Dec

26

GaveKal, by Edward Humbert

December 26, 2006 |

This week’s Barron’s plugged GaveKal’s idea of the “platform company”. This is a polite illustration of Bacon’s concept of the public’s being always behind the form, as pointed out by Victor and Laurel. GaveKal has been on this theme for at least three years. I’ve been a subscriber to their services since the late 1990s. GaveKal is smart. I’m talking super smart. They are a small team of French, English and Americans based in Hong Kong and I have met the team a few times. It amazes me how their output is consistently informative, rational and timely. They beat the pants off the big guns on the Street like Steve Roach et al.. It shows how a small team of highly motivated individuals can outperform their much better capitalized peers. There is a lesson in that for all of us. By the way, I highly recommend their book Our Brave New World. The tome is a cage match between market memes and logical quantitative thought. I am in no way associated with the authors, other than being a regular subscriber to their services and do not in any way benefit from increased sales of their book, etc.

Gabriel Ivan replies:

There is no doubt in my mind that Charles Gave is “super smart” but his Barron’s interview is riddled with half-truths, smoke and mirrors, which shows crystal clear he’s got an agenda. Just a few remarks were:

Reading his comments on the “platform companies” I experienced a NASDAQ 2000 deja-vu all over again. Back then, the smart folks that run Legg Mason today, also had a pretty compelling argument on how dotcoms can generate cash flow indefinitely through working capital and low Capex layouts. The “new economy” model, and we know how that story ends. Furthermore, he presents the valid r&d expenses argument, but conveniently forgets to adjust the Motorola capital to cash flow example accordingly.

In the current-account deficit argument he starts by anchoring the reader in the 7% of GDP as being a banana republic level, but then he switches immediately to the net worth comparison where the 1.5% looks better. This jumping around between income statement and balance sheet would make any Shenanigan CFO blush.

Including the volatile stock and bond holdings in the U.S. net worth calculations, (although a favorite shill of the Fed. Reserve), is not comforting if the trade policy is based on it.

He claims most of the U.S. consumption goes towards healthcare and education like it’s a positive thing per se, with no regards to the return on that capital spent. The quality of healthcare and education (esp. undergrad) per $ spent might have been a better read.

The nail in the coffin is the play-down of the real estate problem. It is the true mark of poor salesmen — lying about the obvious. The growth in real estate prices, in other countries says nothing about their affordability, own to rent analysis, etc., nor do the interest rate increases have an effect, when such increases have much lower impact due to central banks’ lower reach onto business cycles, the absence of mortgage markets, etc..

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