American bankruptcies pay an average of 40c on a dollar. On the other hand, Japanese bankruptcies tend to have to have much terrible outcomes, and the average payout is close to 13c on a dollar. Perhaps one reason is that if you’re a big company in Japan, you’re more likely that the American counterparts to get the loans that you asked for from the Japanese banks, likely keeping the zombie alive for longer as it rots.
To me, “cash on the sidelines” has meant the cash held by the corporates on the their balance sheet, and the tlka has been that when this gets released as spending, it will provide a kick to the GDP. Another set of “cash on the sideline” that has been sitting and patiently waiting is the $300B private equity “dry powder” which includes $150B raised by the vintage 2007-08 buyout funds, and need to be spent in the next couple of years before the LP commitments come due. Plus there’s about $750B debt financing sitting out there given that banks are sitting on mountains of unused reserves and simply collecting IOER from the Fed. My guess is that this $1T of dry powder, plus $1.7T of cash held by the non-financial corps should ignite some buyouts in the next couple of years and will undoubtedly fuel a market rally before it all blows up again.
I was reading BRK’s latest annual report (just the Chairman section), and this is what Buffett had to say about insurance industry in the coming years – “A further unpleasant reality adds to the industry’s dim prospects: Insurance earnings are now benefiting from “legacy” bond portfolios that deliver much higher yields than will be available when funds are reinvested during the next few years – and perhaps for many years beyond that. Today’s bond portfolios are, in effect, wasting assets. Earnings of insurers will be hurt in a significant way as bonds mature and are rolled over.”. The amazing thing about this is one does not need to predict anything; this is bound to happen. This is something akin to demographics, you can easily predict the population characteristics a few years hence, discounting severe wars, natural disasters or re-drawing of boundaries.
I was reading an old GMO article, and this line leapt off the page, especially given that we are near the days when Dow will soon touch the all-time high. “be aware that the market does not turn when it sees light at the end of the tunnel. It turns when all looks black, but just a subtle shade less black than the day before.” This is akin to the message that Buffett has who has said that times will always be uncertain and an investor cannot wait for more clarity before investing because the opportunity will likely be gone by then.
As I was reading remarks by Martin Sorrell, WPP’s CEO, on WPP’s 4Q12 earnings call, I found this bit pretty interesting–government spending on advertising has actually gone up through this global recession / drag-along growth, as governments are being to forced to spend money to get their voice out to the electorate in these politically volatile times. It’s definitely an area where the corporates have cut back significantly since the boom period, and probably one the rare areas in these “austerity-everywhere” (ex-JP, I guess) times where government spend has increased while private spend has backed off (we will obviously discount the automatic balancers).
Another interesting bit that he highlighted was the fact that according to eMarketer, consumers spend 7% of their media time on print, but print constitutes 22% of advertising budgets, while mobile constitutes only 1% of advertising spend, despite 10% of the media time spent by consumers on mobile. TV (43% of time spent) and radio (15% of time spent) were roughly matched. The theory goes, as does Sir Sorrell assert, that mobile ad spend has to go up, and print budget share has to go down. I don’t think it’ll be quite as simple. I fully agree that print will lose share and many publishers will get their ass handed to them (as it has already happened to a large extent), and the better publishing houses will put up online pay walls and/or hike up prices of their print editions and people will eventually pay for premium / local / niche content. The me-toos will be wiped out, and some horrible (in terms of content) such as People and US will survive, but I envision a future where the second-tier newspapers/magazines will have almost no choice but to go under. Users will pay more and advertising will go down. Warren Buffett says something not very different in this year’s annual report. BUT, I don’t think more advertising on mobile is quite as simple as is often thought. The way I think of it–when users are using mobile (unless listening to online radio or watching video), they are actively consuming (reading email, viewing mobile optimized websites / apps where there’s little precious real-estate for ads. Newspaper and magazines allow for passive consumption (one is reading a column with an ad laid out on the left leaf, e.g.) Can we envision such an experience on mobile? I doubt it. People will simply not use the service and use something that is uncluttered and doesn’t hinder the user for experiencing the content. TV and radio, are for obvious reasons, mostly passively consumed, and there’s ample opportunity for ads, and aren’t comparable to mobile at all (unless, as I said, you’re watching TV or listening to radio on the mobile device, and those opportunities seem to be exploited already–e.g. ads on Pandora, or on Hulu, say). I think advertising on mobile will never be as big as people think, as people will either reject the app/website that is intrusive or will pay a notional amount to the content creator to relieve themselves of the burden of being interrupted. Location-based advertising will be the most lucrative subset, but even those $s are more likely to be collected by information portals such as Yelp and Google, and not traditional advertising. I see little money here for the advertising companies. But, perhaps, that’s why I am not Sir Martin Sorrell, and instead writing this in my $10 pajamas and not looking for where I may have misplaced keys to the underground parking at Harrod’s.
Prasad Capital 