Bernanke Recovery, Updated Trickle Down Economics - 7 / 29 / 09

The real question is why the markets are moving up. And the answers are telling. It's my view that cheap capital does not create opportunities for businesses to borrow or obtain growth financing, the type of 9,10, or 11% money that allows them to compete in new markets, or compete better in old markets. Standard loans of that nature are offered by Banks to their most stable, near risk free customers. Asset backed 9% money is excellent business for the top tier banks. These banks, who have been made custodians of our economy by the US government do not know how to lend or take risks on businesses the way they used to.

Financial institutions newly fattened on tax payer funds have no intention of using government provided funds to extend new loans to their existing or new customers. But these are the loans traditionally needed to jump start the economy. Instead they loan money to private equity managers and private lenders who have huge amounts of cash on the books, and permit the banks to hypothecate the risk to these private funds that seek to earn 20% annually. These private funds can't afford to lend at a few percent above what they are borrowing at. They charge 14% interest plus 20% of the loans value in equity. That's what a growth loan looks like these days in a best case scenario. What companies can afford to pay that?

Here's an anecdotal conversation I have recently had with a Tier 1 bank middle market lending officer (who happens to be a close friend of mine) that explains how the Bernanke / Geithner stimulus package really works.

Me - "We just acquired a company that needs some growth capital. It's a 15 year old business with revenues of $22.0 million, and $4.5 million in EBITDA. Currently it has a $5.0 million note on the books from a tier 2 bank. They have assets recently valued at $30.0 million. Shareholder equity is greater than $9.0 million. They would like to borrow an additional 3 million and refinance the $5.0 million into a single $8.0 million note."

Banker - "Well, I don't think its for us. Too risky. I but I could introduce you to 3 private lenders who would definitely give you a proposal."

Me - "How do you know these lenders?"

Banker - "We lent the money to them."

Now I understand that this conversation was held with a single bank, but I have received a similar response from at least one other top tier bank (Wells Fargo) and 2 mid tier banks. Banks don't want to take lending risk. They want to make easy money.

One way they do this is to acquire or build a good trading floor. This trading floor uses a portion of the capital on the banks books to trade / invest in equity, commodities, and secondary debt to generate profits for the shareholders. In good years they pull in 30% on the money - that's a great business. Margins on this type of business are terrific, even after paying high salaries. In a bad year the trading floor covers its costs. Rarely do they lose money. They have access to prime brokerage products. Prime Brokerage products rarely lose value. So why would banks do anything more than proprietary investments and lending to other lenders?

Given this model, for the Bernanke / Geithner stimulous package to work banks need to have enough cheap capital that they are inclined to trade a portion of it and in so doing put money into the capital markets creating buying and upside. This is what has caused the equity markets to rise, not value building in the economy. The real hope here is that the equity markets rise enough and remain at new highs long enough to entice IPO and secondary investors to return to the equity markets. Equity investments are the only reasonable money available to growing companies. And I believe that Bernanke and Geithner know this to be the case. Which is why the US government makes whatever announcements it can make to sustain or improve the equity market's performance. And it is also why the stimulus package will take a very long time to work.

Build Value Every Day

Bradford van Siclen

Perspective 2009 - 7 /26 / 2009

Its an interesting time for market pundits. On the one hand we are in the midst of a terrific market rally. But on the other hand there is really not much to base this rally on. It is the opinion of at least one pundit that the low of this market in March represented the gamblers / speculators worst case US economy valuation, and that recent highs represent these same gamblers / speculators view of a perfect year end US economy value. What we do not have is the rush of value based institutions and I wonder, do any still exist?

More troubling, A few months back we witnessed consistent "surprise" earnings to the upside, and a resulting market surge. Talking heads stated "The economy is showing signs of improvement", "Green shoots" and other knee jerk responses. But the truth is a bit more mundane.

In March and April the earnings surprises were based upon 2 key items:

1) the standard inability for industry and market analysts to accurately predict anything at all and instead heading their statements with negativity - "It's better to miss low than miss high". This concession to their fallibility combines with their refusal to recognize that CFO's of Fortune 500's are far superior to them in managing their businesses for the benefit of market valuation, and

2) the Fed had given all banks the opportunity to operate with virtually no cost of capital. Meanwhile the failed financial sector heavily infused with low cost government capital declined to lend to any new emerging businesses, or even new divisions of established businesses in favor of refinancings to businesses which did not need the assistance and the calling of loans from companies who did. That equates to some profitability gains for established companies as interest payment go down. But no growth capital for companies or divisions that need it - more on this later.

The Fortune 500 responded to this environment through the only methods available, by cutting costs (firing hoards of folks and eliminating expansion investing) then delaying the payment of current costs (increasing payables for example) and the results nearly across the board were lower revenues but higher earnings. Of course the esteemed analysts somehow did not anticipate the bottom line results. Thus the "surprise".

However we recognized this well ahead of the pack, and began looking at the companies who use these practices as a daily business method and were thus among the first to "surprise" to the upside. Our bellwether value companies - Dell, GE - both purged themselves of costs and balance sheet losses during the market's slide, leaving themselves with only one way to go, up, based upon fully disclosed and real value. I expect many of you disagree with my position on Dell and GE citing the continued negative press that seems to circle these two giants. But amid all the negativity take a look at their trend lines since March. Why does that trend line exist? Its called value. Sure there are companies whose shares have fared better on a percentage basis. But DELL and GE are our true value players. Limited volatility, tons of liquidity, tons of cashflow and assets, and excellent financial officers and management. They are big and mature.

I'll add one opinion on GE, I do not believe that the dreaded real estate investment write down that prevents its shares from breaking out will have impact on this company's share value at its current position. And once GE has inched its way above $15.00 there will be a rebound in another GE division which will offset the effects of a writedown of real estate assets. And then while no one is looking, GE will readjust its real estate valuation to proper (lower) levels and no one but the best analysts will catch it. More importantly, no one will care.

That's how its done in the big leagues value investors. And to me it is the most important reason to be a value investor. The mature value building companies can really do have magic bullets, cash, diversification of revenues, assets, and very agile financial departments who understand how to protect the value of their equity.

Which leads us to the recent earnings reports. More "better than expected earnings". It's my belief that any Fortune 500's (save those operated by risk loving CEO's) has at least 18 months worth of stored profits or losses "hidden" in their balance sheets that can be deployed at any time to react in the best proper way to the equity markets. [PLEASE RE READ THAT LAST SENTENCE] If the S & P had been down for the recent 4 weeks instead of up, these same companies would be producing earnings that would be at estimates or occasionally below estimates citing one time charges or a lack luster quarter. Think of it this way, anyone surprise to the downside over the last 5 months - Nope. Shocking given the economic environment. But not shocking given the equity market's run.

Build Value Every Day

Bradford van Siclen

There and Back Again - 7 / 15 / 2009

Times like these give a new definition to the term trading range. Here, the past 2 weeks Dow Jones Index closing prices:

7/1 8542
7/2 8280
7/6 8324
7/7 8163
7/8 8178
7/9 8183
7/10 8146
7/13 8331
7/14 8349
7/15 8519 -> at 10:30am

That is a 500 point or 5% swing over 2 weeks. The Financial media loves to scream market up 100+, market down 100+. But this simple table shows the real story, traders control this market and game other traders up and down based upon questionable government financial statistics and surprise earnings or revenues from Fortune 100's.

Meanwhile instead of investigating the reasons why unemployment, housing starts, bank lending seems to improve month by month, while the previous month's numbers are revised down to worse than previously reported virtually every time, CNBC has decided to focus on the new genius at Goldman Sachs (Blankfien), the marijuana and porn industries. One day we may see Lloyd Blankfien and Jamie Dimon speaking at the CNBC Porn / Marijuana conference.

Seriously, these matters leave me wondering whether the investment markets will return. And contemplating the recent Dow Jones price action, my thought is, it has returned. Investors are the support in the market, traders are the noise. Shut out the noise and focus on the 6 month trend of your favorite issues.

Select them because they are trading at real, conservative, multiples to earnings or enterprise value, and also because they have enough cash (or short term securities) to fake their earnings if they need to. Yes I meant to say that. Don't kid yourself. The biggest, best companies manage their earnings, storing them on the balance sheets when the market dynamics won't give their stock price a decent multiple for their full value, and pulling them off the balance sheet and flowing them through the income statement when times are tough.

Earnings, even for the biggest companies are lumpy. Somehow, unless there is a crisis or a one time event, they are not lumpy. This makes virtually no sense unless the company is a utility. But still GE, DELL, AXP, MSFT, XON, they all have consistent, managed, growth or earnings.

Occasionally I come across a writer from a major financial paper, in this case the Wall Street Journal, who some how sneaks through the Editor in Chief's cheer leading requirements and puts out out a quality piece of analysis. Rather than summarize it, I attach it below in full text (as you may imagine, I agree with him entirely):

From the WALL STREET JOURNAL ONLINE

The Bernanke Market

We won't get real growth until Congress and Treasury get policy right.


By ANDY KESSLER

I remember once buying the stock of a small company and I couldn't believe my luck. Every time my fund bought more shares the stock would go up. So we bought even more and the stock kept climbing. When we finally built our full position and stopped buying the stock started dropping, ending up at a price below where we started buying it. We were the market.

