Specious Argument

I finished reading Benazir Bhutto's Reconciliation: Islam, Democracy, and the West a while ago. Although I thoroughly enjoyed her book, I do not think I learned as much as possible because of my poor background in history and religion.

I was initially attracted to Reconciliation for two reasons. First, I wanted to learn about Pakistan and Islam. Pakistan and Islam are playing important roles in international affairs, especially as NATO countries are involved in neighboring Afghanistan. And second, I was intrigued and inspired by a person who believed so passionately in her causes and beliefs that she should would risk—and succumb to—an assassination.

The challenge I had in reading her book is that my understanding of history and religion is weak. Throughout much of the book, Bhutto discusses history and religion and their affects upon Pakistan. I realize that every political figure uses all media sources to promote a message. As a reader, you should have sufficient background to be able to judge the reasonableness of that message. Unfortunately, my depth of knowledge did not afford that opportunity. As a consequence, I took everything she wrote at face value, realizing that there are those who would disagree with her.

Aside from the historical and religious references, I found two important themes that resonated with me: knowledge and information as well as hope.

On page 295:

Targeted economic development can help reduce poverty and violence in Muslim-majority states. Alleviating poverty is a fundamental responsibility of all Muslims, wherever they live, as part of the basic principles of Islam. It would be far more Islamic in its true sense to declare a jihad on poverty, illiteracy, hunger, and poor governance. That is exactly what I am proposing.

Islam's first generations produced knowledge and wealth that empowered the Muslim empires to rule much of the world. But now almost half the world's Muslims are illiterate. The combined GDP of the member states of the Organization of the Islamic Conference (OIC) is about the same size as that of France, a single European country. More books are translated annually from other languages into Spanish than have been translated into Arabic over the past one hundred years. The 15 million citizens of Greece buy more books annually than do all Arabs put together.

The World Bank comparison of average incomes demonstrates a disquieting pattern. In the United States, the average per capita income is almost $36,000; in Israel it is almost $20,000. Pakistan, on the other hand, has an annual per capita income that barely crosses the $2,000 mark. No Muslim nation that is a non–oil producer has an annual per capita income near or above the world average. I find this pattern, these statistics, unacceptable.

On page 271:

Technology and communication have changed our world and are influencing a global culture. The more one knows of people, the more comfortable one is with them. I believe that, even if Professor Huntington doesn’t. Chatting on the Internet with strangers all over the world builds relationships and friendships and understanding. The ability to “Google” information from anywhere in the world puts technology into the hands of even the most isolated rural communities in the developing world. The more people learn, the more they want to learn. The more they interact, the less likely they will be to fear the unknown. Just as democracy and educational exchange promote peace, the free flow of modern technology and communication promote peace.

Everything we learn about sustained trade between nations tells us that it promotes understanding between cultures and civilizations. Globalization may be the most fundamental element of conflict resolution that has developed. The more nations trade with one another, the more they have to lose by engaging in conflict with one another. And we know that as individuals are exposed to more options in consumerism, in products they can purchase and use and share, the more they want options in other elements of their life.

On page 264:

Contrary to the pontifications of many who are unashamedly contemptuous of Muslims around the world, democracy and Islam are congruent. The basic tenets of democratic governance are specifically and directly cited in Muslim teachings and are basic to religion of Islam. As I have discussed, history shows that democracies do not make war against other democracies. And democracies are not state sponsors of terrorism. Therefore, I conclude (and challenge others to give any evidence to the contrary) that if democracies can be nurtured and sustained in the Islamic world, the possibility of conflict between Islamic democratic states and Western democratic states, and the possibility of democratic state-sponsored terrorism by democratic Islamic states against Western targets, would be all but eliminated.

Given her strong determination and sense of purpose and passion, I am terribly saddened by the loss of Benazir Bhutto. I believe that she had much to offer the world, and especially Pakistan. I hope that her book continues to shed light and optimism and that we—all of us—learn more about one another so that further bloodshed can be one day eliminated.

I highly recommend Reconciliation: Islam, Democracy, and the West. As an aside, often when I am going to meetings, I bring along a book. While waiting for others to arrive, I read a chapter or two. When I brought this book along with me, complete strangers would often stop me and provide their thoughts and opinions on Benazir Bhutto or Pakistan or both. Her book is certainly a conversation starter. I know that if you read her book, you will be much better and wiser for the experience.

My photograph of the Lake Louise in Banff National Park is hosted at Flickr. This picture was taken on 8 November 2008, an usually warm November day with the temperature near the freezing mark. If you click on the picture, you will be taken to my Flickr account where you can see more pictures.

Blue Nile, Inc. (NILE) held its third quarter 2008 conference call last week. I listened to the call and read the transcript at Seeking Alpha. We could dig into the facts and figures, but the reality is, I do not think the highly granular information matters right now.

