quarterly haha!
Conclusion
I hope its useful to you as an investor. You can access my dividend stock tracker by clicking on the link next to the home.
Take a look at the dividend tracker >>
Macquarie International Infrastructure Fund (MIIF) quarter review
Its time to screw MIIF. The infrastruture play that people say good and others say that it is deeply suspect.
They just released their quarterly report and by all figures it looks like they are suffering the effects of this global slowdown.
- Net income was 25 million vs 145 million in the same period last year. This was attributed to
- A Lower gain from fair value of MIIF’s financial assets (6.5 mil vs 211 mil)
- Performance fees were lower (0 vs 3 mil)
- Management fees were lower (3.4 mil vs 4.3 mil)
- Lower total investment revenue. This is due to lower investment income collected as new asian investments generallly pay their distributions out of accounting profits annually in arrears. This results in a lagged receipt of intiial post acquisition disributions from such businesses.
- Dividend of 4.25 cents vs 4.15 cents last year declared.
- Cash position fell from 36 mil vs 55 mil. This is negligible compared to the asset size.
- New longterm debt of 85 mil. However short term debt was reduced from 178 mil to 58 mil.
- Operating cashflow decrease from 63 mil to 2.7 mil
- Capital expenditure decrease from 286 mil to 0
- 43 mil was paid out for div vs 0 mil last year same period.
- Revealed that underlying debt INSIDE ASSETS amount to 2.2 billion.
What we can take away from this set of results is this:
- We hope that by year end, the investment income from the asia assets does come in. MIIF borrowed 30 mil just so that they can pay the dividends. This has to be repaid.
- Consequently, they repaid more of their debt compared to last year, which is always a good thing.
- As a performance guage, the new assets would need to yield higher investment income then the European one. This is an important criteria. They sold those and justify that Asian assets will provide better yields and better value. We as shareholders would like to see that justfication in the bottomline.
- The report revealed more information on the assets. Particularly
- The revenue
- The operating Expenses
- EBITDA
- EBITDA Margin
- While we appluad that, much can be revealed about the interest coverage or the kind of debt financing plans these assets use. Most of these assets are unlisted and thus it is difficult to find any information on them. why am i so particular about this?
- Because the total debt held by these assets amount to 2.2 bil! Thats even more than the parent’s market cap. This is synonymous as those leverage buyouts that borrowed heavily in the hope of paying it off based on consistent, proven cashflow generate by the assets.
- Interest on these debts will reallly wacked the company if its floating rate. In a rising interest environment, interest rates will squeeze net profit margins greatly, thus making MIIF a sour investment.
- Normally these assets do cover these floating rate debts using interest swaps on fixed rate debts. We hope the underlying assets does manage their debts well.
All in all, there is still alot of holes to be filled. The yield is definately attractive at nearly 11%. But is this sustainable? I feel it is. The biggest question are those underlying debts.
MIIF is covered as a dividend play at my Dividend Stock Screen.
Sarin Technologies Quarter Report
This is the most unexpected good results that i have gotten. I would expect the diamond industry to be weaker due to weak US consumption but it is fortunate that Sarin did produce a good set of results.
- Revenue was 21% better than last year the same quarter
- Profit was 43% better than last year
- Cost on R&D have increased
- Weakening of USD compared to New Isreali Shekel increased manpower expenses.
- Africa sales improved by 500% while india sales grew as well.
- cash holding fell due to investments in IDEX and another subsidiary.
On the whole africa did present it with new opportunity instead of destroying opportunities. what is good is that india sales have not decline and they have a new opportunity.
I have listed Sarin as a dividend play, but that is more towards my own portfolio bias. It does pay a good dividend at current price. However, its industry is one where it could really be subjected to much cashflow and business fluctuations.
Thus i would advise folks who want to be invested in Sarin Technologies to look at it more as a growth stock with a good dividend payout rather and a pure dividend play. Lets just say that tech companies do go negative cashflow quite easily and that affects the dividend payout.
Hongwei Technologies half year financial results
For Hongwei Technologies, there weren’t much changes in this half year result presentation.
Net profit fell from 29 million RMB to 25 million RMB. The main reason for the fall have been a 165% increase in interest expense and 93% increase in income tax. Other than that Revenue grew 1.9%.
