If I hear another so called Wall Street expert tell us in an interview that mark to market is a poorly designed policy and that the value of the TARP assets are significantly higher than currently represented I may just wait outside the studio where the interview is held and egg the the "expert". What ridiculous planet have these "experts" been living on?
Oh yeah its Planet Wall Street. Were values are not based on replacement value plus a 4x cash flow multiple, but on 2x replacement value and 12x cashflow.
Conversation between bulge bracket Wall Streeter ("WS") and a true investor ("TI"):
WS. If a bank is not getting capitalized by Uncle Sam and it can not sell its assets at the value they were purchased at what does that mean?
TI. It means the assets are worth less than they paid for them.
WS. How much less?
TI. Whatever anyone will pay for them.
WS. What if I can't get a bank to finance me so I can pay even a much less amount?
TI. You are still paying too much.
WS. But the Banks are saying they can't lend money because they have had to mark down assets too much.
TI. If they hadn't paid speculative values they thought were discounts to future value for these assets they would not be in the bind they are now.
WS. That's ridiculous , do you really believe that all the value, cost, labor, materials used to build these assets also have less than half the value they were paid for and compensated at?
TI. When it comes to the assets you are claiming the Banks won't lend against and have been more than halved in value by mark to market accounting, yes.
WS. That makes no sense at all.
TI. I am not surprised to hear you say that.
We have been living in a hyper inflated world for so long, 20.0x multiples became the norm. $1.5 million for a 1 bedroom apartment seemed reasonable. Billionaire 30 year olds were becoming common. $85,000 cars were common. People, these values were created by unrealistic economic policies and thinking that moved 3 deviations from real for so long that 2 deviations seemed like bargain hunting.
Tomorrow we'll discuss finding stocks in any market that protect your principal and build value for you over time in any market.
Build Value Every day
Brad van Siclen
But
Tuesday, March 31, 2009
Monday, March 30, 2009
US Government Owns Car Companies Too? 3 / 29 / 2009
We have now officially crossed the chasm. There is no turning back. Any company considered large enough that its failure will result in large scale, prolonged unemployment benefits payments, the US Government will come in and save. Folks, President Obama just stated that the US Government will honor all car service plans and warranties. Does anyone find this remarkably shocking even in this era of daily government bailouts?
So, does this mean that when a corporation has a bad year or a bad few years in a row, all it need do is suggest that a bankruptcy is coming and beg for a hand out? You know folks it's all well and good that Executives and CEO's are seeing reduced bonuses and pay cuts. But what of the millions in salary and bonuses they "earned" between 2001 and 2008? Granted, there are a lot of issues that burn us all. But perhaps the biggest issue is the refusal by the US Car makers to refine and improve the qualities of their models in favor of profits. 40 years ago the US made the best cars, period. And beginning with the first oil crisis of the 70's, Auto makers began squeezing out profits by cutting manufacturing and parts costs. Seeing the car as a commodity and consumer disposable, and less like a business critical tool, luxury good, or consumer durable.
In the name of profits they started putting cheap parts and cheap engines into great product lines and poof, consumers and brand identity eroded. Ford made us all endure decades of crappy Mustangs. GM ruined the Cadillac. Crysler..well they destroyed the Jeep. And while this was all happening, and consumers moved to Honda and Toyota, the Big Three began to convince the consumer to drive their trucks instead of their crappy sedans and charged us more for the privilege.
Ok so I have over simplified here, but not by a lot. The real point is that when Honda and Toyota were building substandard cars in the 70's, they competed on price and poured profits into improving their quality, and ten years later were able to charge 25k for their cars and gain significant market share. Hyndai is the latest example of this business model - though they are 20 years behind Toyota and Honda in the cycle.
The sad part is that the Big Three knew this was happening. They knew that they were trading all their build quality and brand strength for short term profits. And the proof is their recent response. Each of the big three has taken a portion of profits and began rebuilding their signature cars to Toyota and Honda quality - the new Cadillacs, Mustangs, Camaros and Corvettes are as good as they ever were. But rather than having the ability to leverage this renewed value, they have run out of time. And only the government believes they can and will endure. The workers are refusing to recognize their position or the long term vision, the executives continue to point fingers, and the build quality for 90 percent of their fleets still lags the Koreans, Japanese and the Germans. In all consumer durables, build quality is synonymous with value at all price ranges.