Just about every policy move to right the U.S. economy after the subprime sinking of the banking system has been a bust. We saved Bear Stearns. We let Lehman Brothers go. We forced Merrill Lynch, Wachovia and Washington Mutual into the hands of others. We took control of Fannie and Freddie and AIG and even own a few car companies, pumping them with high-test transfusions. None of this really helped.
[Commentary]

We have a zero interest-rate policy. We guaranteed bank debt. We set up the Troubled Asset Relief Program (TARP) to buy toxic mortgage assets off bank balance sheets. But when banks refused to sell at fire sale prices, we just gave them the money instead. Dumb move. So we set up the Public-Private Investment Program to get private investors to buy these same toxic assets with government leverage, and still there are few sellers. Meanwhile, the $1 trillion federal deficit is crowding out private investment and the porky $787 billion stimulus hasn't translated into growth.

At the end of the day, only one thing has worked -- flooding the market with dollars. By buying U.S. Treasuries and mortgages to increase the monetary base by $1 trillion, Fed Chairman Ben Bernanke didn't put money directly into the stock market but he didn't have to. With nowhere else to go, except maybe commodities, inflows into the stock market have been on a tear. Stock and bond funds saw net inflows of close to $150 billion since January. The dollars he cranked out didn't go into the hard economy, but instead into tradable assets. In other words, Ben Bernanke has been the market.

The good news is that Mr. Bernanke got the major banks, except for Citigroup, recapitalized and with public money. June retail sales rose 0.6%. Housing starts jumped 17% month to month in May and will likely be flat for June. Second quarter GDP may be slightly up. And he was successful in spreading a "green shoots" psychology throughout the media. But the real question is, now what? Government interventions are only meant to light a fire under the real economy and unleash what John Maynard Keynes called our "animal spirits." But government dollars can't sustain growth.

Like it or not, the stock market is bigger than the Federal Reserve and the U.S. Treasury. The stock market anticipates only future profits and prosperity, not government-funded starter fluid. You can only fool it for so long. Unless there are real corporate profits from sustainable economic growth, the stock market is not going to play along. It's the ultimate Enforcer.

In mid-May, Mr. Bernanke's outlook seemed to change. Maybe he didn't approve of the sharp housing rebound -- like we need more houses! Maybe he saw inflation in commodity prices -- oil popping to $72 from $35. Or, more likely, he finally realized that he was the market and took his foot off the money accelerator, as evidenced in the contracting monetary base (see nearby chart). Sure enough, things rolled over -- the market dropped 7.5% from its peak, oil prices dropped almost 17%, and even gold has lost some of its luster. But in July, the Fed started buying again and the market rallied.

Can the U.S. economy stand on its own two feet without Mr. Bernanke's magic dollar dust? Eventually, but apparently not yet. Unemployment stubbornly hit 9.5% in June, according to the Bureau of Labor Statistics. Housing prices are still dropping, albeit at a slower pace, and foreclosures are still rampant.

But I think what really bothers the market is that the structural problems that got us into trouble in the first place still exist. We took the easy way out and, with the help of Treasury Secretary Tim Geithner's loose "stress tests," swept banking problems under the carpet. We waved off mark-to-market accounting and juiced bank stock prices to help them recapitalize, but all those toxic mortgage assets on bank balance sheets are still there as anchors on lending. All the pump priming and stock market flows didn't get rid of them.

Hats off to Mr. Bernanke for getting the worst behind us. He'll be pressured politically to keep pumping out dollars, but he should resist the urge. The stock market will ignore his dollars if it doesn't believe they'll turn into real profits. Green jobs and government health-care clerks do not make a productive, sustainable economy. That can only come from innovative companies with access to growth capital. The stock market won't turn bullish until it sees that type of economy.

Again, when it's clear that you are the market you have to stop buying and begin tackling the hard stuff. By not restructuring banks, by not getting bad loans off bank balance sheets, by not standing up to the massive increases in government debt crowding out private capital, the Fed and Treasury are holding back real economic growth. [END]


Thanks Mr, Kessler, real investors applaud you.


Build Value Every Day

Bradford van Siclen

When Will We Begin To Improve? 7 / 10 / 2009

The Stock Markets - what's up there? Frankly nothing. The government's bail out program of banks has not restored confidence. It has merely created a back stop. Value investors then grabbed onto the recent bottom created by the bail out and propelled by the "green shoots" commentary from Bernanke. And the market moved from its march lows of 6500 to June highs of 8800.

But I think he made a classic mistake, and spoke optimistically, not factually. Facts are valuable to investors. Optimism is valuable to speculators. The program he engineered with the Treasury has done only one thing - back stopped a financial markets slide into 1996 levels (5000).

This economy is still in clean up mode - this is anything but a recovery mode. And the equity markets are telling us precisely that. These markets are jumpy but will not advance until they can comfortably project growth.

The drag is big, its the biggest anchor the financial world has ever seen. Its a combination of a surplus of the asset that America once coveted (real estate)and a surplus in the basis of its value (US Dollars), topped off with more leverage than even PIMCO cares to guess at.

On that subject, ask yourself why PIMCO is making positive statements about the economy and the performance of high grade debt instruments every day? Because if they step out of line, the debt market and their portfolio will tank. They are compromised and begging for a recovery that can support interest payments. You think California is in bad shape now? In technical if not actual default? Who do you think holds the biggest slug of California Debt? (PIMCO). What conversations do you think they are having with Geithner?

Ask yourself, why is it that employment and consumer price indexes meet or beat (positively) expectations every month only to be revised negatively the following month..Because if speculators and investors both knew the truth - that the economy is still in decline - the capital markets would slide back to the March lows very very quickly.

I agree that the problem created was so large that only the government could have stopped the process of a reset in values that may have wiped the last 12 years of growth and value off the world's balance sheets. I agree that this government was heroic in its efforts to stop or stall this decline. But their job is not done by a long shot. The same characters who were in charge of this fiasco are still, for the most part, in charge. And they are now afraid to make further mistakes, afraid to take any risk because the government is watching them very carefully. All of a sudden their business models which propelled their stock prices to 2006 - 2007 highs are not functional in a regulatory enviornment with real oversight.

Our economic system depends on the ability of our best (in general) and brightest (in general) entrepreneurs and business men getting together and compelling lenders to give them a chance to develop their business.

Now, unfortunately these methods have been forgotten. The people who were competent in lending to growing businesses have been removed, down sized. Middle Market banks and local business lenders are still reducing their loans outstanding to businesses and the loans they are extending are refinancings of performing loans. Worse, the equity markets are languishing. So equity investors are very cautious about putting money into growing companies. In the past, tough lending markets led to accelerating private equity markets as investors searched for a return. Those days will return, but given the current economic enviornment, companies need to be cleaned up first.

They still have a long way to go. At this rate, November seems a likely economic turn around estimate -


Build Value Every Day

Brad van Siclen

7 / 1 / 2009

No changes in this market yet. The Dow Jones is still in the the grips of wealthy hedge fund managers who, lacking any real desire to evaluate discrete issues or sectors they view as momentum plays, are now satisfied moving large sums back and forth along the Dow Jones Index. Everyday these professionals show up and say "You have to be in this market and trade it.", referring to the myriad equity index trading instruments. They don't know when a turn up or down is coming, and so they are left protecting principal and speculating on daily moves. Clearly lacking in this market is position trading and investing.

One subject I happen to watch closely, but avoid spending too much time on is Gold. To me, gold is simply a hedge against loss of value in your currency of choice. Do you think the government is printing too much money? Do you think that the money supply is increasing? Do you think that interest rates are too low? Any one of these is a reason to own gold. But own it, do not trade it. Gold seems to be second to oil, the most manipulated commodity, in volatility on a week to week basis.

Lately the trading of this commodity is giving me great concern. Gold's action is a great indicator of future economic condition. And its action suggests great uncertainty in our economic near future with a very strong negative long term bias.

Beginning with a look at the 5 year gold chart an amateur can see we are still in the first leg of a Bull market in gold. That's bad for the economy. It says that investment professionals don't trust the future of the world and US economy to create value. As a market analyst with an investment banking back ground I learned early on that the only thing protecting an equity issue in the public market is its underlying value by fundamental standards. After the honeymoon and the speculation surge of an IPO, unless the company can produce stable earnings results, the value must ultimately go down. Gold is like the post IPO perspective on the world and US economy. Except that it rises inversely to prosperity. It speaks for itself in its value against the US dollar / US economy - here's a link to the 10 year chart against the dollar. If you are looking for expert perspective on the US economy, click on it or copy it into your browser window.

http://goldprice.org/charts/history/gold_10_year_o_usd.png

Financial writers have it easy. We have 360 days a year and myriad statistics to include or exclude in making our ultimate argument. I could very easily argue that the rise in gold is due to a dynamic industrial world that, driven by greater numbers of participants, primarily China and India, a gold shortage exists that production has yet to catch up with. And the supply and demand imbalance has created Gold's 10 year climb.

But that's not how I see it. What I see is the result of the US economy growing by virtue of financial leverage and cost cutting measures that have created little additional value since 2005 but at the same time created huge amounts of leverage.
Industrial production, which creates real value, continues to be imported by the US in exchange for US currency. US currency value continues to erode because its value is based upon the US economy's overall ability to repay the government's debt. That amount owed is offset by the US government's ability to repay loans through intl. treasury auctions that raise money to repay old loans and interest owed. Each time this occurs, money being borrowed to repay borrowed loans in conjunction with an economy that is creating less value during that time period the value of the dollar is dilluted and the US economy takes on more real leverage.

