US unemployment, cyclical or structural?: the latest round

the Siemens interview

Yesterday’s Financial Times contains a report of the paper’s interview with Eric Spiegel, the head of US operations for the German industrial conglomerate, Siemens.

Asked about the employment situation in the US, Mr. Spiegel comes down squarely in the structural camp.  He makes the following comments (some in the video of the interview, but only summarized in the written article):

–Siemens wants to hire 3,200 workers in the US right now

–all of these jobs require at least a college degree, some require more advanced education

–Siemens has recently begun to use recruiters to find workers to fill these jobs (by luring workers from other firms), because the company can’t find what it needs through internet job boards or resume submissions.  “There’s a mismatch between the jobs…and the people that we see out there.”

–in the Carolinas, Siemens is retraining laid-off textile workers to manufacture gas turbines, adapting the traditional manufacturing apprentice program of in-house training the company uses in Germany to do so.

The article also refers to a recent Manpower “Talent Shortage” survey, according to which 52% of US employers queried say they’re having trouble finding job candidates with the skills needed to fill open positions.  A year ago, only 10% were having this problem.  Other recent employment research says that employers are now willing to pay to relocate new employees, since they can’t find suitable local candidates.

implications for stocks

The Siemens interview suggests that the US is much closer to full employment than a 9% unemployment rate would suggest.

If companies want to continue to expand at full employment, the only way to get workers for their new plants is to bid them away from other employers by offering higher wages.  But this is how wage inflation starts.  And in an advanced economy like the US, wage inflation is the crucial component in overall inflation.

The orthodox remedy to nip incipient inflation in the bud is to raise interest rates to a level where expansion becomes financially unattractive.  Doing this is unequivocally bad for bonds.  History shows, however, that stocks can advance modestly while rates are going up.

On the other hand, one of the sectors that will be hit worst by rising rates is construction–one of the few employment sources for the low- or unskilled workers who make up the bulk of the unemployed.  Also, higher rates typically mean lower house prices and higher payments on variable-rate mortgages.  In a perverse way, it’s fortunate that the economy is only moving ahead slowly, so that any rate rises will likely be more modest than has historically been the case (which is a minimum of 175 basis points).

To my mind, all this has two implications for US stocks:

–the forces that have led the bull market to date, that is, non-US exposure + consumption by the more affluent, will likely keep their front-row role, and

–while the already-employed may be on the cusp of enjoying substantial wage increases, the lot of the chronically unemployed may well deteriorate over the coming year or two.  This is a social problem that fiscal policy from Washington is best suited to deal with.

MGM China (HK:2282) came public on June 7

the IPO price

The offering price for the 760 million shares in the offering was HK$15.34, at the absolute high end of the range of HK$12.36 -HK$15.34 determined by the Hong Kong Stock Exchange..

a secondary offering

As I’ve written in more detail in other posts, this IPO is unusual in that it does not involve the sale of primary shares (ones newly issued by the company).  Rather, it’s a secondary offering.  That is, all the shares being sold to the public come from the already-existing holdings of company equity holders.  In this case, the sole seller is Pansy Ho, who owned 50% of MGM China before the sale.


According to the offering documents, MGM China lost money in 2008 and 2009.  It earned HK$1.566 billion last year.  It projects that at a minimum it will have a profit of HK$1.4501 billion for the six months ending June 30, 2011.  This would equate to eps of $.38 per share.

Let’s assume MGM China earns $.80 a share for the full year of 2011.  The offering price would then represent a multiple of 19x current year earnings per share.  When the offer’s pricing range was being set in mid-May, a 19x multiple represented parity with, or perhaps a slight premium to, the multiple investors were awarding to Wynn Macau (HK: 1128), the company I regard as the market leader–and the highest multiple casino stock on the Hong Kong exchange.

early price action

After trading briefly above the offering price, 2282 ended its first day trading at HK$15.16, on volume of a tad below 77 million shares.  It closed overnight in Hong Kong at HK$13.12, or about 14% below the IPO level.