The shocker for Hongwei technologies lies in the cashflow statement. You will see a -17 million RMB operating cashflow vs 16 million RMB operating cashflow. Much of this can be attributed to a 30 million RMB increase in Trade Receivables, though the good thing is investnories went down by 4 million.
Its dissappointing that there weren’t any explaination why the receivables balloon by so much. I really hope this is a one time thingy and it will be collected next quarter.
The lifeblood of a dividend stock lies in its operating cashflow and if its so inconsistent, we might as well look elsewhere. However, do note that this is a half year report and its better to wait for the full year results to evaluate whether to add or sell.
I’m covering this under my dividend screener, but if the cashflow turns out to be bloody inconsistent and the economics of business is bad as a consistent dividend play, i would take it out.
Food Junction 3rd Quarter Results
This company, which i thought was a gem when i started investing 4 years ago, have been stagnating or even deteriorate during the past 4 years.
ROIC and Margins were decreasing but the biggest problem have been execution in overseas market. While BreadTalk have been doing well in this realm, Food Junction have struggle with its overseas exploits.
So how did they do for this 3rd quarter? From the profits garner you would think they have improved.
Net profit was 1 million vs 657 k for the 3 quarter in 2007. However, there was a provision for loss on disposal of 1 million taken in 2007. This explains why despite revenue being the same and cost increasing, they have done better.
As a criteria of a good dividend counter, its operating cashflow should be increasing and here you will see that operating profit have actually gone down from 3 million to 1 million. Exactly opposite that of the income statement.
At the cashflow statement, you can see that expenditure have increased from last year. the free cashflow is a negative -200k vs 2.4 million from previous year. This would explain why for this quarter, Food Junction will give out 1 ct dividend vs the normal 2 ct it traditionally give.
The group have accepted an offer to operate a food court at The Gardens, Mid Valley city located in Kuala Lumpur, but i am not expecting this to make an impact on full year results.
Going forward, the impact of Lippo Group on Food Junction seems to be rather lukewarm. You would expect some sort of synergy with them and more ventures into Indonesia and all but the results have not translated to an improving bottom line.
Rather, now Auric Pacific have came in with a partial offer to buy some of our shares at 55 cts. That is much less than the average 63 cts i paid for it.
All this translates to food junction being worse and worse as a dividend play. Rather than sustaining good operating cashflow they have been destroying shareholders’ return with ventures that add less returns compare to their singapore operations.
Based on current price, it looks a good company with high ROIC and zero debt. However, my 4 year affair with it tells me that it will take me more than this to make me add on to it. Key that i am looking at is improvement in business execution. With an improvemnt in that area, the cashflow will come and that will improve my view of this company as a dividend counter.
This counter is on my dividend Screener. Do bookmark this link and follow its daily fundmental changes vs its price changes.
Courage Marine 2nd Quarter Results
Just 2 weeks ago there have been a slew of results release on companies i own and i plan to write about them. It just that work have been pretty busy thus i can only update briefly here until now.
The first company i am covering is Courage Marine. despite the fall in Baltic Dry Shipping Index, results have been pretty strong.
- Profit for the period improved by 67% from the previous year.
- Operating cashflow generated was 20 million vs 7.8 million from previous year.
Freight rates have been very volatile during the past few months, with the BDI collapsing to the 5,600 level during the end of January this year after climbing to an all-time record above the 11,000 level from November 2007. The BDI is currently at around the 7,000 level. The Group believes that the market conditions will remain positive based on the perceived strong demand from China for raw materials.
We sent four vessels for dry-docking in 1H08 and they were out of deployment for a total of about 120 days. We expect to send two more vessels for dry-docking during 2H08 and they are expected to be out of deployment for a total of approximately 90 days.
The Group will maintain its cost-efficient structure and focus on keeping its fleet well deployed and running efficiently. Assuming that the BDI stays at around the current level and barring any unforeseen circumstances, the Group expects to continue to do well in the second half of FY2008.
Despite the cyclical nature of the shipping industry, Courage Marine’s strategy to concentrate on cost and not taking unnecessary risks can either be seen as prudent or they could be viewed as gutless to take advantage of the commodities boom to ride the wave.
I like a company that is prudent but not taking advantage of the opportunites out there does not go down welll with this investor. However, when u have a high ROIC such as Courage Marine, you don’t question too much how they earn their beef since you know you probably knows much much less than these managers who have been doing shipping for such a long time.