I have read that the value of an ounce of gold will eventually cross the value of the Dow Jones Index. I have heard ranges between 2500 and 6500. Either way its Armageddon if it occurs, and I for one do not agree that it will ever happen. My optimistic view is that ultimately the dollar will weaken to the point that manufacturing and industrial production increase in the US so value can be created which suggests more than a recession recovery. That will be a valuation overhaul and ultimately the restructuring of the US economy we desperately need.

Build Value Every Day

Brad van Siclen

Bernanke Under Attack - 6 / 25 / 2009

Finally it would appear that Congress is beginning to wake up. Is this because its constituents, the American People, are finally catching up with the detail of the Fed/Treasury/Executive Branch's gross over stepping of financial powers? Have the American people finally realized that we have simply repeated the same mistakes of the past that brought us to this financial precipice? This government, in combination with investment and commercial banks that brought the American Real Estate, Industrial, and Financial systems to the brink of destruction, has now used leverage yet again to solve ALL problems.

Mr. Benanke is a bunch smarter than me, and he certainly speaks more clearly than Greenspan and, pleasantly is not at all sneaky like Greenspan was. So why would he be knowingly adding leverage in historic proportions to the largest pile of leverage ever created? The simple answer is that the problem is really so big that only the world's faith in US government could keep the US and therefor the world's economies from imploding (and entering a dark age of finance). Perhaps that is a bit dramatic. But this is the argument the US government would have us all believe.

But my fear is that there are darker forces at work here. CEOs of the world's financial corporations that are not only smart like Bernanke, but are exceedingly more street smart. You don't rise to the top of these institutions without being very smart, very expert, and very good at understanding and using pressure points on your employees, bosses, and regulators. And in the case of our recent financial crisis, these players who gamed the system with leverage to create fat returns for themselves, were able to compel Benanke and earlier on Paulson to save their firms..all of them but for a few sacrificial lambs - Lehman and Bear Sterns

Unfortunately for these CEOs, Bernanke is no dummy either. He has quickly caught up and has begun revealing the reality of the past bail out events. And what do the Financial CEO's do when they fear more dark secrets will be disclosed to the public at large? They do what they do best and use pressure points to redirect Bernanke's over all efforts. Somehow, miraculously, right at the moment Bernanke is requesting that Bail Out money not be returned by banks yet, his entire leverage package which has saved all of their jobs, and most of the banks they ran into the ground only 6 months ago - the CEO's are no questioning the merits of their career saving bail out packages.

Queue the anti- Bernanke debate. Drag him out in front of the congressional panel and begin knocking holes in the processes he funded. Remember though, he did not create these payment / bailout solutions - the Treasury did. The Fed's only job is to use economic data to determine the prime interest rate. The Fed can then use its balance sheet to prepare for the needed liquidity or contraction of the money supply as may be required by the regional Fed banks to support the financial markets requirements that a change in the prime interest rate creates.

Now, given the fact that the President uses any opportunity to give a speech (he's already given more televised speeches than Ronald Regan and George Bush I combined), why isn't Obama stepping up and giving a speech or a press conference in support of Bernanke? I am not certain. But I do not like it. It suggests that this engineered solution of the financial crisis is in serious question among the world's financial powers, that regardless of the stock market performance since hitting its March low, there are real concerns about the effectiveness of the financial rescue package. And the Executive Branch knows this well. So being politically astute they have used bi-partisan committees to put hard questions to both the Treasury and the Fed. Whoever cracks first will be the scapegoat should this bailout prove to have limited effectiveness.

So this market, and the near term value of the US economy as a whole remains uncertain. We have created liquid, efficient markets and added to it instant top level information. We have yet to determine the bottom of this market. It may have been in March 2009 - but its a long summer ahead. I still believe that the stock market will bet at 10,000 before the end of the year. But it won't be on fundamentals, it will be on speculation, better than expected dollar strength, a weak pound sterling, and a series of positve government and commercial bank performance releases. If we can't build value we will certainly speculate on its eventual return.

Build Value Every Day

Bradford van Siclen

Vaule Based Reality Bites - 6 / 23 / 2009

Yes, I have been silent for a period of time. I have done a bunch of thinking over the last few days. Here are my conclusions.

1) As an investor in equities, you are taking great risk in these markets.

2) There may not be any actual support levels in the markets, and there may never be again by traditional, technical standards.

3) On the other hand, there will be value and fundamental based support levels for discrete issues.

4) Investors can not ever be long term holders of single funds or stocks again.

5) Cost averaging works only with stop loss positions on each entry point. Averaging down means you have made a mistake and now are compounding that mistake.

6) Experts making daily or weekly market direction calls are not only fooling themselves, but they are also fooling investors.

7) The economy has not turned around, nor has it bottomed.

8) The dollar has begun, likely 2 years ago, its inevitable slide to 70% of its 2005 - 2006 values. World currencies are performing similarly.

9) Cash Flow remains and will always be King.

10) Gold is not an investment, it is a hedge.

11) Oil is a manipulated commodity, by governments, by traders, by producers. And because of this, the dollar is a manipulated currency as well.

12) It is not possible to be a long term investor in any traditional asset - real estate, commodities, currencies, equities, or bonds - given the lack of investment and financial experience at the US government Treasury, Fed, Executive, or Congressional levels. Without an expert and consistent theme from the US government, there will be no stability.

Watch your step very carefully.

Build Value Every Day,

Bradford van Siclen

Thoughts - 6 / 16 / 2009

First a note about this market, be very very careful. Anytime there is an upside market hesitation the result can be a short but significant downside event. What event could trigger this? Well in this market all it takes is a government report, a missed estimate in housing, a missed estimate in unemployment, in manufacturing. Any reports from the government that would suggest the bottoming out of the economy is not yet at its bottom. These announcements will trigger speculators to sell or short the Dow Jones Index. And when this occurs, the Dow Jones takes a rapid decline - and then waits for the government to put some good news out. This has been happening repeatedly throughout the crisis. Good news is released, followed by more good news if the dow jones rises, followed by bad news when the Dow Jones stalls. The Bush,Obama,Paulson,Greenspan,Bernanke,Gheitner government has made a gigantic error in how to deal with the capital markets. Timing the markets with news releases is a sure way to create uncertainty, and that leads to volatility, and ultimately lower volume. Each one of these issues is troubling to investors in the equity markets and poorly performing equity markets remove more funding groups from the markets themselves.

The Credit markets remain closed to developing businesses and to troubled mortgage holders. Of the first amount of TARP that went to the banks, who enjoyed the benefits? Only the companies and mortgage holders WHO DID NOT NEED IT. The troubled mortgage holders saw very very little of it. Developing businesses are out of luck. And it is credit to those growing businesses that creates economic expansion.

Bill Maher, comedian and political pundit, said it best. "The banks we bailed out are laughing at us. They [wrecked] the economy and then got to keep their jobs and businesses." He is right. The rationale for bailing these banks out was a simple one...this crisis will expand if we don't keep these banks alive and functioning and lending. But all we have done is allow executives from these banking institutions that ran their assets and shareholders into the ground keep their jobs. Meanwhile they refuse to extend credit to business owners and home owners who, in turn, lose their homes and jobs. And meanwhile these bankers are bailed out ultimately by the taxes of the people they refuse to do business with....

We can't even sit back and wait it out because inflation is growing at a faster pace than the banks are willing to pay us in interest for saving money. We are forced to actively invest simply to maintain the value of our savings. Our method of choice, invest in the highly liquid, under valued, equity of Fortune 100 companies. Consistent historic earnings and low multiples relative to their peers.

Its a broken record, but it works people.

Build Value Every Day.

Brad van Siclen






Let's collectively start thinking about how to live through this. I believe perspective is the cornerstone of any business or investment related decision.

So Where Are We 6 / 10 / 2009

Readers of this news letter must be feeling pretty good these days. In the face of a horrifying market, we have learned the basics of value investing and risk reduction, and how the global markets ultimately catch up or move down to the real value of companies. Of our value based company selections, one American Express, we were forced to exit due to the added government risk and we lost $1.20 or 5% on that trade. American Express may eventually rise back to $40.00. But we don't like the risk of future government regulation on credit card companies. Our other 2 companies, GE and Dell continue a healthy trend toward our Fair Value or fully valued calculations just north of $15.00. Our gains there have been at least 30% - this is important because it was the use of key value based investment methodology that triggered our buy in pricing at a greatly reduced risk level. As for the markets, yes they are getting ahead of themselves, but they are certainly on track to meet our expectations. Indeed the Dow recently closed above 8500 for 5 straight days - creating a new floor.

So here we are, where do we go next?..I wonder what will propel the investment markets from here. My guess is inflation. Inflation is the rise in price of assets. Stock is an asset. Prices for shares will rise. I know to most of you that statement seems backwards. Finance heads would say that a weakening dollar will reduce buying power and will reduce spending which will reduce corporate revenues. Finance heads will say that as inflation rises, the value of US bonds decreases, and ultimately that manifests itself in increased interest rates, further cutting the consumer's ability to spend. That's what Wall Street "experts" will tell you.

Here is the truth though - US corporations are a safe haven for the world's investors because the big ones get bailed out which means their service providers reap the rewards. What does a virtually frozen credit market mean to the stock markets? Nothing right now. Why? Because the the largest US companies whose fundamentals drive the Dow's performance are beneficiaries of inflation environments. They can set prices, they have the largest margins, and they have the greatest reserves to manage their inventory and raw goods costs and ultimately earnings reports.