The psyche of the consumer has been badly damaged, with October posting the lowest consumer confidence level on record. While our third quarter sales declined by 2.9% overall, published reports indicate that total Internet jewelry sales declined 11% year on year in the quarter. At Blue Nile we have seen our sales weaken in the past seven weeks, following the unprecedented events in the financial markets beginning in mid-September.

For the month of October, our sales were down 20% year on year. Given the events that have taken place in the global financial markets, consumers are understandably reluctant to spend. As the financial crisis has spread from the U.S. to other parts of the world, sales growth in our international business has slowed. Our international sales grew 53% year on year in the third quarter. Strong relative growth but down from our 179% growth rate last quarter.

The deteriorating global economy, coupled with the strengthening of the U.S. dollar, caused our international results to be more muted than those delivered in the first half of the year. With the buying power of currencies in our international markets declining roughly 20% versus the dollar, in combination with diamond prices increasing 20% year-over-year in dollar terms, consumers outside the U.S. saw extremely sharp increases in jewelry prices in Q3.

In addition, it’s important to note that the third quarter was the first full quarter in which we had anniversaried the May, 2007 introduction of our local currency websites for Canada and the UK. While we are experiencing some short term headwinds in our international business caused by global economic conditions and currency changes, we continue to be very enthusiastic about the future opportunity for our international business given the exceptional consumer value proposition that we offer.

Looking ahead, the economic climate remains extremely difficult. We are approaching the upcoming holiday season very cautiously. We will be sharp on price and value and will use this as an opportunity to enhance our competitive position. Current sales trends are very unclear. We don’t have a good picture as to how sales levels for the remainder of the quarter will compare to sales levels in the month of October.

While we would prefer to provide Q4 guidance, we have very little clarity as to how the economic environment will impact consumer spending patterns for the holiday season. For these reasons, we have decided that the prudent course is to not provide financial guidance for Q4.

What more do you need to know?

My view is quite simple. First, company met its guidance and enjoyed free cash flow, both of which are positive. Second, the company's model scales extremely well. That is, when times are difficult, it does not have brick and mortar stores and other high fixed costs to support. When times are great, it can expand rapidly. Third, much of their competition is getting their brains bashed out during this difficult economic climate. Fourth, economic times are extremely challenging and, as a consequence, Blue Nile is unable to provide guidance for the fourth quarter. And fifth, uncertainty and nervousness are extremely high.

So where does this information leave us in terms of share valuation?

Any analyst that ascribes a specific value for the proper share price is nuts. Given that the company is unable to provide guidance and that uncertainty and nervous are rampant, precise share valuation is meaningless. My intuitive guess is that is the low 20s is likely a buying opportunity and the high 20s is a selling opportunity. That is, buy the dips and sell the rips. I expect the stock market to remain volatile as we feel our way through this current mess. At times, buyers will feel confident and push share prices up. That is your opportunity to lighten up. And at other times, buyers will feel pessimistic and allow share prices to fall. That is your opportunity to purchase. If you like the overall business model, you can just sit back and enjoy the share price movement. When the economy shows signs of stabilizing (notice I did not say improvement, though that would be even better) and the share price is in upper 30s or higher, then you can buy.

A natural question is, if the stock is going to rise eventually, why not buy now? Many people will not be able to stomach the volatility that we might encounter. If we hit a particularly rough patch, the price might even dip into the teens. For most people, the anxiety would be too great.

There are many beaten down stocks that will rebound sharply once the economy shows signs of stabilizing or improving. Look for companies with low debt and an ability to weather the economic storm. Keep track of these companies and when the economy begins to turn, you can seize your opportunity. In the meantime, keep your powder dry and wait.

Disclosure: I am long Blue Nile stock.

My photograph of downtown Jasper is hosted at Flickr. If you click on the picture, you will be taken to my Flickr account where you can see more pictures.

Today is Remembrance Day (or Veterans Day in the United States) where we celebrate our freedom. The red poppies are to commemorate the sacrifices of those who served in the First World War. A Wikipedia article provides more background.

This past weekend while driving to Lake Louise, I came across this statue of a Ukrainian internee at a Ukrainian internment camp near Castle Mountain in Banff National Park.

During Canada's first national internment operations in World War One, thousands of immigrants from the Austro-Hungarian Empire, the majority of Ukrainian origin, some citizens of Canada, were imprisoned as "enemy aliens". Internment operations lasted from 1914 to 1920. This plaque is in memory of those held as Castle Mountain camp from 14 July 1915 to 15 July 1917.

Why?

Ukrainian internee at Castle Mountain

by John Boxtel

For those wanting to know more about Ukrainian Canadian Internment camps, you can read this Wikipedia article and another specific article on Castle Mountain Internment Camp.

My photograph of a Ukrainian internee statue located at the Ukrainian Canadian Internment Camp near Castle Mountain in Banff National Park is hosted at Flickr. If you click on the picture, you will be taken to my Flickr account where you can see more pictures.

