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
Wednesday, May 20, 2009
Monday, May 18, 2009
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
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
Wednesday, May 13, 2009
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
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
Thursday, May 7, 2009
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
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
Tuesday, May 5, 2009
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
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
Monday, May 4, 2009
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
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
Friday, May 1, 2009
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
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
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