So while it may seem counter intuitive to Wall Street pros, the truth is, stocks rise during inflationary periods.

Another theme that has been crossing my screens is executive pay and alignment with shareholders. Here's an easy way to do it Boards of Directors. Pay real dividends. When hired offer a significant amount of shares to key executives that vest at 20% over a five year period. Next tell executives their bonus will be paid from dividends in shares they own and have fully vested. Just watch how fast executives align their interests with shareholders.

My recent favorite theme is shareholders calling for the removal of CEO's when their stock falls. Its not a new theme I know, its just one that has surfaced again. Get a grip on yourselves people. CEO's don't control share prices, and they certainly don't prevent you from selling your stock at any time. Investors are a stupid lot, in general. And I'll lump the professional "expert" investors into that grouping as well. They have no issue buying pieces of companies at a price equal to 25 years worth of earnings. That's what you do when you buy stock at a 25.0x earnings multiple. And then these experts wonder why ultimately the stock price falls because the real earnings growth doesn't compel speculators to buy shares at a price equal to 30 years worth of earnings.

Next they blame CEO's for the falling price of the stock they hold...my answer, don't hold it, sell it. Blame CEO's for adding risk to the balance sheet, for falling revenues, for falling earnings, for compensation that is disproportionate to their efforts. But not for stock prices. Investors have shares they are able to sell any time..sell them folks.

Build Value Every Day
Bradford van Siclen

Shock and Awe - 6 / 3 / 2009

It is shocking to me the lessons learned by the US Government during the last 10 years. While I believe there is a need for proper regulation and taxation in the creation and management of overall US and Global productivity (a.k.a. the world economy), the US Government continues to err on its approach in good times and bad. The United States has at least 25% of the greatest economic and business minds the world has to offer. And ultimately it's these men and women whose collective actions or decisions drive the US Economy and its productivity. Some are entrepreneurs who have become Fortune 500 CEO's, some are commercial and investment banking CEO's and Executive Officers. Some are top end academics, some are capital markets investors or speculators. And some are US Government Finance Officials. Make no mistake that these US Government Officials and the people mentioned before them are as smart as they come.

What shocks me is that the US Government Finance and Executive Branches have since 1999 and Greenspan's "irrational exuberance" speech, decided that they must communicate with the US Equities Markets. That some how the fate of the US Economy is determined by the direction of the stock market. The belief is that higher, bullish trending, stock markets result in better funding opportunities for established and growing businesses. Better funding opportunities means economic expansion and economic expansion means economic prosperity. This magic bullet for American prosperity, the Executive branch, the Fed, and Treasury believe begins with the US Stock Markets.

This could not be more wrong and, could not be more damaging ultimately. Right now, the US Markets are trading at the direction of the Fed and the Treasury. The Fed and Treasury in turn are being directed, as they have been since 1999 when Greenspan let his term "irrational exuberance" slip, buy the Executive Branch. That was the moment that the Executive Branch recognized that if the economy was going in the wrong direction their ability to fix it quickly could only be effected via a super liquid capital markets enviornment combined with an advancing stock market. That simply reducing interest rates was not fast acting enough for the Executive Branch. Readers this government, and the Clinton and Bush governments, have had an active economic policy that supports and endorses speculation as the way out of economic down cycles.

What they should endorse is an economic policy that supports productivity. Why have we seen 2 speculative bubbles in 10 years? Because that is the type of economic policy that our governments, democratic or republican, endorse through the Federal Reserve and US Treasury. And now we are trapped in yet another cycle of announce good news when the markets are trending down, and announce bad news when the market starts to surge. This is managed speculation and it continues to add NO VALUE to our productivity base.

Why is this? The sources of capital to grow productivity, Commercial and Investment Banks, have no interest in long term investments that enable the creation of productivity expansion in small and mid sized businesses because, ultimately, they can make more money over a shorter time horizon, speculating in the capital markets. You want answers to the decline in the value of the dollar, the decline in wage growth, the decline in employment rates (or the increase in unemployment), the decreased time in economic cycles...It is all because the US Government has by its economic policies over the last 10 years, created speculative markets, rode them higher, and then stepped aside and searched for scapegoats to describe the result of any speculation that comes without relative increases in productivity, a crash. In 1999 it was CS First Boston and Carlucci, now its AIG and Citibank.

But really, it is the short sited government economic policies that have us bound to a boom / bust economy. These policies serve their purpose. They transfer wealth from one group to another (creating new wealthy), and they enable the Executive branch, if managed properly, to point to a rising stock market as a sign of successful policies and point to the beneficiaries as the bad guys of the those markets in a crash.

What has been lost in all this is the US industrial state. Once the envy of the world. We have lost US productivity and US quality. Short sited speculative economic policy can't support value creation and productivity over a 10 year cycle. It is Shocking to me that this is the approach the government continues to take, and I am in awe that they have been able to keep the media from recognizing it.

So if you are an investor, or a trader you have no choice. There are no rewards in this system for long term investors in productive companies. No rewards for people who save their money (because inflation robs value). So ride the next wave of speculation, just put your upside and downside limits in and you will be protected. We may be in a Bull Market, but it cannot be sustained without productivity gains. And this government just like the past 2 governments, is not addressing that issue properly.

Build Value Every Day

Bradford Van Siclen

Dow Jones - a Victim of Mixed Messages - 5 / 27 / 2009

In this individuals opinion, it is a crucial week for the the future of the Dow Jones. There are many news items that are competing for trader's mind space. And there are a few questions we as individual investors or as individual speculators need to get our heads around as we look out 30, 90, and 180 days. Ultimately we must decide if the Dow Jones is an indicator of today's sentiment, yesterday's sentiment, or tomorrow's sentiment. The keys in any market driven investment strategy are 2. The first is to understand your own personal risk or exposure tolerance. The second is to recognize your own strategy, trader / speculator or investor. And then stick to that perspective no matter what. When you hear fund managers discuss or advertise a "disciplined" approach this is the process that they are attempting to describe. Under what circumstances are they buyers or sellers? The best managers never veer from the circumstances that determine their own buying and selling. And neither should you. Ignoring your discipline may be the biggest single mistake you can make as an investor or as a trader / speculator.

Of all the questions I receive from readers, the direction of the Dow is the most asked. Consistent readers know that I think following the Dow as a guide to one's personal investment strategy is a losing proposition. The Dow in my opinion is a puppet of large funds that day trade its index for sport more than as a value strategy. Since 9/11, the Dow has been little more than a measurement of professional investor sentiment on any given day. So while it is a good indicator of the present, it is not a good indicator of the future. And whether investing or speculating either approach to the capital markets is based upon the future value, higher or lower, of an individual issue or a group of individual issues. The Dow is no longer that. It is the sentiment indicator of the big money day traders. News items reverse it as much as discrete non-component company performance announcements. How is this an indication of the future?

So in fairness to my readers consistent questions, here is my current perspective on the Dow Jones. There is a ton of competing news out there. Consumer confidence higher, existing home sales lower, GM bankruptcy, Bank America raising capital. We are one headline away from a surge in the Dow or a plunge in the Dow. The question is which will it be?

It's a very difficult task from a value perspective. All value signs for the US Economy show a continued fall in productivity, continued decline in employment, consumer credit, housing. Increases in gas prices, food prices, commodities, inflation. We have nothing more than predictions by academics as to when all these decreasing value indicators will reverse. Now throw into the mix US government agencies, The Fed and The Treasury, willing to over extend their powers and ability to offer liquidity of any size and scope to mistaken lenders (debt holders in failed Fortune 100 companies) in order to limit the decreasing productivity effect on the US Economy. These efforts ultimately leading to significant inflation, misuse of funds by those in charge, and in this analysts opinion an eventual devaluation in the world's US Dollar keyed assets. For every negative announcement, the government throws out a positive announcement. When the Dow moves higher, the government uses the opportunity to release its negative news. Watch the financial media and see if I am right.

But leaving financial conspiracy out of the mix, this Dow Jones, barring War in Korea or Pakistan / Afghanistan - over the next 30 days will trade in its current range with a down side bias. By August we will see the Dow approach 9,000 based upon more and more corporations saying the recession, for them, is ending. And by December the Dow will make a run at 10,000. Unfortunately it will be a hectic and choppy market to that number. Ultimately the US Government led mixed message smoke will clear enough and combine with a weakening dollar (look for a dollar value slide in June and July) so that enough Fortune 100 companies will see productivity increases. And these increase will lead the day trader speculators to a higher Dow Jones Index conclusion.

Build Value Every Day.

Bradford van Siclen

Housing Crumbles - What's the Meaning? - 5 / 26 / 2009

Housing Prices fell 19.1% alone in the first quarter 2009 and is now down 32% from a peak in 2006. The noted "20 City Index" fell by 18% in this quarter. These numbers all came from S & P. What's going on? You all know the answer. You all became real estate experts during the boom times of 1999 - 2007, right? Your homes are all worth more than you paid for them, right? Your mortgages are all less than they were 10 years ago, right?

Congratulations. You are one of the very very few brilliant real estate investors.

There are two ways to look at a home. One is as an investment, the other is as a savings account. My view is the latter. It's one of those assets that you can use without diminishing its value, generally speaking. But that assumes you have purchased it with more equity than debt or at a low in the housing market. It is unlikely that you were able to do both. Why? Because homes are almost always purchased when you need them, and when there is a need, market dynamics take a back seat. The housing markets do not care what stage your family is in, growing, contracting, making more money, making less.