I don’t regard this decline as particularly surprising, since the entire casino sector in Hong Kong has under gone a sharp correction that began in early May (Wynn Macau, for instance, is now trading at about 15x earnings).  What’s more noteworthy is the investment bankers’ ability to get the MGM China issue off at an unusually high price.

my take on the stock

I haven’t seen any sell-side research on MGM China.  The offering documents suggest, however, that the sales pitch for the company is that it represents a blending of the best of East and West–the local market knowledge and connections of Ms. Ho and the technical know-how about glitzy upmarket gaming of MGM Resorts International, which now has a controlling 51% interest in MGM China.  There’s a whole laundry list of related-party transactions between Ms. Ho and 2282 in support of this idea.  The documents do refer to the regulatory problems Ms. Ho has encountered in the US.  But they point out that she has never formally been declared to be “unsuitable” to hold a casino license in the US–although MGM appears to have ceased operating in Atlantic City to avoid this result.

I’m not sure the synergies the market seems to expect will work out.  It’s not 100% clear to me how Ms. Ho will balance her obligations to MGM China with those to the much larger Ho family-controlled rival, SJM.  I’m also not convinced that many talented Las Vegas executives will want to link their fortunes to the Ho family.

Whatever qualms I may have about the Ho family connection, however, MGM and the Hong Kong market–where the price of MGM China shares will ultimately be decided–appear to have none.  In addition, the Macau gaming market appears to me to be still in the rapid growth phase where the rising tide lifts all boats.  So I suspect that despite the fact I won’t be a shareholder the stock will be an above average performer in the Hong Kong market from this point on.

Chinese companies with questionable financials–what a shock!

Press reports over the past several months have outlined questions that have arisen about the financials of some Chinese companies, both ones where western hedge funds have made substantial investments and ones that have achieved “backdoor listings” in the US.

(Backdoor listings are  mergers of unlisted companies into already-listed corporations.  They come in two flavors:  merger into a shell company, created solely to be used in this manner; and merger into a once-vibrant firm that has an actual business that has fallen on hard times.  These are “reverse” mergers, in the sense that the acquired firm runs the combined entity.  Typically, the company name is immediately changed to reflect the new owners’ business.)

the more things change…

I don’t find this fact surprising.  This is a typical issue with any emerging market.  It has been a particular issue in China for at least twenty years.

…the more they remain the same

What I do find surprising is that investors continue to fall for the same tricks today that they did back then.  This also happens despite the financial press being filled with stories that recount the fact that financial intermediaries who promote these companies to investors, both in general and in the particular case of emerging markets specialists, have very little regard for their clients’ well-being.  Their main concern is their own profits. The current disputes between government-controlled institutional investors and their custodial banks about systematic overcharges on their foreign exchange transactions is an especially telling example.

In addition, anyone who has read a book on developing countries or sat through the first day of an economics or finance course on this part of the globe knows that a key issue for governments in such areas is to avoid selling their economic crown jewels for a pittance to wealthy foreigners.


Why, then, do investors repeat the same kind of mistakes over and over again?  I think there are three main psychological factors:

1.  Successful professional investors  often tend to think that the same characteristics that made them winners in their home markets will make them successful elsewhere.  Every marketing person they associate with, from their in-house staff to the institutional salesmen who vie for their commissions business, encourage them in this belief.  So they end up not preparing well for potential differences in new markets they may enter.

2.  Rookie investors tend to underestimate the collective intelligence of the guys on the other side of the trade.  In a similar vein, even professionals entering developing markets sometimes think that because they are wealthier than local investors, they are somehow smarter. The opposite is invariably the case when it comes to securities in the local arena.  As a result, they don’t do enough research.

3.  Investors of all stripes tend to rely too much in developing markets on the advice of the brokers they do business with.  The latter group’s primary allegiance is normally to the political and corporate leaders of the developing country, for whom they hope to do amounts of financial business that dwarf what they can expect from any class of portfolio investors.

what to do?

I think there are for strategies you and I can use to participate in developing markets while limiting the risk of exposure to companies with questionable financial reporting.  They are:

1. use emerging markets index products.