Courage Marine is one of the stocks on my dividend screener. Here i use a rather conservative dividend per share since shipping stocks like Courage and Singapore Shipping are prone to really good times and givign out one time big dividends. That is not what we want on my dividend screener. What we want is a consistent high yield or at least a good yield of 6-7% that is increasing yearly. This would explain why the yield based on current price is just 6.7%. Lets just say that my div yield is almost 20% from the last payout.
Courage Marine generates a good operating cashflow and have rather low expenditure. Most likely, payouts will continue long term at 6-7% with the occasional big payouts.
At current price, its EV/EBITDA is only 3.2 times, which means if you believe this cyclical shipping boom will last at least 3 years, it will take 3 years of zero operating growth to earn back what you pay for this company.
Do be advice to rational your valuation on cyclical shipping play. Your yield depends on your entry vs the cyclical nature of the industry. Ensure you do not buy it at a high premium.
George Soros: Distress buying of mining companies
According to the mining investment news site Mineweb, billionaire investor and philanthropist George Soros was significantly active in the mining sector last quarter. Mineweb’s Dorothy Kosich wrote earlier today:
Über investor George Soros stocked up on potash mining shares during the second quarter, increased his Freeport-McMoRan Copper & Gold holdings by more than 1,600%, invested in the world’s largest uranium miner, Cameco, and dumped his holdings in Apex Silver, CVRD and Southern Copper.
Documents filed with the SEC revealed that among the gold companies in which Soros Fund Management maintained its holdings during the second quarter were AngloGold Ashanti, Barrick, and Newmont.
Soros Fund increased its holdings in Potash Corp. of Saskatchewan Inc. by 2568%… The fund also enhanced its Freeport-McMoRan Copper & Gold holdings by 1608%…
Among the fund’s new purchases was Canadian uranium miner Cameco… as well as CONSOL Energy Inc., the largest U.S. producer of high-Btu bituminous coal… The fund also initiated holdings in Intrepid Potash, the largest U.S. potash producer…
The Soros Fund reduced to its holdings in IAMGOLD Corp. by 23.3%… Soros reduced to his holdings in Alpha Natural Resources Inc., a Central Appalachian coal producer, by 46.95%…
Meanwhile, the fund sold out its holdings in the world’s largest iron miner, Brazil’s Vale (previously CVRD), as well as its holdings in U.S. silver producer Apex Silver Mines, and also in Southern Copper Corp.
Exclusive Interview: Jim Rogers Predicts Bigger Financial Shocks Loom, Fueling a Malaise That May Last for Years
[The First of Two Parts.]
Keith Fitz-Gerald
Investment Director
Money Morning/The Money Map Report
VANCOUVER, B.C. – The U.S. financial crisis has cut so deep – and the government has taken on so much debt in misguided attempts to bail out such companies as Fannie Mae (FNM) and Freddie Mac (FRE) – that even larger financial shocks are still to come, global investing guru Jim Rogers said in an exclusive interview with Money Morning.
Indeed, the U.S. financial debacle is now so ingrained – and a so-called “Super Crash” so likely – that most Americans alive today won’t be around by the time the last of this credit-market mess is finally cleared away – if it ever is, Rogers said.
The end of this crisis “is a long way away,” Rogers said. “In fact, it may not be in our lifetimes.”
During a 40-minute interview during a wealth-management conference in this West Coast Canadian city last month, Rogers also said that:
- U.S. Federal Reserve Chairman Ben S. Bernanke should “resign” for the bailout deals he’s handed out as he’s tried to battle this credit crisis.
- That the U.S. national debt – the roughly $5 trillion held by the public– essentially doubled in the course of a single weekend because of the Fed-led credit crisis bailout deals.
- That U.S. consumers and investors can expect much-higher interest rates – noting that if the Fed doesn’t raise borrowing costs, market forces will make that happen.
- And that the average American has no idea just how bad this financial crisis is going to get.
“The next shock is going to be bigger and bigger, still,” Rogers said. “The shocks keep getting bigger because we keep propping things up … [and] bailing everyone out.”
Rogers first made a name for himself with The Quantum Fund, a hedge fund that’s often described as the first real global investment fund, which he and partner George Soros founded in 1970. Over the next decade, Quantum gained 4,200%, while the Standard & Poor’s 500 Index climbed about 50%.