A home is a savings account that grows in value by at least 5% year over year, even with the recent housing value slide, buyers of homes pre-2006 are up in value across the board. That's actually better than a savings account because as the value of the dollar decreases, creating inflation, assets like homes increase in value relative to the dollar. The proper way to look at your home is to pay it off as soon as you are able to. Now the savings compound over time, and you get to use the asset every day.

For you real estate investors, these concepts may seem conservative, or maybe a bit nutty. You select your home, size, location, based upon your belief that the price of it will increase, and based upon that your equity value will increase with it. The bank offers you credit to buy the home and you leverage that credit into creating value that exceeds the rate of value growth in the area you own the property. Its a great model, except when hosing prices drop.

See the Federal Reserve convinced home owners to dip into their savings by offering cheaper and cheaper refinancing rates. That led to lower monthly payments and more free spending cash into the economy. Banks then churned this cheap money and instead of building their reserves they too, like consumers, leveraged their balance sheets with an eye to increase profitability. We all know what happened, the value of these real estate assets purchased since 2007 fell by 30% or more across the board and by October 2008 we had our 2nd major financial bankruptcy (Lehman) and a world financial crisis caused by the rapid contraction of asset values as speculators and investors ran from real estate investment securities. But this is old news.

So now we are left to search for answers. Increasingly, "expert minds" in finance are suggesting that the size and scope of the problem can only be addressed by the government. This weekend, Alan Greenspan said the same. I won't be fooled by this esteemed gentleman again, and I hope neither will the US government. Now is the time to allow the $1.6 trillion of our tax dollars to go to work. Stimulus must begin with the banks holding the access to the money, and our solution is a simple one..ALL BANKS NEED TO BEHAVE LIKE WELLS FARGO AND ITS WACHOVIA BRANCHES AND REFINANCE AS MUCH OF THE HOUSEHOLD DEBT ON THEIR BOOKS AS THEY CAN. This act alone will stop the mortgage crisis, will stop the foreclosure crisis. No more government stimulus is necessary, nor should it be requested. The World Economy will support the Dollar well enough now, but calls for an additional trillion in stimulus will crater the dollar an additional 25%.

Unfortunately the US government (BUSH / OBAMA / GREENSPAN / BERNAKE / PAULSON / GEITHNER) is not predictable in its selection process and its bail out process. That in itself is a real issue for the economy. Businesses which should have been bankrupted were not (Citibank, Bank America, AIG, GM, Chrysler) and businesses that should have been saved (Bear Sterns, Countrywide, Lehman) were not saved. Had the government (yes the names BUSH / OBAMA / GREENSPAN / BERNAKE / PAULSON / GEITHNER are all the same government to the US economy) saved Bear, Country, Lehman at the cost of $300,000,000,000 this crisis would have been very, very different.

Instead we are left with a housing crisis that has no end. Expect deeper and deeper housing price losses until this government forces refinancing to those who need it. Bring Fannie and Freddie back to do just that. Let the Banks ride their coat tails out of the forthcoming housing market depression.

Build Value Every Day.

Brad van Siclen

Which Way Now? 5 / 21 / 2009

Here follows a brief discussion of our current perspectives in these markets:

1. Value / value drivers: When we analyze different companies for the purpose of investing in their publicly traded stock we seek out companies that have grown their profits consistently over the most recent 3 year period. We then seek those companies that are both trading at an historic discount to its own P/E multiple at fair value and are also trading at a relative P/E discount to its peers. As we see it, our value drivers are simple - earnings and earnings growth. Can a company's management use its own assets to generate improved earnings over time? We can be much more analytical and research minded, but we are not investing 10,000,000 in any position, and therefor we remain unconcerned about incremental valuation metrics - asset turn over ratio aside.


2. Trading / stock market action: We remain very cautious in receiving and even listening to technical analysis. In our opinion, technical analysis is nothing more than the application of statistical analysis to historic sentiment. Whether the history being reviewed is 1 hour or 1 year, the use of statistics and graphs on buying and selling volume, speed and acceleration in either direction is dangerous. Technical analysis is dangerous because it assumes the market is rational and will recognize and anticipate value properly. Investing has risks, but fundamentals in our opinion reduces our downside risk while making us behave as owners of the business, not traders of common stock which leads to speculation, and ultimately to "investment" decisions that rely heavily on market timing and not business analysis.

3. Economic Drivers - There are none in today's market. Earnings, Labor, and productivity are still heading lower. All this talk of "decreasing losses" as an indicator of a forthcoming economic bottom is absolute spin. Decreasing job losses in a recession, that's like a meteor breaching the atmosphere. It may slow down, but it still has to hit bottom before it stops. And how are we to rely on government statistics and research analysts to provide us with accurate forecasting or information? We can't. Hundreds of millions of dollars are being paid to these professionals, and the information is not accurate. Its simply not accurate. Government statistics and research analysts are not audited. Corporate numbers are audited. Why are all revisions of government economic statistics downward revisions? Spin. Stick with audited numbers and consistent historic earnings growth.

4. Finance / monetary - Right now, the dollar is worth less than the Canadian dollar. In fact as of this morning, it costs $1.20 to buy one Canadian dollar. I'm old enough to remember driving with my parents on New England Toll roads and seeing signs that stated, "Toll: $0.25, Canadian Currency: c 0.40. In the last 20 years the value of the dollar has dropped by near 50% against Canadian currency. Folks Canada has managed its resources, its productivity, and its monetary policy much better than we have. Want another Greenspan era legacy? Our dollar is worth less than the Canadian dollar. Still think he was a genius? I respect Bernanke, but he has been left with a near impossible task. His only solution is to so devalue the dollar that the economies that rely on the value of the US dollar to function, and that's virtually all world economies, will be forced to devalue their own currencies. Watch. This will be reported by the media as the dollar strengthening. It will be reported as proof the Bernanke method works, when in fact any chimp can print dollars and sell treasuries at 14% returns. Bernanke, you are smarter than this, what you need to be is tougher. Face this administration, the one I voted for. It has gone so far afield, so fast, our great grand children will look at us like idiots. The generation that reduced America to a G8 participant rather than a leader.
Now for finance. Consumer Credit will shrink to 50% of 2006 levels. Consumer spending will not recover until savings begins to fill the lost credit gap. And this needs to happen in a shrinking economic enviornment coupled with higher taxes and reduced productivity. See what we are getting at here? Banks will not lend to even modest credit risks. So the Obama / Bush / Paulson / Geithner plan will not work. Until they fund real productivity and value creation AND that begins to take hold in the economy we will not see economic, financial, or monetary improvement. Green investing may be needed, but it will not create any significant productivity for years. What happened to infrastructure spending? It has gone with the wind. Any money we could have spent creating jobs and rebuilding our transportation, communication, and education infrastructures has been handed to the banks and they have created NO VALUE with it for the American people. These banks will offer financing only to the largest and most stable enterprises. And here's the good news, these are the enterprises we like to invest in at current discounted levels. Simply stated, the only enterprises (individuals as well) that will receive credit are those that really don't need it to fuel their expansion. The result will be an increased concentration of wealth among the already wealthy and a decrease of wealth among the middle class.

People, this is a call to you and your families. You must take control of your financial future. You must be productive and you must recognize how to create value. To do this look at enterprises that have created value and simply invest in them.

GE: 13.10
Dell: 10.74

As for American Express, we had a good selection there, but the government has stepped in and over regulated them. This to us is much like fraudulent reporting. Clearly AXP has been in lengthy discussions with the Government concerning the future of credit charges dating back 2 reporting periods. But none of that information was disclosed, as it should have been, by any of the credit card issuers to the investment public. Rather, they guided lower and then beat expectations...watch for more of the same as their revenues continue to decline. We move this position to speculative - It could double or be cut in half. So we take our first loss of $1.50 per share or 6%.


As for the Dow, our call is a retest of the new floor some where between 7,800 and 8,200 soon.

Build Value Every Day.

Bradford van Siclen








Conclusions

Geithner Passes the Buck - 5 / 20 /2009

Chris Dodd, asked an excellent question today of Treasury Secretary Tim Geithner. And Geithner's response frankly scared us very badly. He asked the same question we have written about in this blog quite a few times. "Why the US government continues to use tax payer money to pay 100% of claims to financial institutions that were insured by AIG." Geithner's response was long winded, and shocking. The Treasury Secretary said "We, as a government, have no authority to make those decisions."

Does anyone feel weak in the knees hearing this? This is a government that continues to say one thing and do another. They are bailing out all the folks that voted them in and, by coincidence, all the folks that caused this systemic crisis to begin with. The list is long and wide but includes Goldman Sachs executives and union laborers building crappy cars. This government has convinced itself that the solution to the financial crisis is to give all the reins to its friends...and no one is raising this issue publicly because our elected officials are too frightened to speak out against the Obama administration.

I voted Obama in because in my mind the Bush administration had passed huge amounts of tax payer money into a war that seemed to benefit the businesses of his cronies while at the same time keeping the US economy churning through a series of Federal Reserve interest rate maneuvers. These moves were amplified by a reduction in oversight and regulation which, over 10 years, created the greatest credit and asset recession in world history. But that was 6 months ago. Since then huge amounts of the remaining economic value and influence have transferred to the Obama supporters.

To a certain extent, these scenarios are part of every political state. Friends of those in power always get the sweet heart deals. But in this financial crisis, with the future role of American global economic influence in question, the answer to our economic recovery can not be to give the keys to our financial system to our friends and let those who are not our friends fail.

