Mapping the Internet

Human ingenuity never ceases to amaze me. This time it was a hacker who developed a methodology to answer the question, “How big is the Internet?”

The results were spectacular – so too was a collateral discovery:

The anonymous person simply wanted to find out how many devices that were online could be opened with the standard password "root," he writes in a kind of research report on the project, entitled "Internet Census 2012." The result was the discovery that there are hundreds of thousands of devices secured only with the most common standard password, or without any password at all.

One of the largest groups of devices he found were routers, an issue we recommend that readers address immediately. Routers received by Internet providers are likely to have one of a few standard administrator passwords, including "root" or "admin." 

Click on the following link to see how usage of the Internet changes over a 24 hour period.  It's also well worth clicking on the internal link to savour a beautifully written account of the methodology behind the investigation. 

http://www.spiegel.de/international/world/hacker-measures-the-internet-illegally-with-carna-botnet-a-890413.html

Fundamental Change Underway in North America - The New Engines of Growth

Five years ago, I started to subscribe to regional newspapers in Texas and along the eastern front of the Rocky Mountains. Why? I was amazed by some of the things I saw when on a long cross-continent cycling trip about 14 years ago and decided to learn more. Two things struck me at the time:

• the confidence and sophistication of cities such as Lincoln Nebraska and Boise Idaho
• a remark made by a road foreman who kindly offered to take me through a rather dangerous stretch of road construction in her pick-up truck. She said that in Wyoming a woman was accepted as an equal if she proved she could do the work.

In recent months, I started to explore the growth story of the interior of the U.S. in more detail – this time from the perspective of a geographer. Here's the short version:

Much of the discussion about American economic recovery and growth in 2012 focused on the usual suspects: regions on the Pacific and Atlantic coasts and on the shores of the Great Lakes. But the best recent economic record, as well as the best prospects for future prosperity, are to be found elsewhere in the United States. We have identified four regions of the country that we call "growth corridors." What they lack in media attention they make up for in past performance and likely future success. Over the past decade-and, in some cases, far longer-these regions have created more jobs and gained more population than their counterparts along the ocean coasts or along the Great Lakes. The four growth corridors are: 1. The Great Plains region, made up of Montana, Wyoming, Colorado, New Mexico, Texas, Oklahoma, Kansas, Nebraska, and the Dakotas 2. The "Third Coast" stretch of counties whose shores abut the Gulf of Mexico and which range through Texas, Louisiana, Mississippi, and Florida 3. The "Intermountain West," consisting of counties in the north of New Mexico and Arizona, parts of eastern California and western regions of Montana, Wyoming, and Colorado, as well as the non-coastal eastern regions of Oregon and Washington and all of Idaho, Utah, and Nevada 4. The "Southeast Manufacturing Belt" of counties in eastern Arkansas, all of Tennessee, and large swaths of Kentucky, the Carolinas, Georgia, Alabama, Mississippi, and southwestern Virginia These regions have different histories and different trajectories into the future, but they share certain key drivers of economic growth: lower costs (particularly for housing); better business climates; and population growth. Some have benefited from the strong global market for commodities, particularly food, natural gas, and oil. Others are expanding because of a resurgence in manufacturing in the United States.

http://www.manhattan-institute.org/html/cr_75.htm#.USzP2lceHWC

Washington DC has also experienced significant growth but, like Ottawa Ontario, it's largely the product of the business of government. For example, lobbyists abound ... when in Washington last year, I heard that there are more lawyers than school children in that town! As an investor, I'm on the hunt for productive growth opportunities, so I'll give Washington a pass.

The Great Plains Corridor also extends into Canada. This perspective led me eventually to invest in Rocky Mountain Equipment.

Much of this development has occurred over the past 15 years or so. Why have these areas prospered in comparison with other parts of the continent?

• Outsourcing and foreign competition hollowed out many traditional manufacturing strongholds, especially in the northern tier of US states and eastern Canada.
• The business climate is perceived to be more favourable – a more welcoming attitude to growth/change, lower taxes etc. 