The Wall Street Journal article GM's Shares Tumble on Rising Cash Concerns (subscription required) is one of several in the financial press that is discusses the likely demise of a once great and proud company General Motors Corporation (GM).

General Motors Corp. stock fell to its lowest level since 1946 as concern intensified that the auto maker could run out of cash and be forced to file for bankruptcy protection.

The stock's decline came as several analysts issued dire reports about GM and the company acknowledged in a government filing it could be at risk of violating the terms of some of its debt if it doesn't steady its deteriorating finances by year's end.

A violation of the debt covenants, GM said in the filing late Friday, would give lenders the right to demand repayment of $6 billion, a sum that potentially could cripple the car maker's ability to stay in business.

I shorted GM at nearly $40 per share back on 17 January 2003, nearly six years ago. I wish I were able to say that I saw all this coming. The reality is far different. Back in January 2003, West Texas Intermediate (WTI) oil price was a whopping $33.88 (see Energy Information Administration spreadsheet on historical WTI prices). I thought that if oil prices rose in the future, GM would be in difficulty. However, I never foresaw prices going beyond $100 per barrel. Had I been asked in 2003 the maximum price that western economies could tolerate, my guess would have been $60 per barrel.

In reviewing the GM share price chart (courtesy of Yahoo!), you will note that for much of the time I was under water.

Click through on the above chart to reveal a larger version.

Later, I was doing well until Kirk Kerkorian and Jerry York of Tracinda Corp. came along in around 2006. Their involvement created excitement and buzz in GM. Rick Wagoner, GM's chairman and chief executive, successfully fought off Kerkorian and then ran his own show. Oil prices went into the stratosphere and the housing bubble collapsed. And here we are now—the stock closed down today nearly 25 percent to $3.36. Should GM file bankruptcy shortly, it will be a rather sad dénouement.

Various pundits are out in force telling all those that will listen how poorly managed the big three auto companies are. I disagree. While I believe GM should not have relied so heavily on its large vehicles—that was my initial premise for shorting GM—very few people foresaw this eventuality where oil prices would remain stubbornly high and we would endure an unprecedented financial crisis around the world. In reality, I think Wagoner has done a remarkable job.

Should governments bailout GM? In all honesty, I do not know. If GM is allowed to fail, what are the repercussions? How far does it spread in terms of employment and loss of business activity? How far do GM bonds reach, and what are implications of default?

If the governments pump money into GM, how much money is required and what is the direct purpose? By purpose, what will the money be used for? Will the initial injection be enough? Can any amount of money make the company a strong viable competitor again? Will other national governments pump money into their car companies too, further increasing competition?

If GM is allowed to fail, then shortly thereafter I believe it would be reconstituted in a much different form. Existing union contracts would, of course, be history. Existing pension and health care benefits would be gone. The number of models would be greatly reduced. Many more white collar jobs would be gone, and much of management would be replaced. And with that, GM would begin anew. That is not to say that it would be successful, but rather, it would undergo massive changes before it began producing cars again.

My initial short position was small as a percentage of my portfolio. Of course, that percentage is much smaller now. I am content to watch this scenario play out. My guess is that the governments will assist GM and that GM common stock goes to zero or nearly zero.

Disclosure: Short GM stock.

My photograph of Jasper National Park is hosted at Flickr. If you click on the picture, you will be taken to my Flickr account where you can see more pictures.

James DiGiorgio recently highlighted a new and interesting blog StudioMarcotte.com by Bob Marcotte, a photographer in Fresno, California. With his latest article When Your Best Is Not Good Enough (Part 1), Bob has turned me into a loyal reader. Go and read his article, and I am sure you will become a loyal reader too.

Regardless of our methods and techniques, we’re all striving to create a soul in our images. So it would seem to be an easy task to shoot a town filled with souls. It would seem…

California is filled with millions of souls and personalities. Most of the world only hears about the fruits, flakes and nuts that make up the Granola State. I would like all of you to know that there are heroes who live here, too. They don’t get headlines. In fact, I couldn’t get these pictures or this story published by the one major newspaper or the two local magazines in Fresno. Anti-heroes get press, the story of these volunteers wasn’t considered news.

The souls I refer to are the pilots, doctors, nurses, translators and volunteers of an organization called the Flying Doctors of Mercy. I was fortunate to fly with the Fresno chapter. The short version of their story is that the first weekend of almost every month, private pilots fly their own planes filled with volunteers and supplies to impoverished towns in Mexico. Planes fly from San Diego, Los Angeles, Fresno and other cities to adopted towns deep inside Mexico … far from prosperity and medical expertise.

Just wait to you see his picture that accompany the beginning of his article. They drip with soul. I especially love the photograph of the husband and father with his child and wife.

My photograph of Jasper National Park is hosted at Flickr. If you click on the picture, you will be taken to my Flickr account where you can see more pictures.