Update No. 31 – 30/10/11

Full website: www.eternalgrowthpartners.com

Stocks moved sharply upward this week, fellow owners and regular followers will have noticed our portfolio is generally much less volatile than the broader market. When the market declines sharply, we rarely decline as fast, unfortunately, when the market rises sharply, we usually fail to keep up as we have this week.  The Europeans seem to have developed a ‘solution’ the market likes – for now…

I have talked a little over the past few weeks about my view of the difficulties faced by the Euro-Zone countries and about the hobbling effect on the weaker economies of a common currency (there is a correspondingly ‘undeserved’ boost to the stronger economies which is less mentioned). I mentioned in Update 28 that absent the ability for the currency underlying a weak economy to weaken, the prospect for recovery is severely muted.  Among my daily consumption of financial reading is Paul Krugman’s blog, ‘The Conscience of a Liberal’, many of Krugman’s views are at odds with mine (though he’s the one with the Nobel Prize…), but his writings are always eminently readable and wonderfully considered.  Though he stridently disputes it, Krugman is prone to ‘cherry-picking’ data that tell the story as he sees it (though if we’re honest, I think we’re all guilty of that).  In order to demonstrate my view about the importance of a sovereign currency I will cherry-pick this post, which shows how Iceland, which was probably the worst economy in the world during the GFC is in what could only be described as a state of rudely good health.  Well, rude good health could be an exaggeration, but many factors that point to economic strength are much better than the three comparison countries Krugman uses (Latvia, Ireland & Estonia) which either use the Euro or have their currency pegged to the Euro.  It is a short, sharp reminder of the importance of a (freely floating) sovereign currency as a defence against the economic cycle.  There have been a few follow up posts which give more detail to the story, also well worth reading.

Something else very much in the news (at least the finance news, which is where most of my attention goes) is the ongoing OWS (Occupy Wall Street) protests.  I must be honest; I don’t share a lot in common with many of the sentiments expressed by protesters.  I can appreciate the perception that the financial world occupies an unfairly privileged space that seems to have enormous upside and government backstopped downside.  I also understand the concerns about executive salaries and the high proportion of national earnings earned by ‘the 1%’, I’m pretty sure it isn’t ‘the 99%’ who have driven house prices in the Hampton’s up by 22% last year, while the rest of the US housing market is basically wrecked – and some executive salaries are indubitably obscene, but it is the shareholders (mostly) who get burnt by that.  To me though, a central tenet of living in a capitalist economy is that if I covet what my neighbour has, I can work hard and obtain the same level of income or power or whatever thing that he has that I covet.  The thing for which OWS is most widely criticised is having no particular goals.  The closest I have seen to a coherent aggregation of the feelings behind the movement was presented here by ‘Lemony Snicket’; my personal favourite is number 7:

7. Someone feeling wronged is like someone feeling thirsty. Don’t tell them they aren’t. Sit with them and have a drink.

It is for this reason that provided the protests are peaceful, I see no harm in them whatsoever. I maintain that if the movement provided a coherent plan to resolve their issues, I would give them a great deal more respect, as Benjamin Franklin said “Any fool can criticize, condemn and complain and most fools do!”

While I’m directing blog-readers to my ‘liberal’ information sources, I should direct you to one more here, the site ‘macrobusiness’ aggregates the writings of a variety of economists writings with, as I mentioned, mostly left-wing in their views, but invariably well written and comprehensively explained.  The article linked briefly details a county in Georgia (near Atlanta), which ‘incorporated’ its local government with considerable success.  It must be noted that this is much easier to do successfully in a relatively affluent area, but the results appear to have been so good they certainly warrant further examination.  Most interesting is the leftie columnist (perhaps unknowingly) praising the work of a libertarian mayor. Tony Hansen 30/10/11.

	April 1st 2011	July 1st 2011	Current Price	Current Period	Since Inception
EGP Fund No. 1	1.00000	1.08396	1.03050	(-4.93%)	3.05%
S&PASX200TR	35632.05	34200.68	32846.67	(-3.96%)	(-7.82%)
EGP 20	1000.00	883.67	836.88	(-5.30%)	(-16.31%)

EGP Fund No. 1 Pty Ltd. Down by 4.93%, lagging the benchmark by 1.03% since July 1^st. Since inception, EGP Fund No. 1 Pty Ltd is Up by 3.05%, leading the benchmark by 10.87% all-time (April 1^st 2011).

EGP 20.  The EGP20 index is Down by 5.30%, lagging the benchmark by 1.34% since July 1^st.  Since inception the EGP20 is Down by 16.31%, lagging the benchmark by 8.49% all-time (since April 1^st 2011).

S&PASX200TR  The benchmark index is Down by 3.96% since July 1^st. The benchmark is Down 7.82% all-time (since April 1^st 2011).