• The tailwind created by the boom in commodities: oil and gas (especially with the advent of new technologies such as fracking); potash; agricultural foodstuffs (with the exception of livestock) has generated considerable wealth, much of which has remained in local economies and stimulated new business formation. It has also channeled foreign investment into the regions and attracted new workers who are, perhaps, more motivated than their counterparts in declining regions and willing to take on more risk.
• Housing and the cost of living relative to wages is more affordable than in many other dynamic areas of the US. Here there is a lively debate between some geographers and Richard Florida, a noted proponent of the view that knowledge workers are attracted to the amenities and lifestyle of highly urban areas, many of them along the eastern and western coasts (which generally are not performing as robustly).

I recommend highly that you read the following report, America's Growth Corridors – America's Key to Survival, by Joel Kotkin. He is a geographer with much to say ... and what he says is backed up by facts. http://www.manhattan-institute.org/html/cr_75.htm#.USzP2lceHWC

The graphics shown above were extracted from this report. 

In a subsequent posts, I will investigate how this growth is taking place and potential themes to explore by way of strategic investments in this fundamental geographical restructuring of North America's economy.   

Canada's First Nations – Pipelines and Resource Development

Few Canadians and even fewer international investors have any appreciation of the fact that treaty rights of First Nations are enshrined in Canada's Constitution Act of 1982, section 35.

35. (1) The existing aboriginal and treaty rights of the aboriginal peoples of Canada are hereby recognized and affirmed. (2) In this Act, "Aboriginal Peoples of Canada" includes the Indian, Inuit and Métis peoples of Canada. (3) For greater certainty, in subsection (1) "treaty rights" includes rights that now exist by way of land claims agreements or may be so acquired. (4) Notwithstanding any other provision of this Act, the aboriginal and treaty rights referred to in subsection (1) are guaranteed equally to male and female persons.

The Supreme Court of Canada has reaffirmed these provisions. In various decisions since 1982, the Court has noted that the Crown has both a moral and legal obligation to uphold treaty rights. Further, it has reaffirmed the term “existing aboriginal and treaty rights” by noting they are extant in areas not covered by existing treaties viz most of British Columbia. Further, it has stated that the “honour of the Crown” obligates governments to consult with First Nations in matters of land use whether it takes place in non-treaty areas or in treaty areas outside of reserves.

http://en.wikipedia.org/wiki/Section_Thirty-five_of_the_Constitution_Act,_1982

A more detailed treatise on the evolution of the relationship between the Crown and First Nations is presented here:

http://www.thecanadianencyclopedia.com/articles/indian-treaties

It is a very dynamic area of law and opinion varies greatly within and outside First Nations. 

A trans-mountain pipeline to move bitumen to Canada's west coast will not happen any time soon. In a very real sense, I can sympathize with the misgivings of First Nations – the people with the most to lose if an environmental catastrophe takes place either through a rupture of pipelines and storage facilities or leakage from tankers. Further, BC has a record of major earthquakes and many seismologists feel that the next “big one” is due reasonably soon on the basis of geological evidence.

The implications are horrendous. While the damage to infrastructure from initial shockwaves can be very significant, the follow-on impacts are even more devastating:

Low-lying land masses are at highest risk for extensive flooding in the event of a tsunami. Damage to coastal British Columbia would be great. A final concerning consequence of a major earthquake is that of landslides. Although surface soil is mainly made of compact layers of silt or clay, the less compact layer below is composed of sand and highly susceptible to liquefaction. Sandy soils that are water-saturated can behave more like a liquid than a solid during an earthquake (7). Movement of the more solid surface layer over liquefied sand can destabilize building foundations and damage bridges, roads, and pipelines.

http://www.scq.ubc.ca/the-big-one-understanding-why-the-big-earthquake-is-predicted-for-vancouver/

In the debate about the future of the pipeline(s), First Nations may well be the only interests who will be effective in forcing governments to address the environmental and cultural implications of pipelines. Speaking personally, I have far more respect for the right of First Nations to question the pipelines than I do for many environmentalist groups, a few of which will be easy for governments to dismiss in the court of public opinion due to their unbending ideological opposition to fossil fuel based energy. As one who has invested significantly in oil sands companies, I am inclined to respect the right of First Nations to have a major say in determining the future of the pipelines. And if the final decision inconveniences me as an investor, I am more than willing to accept it as there are more important considerations at play than my personal financial interests.

“Only in Canada” you say? I say, “Thank God for that.”  It is to be celebrated. 