And now under pointed questioning by the senate finance committee, the Secretary of the Treasury says, "We (the government) have no way of making decisions that effect these businesses." Except this government is the majority or the largest shareholder in the very businesses that Geithner claims the government can influence only minimally.

When will this Government take responsibility for its actions and decisions. Who votes the government's shares? They do not want you to know.

This subject will require further discussion - I wait for the review of the Blackrock Mortgage Asset Deal. A sad sad statement made by this administration.

Build Value Every Day

Brad van Siclen

Silly Silly Media Commentary - 5 / 18 / 2009

"US stocks rebounded on Monday following their first bruising week since the rally began in March as encouraging results from Lowe’s, the home improvement retailer, raised hopes the economy would soon reach a bottom." - This statement is from the overtly pessimistic Financial Times of London.

To suggest that there has been any improvement in housing or retail flys in the face of recent Fed announcements. Folks all that we are seeing is a result of the new Dow Jones index, the index driven by day trading speculators of all sizes, jumping on a story, positively positioned by the rah rah media.

Here is the real story -

"Lowe's Cos. reported a smaller-than-expected 22% decline in first-quarter profit after expense control, reduced discounts and demand for paint and other smaller-ticket merchandise helped limit the impact of a decline in sales of big-ticket items.

Shares of Mooresville, N.C.-based Lowe's rose 7.6% to $19.86 in late afternoon trading. "

Does this sound like an optimistic outlook? Lowe's executives managed their existing inventory to properly address a bleak out look, resulting in losses that were less that those these same executives originally told Wall Street Analysts to project. Lowe's is not even a member of the Dow Jones Index, so why would it's rise in price have any effect on the Dow's near 200pt move up? Answer: It wouldn't.

We are witnessing is a Dow Jones head fake courtesy of the trading professionals. In the last 6 weeks, excluding today, the Dow has climbed 300 pts from 7,975 April 6th. We have witnessed an interday high of 8657. Yes the trend looks better, but it is not at all due to improving housing markets or even less worse housing markets. Our opinion, this Dow trend is due exclusively to the cheap money given by the Fed to financial institutions which now have fresh capital to invest. And while it is true that many many mortgages were refinanced by respectful and responsible commercial banks like Wells Fargo, those newly classified commercial banks, Goldman and Morgan, were able to re-inflate their prime brokerage lending to their best hedge fund clients, and these clients bought more equities than they sold.

Not much, if any, significant capital investments have been made into the parts of US companies that are productive and create value that are represented by the shares of the .

In fairness, we believe some value has been created by US corporate finance executives who have deftly adjusted their balance sheets, converting inventory to revenues at better than projected rates and reducing the costs of debt on their books (both are cash flow positive). But what we haven't seen yet is any value creation by these companies. Mainly because they can't. Who is buying products or services in greater numbers than they were 6 months ago...few companies. And until we see revenues growing, not beating reduced projections, we can't believe that value has come back to these markets, regardless of what the Dow Jones and its media followers are ranting about today. When the Dow closes above 8,500 and then stays above 500 for 5 consecutive days, then and only then will we know that a new floor has been placed in the markets.

GE - $13.44 / Stop Loss $10.75
Dell - $11.27 / Stop Loss $9.52
AXP - $26.13 / Stop Loss $22.20

Build Value Every Day

Brad van Siclen

The Dow and the Economy - 5 / 14 / 2009

Its been a few days for me readers, a busy schedule is partly to blame. The other part is watching the markets and seeing nothing new to report. Our collective analysis is playing out as we have written it and now we need to be patient until the next catalyst hits the markets.

We have been hearing and reading a great deal about bad news and the markets. The standard comment is that "All Bad News is Built into current market levels." Don't believe it. At 7,500 bad news or good news the market was heading higher. This was confirmed by 3 weeks of earnings announcements that trounced analysts expectations on the way to a near term Dow high of 8574. But now we have exhausted the appetites of the value buyers that created the last rally. A new floor has been created some where around 7800. And the traders are back fully in charge of these markets.

Here's the bad news for market Bulls and the thinking that a new Bull market has launched. There needs to be a catalyst that turns this Market into a Bull market, and so far we have had none. In 1995 the market rocked past 5,000 on technology IPO's. In 2002 the markets climbed on cheap money and interbank rates that systemically altered investor and finance professionals perspectives, vastly inflating values beyond rational analysis.

We all know the rest.

The problem is that for the next 6 months, there will be nothing but consumer contraction towards stability, job contraction, and business contraction and bankruptcy. It took enormous amounts of capital to stabilize the financial system, 1.7 trillion US dollars, and now we have no choice but to sit and wait for the next, well positioned company and industry to lead us into the next Bull market. WE ARE NOT THERE YET. So be very careful about ignoring or re-entering equity based funds with your savings. We have real issues to overcome.

Here are the 2 issues:

1. The Fed has publicly committed so much money in stabilizing the financial system that as they pursue the job of auctioning off bonds to supply these funds, a massive devaluation of the dollar is occuring and huge inflationary forces are set to take off. In certain cases this may act as a stimulus, further cheapening the value of US exports and making the US more competitive. But that means that the value of US assets will ultimately fall as well - by some estimates by another 25%. Meanwhile home values have stabilized (seemingly) by virtue of the cheap Fed / Obama money and the entry into the lower end of the market by first time home owners - that's the part of the market worst hit by the real estate bubble bursting. My gut tells me the safest place to put money is gold. You may have to deal with volatility, but its the only investment that hedges your savings account balance.

2. We have a significant issue with regard to the Dow Jones Index - it has become a puppet of Day Trader sentiment. It has accelerated past it current fair value in recent speculative bliss, and now has no more legs, no more breath until our next catalyst. Growth buyers (I like to call them value minded speculators) are very reluctant about purchasing equity under these circumstances. Its these growth company buyers that truly lead us into the next Bull market, and they have much to over come. Earnings will stagnate, home values have stagnated, the value of US goods and services will decrease too.

The only way to create sustainable value in a company, or in an economy is by increasing productivity and thereby producing more value. The stimulous packages have done nothing yet but keep the financial infrastructure from crashing around us. They have yet to create value, and unfortunately given the fact that the stimulous money went entirely to groups that have a recent history of taking or leveraging value created by others, I am not hopeful.

Build Value Every Day.

Brad van Siclen

The Fed Chairman Speaks - 5 / 7 / 2009

Bernanke spoke this morning to his nation, the Financial Nation, a nation of which he is Commander and Chief. He speaks slowly and simply to financial professionals and, very much unlike Alan Greenspan, there can be no question what his message is. Here's the message I heard and then, in italics, my view as to the ultimate effects the public companies we care about.

1. The Fed has finally grabbed the Regulatory agencies by the horns and will hold them accountable for future misses, bubble creation, lax or inconsistent review and, action or inaction.

In short, the days of hands off industry self regulation are over. The SEC will become bigger, badder, and go after the larger sized offenders (Investment, Commercial, Mortgage Banks) as a priority, rather than justifying their existence by over regulating and punishing small offenders that have little impact on the financial system. Lax oversight of the big banks directly contributed to this economic crisis. Virtually all SEC heads, NASD heads, and FINRA heads came from industry - that is to say they came from these big companies, and their cronies at these biggest institutions were given by them, in many cases, a free pass or a less regulatory environment to operate in. Meanwhile these agencies went after the smaller, regional and local, broker dealers and commercial mortgage lenders with aplomb. They may have been offenders too, but their reach was not systemic. Expect to see Government employed legal minds and Phd's taking over the top spots at these agencies. And expect that these agencies will double in size.

2. This speech by Bernanke will be referred to for years by the regulators, congressional, and senatorial oversight committees as the May 2009 address. In this address Bernanke said to all Public Company Boards and Executives in all industries that you are required to and will be held accountable for managing your balance sheet risk.

This means that after the US Economic Machine is stabilized to the Fed's satisfaction, the US government is finished saving companies, finished saving jobs, finished financing broken industries.

3. Bernanke said that bigger, more economically critical firms in any industry, will be subjected to greater scrutiny and changes in laws and regulations that will reduce their ability to create systemic risk.

So long as Benanke is in place, and barring illness it will be at least 10 years, the rules and regulations governing US public corporations in any industry of significant size will be subject to changes at a moments notice. This does not exclude Microsoft, Google, Pfizer, GE, and, of course any money center bank or equivalently sized Investment bank.

4. Executives of leading institutions of any industry must understand their responsibility to their shareholders as well as to the public at large.

If, in the future, you as an executive or board member, presides over an institution that takes advantage of the US Economic system to the ultimate detriment of the system or to the detriment of your shareholders, you will be paraded out in the public and held accountable for your management actions or inactions which caused the problem.

5. Banks will need to raise more capital to satisfy the newly determined risk / volatility in the world financial markets.

Ultimately this means that the banks must maintain stronger balance sheets and must issue more equity to meet these new requirements which should cause their equity value to fall due to the added dilution.


In my view Benanke has set the foundation for future action by the government, by its regulatory agencies, and by the law itself which will slow economic growth in the near term, but ultimately create a more level playing field for all institutions participating in a US led World Economy. If I were an executive in any systemically important institution I'd realize that my days of huge profits and salaries at the expense of the US and World economies are over. You can keep all the salary and bonus you want once the government is satisfied you are adding value to the system, the economy and the public at large.

so executives, Build Value Every Day, or else.