2.  in emerging areas, use actively managed mutual funds run by seasoned management organizations with a long record of success.  The Matthews China-related funds are a good example.

3.  buy companies like TIF that are traded in developed markets and have accounts audited by well-known accounting firms, using accounting principles you understand, but which have significant exposure to–and success in–developing markets.

I’m suddenly a tablet advocate: here’s why

my take on tablets

I like gadgets.

I’ve had my eye on a tablet since I first saw one in a university bookstore (a MSFT product) almost a decade ago.  But that one was very clunky and didn’t let you do much more than highlight Word documents.  I looked at a Lenovo combination laptop/tablet a few years later, but it was very underpowered.  And there was still no infrastructure of applications to justify the tablet part.

Now there’s the iPad.  It’s the usual well-designed AAPL consumer device.  But to me it has seemed little more than another device to lug around that’s not much more than an expensive e-reader and an extremely costly way to play Angry Birds.

my newspaper problems

Then the Financial Times newspaper stopped coming to the house.

Yes, I still read the physical newspaper.

I read:

–the FT (comprehensive global business news; a UK perspective on US/world economic and political developments),

–the NY Times (reasonable, US-oriented business news, good–though weakening–sports coverage) and

–the Wall Street Journal (good sports, lots of gossip in the NY section, almost no useful business coverage–meaning I won’t renew).

why the physical paper

I’m not a fan of wood products per se.  But I’ve thought the physical paper has several advantages over the web version:

–the amount of news in the physical paper is greater than on the front page of the newspaper website.  So the editors’ selection of what’s most important is a greater influence on what you see online than in the physical paper.  As a result, the chances of finding information whose significance is not adequately understood is greater in the physical paper.

–I think the web presentation is organized to highlight stories that will maximize visits.  In contrast, the physical paper is organized to deliver information.

–I thought (not any longer) that it’s easier to reconstruct with the physical paper a timeline of information flow by reading back editions you might not have gotten on the day of publication than it is to go back a day or two in time on the website.

my call to the FT

When I called the FT last Saturday to get replacement copies of the papers that didn’t come, the representative I talked to mentioned the e-paper that’s available through

The site is run with software from Olive Software, a private company in Aurora, Colorado. has daily back editions.  You can turn the pages of each edition, just like an online catalog.  You can pop out to larger size and different formats the articles you want to read in depth.  I also discovered that, through FT email alerts, I had already read most of “today’s” paper online yesterday! has been around for a couple of years.  I just didn’t know about it.

my calculation

Anyway, I can cancel my physical paper subscription and save a couple of hundred dollars a year.  No more worries about cancelling delivery when we may be travelling.  No more toting around piles of unread orange newsprint.  Less recycling to do.

All of that just means that I can rationalize paying for a tablet with the money I’ll save by stopping a newsprint subscription.  But I’ve also found a sophisticated and valuable application, other than email, that’s completely suited to what a tablet can do and that I use every day.  This means that I have a positive reason to buy one.

I’d like to see the new Google tablets, as well as iPad 3, before I take the plunge.  I have only one concern.

one concern

In my career on Wall Street, I’ve observed the long struggle for control of brokerage houses between researchers and traders that has been decisively won by the latter.  I’ve thought of this as somewhat like the age-old high school contest between jocks/cool people and the nerds.

It seems to me that the same battle is going on in newspaper firms between traditional reporters and online search engine optimizers–the latter being more interested in eyeballs than in information.  As I study successful financial websites with an eye to improving this blog, I can see the same dynamic in play in this arena–well-crafted and very popular websites with lots of advertising, but almost no useful investment information.