As the Report of the Royal Commission on Aboriginal Peoples 1996 states:

Canada is a test case for a grand notion - the notion that dissimilar peoples can share lands, resources, power and dreams while respecting and sustaining their differences. The story of Canada is the story of many such peoples, trying and failing and trying again, to live together in peace and harmony.

But there cannot be peace or harmony unless there is justice.

...Canadians need to understand that Aboriginal peoples are nations. That is, they are political and cultural groups with values and lifeways distinct from those of other Canadians. They lived as nations - highly centralized, loosely federated, or small and clan-based - for thousands of years before the arrival of Europeans. As nations, they forged trade and military alliances among themselves and with the new arrivals. To this day, Aboriginal people's sense of confidence and well-being as individuals remains tied to the strength of their nations. Only as members of restored nations can they reach their potential in the twenty-first century.

Let us be clear, however. To say that Aboriginal peoples are nations is not to say that they are nation-states seeking independence from Canada. They are collectivities with a long shared history, a right to govern themselves and, in general, a strong desire to do so in partnership with Canada.

http://www.aadnc-aandc.gc.ca/eng/1100100014597/1100100014637

Financial Kowtow Hanfeng Style

Hanfeng has run into a severe crisis in China, as its largest customer has refused to buy its fertilizer products unless the Toronto-based company goes private. The customer, a state-owned entity called Beidahuang Agriculture Company Ltd., is also interested in buying a stake in Hanfeng — but only after the firm is acquired by CEO Xinduo Yu. ...

Hanfeng used to sell its fertilizer products to a wide variety of Asian customers. But in the past couple of years, it has focused almost exclusively on Beidahuang, which accounted for more than 70% of the company’s sales in 2012.

The downside of this partnership became apparent late last year, when Beidahuang wasn’t buying. Sales in the quarter ended Dec. 31 were just $8.5-million, compared to $45.8-million in the same quarter a year ago. Hanfeng also recorded a massive $118.5-million writedown on its flagship Chinese operation. That writedown was worth more than the company’s entire market value today, which is roughly $106-million.

http://business.financialpost.com/2013/03/15/shareholders-of-chinese-fertilizer-firm-hanfeng-approve-ceos-takeover/

This is yet another example of the dangers of investing in Chinese companies listed on the TSX.  Corruption, political interference - these are staples of the business scene in China.  Small fry like Hanfeng are eaten for breakfast, although conspiracy theororists could have a potential field day in this instance.  As stated previously, I will never again invest in companies of this nature.  Check out the website of Hanfeng Evergreen - the bland corporate speak is akin to Hanfeng's competing product - organic fertilizer. 

http://www.hanfengevergreen.com/home.html

Meanwhile, the TMX and TSX continue to solicit listings of Chinese companies:

http://www.tmx.com/china/index_en.html

I took a brief look at the listings and noted that Cathay Forest Products was included.  Too bad that the following item was not annotated:

Since the board reconstitution, the new board has been working to properly understand the existing assets and liabilities of the Company and to develop and implement, to the extent possible, an orderly disposition of those assets in a manner that generates maximum possible value.  The new board's efforts in that regard have been challenged by a number of factors, including the lack of liquidity within the Company and its subsidiaries, the location of the Company's principal indirect assets in the People's Republic of China (the "PRC") and the Russian Federation, the ownership of certain of those indirect assets through joint-venture or other arrangements in which third parties have an interest, the staff turn-over that had previously occurred at the Company and its subsidiaries, the difficulties in accessing available corporate and other records, and the continuing need to manage various legacy issues, claims and liabilities arising from the business and affairs of the Company prior to the board reconstitution.

http://www.newswire.ca/en/story/1101295/cathay-forest-products-corp-update

These are not isolated incidents.  Chinese officialdom is getting concerned and the heavy hand of the state machinery is starting to focus on the issue:

The failures have damaged the country’s corporate reputation and prevented many Chinese companies from raising money from North American investors, at a time when China’s corporate and political leadership is trying to play a bigger role in global business and finance. This week, China’s official Xinhua newswire, a mouthpiece for the Communist Party government, praised a group of Chinese businessmen who have publicly attacked short-sellers like those who employed Mr. Huang. Xinhua connected the fight to China’s broader effort to be treated as an ordinary player on the global capital markets.