Brad van Siclen

Our Valuation vs. Their Valuation - 5 / 5 / 2009

A short one today readers, but maybe the most important one yet:

A few comments from the well paid talking heads this morning: "Its a Bear Market Rally", "We've gained nothing this year, the S & P is just back to even", "There is no way to value companies in this economy. There are no clear projections."

Let's address the last one, "There is no way to value companies in this economy. There are no clear projections." The speaker actually added, "We need to see 2nd and 3rd quarter results to be comfortable with re-entering the equity market."

I use him as an example as to why fund managers almost never keep up with the S & P 500 index. Folks, I want this guy to be a warning to you all. This is the standard mentality running your portfolio and your pension and 401k investments. Invest with guys like this, and unfortunately he is like most others, and you add risk to your investments - He would prefer to speculate with your money in momentum markets and stocks, rather than buy the best companies at significant discounts right now.

Investments in the public market are the purchases of companies undervalued by historic metrics, AND undervalued by historic performance. Speculative purchases are made by buyers of common stocks in public markets based upon forward looking information and estimates.

If you want to buy value, which has the effect of protecting your principal, you can't look at a company like Google or Apple that have been over bought based upon future projections and have price to earnings multiples of 30.0x and 25.0x respectively. Because at those prices you are betting that earnings will grow more and more every quarter, and that there is more future value in these companies than present value. And while you may be right in that perspective on these two fantastic companies, you are still speculating on their future value not investing in the value they have already built.

The often quoted Warren Buffet made a statement many years ago concerning Berkshire's value. He said that his goal is to provide transparent information on Berkshire to his shareholders and the public. If he was doing that right, the stock would be trading at fair value all the time. But he added, if someone wants to pay more than fair value and speculate on the future value of Berkshire's stock, I can't stop them.

Please re-read that last paragraph if you consider yourself a value investor. You might consider getting it tattooed on your arm.

GE - 13.10, stop loss moved to 10.48
Dell - 12.28, stop loss moved to 10.44
AXP - 27.28, stop loss moved to 23.18

Build Value Every Day

Brad van Siclen

Stress Tests - The Real Story - 4 / 4 / 2009

Six months ago a close associate of mine who was working as a NASDAQ trader for a top 10 Investment Bank in NYC received a call from a former employer. This employer was in desperate straights. They needed former analysts who knew their internal process, systems, and models to come back to work for them on the largest financial project in their history. It did not matter that my close friend had left that job 15 years ago and had done nothing but sell NASDAQ blocks in the interim. They would match his salary, give him better benefits, long time job stability, and offer him an inside look on the US and World economies every day. Since the NASDAQ was cratering in October and most traders were getting the axe, he rejoined his former employer, The New York Federal Reserve Bank.

I shared a cocktail with him 8 weeks later on New Years Eve and the subjects of Citibank, Wells Fargo, Wachovia, B of A, and Merrill came up. His statement shocked me. He said - It is so bad, I am being told that all major banks are insolvent by our standards. That no one has a clue how bad it will get, and that teams were being formed to monitor all domestic and international money center banks, analyze them, and provide recommendations on how they might be saved.

We all know the rest, in January and February word began to leak on what the Fed was up to. Financial stocks dropped dramatically, and the Fed and the Treasury used every available means to stop the bleeding. But, we were told, "stress tests" were being launched and results were a few weeks away.

Here we are, May 4th, and the results of the Stress Tests have yet to be released. Well folks, here is my best guess as to why these results are being delayed further and further every day. -

I think the answer is obvious here - The results are in, and the government is cutting back door deals with banks that failed the tests so they can announce that all banks they tested have either passed or been stabilized. There are more banks that failed the tests than the Fed wants to admit to. Some are foreign banks. Some are foriegn government subsidized banks. The real pandemic out there is the weakness of all the world's national and money center banks. And the US government and G - 7 equivalents are trying like mad to cut back room deals among any party that will participate in an effort to shore up the banks that did not pass.

Once this has been done then we will get a public announcement. It's just a repeat of October's insider deals between Wells Fargo, Citigroup, Wachovia, Countrywide, Berkshire, Merrill, B of A. The government is just being more careful this time given the results of the B of A / Merrill forced deal.

These, folks are trying times, and I believe that in addition to the back room stabilization deals, the Government is also waiting to see where this interim capital markets rally ends. They are afraid that a stress test results release without proper solutions and fixes in place for weakened banks, will cause more capital markets panic and a reversal in recent optimism.

I believe the capital markets came to this conclusion 2 weeks ago and the capital markets have no real fear of unknown weakness in money center banks. They know already that the world's reserve banks will not let another crucial bank tank. If nothing else, the US Government understands the sentimental connections by and among banks, corporations, and the equities markets - a trick picked up from the Greenspan Era - and recognizes it is a tricky path to walk. So they will most certainly hedge their bets and stabilized banks that failed their stress tests ahead of announcing any stress test results. Let's hope that the deals they are making do not weaken more banks. Because one thing is for certain, this Fed is running out of silver bullets. You want an answer as to why the capital markets seem to be ignoring bad news? You at least have my answer.

Build Value Every Day

Brad van Siclen

Misguided Media Questions Buffet - 5 / 1 / 2009

This weekend, Warren Buffet's Berkshire Hathaway hosts its annual Shareholder's meeting. This event needs no description. A group of lovely, cash flowing companies set up booths at a local convention center and answer questions from fellow shareholders while they wait for Warren Buffet or Charles Munger sightings.

These last 12 months however have been difficult for Berkshire Hathaway's shareholders to understand. One year ago, Berkshire's bellwether shares, BRK - A, sat comfortably at $133,000.00 per share. Today the price per share sits at $94,000.00. A 30% annual loss. So the financial media has taken this opportunity to send up flares and interview investors who are asking if Buffet still has the magic touch. Or if Buffet has lost his way.

Buffet too may be feeling a bit out of his element. Beginning October 2008 he began a series of interviews with the major financial channels, wrote a few op ed's for the major news papers, and recently began comparing the share performance of the company he chairs to that of the major stock indexes. In one quote he sounds like a lowly fund manager suggesting his stock out performed the comparable markets (by virtue of a smaller annual loss).

What he should do is take the opportunity to do what he does best. Communicate his disciplined value approach to equity investments and re-educate his shareholders on his simple formula. Here it is, and readers, it really is the best way to invest.

First Berkshire only looks at companies that can show significant and consistent earnings over there most recent five year history. Next he determines the Present Value of the company, based upon the company's likelihood of maintaining its earnings growth given historic levels. He won't ever expect a company to grow its earnings by a greater percentage year over year than it has historically. Next step, he determines the return he needs his shareholders to receive on their investment annually, and compounded over the next five years, that return number is 21%. This math ensures the price he is willing to pay on his shareholders behalf is accretive or adds value to the share holder's current value (most acquisitions don't benefit shareholders because they are dilutive to the companies equity value on day one). And, he rarely moves from this model, unless he is buying insurance companies which become banks for him in that they provide a nearly free float or financing source for the company(a subject we can review another day.)

What has been created is a collection of cash flowing businesses bought at significant discount to their future value. Businesses that grow modestly, but whose values on an individual basis add significantly to the shareholders of Berkshire.

The share price also has a very favorable effect on the company's value in the market. It is much much too high to permit significant numbers of speculators from trading for a daily 1% or 2% move. So its liquidity, although growing every year, is not comparable to other companies (136,000 shares a day in the last 3 months). This share price reinforces the notion that investors need only apply. No speculators please.

But to this point of speculators, the last 15 months market crash has had an interesting effect on Berkshire's shareholder base. Fund managers searching for ways to reverse their shoddy returns, put some of their investments into Berkshire (which is a holding company with a fund manager's discipline). The result, speculators jumped in to. And these are the folks that need to be reminded by Buffet that their needs and perspective are not aligned with the Berkshire disciplined value approach. Announcements from Berkshire are few and far between. He holds one research analyst meeting a year to keep research speculation to a minimum (also a great indicator of how Buffet feels about the value added of research analysts in general). Buffet buys value, he buys cash flow and earnings, and if other's want to speculate on the value of his stock, let them. He lives only as a value investor under the same model which only acquires companies and investments that fit his criteria at a price that ensures future returns.

All this said, he does have to explain how and why his insurance groups got involved with mortgage based derivatives. He attempted this in his annual report, but the explanation wasn't very compelling.

The real point is that anyone can apply this model to their investment methodology. The key is having the patience to ignore the media and dow jones noise which will tell you that you could be making 30, 40 or 100% returns a year if you are willing to be a speculator. And if you have made those returns in a year, you are either a speculator or have been the beneficiary of other speculators. And those returns and that approach will never be sustainable.

Build Value Every Day

Brad van Siclen

Excellent News From Well Managed Firms - 4 / 30 / 29

From the front page of Investor's Business Daily, "Visa EPS Climbs 40% and Tops Views Raising Outlook for Operating Margins". But the real story from this earnings report actually appeared in this site's 4/27/2009 posting.

Visa cut quarterly operating costs by 50 million dollars while revenues remained stable. This resulted in better than expected income results on a per share basis.

When the economy and the equity markets go into a tailspin, the best public companies, Visa among them, use these times to trim the fat, cut off the dead wood, push back vendors, and emerge more profitable, leaner and more efficient. And for the value investor, these times are really really good because the cost of assets and future earnings is half what it was 12 months ago. (Value Building 4 / 27 / 2009).