By shifting my financial support from the reportorial nerds to the online jocks, I’m most likely speeding the day when even the FT will suffer from a content deficiency.    But that’s a problem for another day.


trading errors: what to do if you push the wrong button

trading errors happen

Trading errors–buying when you mean to sell, or buying/selling much larger amounts than you intend–happen.  Not often, but they do.  (For completeness sake, I could have included buying/selling much smaller amounts of stock than you mean to, but that’s not painful to fix.)  Their possibility is the main reason your broker records all the buy and sell instructions he receives.

discovering an error

In my experience, discovering a trading error comes almost immediately on having made it.  So potential damage done before you find out is less an issue than figuring how to trade back out of the error you’ve made.

professionals have more safeguards

Professional investors have safeguards that individuals don’t.  In the US, SEC-regulated managers always employ in-house traders as intermediaries between the portfolio manager and broker.  (The idea is to prevent brokers from bribing portfolio managers.  Of course, the measure doesn’t prevent wrongdoing, just shifts its focus.)  Entering an order that’s 100x normal size will certainly elicit a confirming phone call from the trading room.

foreign securities

Trading in foreign securities is a particular sore spot.  It’s easy to lose a decimal point when the local currency isn’t something you’ve dealt with since childhood.  I’ve also had foreign brokers observe to me that some clients insist on demonstrating their language “skills” by delivering orders in the local tongue–only to botch the numbers badly.  This is a particular problem for Westerners in Japanese, where the number 10,000 is “ichi man” = one ten thousand and not “ju sen” = ten one thousands.  All the Asian brokers I knew had a policy of confirming all orders in English.

what to do

I made a trading error the other day–my first in over twenty years.

As I’ve mentioned in other posts, I own two Japanese social networking stocks, DeNA and Gree.  I have what’s for me a large position in DeNA, a company I’ve followed for years.  I only began to pay attention to Gree recently, when the company made a complaint to the Japanese Fair Trade Commission that DeNA was pressuring third-party mobile game developers not to offer their output to Gree.  To me, that means Gree is a serious rival, so I bought a small amount while I started to research it.

A couple of weeks ago I decided to double my position size.

I use Fidelity’s online international stock service.  It’s very inexpensive, fast and easy to use.  There’s a slight, but noticeable, lag between the prices Fidelity shows and the real-time quotes in the local markets, but I’ve never found that a problem.

I entered the number of shares I wanted, clicked the “trade” button, and clicked again to confirm the order (which was now denominated in yen).

The order was filled almost instantly.  But when I looked on my positions page, I had bought 10x what I wanted.  (I’m not sure how this happened.  My best guess is the following:  as you enter an order online, a drop-down box appears beneath the number of shares box in the order form.  It contains possible order sizes for the number you’re in the midst of typing.  The possibilities include 10x the amount you’ve already entered.  Somehow, I must have scrolled down to the larger amount.)


…actually, worse than “Whoops!”.  Suddenly not only did I have a huge position in Gree, but the Japanese social networking tail of my portfolio was now humongous enough to wag the entire portfolio dog.

I had two choices.  I could either enter a sell order immediately for the entire extra amount and take whatever price the market would give me.  Or I could try to trade out of the position over a period of time, hopefully at higher prices.

One of my first bosses used to say that a situation like this is a choice between fast death and slow death (she was a rather pessimistic person), and fast death is always preferable.  I think that’s true, that the second alternative is a form of denial and will lead to no good.  But I’d frame the issue a bit differently.  I’d say instead that Murphy’s Law is in force with this trade:  if you sell right away, the stock will go up as soon as you’re done; if you hold on, the stock will plunge.  –Actually, as I write this, I realize my thoughts are the same as my old boss’s, only prettied up a little.

So I sold 90% of the extra stock.  I gained about a yen a share on the sale, which came close to covering commissions, but I lost about 1.5% of the principal on currency conversion.  And, of course, Gree went up by about 15% in the following week.  …oh, well.


The main points, though, if you make a trade error, are:

–consider the risk you’ve introduced to your portfolio as a whole.  If it’s unacceptably large–meaning, say, you would be tempted to hide bad results from your spouse–reverse the trade immediately.

–consider that your judgment at the moment is suspect–after all, you created the mess you’re in–so err on the side of caution.

–act according to behavioral rules that have worked for you in the past, assuming you have enough investing experience to know what your tendencies are.

–the most conservative course of action is to reverse the unwanted trade at once.