So maybe it is up to the US Government to step in and save the industry. Maybe in this case the same government who the auto workers voted in has no choice but to save them. But once saved, we should all be afraid of these companies repeating the same mistakes in the future. Maybe they need to hire foreign workers and Japanese and German executives who still understand that value is built incrementally every day year over year. If we were this government, we'd do what Regan did. Lock'em all out and take over the assets on behalf of the shareholders. Then hire cheaper and importantly better workers. Yes extreme, but that's what's needed these days. These companies lose vast amounts each week they remain open in current state.
Build Value Every Day.
Brad van Siclen
So, does this mean that when a corporation has a bad year or a bad few years in a row, all it need do is suggest that a bankruptcy is coming and beg for a hand out? You know folks it's all well and good that Executives and CEO's are seeing reduced bonuses and pay cuts. But what of the millions in salary and bonuses they "earned" between 2001 and 2008? Granted, there are a lot of issues that burn us all. But perhaps the biggest issue is the refusal by the US Car makers to refine and improve the qualities of their models in favor of profits. 40 years ago the US made the best cars, period. And beginning with the first oil crisis of the 70's, Auto makers began squeezing out profits by cutting manufacturing and parts costs. Seeing the car as a commodity and consumer disposable, and less like a business critical tool, luxury good, or consumer durable.
In the name of profits they started putting cheap parts and cheap engines into great product lines and poof, consumers and brand identity eroded. Ford made us all endure decades of crappy Mustangs. GM ruined the Cadillac. Crysler..well they destroyed the Jeep. And while this was all happening, and consumers moved to Honda and Toyota, the Big Three began to convince the consumer to drive their trucks instead of their crappy sedans and charged us more for the privilege.
Ok so I have over simplified here, but not by a lot. The real point is that when Honda and Toyota were building substandard cars in the 70's, they competed on price and poured profits into improving their quality, and ten years later were able to charge 25k for their cars and gain significant market share. Hyndai is the latest example of this business model - though they are 20 years behind Toyota and Honda in the cycle.
The sad part is that the Big Three knew this was happening. They knew that they were trading all their build quality and brand strength for short term profits. And the proof is their recent response. Each of the big three has taken a portion of profits and began rebuilding their signature cars to Toyota and Honda quality - the new Cadillacs, Mustangs, Camaros and Corvettes are as good as they ever were. But rather than having the ability to leverage this renewed value, they have run out of time. And only the government believes they can and will endure. The workers are refusing to recognize their position or the long term vision, the executives continue to point fingers, and the build quality for 90 percent of their fleets still lags the Koreans, Japanese and the Germans. In all consumer durables, build quality is synonymous with value at all price ranges.
So maybe it is up to the US Government to step in and save the industry. Maybe in this case the same government who the auto workers voted in has no choice but to save them. But once saved, we should all be afraid of these companies repeating the same mistakes in the future. Maybe they need to hire foreign workers and Japanese and German executives who still understand that value is built incrementally every day year over year. If we were this government, we'd do what Regan did. Lock'em all out and take over the assets on behalf of the shareholders. Then hire cheaper and importantly better workers. Yes extreme, but that's what's needed these days. These companies lose vast amounts each week they remain open in current state.
Build Value Every Day.
Brad van Siclen
Friday, March 27, 2009
The Dow Jones Speaks - 3 / 27 / 2009
This Dow Jones Index is very different from the Dow Jones Index of the past. What was once an elegant and simple barometer measuring the health and forecast of America's 30 greatest companies, has become a bipolar, reactionary indicator of day trader sentiment. It is this writer's opinion that the creation of the Dow Jones Index shares, which enables you to buy or sell pieces of each Dow Jones component in one single transaction has in fact ruined the very value the Index was designed to report.
Wall Street continues to hail the American Exchange for creating this trading opportunity, and by Wall Street standards, it has been one of the greatest successes of all times. The daily volume trades in the Dow Jones components have soared, and the "Diamonds" as the index shares are called trade as liquid water in the Amazon.
But in market conditions like we have beginning 2007 when valuations on companies far exceeded any rational financial math combined with market liquidity fed by extraordinarily lax margin standards even the most bullish of equity analysts stopped risking large investments in single issues, and instead focused their efforts on the momentum driven index investments. And the Diamonds, with their huge daily move potential and extreme liquidity fit the day trading psyche perfectly. Except unlike the $10,000 positions that fueled the day traders of the Internet bubble, 100,000 - 1,000,0000 positions became the norm as professional money managers and the traders became the new day traders.