Visa is an excellent example for us to analyze from a value perspective for a number of reasons. Visa's executive management really does squeeze the most equity value out of its operations that it can. Here is a company that exists and thrives almost entirely on consumer credit. And when the general equity market trends turned against Visa, and their stock dropped from year ago heights of 85.00 per share to a January 2009 low of 47.00, management steadily cut is operating costs, squeezed its vendors, wrote down its bad loans at times when no company had any influence in their share price, took advantage of a very favorable credit market (FOR COMPANIES WITH GREAT CREDIT RATINGS) and now has emerged leaner and more profitable. Of course to our readers it comes as so surprise that the illustrious Wall Street analysts missed another one. When everyone, businesses and consumers alike needed to rely on credit, Visa was in the financial position to offer it, at a higher price which is why their revenues remained stable.

The problem with Visa is that it is too expensive at its current 54.0 P/E Ratio for any self respecting value investor to approach it. As great a company as this is, are investors really willing to pay a share price equal to 54 years of earnings results to own it? Leave it to the speculators I think, but kudos to management for maintaining such a P / E ratio in this credit market environment.

Its main competitor, American Express sits on a relative value advantage with an 11.0 P/E Ratio. Hmmmm. Get any ideas readers on another company we may need to add to the list? American Express has an even more conservative approach to consumer credit, has much lower and selective market share and is likely trading below its fair value currently. Which means unless there is a systemic issue the company is not reporting, American Express, currently priced at 25.00 should approach $37.00 within 12 months. Let's begin watching it.

DELL - $11.25, Buy in price $10.00, Stop Loss $9.56
GE - $12.22, Buy in price $10.60, Stop Loss $9.70
AXP - $24.95, Buy in price $24.95, Stop Loss $19.96

Build Value Every Day

Brad van Siclen

Value Creation in the Land of Day Traders - 4 / 27 / 2009

We have recently established that the market gyrations of late amount to deep pocketed day traders trying to beat other speculators into the next index momentum move, up or down. I add to that today's "Swine Flu" concerns. "Futures Lower Based Upon Swine FLU". This is time to be investing people. The financial media has lost its way. And when unsure how to bring value to their viewers and readers, they resort to attaching silly explanations to the momentum trades of the day. Put your value caps on and seek out those great companies you could not afford only a year ago. They are selling at relative bargains.

Meanwhile has any one been paying attention to the earnings announcements from major public companies? Here's what we have learned.

Public Company Executives took advantage of Fall 2008's banking crisis to fool the current crop of shoddy research analysts into reducing their earnings and valuation projections. Then, being masters of operational and profit efficiency, set about restructuring their businesses for a return to profits and profit growth, and "poof" virtually all component companies have beaten earnings expectations for Q1. Still most public company executives are once again cautious about their forward looking earnings commentary. But in truth this is simply more misdirection. I am not suggesting that the economy will improve, just simply that the best companies and executives are excellent in consolidating market share and profits during recessions.

Public company executives have learned long ago that you can't buck the general market trends their common stock trades in. So they have now begun to use this to their advantage and in times like these when their shares should be valued higher they cry the blues, discuss common buzz terms like China's Currency Manipulation, Consumer Confidence, European Protectionism, Health Care and Pension Costs, and my favorite generalization, "Unfavorable Economic Environment".

Well these are the supposed outlooks of companies who continue to operate in an economy that has seen 1) no real wage growth in a decade (labor costs flat), 2) a dramatic rise in out sourcing to cheap wage countries (production costs down), 3) A favorable dollar (low compared to its competitors), 4) inexpensive cost of capital (low low interest rates), 5) supreme financial management software (adds to efficient capital decisions), and 6) a hands off regulatory and tax system.

Sure the systemic banking crisis has created a recession, and has revealed significant issues with our regulatory systems, I don’t belittle this issue in the slightest.

But the best companies, the smartest companies, the companies with the most value use these events to trim the fat, cut off the dead wood, push back vendors, and emerge more profitable, leaner and more efficient. And for the value investor, these times are really really good because the cost of assets and future earnings is half what it was 12 months ago.

So let’s dust of our financial texts books and go bargain hunting. Sell your failed, professionally managed equity funds. And buy the great companies you always wanted to own. They will be the leaders out of this recession. They will be the leaders in earnings growth.

Set realistic investment return expectations. Select companies with a solid price base (we’ll discuss this later). Then sit back and let the speculators extend your returns. As you are hopefully a bit more expert in how the best company execs use Wall Street research experts as just another tool in managing their value creation.

Build Value Every Day
Brad van Siclen

At a Loss For Words - 4 / 24 / 2009

Yesterday's announcement concerning Paulson, Bernanke, and Bank of America CEO Ken Lewis may have sent shock waves through a less savvy market. But the US markets took it all in stride. I will use this fact, again, as proof that traders are running the indexes now. That new investment money is still on the sidelines. And lastly as a reminder that the US Government sees Wall Street firms and the Commercial Banks that acted like them, as speculators and taxation profit centers, and not value builders.

Essentially, Paulson and Bernanke told Bank America that the American public should be kept in the dark concerning the condition of Merrill Lynch. That saving Merrill Lynch and its shareholders was more important than lying to and damaging Bank of America's shareholders. That Bank of America had enjoyed the favorable economic and regulatory conditions of the US markets for many years by the good graces of the US Government, and now the US Government was telling them it was pay back time. Oh, and if you are not happy with the US Government's position on this matter, we will remove you and your board and put another Liddy (AIG's government appointed CEO) in charge. I am truly at a loss for words. This public revelation essentially tells all CEO's that the cost of capitalism is, at any time, at the bidding of the US Governement and that the shareholders rights are nearly worthless in the Government's mind. That is a terrible precident.

Perhaps more shocking is that Paulson, a man who benefited enourmously from the government's lax regulations when working for Goldman Sachs, was able to lead the charge in the selection of survivors among AIG, Citibank, Lehman, Bear, Merrill Lynch, and now Bank of America, while maintianing and funding via government requirement, the stability of Goldman Sachs. One can only imagine the books that will be written on this era in the future.

In the past you may remember that JP Morgan bailed out the government. Well these days are long gone. And in their place seems to have arisen the greatest theft from American shareholders and investors ever perpetrated. It may not seem like it, but I really am at a loss for words on this subject.

But one thing is true. The President I voted for has proven to be a greater light weight than the most conservative media could ever have guessed at. Virtually all of Wall Street's value has been consolidated by this government's direct decisions into 2 banks, Goldman Sachs and Morgan Stanley. That, people was not through survival of the fittest, but through government selection led by former Goldman Sachs partners and consultants. This President has permitted this to happen and has yet to show that was his vision or even by his influence or approval that this consolidation occured.

So what good has come from all this? Perspective. You can rely on no one to make proper invesment decisions but yourself. And even when you make them the government may, at some point in the future determine that your equity position does not deserve the proper free market information its agency, the SEC, requires of its public companies by law. You have learned that the government has always been working with these large banks, and only during a bear market is that marriage exposed.

Wall Street professionals always knew this, they just didn't tell you. And that is why the markets shrugged off this news of forced collusion of public entities and the government at its highest levels.

I wonder, who other than Goldman Sachs will ultimately benefit from this government's efforts in the US economy? I also think we now know the conversation that was had with Warren Buffet and the US Government prior to his preferred investments in GE and Goldman Sachs.

GE closed yesterday at $12.03. Dell at $10.20 no changes needed.


Build Value Every Day, become more expert.


Brad van Siclen

You Are Officially Alone - 4 / 22 / 2003

Citibank. If you are invested in a fund or index, you own some. How? Your fund certainly owns a few index spiders. Citi is a part of most portfolios and equity indexes. And those in charge of managing your investments in equity funds have just officially vacated all fiduciary responsibility to you, the investors.

They have done this by allowing the Citibank board to be unanimously re-elected. These board members, super smart people, are paid to ensure that the executives of the company manage the corporation for the benefit of the shareholders. Do you think they upheld their end of the contract? This Board has sat back and done absolutely nothing for 2 years and presided over one of the greatest loses in value and operational in competence in the history of American Banking. And guess what? The professionals you pay to manage your investment and to cast your votes by proxy decided to reconfirm this excellent board.

It's official people, you are alone. Professional management of your money does not exist. And fiduciary responsibility is not at all a requirement in the eyes of Fidelity, Janus, Vanguard. I am terribly sorry if I offend some readers who work for these named funds and really do a great job for investors. But at some point they need to ask themselves if they take any responsibility for the record redemptions they have seen at their funds in the last 12 months. Those redemptions are investors casting their votes on the fund managers. Its that simple. Perhaps if fund managers had taken more responsibility in looking out for their investors money, had remained disciplined, had not been caught up in the speculative momentum of the last few years, and had made the necessary public statements and actions to ensure the boards of companies they invest your money in were beholden to the shareholders first, we would recognize their value in the process. Instead the vast majority of equity fund managers are little more than clearing houses for your investment money. They are not expert, or they were once but now take credit when the markets go up, and point fingers when the markets go down.

This is the very reason you must be more expert. You must learn some investment basics. You must decide your investment profile. And you must act on it. It's called taking responsibility. Because if these results of the Citibank Board re-election tell you anything, its professionals you pay to watch your financial back are not going to do it at all. Read future and past postings, send in your comments or questions or suggestions. Together we can become more expert.

Learn. Be Conservative. You worked very hard for your 401k.

Build Value Every Day (on your own).

Brad van Siclen