“Due to differences in political systems, economic structures and culture, foreign investors are prone to view Chinese companies with suspicion and prejudice,” Xinhua wrote. The newswire linked such “suspicions” to foreign governments blocking takeover bids by champion Chinese firms such as China National Offshore Oil Corp. (whose $15.1-billion (U.S.) bid for Calgary-based Nexen Inc. is currently being reviewed by Ottawa) and telecommunications giant Huawei Technologies Co. Ltd.

http://www.theglobeandmail.com/report-on-business/international-business/asian-pacific-business/in-china-silvercorp-critic-caught-in-campaign-by-police/article4528671/

My suspicion is that large multinationals have some chance of surviving in this environment due to their size and ability to cultivate political connections.  And if things do go south, market diversification will help to ease the pain.

China has a rapidly developing economy and it has made amazing strides in raising a large proportion of its population out of poverty within a very short period of time.  The widespread work ethic and respect for eduction will position the country well for the future.  

Financial malfeasance is not restricted to China.  Some of the biggest con jobs have occurred close to home. It is always useful to remember that financial shenanigans in the United States of the part of  the Robber Barrons, and more lately, the Wolves of Wall Street, are a feature of investing life.  It literally pays to be sceptical and to check out the credentials of company officers before succumbing to their blandishments. 

Financial Magazines - Look Elsewhere to Improve Your Knowledge

When I first started out, I subscribed to a variety of magazines with the thought that I could learn a lot by way of organizing my financial affairs.  With experience, however, I found it far more productive to read books.  In this regard, there's no better book than The Wealthy Barber by David Chilton.  It is now out of print but copies are readily available.  

The main attraction of this book is that it provides a robust framework - an extremely valuable tool as you can proceed in a purposeful way as opposed to a disorganized, peripatetic scramble.  Although it is outdated in parts, it is a simple matter to search the web to update recent developments in each of the areas he addresses.  All in all, a superlative book without equal.  More recent pretenders simply fail to reach the standard established by St. Chilton. 

My experience with financial magazines has been somewhat less satisfactory.  A case in point is The Canadian Money Saver, a publication which I once praised in earlier editions.  It has deteriorated and in some instances, amounts to not much more than an advertisement for the services or products of some of its authors.  I will not be renewing my subscription and will not recommend the publication to others.  The one saving grace of a subscription is that it provides access to a wonderful collection of web sites which have been suggested by readers over the years - one of the best references anywhere.  I don't know if it can be accessed by non-subscribers. 

In recent years, I have diversified by investing more in American companies and US-based multinationals which derive a significant part of their income from international markets.  In this regard, the American Association of Individual Investors has been quite useful.  I mentioned the Association in a previous posting on stock screeners and my appreciation for the organization has grown even more.  The screeners have facilitated the search for companies in sectors of strategic interest and the articles are well written and insightful.  Highly recommended.  

Cycles - What to do when others won't and not to do when they will

It is always best to be manage risk and anticipate potential dangers when navigating on the water.  Passages such as this should only be attempted in shallow draft boats and in ideal weather.  There's no need to run aground if the proper precautions are taken. 

It's the same with investing.  

Every investor should memorize this memo from Howard Marks, Chairman of Oaktree Capital Management, L.P.

http://www.oaktreecapital.com/MemoTree/Ditto.pdf

It is one of the best, most accessible discourses on risk that I have read to date.  It is the product of a man whose prospect of future employment depends on his ability to manage money.

He opines:

Becoming more and less risk adverse at the right time is a great way to enhance investment performance.  Doing it at the wrong time - like most people do - can have a disastrous effect on results. 

Mr. Marks enlarges on this theme by addressing:

• The Real Estate Cycle
• Cycles and Risk
• The Source of Investment Risk
• The Cycle in Attitudes Toward Risk
• Coping with the Risk Cycle
• Risk and Return Today (2004 version)
• Risk and Return Today (2013 version)
• Getting Rid of Money

I printed out the article and placed the pile on the desk near the computer.  I will turn over the topmost page on a weekly basis ... my financial Book of Kells. 

You can subscribe to Mr. Marks' missives here:
http://www.oaktreecapital.com/Forms/memoSubscription.aspx