With this switch, the Dow Jones became an index of hourly day trader sentiment of the US Economy, and its crazed runs and dips caused by speculative watchers of intraday technical trends and charts. And now we have a Fed and Treasury Secretary to is reacting to this index..How?
Well we and they really do not know how bad the banking system is, nor how far out and how large the legitimate counter party claims on derivatives go. Why does the Treasury continue to give money to AIG? Not to save AIG, but to settle the claims of the parties who bet incorrectly in this economic fiasco who in turn owe money to the parties who bet correctly. See AIG insured the parties that bet incorrectly. And those parties include Goldman Sachs, Bank America, Citigroup, HSBC, Wells Fargo, Barclays, and Society General, to name a few. These illustrious institutions can not afford to pay the claims against them unless AIG covers their losses. And AIG can't cover their losses unless the US government pours more and more money into it.
Now back to 2007. The hardened financial traders only care to make money. They smell blood and they begin selling the Dow Jones Index in massive quantities knowing that a wrong bet may cost them 5% at most because of the extreme liquidity of the Diamonds. Meanwhile, fund managers running your money are, in general blind to this momentum driven equity fiasco. They think, "Hey, i guess selling has started because valuations are too high." Most of these managers recognize that P/E multiples of 20.0x - 24.0x are a bit high, so a 15% retrace of the 2007 valuations is likely and expected. They sell a bit, but hold the vast majority of their Dow Jones component positions. That brings the Dow into the 12,500 range. But the traders keep selling. And by know the losses are piling up at a pace your fund managers who are strapped to individual issues can't keep up with. Traders, interested only in the super liquid Diamonds keep selling. They keep the momentum going and pretty soon Dow Components see multiples go to 8.0 - 10.0 x and the DOW indicated market loses 40% - 50% of its value with your fund managers wondering how and why.
Now bring in the economists who have a systemic financial issue, caused by the ridiculous expanse of the derivatives markets and the abusers of it, combined with their incorrect assumption that the Dow Jones Index is still a great barometer of the US economy, and they, including the Treasury, feel justified in throwing trillions of dollars into the pockets of the ring leaders of this crazed capital market gyration. I listed a few of them above (AIG,Goldman Sachs, Bank America, Citigroup, HSBC, Wells Fargo, Barclays, and Society General).
These institutions will not do good for the world unless the world aligns itself with their needs. But the Treasury and the Fed feel these groups are an integral component to the World Economy Functioning properly. This is no longer the case. while in a Bull Market they are leaders in raising capital for speculative ventures, in Bear Markets they are the leaders of the race to the bottom.
I ask all readers - Who funded India's, China's, Korea's last 20 year trajectory? Commercial lenders and private equity. Not Wall Street World. Wall Street World came in only lately to take advantage of the last 20% speculative growth. So why must we bail them out? If the US government wants to save the US economy, by pass Wall Street, they have become expert in speculating. Give the money to long standing conservative institutions and bring back Glass Steagall. Bring it back now. Wall Street will never self regulate, and when they got their hands on the Commercial Banks, it has been one speculative disaster after another. The Dow Jones may now just be an indicator of precisely that. Wall Street has maybe proven itself to be nothing more than a pass through for professionals who make a living speculating on the economy. The Dow Jones Index is good at telling us only that.
Build Value Every Day.
Brad van Siclen
Wall Street continues to hail the American Exchange for creating this trading opportunity, and by Wall Street standards, it has been one of the greatest successes of all times. The daily volume trades in the Dow Jones components have soared, and the "Diamonds" as the index shares are called trade as liquid water in the Amazon.
But in market conditions like we have beginning 2007 when valuations on companies far exceeded any rational financial math combined with market liquidity fed by extraordinarily lax margin standards even the most bullish of equity analysts stopped risking large investments in single issues, and instead focused their efforts on the momentum driven index investments. And the Diamonds, with their huge daily move potential and extreme liquidity fit the day trading psyche perfectly. Except unlike the $10,000 positions that fueled the day traders of the Internet bubble, 100,000 - 1,000,0000 positions became the norm as professional money managers and the traders became the new day traders.