Full website: www.eternalgrowthpartners.com

Update No. 30 – 23/10/11

Update No. 30 – 23/10/11

Full website: www.eternalgrowthpartners.com

I mentioned in my post a fortnight ago that US housing starts were expected to continue their strong upward trajectory, well they were reported through the week here:

“Privately-owned housing starts in September were at a seasonally adjusted annual rate of 658 000. This is 15.0 percent (±13 7%) above the revised August estimate of 572,000 and is 10.2 percent (±13.3%)* above the September 2010 rate of 597,000.”

Notwithstanding the strong signs that the US is turning the corner, markets continued their downward trajectory this week, Europe is the big concern.  The key European powers are meeting over the weekend to propose a ‘solution’.  It remains entirely likely that nothing will come of it; a properly catastrophic failure (such as the Lehman collapse in 2008) is probably required to force action.

Despite all the calls for action, I think inaction and allowing events to run their course without significant political interference would likely have the greatest long-term benefits.  Unfortunately, our political leaders the world over need to be seen to be ‘strong & decisive’ and this causes them to act even when inaction is the prudent course.

The more I think about it, the more it puzzles me that we fail to accept the inherently cyclic nature of the (predominantly) capitalist world we live in. Don’t get me wrong, I understand the political motivation that drives the interventionist behaviour, I just think it is not in our best interests. For many years, a good savage downturn cleaned out inefficient/marginal industries in a country, driving productivity increases as the truly competitive industries thrived when conditions turned.  Too often interventionist policies are blunting the natural regenerative properties of capitalism.

To our holdings - although we have been performing (in respect of price) only marginally better than the market, the AGM season has provided some very ‘upbeat’ commentary about our holdings.  An example from one AGM this week is:

“At the end of the first quarter of FY2012, order intake is up 65% and unit sales are up 25% on the first quarter of FY2011.  As a result, our order bank at the end of September 2011 is up 155% on the order bank at the end of the prior corresponding period”

Now the prior period was an historically weak one for the above business and I had this firm pencilled in for significant sales and operational improvement this year.  I didn’t however picture anything like a 155% growth in back-orders, that type of superior business performance materially increases the intrinsic valuation and we already acquired them at less than half my previous estimate of IV!  The gains will come, of that I am very confident, but the present sentiment dulls the response even to such positive announcements.  Unfortunately the gains in some of our holdings have been offset by the ongoing takeover saga surrounding one of our largest holdings.  An AGM must be called soon and we should get a better understanding of exactly what’s happening there - Tony Hansen 23/10/2011.

	April 1st 2011	July 1st 2011	Current Price	Current Period	Since Inception
EGP Fund No. 1	1.00000	1.08396	1.00453	(-7.33%)	0.45%
S&PASX200TR	35632.05	34200.68	31248.43	(-8.63%)	(-12.30%)
EGP 20	1000.00	883.67	791.2	(-10.46%)	(-20.88%)

EGP Fund No. 1 Pty Ltd. Down by 7.33%, leading the benchmark by 1.30% since July 1^st. Since inception, EGP Fund No. 1 Pty Ltd is Up by 0.45%, leading the benchmark by 12.75% all-time (April 1^st 2011).

EGP 20.  The EGP20 index is Down by 10.46%, lagging the benchmark by 2.83% since July 1^st.  Since inception the EGP20 is Down by 20.88%, lagging the benchmark by 8.58% all-time (since April 1^st 2011).

S&PASX200TR  The benchmark index is Down by 8.63% since July 1^st. The benchmark is Down 12.30% all-time (since April 1^st 2011).

Full website: www.eternalgrowthpartners.com

Update No. 29 – 16/10/11

Full website: www.eternalgrowthpartners.com

A short update this week as I’m travelling, don’t worry, nowhere luxurious, I’m in Cooma as I write.  Because I haven’t the time to write anything interesting myself, I will refer you to someone else’s work, which in any case is a thousand times more insightful than my weekly observations.

I refer to this article, which is a transcript of a speech given by Charlie Munger in 2003 on ‘Academic Economics’.  Like almost all Munger speeches, it drifts into multi-disciplinary learning, which I believe is one of the most valuable (and under-considered) concepts around.

I hope you enjoy the article as much as I do, if you do, you should consider laying your hands on a copy of Poor Charlie’s Almanac, which expands further on the ideas – Tony Hansen 16/10/11.

	April 1st 2011	July 1st 2011	Current Price	Current Period	Since Inception
EGP Fund No. 1	1.00000	1.08396	1.01730	(-6.15%)	1.73%
S&PASX200TR	35632.05	34200.68	31729.47	(-7.23%)	(-10.95%)
EGP 20	1000.00	883.67	836.67	(-5.32%)	(-16.33%)

EGP Fund No. 1 Pty Ltd. Down by 6.15%, leading the benchmark by 1.08% since July 1^st. Since inception, EGP Fund No. 1 Pty Ltd is Up by 1.73%, leading the benchmark by 12.68% all-time (April 1^st 2011).

