Five things I learned this week: Dec 2nd 2012

I was watching a documentary about corn when I learned that corn has 32,000 genes compared to 20,000 for humans, which is what makes it easy for modifying its genetic material and breeding super corns that have incredible yields and resistance to various diseases–essentially most of the corn that is planted today. This abundance of genetic material also allows it to survive in different types of weather. Since I think about investing all the time, I was thinking how most money managers  are successful in only one type of investing environment, and plod along, or worse, fail when the environment where they built the expertise doesn’t exits anymore. Few rare investors have those “extra genes” in their investment firm’s build-up that allows them to make money in multiple kinds of investing environment. This  is a very very hard skill to acquire (assuming that it even can be done). In the movie, a corn expert said that it plants in general have more genes than animals because animals can move around in response to changing weather but plants can’t so they need to have the genetic material to be able to respond to the changing environment. Something new investors like me can try to learn from plants. Human genome size is 3.5 picograms and gymnosperms (see-producing plants) and angiosperms (flowering plants) have a mean of 12.5 and 6.5 pg. So much for the theory how humans are the most evolves species on the planet, along with the bigger-is-better mantra. In fact, all lungfishes and salamanders have bigger genome size than all mammals. I don’t know if bigger is necessarily better but I do think nature is phenomenally efficient and isn’t packing all this information in these species for nothing. Perhaps they’ll outlive our species and can survive much harsher climates. Check out http://www.genomesize.com/statistics.php?stats=entire#stats_top to see how mammals stack up against other groups in terms of genome size. Pretty damn fascinating, esp. given that an amoeba (what I always think of as a simple organism) has a the biggest genome. I guess it takes a lot of knowledge to survive the world as a single-cell shape-shifter.

Historically, gross capital formation as a % of GDP has followed the profit margin of corporates–essentially, companies go in investment mode once they build up cash. This hasn’t happened in this cycle. Capital formation is stuck near 15% of GDP, as compared to 20% of GDP which is the norm when profit margin are near historic highs of about 8%. Capital formation has been dropping throughout 2008-12, as U.S. goes through throes of de-leveraging, fiscal uncertainty and lack of the a sustainable driver of consumer demand (who make up for 70% of the GDP). Rate of growth of hourly wage has been declining steadily, and savings rate is falling again, as corporates and govt. bodies cut costs by nipping the paychecks they hand out, when they’re not cutting them altogether. This makes for great margins, as corporates have shown over the last three years, but slowly snuffs out the long-term consumer demand that’s supposed to drive the GDP forward, which is a disincentive for capital formation, which slows long-term growth of the economy. If you just imagined a snake eating its own tail, I understand.

Last night was pretty exciting. I was reading an article about peak oil, which lead to peak everything, then one thing led to another, and I learned than Aluminum is about 4% of the entire earth’s crust (8% is Bauxite, which in turn contains ~50% alumina). That makes it a pretty damn available metal and according to some estimates it will last for us humans for a few centuries (and it’s pretty recyclable)–not something that can be said about Copper, which at the current rate, we will exhaust in a few decades, maybe three. An estimate by New Scientist says about 33 years from now (see http://www.science.org.au/nova/newscientist/ns_diagrams/027ns_005image2.jpg) Now, that’s not an investable idea by itself because capitalism’s language is price, which in turn is dictated by demand and supply, and we can continue to deplete the maxed out capacity mines in Chile and the U.S. to sate our demand for the next decade or so. What would be investable would be a technology firm that can perhaps develop an alloy of aluminum that would bring its conductivity close to that of copper’s (Al’s conductivity is about 60% of Cu). In addition, my guess is that aluminium’s price will fall in the long-term as cost of electricity drops; energy is about 35% of aluminum’s cost, solar module prices keep falling, solar cell efficiency keeps rising, and Australia’s solar irradiation map is pretty good.  In the short-run, labor disputes and ecological disasters in South America with sadly dictate how you bet on copper, assuming no sudden moves in Chinese demand, which drove the metal to its highs in the past few years.

I read that 1 out of 10 jobs in France are related to the auto industry. That’s a massive percentage for a developed country not exactly known for its manufacturing of global engineering goods. In the United States, once you run some quick numbers, about 2.5% of jobs are tied to the auto industry. Given that Obama administration’s steps to deal with the auto-crisis in 2009 probably delivered him the election, it is easy to imagine how much more political the industry would be in France. In that light, it is easy to see why France guaranteed 7m Euro loan for PSA Peugoet Citroen, a struggling carmaker that’s bleeding 200m Euros of cash per month.

Continuing on the topic that I have been noting for the past few weeks, CLO issuance this year has touched $45B, more than the last four years combined. Yield-fetish is in full gear. Distressed debt has also been the most successful strategy this year. One could expect a sell-off once the HFs bake their distressed debt profits in black ink post-Dec.

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