It was after Rogers “retired” in 1980 that the investing masses got to see him in action. Rogers traveled the world (several times), and penned such bestsellers as “Investment Biker” and the recently released “A Bull in China.” And he made some historic market calls: Rogers predicted China’s meteoric growth a good decade before it became apparent and he subsequently foretold of the powerful updraft in global commodities prices that’s fueled a year-long bull market in the agriculture, energy and mining sectors.
Rogers’ candor has made him a popular figure with individual investors, meaning his pronouncements are always closely watched. Here are some of the highlights from the exclusive interview we had with the author and investor, who now makes his home in Singapore:
Keith Fitz-Gerald (Q): Looks like the financial train wreck we talked about earlier this year is happening.
Jim Rogers: There was a train wreck, yes. Two or three – more than one, as you know. [U.S. Federal Reserve Chairman Ben S.] Bernanke and his boys both came to the rescue. Which is going to cover things up for a while. And then I don’t know how long the rally will last and then we’ll be off to the races again. Whether the rally lasts six days or six weeks, I don’t know. I wish I did know that sort of thing, but I never do.
(Q):What would Chairman Bernanke have to do to “get it right?”
Rogers: Resign.
(Q): Is there anything else that you think he could do that would be correct other than let these things fail?
Rogers: Well, at this stage, it doesn’t seem like he can do it. He could raise interest rates – which he should do, anyway. Somebody should. The market’s going to do it whether he does it or not, eventually.
The problem is that he’s got all that garbage on his balance sheet now. He has $400 billion of questionable assets owing to the feds on his balance sheet. I mean, he could try to reverse that. He could raise interest rates. Yeah, that’s what he could do. That would help. It would cause a shock to the system, but if we don’t have the shock now, the shock’s going to be much worse later on. Every shock, so far, has been worse than the last shock. Bear-Stearns [now part of JP Morgan Chase & Co. (JPM)] was one thing and then it’s Fannie Mae (FNM), you know, and now Freddie Mac (FRE).
The next shock’s going to be even bigger still. So the shocks keep getting bigger because we kept propping things up and this has been going on at least since Long-Term Capital Management. They’ve been bailing everyone out and [former Fed Chairman Alan] Greenspan took interest rates down and then he took them down again after the “dot-com bubble” shock, so I guess Bernanke could try to start reversing some of this stuff.
But he has to not just reverse it – he’d have to increase interest rates a lot to make up for it and that’s not going to solve the problem either, because the basic problems are that America’s got a horrible tax system, it’s got litigation right, left, and center, it’s got horrible education system, you know, and it’s got many, many, many [other] problems that are going to take a while to resolve. If he did at least turn things around – turn some of these policies around – we would have a sharp drop, but at least it would clean out some of the excesses and the system could turn around and start doing better.
But this is academic – he’s not going to do it. But again the best thing for him would be to abolish the Federal Reserve and resign. That’ll be the best solution. Is he going to do that? No, of course not. He still thinks he knows what he’s doing.
(Q): Earlier this year, when we talked in Singapore, you made the observation that the average American still doesn’t know anything’s wrong – that anything’s happening. Is that still the case?
Rogers:Yes.
(Q): What would you tell the “Average Joe” in no-nonsense terms?
Rogers: I would say that for the last 200 years, America’s elected politicians and scoundrels have built up $5 trillion in debt. In the last few weekends, some un-elected officials added another $5 trillion to America’s national debt.
Suddenly we’re on the hook for another $5 trillion. There have been attempts to explain this to the public, about what’s happening with the debt, and with the fact that America’s situation is deteriorating in the world.
I don’t know why it doesn’t sink in. People have other things on their minds, or don’t want to be bothered. Too complicated, or whatever.
I’m sure when the [British Empire] declined there were many people who rang the bell and said: “Guys, we’re making too many mistakes here in the U.K.” And nobody listened until it was too late.
When Spain was in decline, when Rome was in decline, I’m sure there were people who noticed that things were going wrong.
(Q): Many experts don’t agree with – at the very least don’t understand – the Fed’s current strategies. How can our leaders think they’re making the right choices? What do you think?
Rogers: Bernanke is a very-narrow-gauged guy. He’s spent his whole intellectual career studying the printing of money and we have now given him the keys to the printing presses. All he knows how to do is run them.
Bernanke was [on the record as saying] that there is no problem with housing in America. There’s no problem in housing finance. I mean this was like in 2006 or 2005.