EGP 20.  The EGP20 index is Down by 5.32%, leading the benchmark by 1.89% since July 1^st.  Since inception the EGP20 is Down by 16.33%, lagging the benchmark by 5.38% all-time (since April 1^st 2011).

S&PASX200TR  The benchmark index is Down by 7.23% since July 1^st. The benchmark is Down 10.95% all-time (since April 1^st 2011).

Full website: www.eternalgrowthpartners.com

Update No. 28 – 09/10/11

Full website: www.eternalgrowthpartners.com

The market staged a big turnaround this week; unfortunately our holdings didn’t keep pace.  I guess the question is - can the gains be sustained.  It is hard to tell, but to my way of thinking, positive economic news is starting to out-weigh negative economic news.  I always focus on US news, because like it or not, the US is still the worlds economic engine.  August US building permits were up 3.2% month on month and 7.8% year on year, September is expected to be marginally better still.  Building permits are an approximate 6 to 12-month leading indicator to housing starts, which is a pretty direct proxy for the strength of the building industry, which is in turn consistently underestimated as a key driver for growth and employment.  Total housing starts for the whole of calendar 2009/2010/2011 will be less than they were in each of the 2002/3/4/5 calendar years.  In fact fewer US houses have been built in the last 3 years than the average constructed each year on average for the 10 years prior to that.  The excess supply has been largely absorbed, the only question is how long it takes the market to react to the new undersupply situation and more than double the current new home construction to return it to its equilibrium level of about 1.3m per year.  I would be surprised if by the end of 2012, housing starts weren’t up to about 900k per year and unemployment below 7.5%.  These are not forecasts, just a supposition as to how a rational market would react (remembering the market is rarely perfectly rational).

Real GDP in the US increased to 1.3% in quarter 2 and is particularly impressive when you consider a relatively high inflation rate of 3.8% reported in August (real GDP measures the GDP factoring inflation).  Another big positive is a recent narrowing of the trade deficit, combined with the continued strong growth in exports (set the chart to 5 years to get a good feel for how impressive the growth is), this proves the enormous ongoing effort to weaken the US$ is working (like it or not).

The other side of the coin of course is the Euro-currency zone and Europe generally.  The Euro-Zone is an economic area comparable in GDP to the US.  Unfortunately, I am not so excited by Euro-Zone prospects.  I have always been sceptical of the workability of a common currency across a disparate group of economies.  Unless a country has the capacity to weaken its currency when its economy is weaker than the global average (either through natural forces, or by manmade force as the US has done), trade factors will be distorted and an economy has no means of finding equilibrium.

I can attest to what a wonderful ‘concept’ the Euro is, having spent time travelling through Europe, spending the same notes and coins in nearly every country.  Despite this, whatever improvements in trade and portability the Euro has created, the is enormous downside is being witnessed by the weaker Euro economies now.  Under normal conditions, Greece’s currency should have plummeted, they should now be in the midst of an export led recovery, probably led by tourism, but supplemented by other Greek export industries - fruit, vegetables, olive oil, textiles and steel.  The weak currency would make imports prohibitive and some sense of normality would quickly be established.  Foreign Greek bond-holders would be burned by currency losses rather than capital losses.  None of these normal solutions can occur because of the distortion caused by the shared currency.  The best thing the Euro-Zone could do is declare the Euro a failure and return to floating sovereign currencies in the most orderly way possible.  This option is enormously politically difficult, but will likely have to happen in the next few years to help Europe deal with its issues properly.

In any case, I don’t hold out much hope for the sparks of a recovery coming from the Euro-Zone, but I am very hopeful of a US led recovery – Tony Hansen 09/10/2011

P.S. talking of currencies, there are many more benefits than costs to the Chinese in allowing their currency to trade somewhere closer to fair value - also the global economy would benefit.

	April 1st 2011	July 1st 2011	Current Price	Current Period	Since Inception
EGP Fund No. 1	1.00000	1.08396	1.00917	(-6.90%)	0.92%
S&PASX200TR	35632.05	34200.68	31405.67	(-8.17%)	(-11.86%)
EGP 20	1000.00	883.67	794.02	(-10.15%)	(-20.6%)

EGP Fund No. 1 Pty Ltd. Down by 6.9%, leading the benchmark by 1.27% since July 1^st. Since inception, EGP Fund No. 1 Pty Ltd is Up by 0.92%, leading the benchmark by 12.78% all-time (April 1^st 2011).

EGP 20.  The EGP20 index is Down by 10.15%, lagging the benchmark by 2.02% since July 1^st.  Since inception the EGP20 is Down by 20.6%, lagging the benchmark by 8.74% all-time (since April 1^st 2011).