With this switch, the Dow Jones became an index of hourly day trader sentiment of the US Economy, and its crazed runs and dips caused by speculative watchers of intraday technical trends and charts. And now we have a Fed and Treasury Secretary to is reacting to this index..How?
Well we and they really do not know how bad the banking system is, nor how far out and how large the legitimate counter party claims on derivatives go. Why does the Treasury continue to give money to AIG? Not to save AIG, but to settle the claims of the parties who bet incorrectly in this economic fiasco who in turn owe money to the parties who bet correctly. See AIG insured the parties that bet incorrectly. And those parties include Goldman Sachs, Bank America, Citigroup, HSBC, Wells Fargo, Barclays, and Society General, to name a few. These illustrious institutions can not afford to pay the claims against them unless AIG covers their losses. And AIG can't cover their losses unless the US government pours more and more money into it.
Now back to 2007. The hardened financial traders only care to make money. They smell blood and they begin selling the Dow Jones Index in massive quantities knowing that a wrong bet may cost them 5% at most because of the extreme liquidity of the Diamonds. Meanwhile, fund managers running your money are, in general blind to this momentum driven equity fiasco. They think, "Hey, i guess selling has started because valuations are too high." Most of these managers recognize that P/E multiples of 20.0x - 24.0x are a bit high, so a 15% retrace of the 2007 valuations is likely and expected. They sell a bit, but hold the vast majority of their Dow Jones component positions. That brings the Dow into the 12,500 range. But the traders keep selling. And by know the losses are piling up at a pace your fund managers who are strapped to individual issues can't keep up with. Traders, interested only in the super liquid Diamonds keep selling. They keep the momentum going and pretty soon Dow Components see multiples go to 8.0 - 10.0 x and the DOW indicated market loses 40% - 50% of its value with your fund managers wondering how and why.
Now bring in the economists who have a systemic financial issue, caused by the ridiculous expanse of the derivatives markets and the abusers of it, combined with their incorrect assumption that the Dow Jones Index is still a great barometer of the US economy, and they, including the Treasury, feel justified in throwing trillions of dollars into the pockets of the ring leaders of this crazed capital market gyration. I listed a few of them above (AIG,Goldman Sachs, Bank America, Citigroup, HSBC, Wells Fargo, Barclays, and Society General).
These institutions will not do good for the world unless the world aligns itself with their needs. But the Treasury and the Fed feel these groups are an integral component to the World Economy Functioning properly. This is no longer the case. while in a Bull Market they are leaders in raising capital for speculative ventures, in Bear Markets they are the leaders of the race to the bottom.
I ask all readers - Who funded India's, China's, Korea's last 20 year trajectory? Commercial lenders and private equity. Not Wall Street World. Wall Street World came in only lately to take advantage of the last 20% speculative growth. So why must we bail them out? If the US government wants to save the US economy, by pass Wall Street, they have become expert in speculating. Give the money to long standing conservative institutions and bring back Glass Steagall. Bring it back now. Wall Street will never self regulate, and when they got their hands on the Commercial Banks, it has been one speculative disaster after another. The Dow Jones may now just be an indicator of precisely that. Wall Street has maybe proven itself to be nothing more than a pass through for professionals who make a living speculating on the economy. The Dow Jones Index is good at telling us only that.
Build Value Every Day.
Brad van Siclen
Wednesday, March 25, 2009
Monday, March 23, 2009
Part 1 - Observations on Market Gyrations - 3 / 25 / 2009
Lately, the horror stories concerning decimated 401k's and lost retirement accounts has brought to bear a significant misconception in any kind of investing, and most obviously equities investing. We, and I include myself in this, have been fooled by fund managers, traders, research analysts, the lot for 50 years now.
I recognize this is a statement that offers one response, "No Kidding". But I think it's the reason why we have been misled that offers some of the best examples of how to minimize its impact on your future and your children's futures. I have borne witness to much of what I will explain here for all of my professional career. And it's the investors, institutional and individual, that intuitively understand this and importantly ACT on this information who manage to protect their principal, protect their gains, and compound those gains over a 5 year, 15 year, and 20 year period of time.
So with that statement, we embark on a series of daily called "Observations on Market Gyrations" designed over time to enhance your capital market's perspective and ultimately your expertise. Each posting under this heading will highlight common investment issues and basic solutions to them and the perspective that took us from them.