(Q): Right.
Rogers: He is the Federal Reserve and the Federal Reserve more than anybody is supposed to be regulating these [financial institutions], so they should have the inside scoop, if nothing else.
(Q): That’s problematic.
Rogers: It’s mind-boggling. Here’s a man who doesn’t understand the market, who doesn’t understand economics – basic economics. His intellectual career’s been spent on the narrow-gauge study of printing money. That’s all he knows.
Yes, he’s got a PhD, which says economics on it, but economics can be one of 200 different narrow fields. And his is printing money, which he’s good at, we know. We’ve learned that he’s ready, willing and able to step in and bail out everybody.
There’s this worry [whenever you have a major financial institution that looks ready to fail] that, “Oh my God, we’re going to go down, and if we go down, the whole system goes down.”
This is nothing new. Whole systems have been taken down before. We’ve had it happen plenty of times.
(Q): History is littered with failed financial institutions.
Rogers: I know. It’s not as though this is the first time it’s ever happened. But since [Chairman Bernanke’s] whole career is about printing money and studying the Depression, he says: “Okay, got to print some more money. Got to save the day.” And, of course, that’s when he gets himself in deeper, because the first time you print it, you prop up Institution X, [but] then you got to worry about institution Y and Z.
(Q): And now we’ve got a dangerous precedent.
Rogers: That’s exactly right. And when the next guy calls him up, he’s going to bail him out, too.
(Q): What do you think [former Fed Chairman] Paul Volcker thinks about all this?
Rogers: Well, Volcker has said it’s certainly beyond the scope of central banking, as he understands central banking.
(Q): That’s pretty darn clear.
Rogers: Volcker’s been very clear – very clear to me, anyway – about what he thinks of it, and Volcker was the last decent American central banker. We’ve had couple in our history: Volcker and William McChesney Martin were two.
You know, McChesney Martin was the guy who said the job of a good central banker was to take away the punchbowl when the party starts getting good. Now [the Fed] – when the party starts getting out of control – pours more moonshine in. McChesney Martin would always pull the bowl away when people started getting a little giggly. Now the party’s out of control.
(Q): This could be the end of the Federal Reserve, which we talked about in Singapore. This would be the third failure – correct?
Rogers: Yes. We had two central banks that disappeared for whatever reason. This one’s going to disappear, too, I say.
(Q): Throughout your career you’ve had a much-fabled ability to spot unique points in history – inflection points, if you will. Points when, as you put it, somebody puts money in the corner at which you then simply pick up.
Rogers: That’s the way to invest, as far as I’m concerned.
(Q): So conceivably, history would show that the highest returns go to those who invest when there’s blood in the streets, even if it’s their own.
Rogers: Right.
(Q): Is there a point in time or something you’re looking for that will signal that the U.S. economy has reached the inflection point in this crisis?
Rogers: Well, yeah, but it’s a long way away. In fact, it may not be in our lifetimes. Of course I covered my shorts – my financial shorts. Not all of them, but most of them last week.
So, if you’re talking about a temporary inflection point, we may have hit it.
If you look back at previous countries that have declined, you almost always see exchange controls – all sorts of controls – before failure. America is already doing some of that. America, for example, wouldn’t let the Chinese buy the oil company, wouldn’t let the [Dubai firm] buy the ports, et cetera.
But I’m really talking about full-fledged, all-out exchange controls. That would certainly be a sign, but usually exchange controls are not the end of the story. Historically, they’re somewhere during the decline. Then the politicians bring in exchange controls and then things get worse from there before they bottom.
Before World War II, Japan’s yen was two to the dollar. After they lost the war, the yen was 500 to the dollar. That’s a collapse. That was also a bottom.
These are not predictions for the U.S., but I’m just saying that things have to usually get pretty, pretty, pretty, pretty bad.
It was similar in the United Kingdom. In 1918, the U.K. was the richest, most powerful country in the world. It had just won the First World War, et cetera. By 1939, it had exchange controls and this is in just one generation. And strict exchange controls. They in fact made it an act of treason for people to use anything except the pound sterling in settling debts.
(Q): Treason? Wow, I didn’t know that.
Rogers: Yes…an act of treason. It used to be that people could use anything they wanted as money. Gold or other metals. Banks would issue their own currencies. Anything. You could even use other people’s currencies.
