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
Friday, July 10, 2009
Wednesday, July 1, 2009
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
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
Thursday, June 25, 2009
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
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
Tuesday, June 23, 2009
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
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
Friday, June 12, 2009
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.
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.
Wednesday, June 10, 2009
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
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
Wednesday, June 3, 2009
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
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
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