S&PASX200TR  The benchmark index is Down by 8.17% since July 1^st. The benchmark is Down 11.56% all-time (since April 1^st 2011).

Full website: www.eternalgrowthpartners.com

Update No. 27 – 02/10/11

Full website: www.eternalgrowthpartners.com

I write this blog mid-week before it is to be posted (i.e. prices used were sourced Wednesday – don’t scream if they’ve changed, they change all the time!), after looking back through my posts last week to find the post I referred to in last weeks blog, I found my proposal in Update No. 6.  I thought I might review it this week, the post proposed a way to potentially speculate in what I viewed as an overheated silver bullion market.

Regular readers will remember that I proposed the following ‘pairs trade’:

• Buy 60oz platinum @ AU$1,662.98 per oz for $99,778.80
• Sell 2,375oz silver @ AU$42.01 per oz for $99,773.75

We are now 133 days (19 weeks) down the road; let us review how the trade would look if we closed it out now:

• Sell 60oz platinum @ AU$1,517.33 per oz for $91,039.80 (Loss = $8,739)
• Buy 2,375oz silver @ AU$29.41 per oz for $69,848.75 (Profit = $29,925)

So the pairs trade worked almost exactly as we wanted/expected it to, and I have demonstrated how we could potentially make money in a (sharply) falling market.  The platinum price, which was trading below it’s historic average (relative to gold), has declined only modestly (about 8.8%), and the silver price, which I demonstrated was at it’s all-time high (in relation to gold) has declined the majority of the way (30% in real terms) to the long term mean (a further 20% decline relative to gold would return it to the long-term mean (1/65^th the price of gold per unit). The total gain demonstrated above of $21,186 represents a 10.62% profit over the 133 days, or an annualised gain over 30% (I haven’t followed the prices closely, but I am sure there were probably greater profits at some point).  Given that the EGP share price has done virtually nothing in the same period, fellow holders may question why I didn’t take on such a trade.  The answer is simple, when it comes to currencies, commodities and other tradeable items, the underlying causes of the movements are too hard to pick.  Now, share prices can swing just as wildly as the last month or two have reminded us (funny the swings only seem wild when prices head down though…), however the drivers in increasing the prices are much more predictable.  Relying on mean reversion is not an investing format I am comfortable with; in the long-run owning outstanding companies with sound fundamentals will prove more profitable I believe.

Gun to my head, if you make me choose a precious metal to own, I would still take platinum over silver/gold as it is still very close to historic lows in relation to gold price.  By the way, this is an absolutely imperfect view to hold, there may have been a great many platinum discoveries over the past few years that have reduced the scarcity of platinum relative to the other precious metals, which has led to the lower ratio; or a variety of demand factors could have forever changed the precious metals market.  Think about these things before you storm the Perth mint & buy hundreds of kilos of bullion (under AU$50,000 per kilo after recent price falls! Cheap as chips!)

Many of the underlying macroeconomic factors can be the same for stocks as for commodities, for example, when the global economy is weak, commodity prices fall due to weakened demand & stock prices of companies producing those commodities will fall as they will make less profit at the lower prices.  Gold and Silver can sometimes defy this trend, due to their perception as a currency/store of value, but correlated price movements can often hobble this argument as we have seen in the last couple of weeks.

Imagine this - the price of the commodity a company produces stays static for 10 years (for some reason).  The price of the company could still grow if it increases production and controls costs.  The other thing a company can do that a commodity can’t is use the cash it generates to buy new businesses or expand in other ways.  So provided you can pick a company with the right fundamentals, you won’t have to rely on the greater fool to be successful – Tony Hansen 02/10/11

	April 1st 2011	July 1st 2011	Current Price	Current Period	Since Inception
EGP Fund No. 1	1.00000	1.08396	0.98604	(-9.03%)	(-1.4%)
S&PASX200TR	35632.05	34200.68	30239.41	(-11.58%)	(-15.13%)
EGP 20	1000.00	883.67	752.82	(-14.81%)	(-24.72%)

EGP Fund No. 1 Pty Ltd. Down by 9.03%, leading the benchmark by 2.55% since July 1^st. Since inception, EGP Fund No. 1 Pty Ltd is Down by 1.4%, leading the benchmark by 13.73% all-time (April 1^st 2011).

EGP 20.  The EGP20 index is Down by 14.81%, lagging the benchmark by 3.23% since July 1^st.  Since inception the EGP20 is Down by 24.72%, lagging the benchmark by 9.59% all-time (since April 1^st 2011).

S&PASX200TR  The benchmark index is Down by 11.58% since July 1^st. The benchmark is Down 15.13% all-time (since April 1^st 2011).

Full website: www.eternalgrowthpartners.com