Things were so bad in the U.K. in the 1930s they made it an act of treason to use anything except sterling and then by ’39 they had full-exchange controls. And then, of course, they had the war and that disaster. It was a disaster before the war. The war just exacerbated the problems. And by the mid-70s, the U.K. was bankrupt. They could not sell long-term government bonds. Remember, this is a country that two generations or three generations before had been the richest most powerful country in the world.
Now the only thing that saved the U.K. was the North Sea oil fields, even though Prime Minister Margaret Thatcher likes to take credit, but Margaret Thatcher has good PR. Margaret Thatcher came into office in 1979 and North Sea oil started flowing. And the U.K. suddenly had a huge balance-of-payment surplus.
You know, even if Mother Teresa had come in [as prime minister] in ’79, or Joseph Stalin, or whomever had come in 1979 – you know, Jimmy Carter, George Bush, whomever – it still would’ve been great.
You give me the largest oil field in the world and I’ll show you a good time, too. That’s what happened.
(Q): What if Thatcher had never come to power?
Rogers: Who knows, because the U.K. was in such disastrous straits when she came in. And that’s why she came to power…because it was such a disaster. I’m sure she would’ve made things better, but short of all that oil, the situation would’ve continued to decline.
So it may not be in our lifetimes that we’ll see the bottom, just given the U.K.’s history, for instance.
(Q): That’s going to be terrifying for individual investors to think about.
Rogers: Yeah. But remember that America had such a magnificent and gigantic position of dominance that deterioration will take time. You know, you don’t just change that in a decade or two. It takes a lot of hard work by a lot of incompetent people to change the situation. The U.K. situation I just explained…that decline was over 40 or 50 years, but they had so much money they could have continued to spiral downward for a long time.
Even Zimbabwe, you know, took 10 or 15 years to really get going into it’s collapse, but Robert Mugabe came into power in 1980 and, as recently as 1995, things still looked good for Zimbabwe. But now, of course, it’s a major disaster.
That’s one of the advantages of Singapore. The place has an astonishing amount of wealth and only 4 million people. So even if it started squandering it in 2008, which they may be, it’s going to take them forever to do so.
(Q): Is there a specific signal that this is “over?”
Rogers: Sure…when our entire U.S. cabinet has Swiss bank accounts. Linked inside bank accounts. When that happens, we’ll know we’re getting close because they’ll do it even after it’s illegal – after America’s put in the exchange controls.
(Q): They’ll move their own money.
Rogers: Yeah, because you look at people like the Israelis and the Argentineans and people who have had exchange controls – the politicians usually figured it out and have taken care of themselves on the side.
(Q): We saw that in South Africa and other countries, for example, as people tried to get their money out.
Rogers: Everybody figures it out, eventually, including the politicians. They say: “You know, others can’t do this, but it’s alright for us.” Those days will come. I guess when all the congressmen have foreign bank accounts, we’ll be at the bottom.
But we’ve got a long way to go, yet.
Mark Mobius Sees Commodites Correction, Not End Of Boom
Emerging markets veteran Mark Mobius doesn’t think the recent selloff in commodities is the end of a boom which started back in 1999. Pratima Desai for Reuters UK wrote last week:
“When you have a long-term uptrend, excesses build up along the way. We are witnessing a correction,” said Mark Mobius, executive chairman at Templeton Asset Management.
“Demand for commodities will remain at a high level in countries like China and India. If we see a serious worldwide recession, then we will see the end of the commodities boom.”
In fact, Dr. Mobius believes commodities may just be the global economy’s “saving grace.” Reuters Kevin Plumberg said on August 15:
Mark Mobius, executive chairman of Templeton Asset Management Ltd, said he believes consumer demand in emerging markets will ultimately be one of the factors keeping the global economy out of recession. Mobius is a value investor who has long touted the inherent strength of emerging markets.
“What we like are the consumer plays. As much as possible we are trying to get exposure to consumer-oriented sectors, whether that is consumer banking or retail,” he said in a phone interview from Turkey.
In addition to China, Mobius, who oversees some $40 billion in assets, likes the technology sectors in Taiwan, India and Korea. His firm has also cut down on its exposure to the commodities sector while increasing holdings in consumer-oriented sectors in South Africa and Turkey, where he said interest rate rises have brought share prices down to attractive levels.
Levent Financial District
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