Weekend Reads for Global Investors: Is Glencore the Next Lehman Brothers?
If you did not know what Glencore was all about, chances are that you’ve found out by now.
Glencore, a large commodities trading and mining company, made headlines all around the world this week as its stock price tanked. Some analysts went so far as to call it the next Lehman Brothers.
As it turns out, there is much that we can learn about investing from the Glencore story. I think the most important takeaway for investors is probably that macro matters. For too long, too many otherwise intelligent portfolio managers have claimed to be completely “bottom-up” investors, i.e., they would only study the financials and strategic positions of specific companies. Although this is probably feasible for small-cap investors, I’ve always wondered why these managers, particularly those who invest in large-cap companies, would not at least spend some time thinking about what macroeconomic developments could do to the companies on their radar screens.
Glencore turns out to be a car wreck that portfolio managers with an eye on macro could have seen from a mile away. We have been writing in this column about the slowdown in China’s economic growth and how it affected commodity prices as well as the currencies of countries that rely on commodities exports, Australia and Canada among them. Applying that macro picture to the stock markets, the weakness in commodities traders and mining and shipping companies witnessed this week becomes fairly straightforward and easy to understand.
Another lesson for less sophisticated investors is that increasing leverage has its risks. The Modigliani-Miller Theorem states that in an ideal world whether a firm gets financing through debt or equity makes no difference. Since debt has a much lower cost compared to equities, naive investors tend to think using debt is a shortcut to higher profitability. Glencore has once again proven that leverage is not risk-free. Its precarious debt position, coupled with the unfavorable macro development, is what got Glencore into trouble in the first place. Instead of taking home a little less profit, the equity investors’ risky bet now could potentially wipe out all their investments.
The Glencore case also showcases why value investing is a tough discipline to master. Cyclical companies are a favorite of traditional value investors. As many value investors have pointed out though, value investing requires considerable patience. They know that they are often early. And when they are, they’ll have to spend months and years afterwards wondering if they made the right call. And that, no doubt, is what many investors in Glencore and other commodities-related companies are going through right now.
Below are the links to the Glencore story and some of the other readings that I have come across this week. Enjoy the weekend and happy reading!
- “Glencore Shares Plunge as Debt Fears Rattle Investors” (Wall Street Journal)
- “Glencore Could Be the Resource Sector’s Lehman Brothers” (Australian Broadcasting Corporation)
- “Forget Glencore: This Is The Real ‘Systemic Risk’ among the Commodity Traders” (Zero Hedge)
- “Cyclical: Investing Essentials” (Motley Fool)
- “How Congress Helped Save Goldman Sachs From Itself.” Of course it’s a risky business. There is no free lunch in this line of work. The key is whether you understand and can efficiently manage the risk. As history shows, too often the answer is no. (Bloomberg)
- “Icahn Sees ‘Danger Ahead’ over Zero Rates, Junk Bonds.” He has also endorsed Donald Trump for president. (MarketWatch)
- “Has the World Reached Its Credit Limit?” (Benzinga)
- “One Stock Market Sets the Tone for the Rest of the World.” And I bet you know which one. (Business Insider)
- “Why Did Markets Drop after the FOMC Meeting?” Speculation and more speculation. What makes this article different is that it is penned by a US Federal Reserve staffer. (Federal Reserve Bank of St. Louis)
- “The Fed, NOT China, Is at Fault for Market Volatility” (Asia Times)
- We are not advocates of market timing. It may be helpful from time to time, though, to take the pulse of the market and see where other market participants stand. “Strategist: Don’t Touch Emerging Markets Just Yet” (CNBC)
- A research outlet from Down Under is getting more confident in the global economic outlook. “Global Recession Fears ‘Too Gloomy,’ Says Lombard Street Research” (Sydney Morning Herald)
- Apparently a boost to the Indian stock market: “Rajan Surprises Again With Bigger-Than-Forecast India Rate Cut” (Bloomberg)
The Soft Side of Business
- Appreciating cultural differences requires considerable empathy, among other leadership traits. “How Meetings Differ, from Stockholm to New Delhi” (Harvard Business Review)
- As this will inevitably happen to most everyone somewhere along the career path, it always pays to be prepared. “What to Do When Your Personal Growth Stalls” (Harvard Business Review)
- Although I am getting tired of reading similarly titled articles, this one makes a lot of sense. “5 Traits of Successful Leaders” (Entrepreneur)
And Now for Some Readings Truly for the Weekend . . .
- My favorite casual-reading magazine wrote about my favorite financial newspaper. “The Financial Times and the Future of Journalism” (New Yorker)
- “How Your Brain Is Wired Reveals the Real You” (Scientific American)
- You thought you’d only see this in sci-fi movies: “Hitachi Says It Can Predict Crimes Before They Happen” (Fast Company)
- Meditation and yoga have been pure magic in the healing of an NFL player. “How Yoga Is Saving the Bodies and Minds of NFL Players” (Men’s Journal)
- “Research Finds That Bilingual People Are Smarter, More Creative, and Empathetic.” Gloating about it would make one sound less empathetic, right? (Lifehack)
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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.
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