First and foremost, the concept of professional fund management is, and always will be a farce at one level or another. Fund managers and fund companies exist to offer vast diversification and educated stock selections to individuals who want the opportunity to invest in equities but do not have the time or do not want to make the effort to review and select their own investments. But this said, it is the exception, not the rule that Fund managers perform better over a 5 year period than any of the major indexes. The reason for this is they seek out, as core portfolio holdings, companies with consistent earnings and proven management that come with good Moody's, Valueline, and S&P ratings and receive ample "Buy" recommendations from research analysts at the larger investment banks. Seems like a safe and consistent bet that, importantly, no investor in their fund can argue with.
A quick review of the core holdings from my random sampling of popular Growth and Income funds from major Fund Managers reveals the following corporation's stocks in their portfolios: Exxon, Procter & Gamble, General Electric, AT & T, Johnson & Johnson, Chevron, Microsoft, Wal-Mart, Pfizer, JP Morgan Chase. Big names, great companies. But here is a key problem. The entire research world spends hundreds of thousands of hours quarterly on these very same companies. The result is that each of the shares of these companies are fully valued and fairly valued by any metric that the equities research world bases their recommendations on. And fairly valued or fully valued shares UNDER PERFORM MARKET INDEXES. (P.S. We am not forgetting the dividend factor. But people, these companies pay very poor dividends which, upon announcement, reduce the price per share equivalent by the dividend amount. Its a zero sum to the holder. In our opinion, dividends that are not equal to 33% of the companies earnings are not dividends at all.)
If you invest in one of these companies or "hold" your position in one of these companies you are in fact speculating that the global industry these companies address will grow. That the economic environment that each of these companies operate in will continue to grow. And we all know now that speculation leaves you and your investment wide open for a market corrections and loss. Or does it?
There are simple preventative measures that all of us, fund managers included, can use to protect large losses. We will review these periodically, but the easiest one to remember is called a stop-loss order. In this type of order the investor in say Microsoft can enter an order to sell all or part of a position at a pre-set price that is below the current price of the stock. Thus should a interim correction occur, that ultimately becomes a bear market free fall, you as an investor have pre-set your gains or at least your selling price and therefor are protected from significant future loss.
Now People, we do not want to hear, "yes, but if my position is sold and the market for that position rallies, an hour later I could lose my upside". Because if that is your perspective you are a speculator, not an investor, and that means you are willing to risk your principal investment and perhaps your savings in order to have a chance to participate in a speculative market rally.
This brings us back to "professional" fund management. How is it that managers entrusted with your investments would rather speculate with your money than build its value incrementally? How is it that any of them shows a loss of more than 20% last year? Unfortunately its not for lack of ability of lack of training. It is complete lack of perspective. And hopefully, through this daily piece, we are building real perspective and therefore real value incrementally and over time.
Build Value Every Day.
Brad van Siclen
I recognize this is a statement that offers one response, "No Kidding". But I think it's the reason why we have been misled that offers some of the best examples of how to minimize its impact on your future and your children's futures. I have borne witness to much of what I will explain here for all of my professional career. And it's the investors, institutional and individual, that intuitively understand this and importantly ACT on this information who manage to protect their principal, protect their gains, and compound those gains over a 5 year, 15 year, and 20 year period of time.
So with that statement, we embark on a series of daily called "Observations on Market Gyrations" designed over time to enhance your capital market's perspective and ultimately your expertise. Each posting under this heading will highlight common investment issues and basic solutions to them and the perspective that took us from them.
First and foremost, the concept of professional fund management is, and always will be a farce at one level or another. Fund managers and fund companies exist to offer vast diversification and educated stock selections to individuals who want the opportunity to invest in equities but do not have the time or do not want to make the effort to review and select their own investments. But this said, it is the exception, not the rule that Fund managers perform better over a 5 year period than any of the major indexes. The reason for this is they seek out, as core portfolio holdings, companies with consistent earnings and proven management that come with good Moody's, Valueline, and S&P ratings and receive ample "Buy" recommendations from research analysts at the larger investment banks. Seems like a safe and consistent bet that, importantly, no investor in their fund can argue with.
A quick review of the core holdings from my random sampling of popular Growth and Income funds from major Fund Managers reveals the following corporation's stocks in their portfolios: Exxon, Procter & Gamble, General Electric, AT & T, Johnson & Johnson, Chevron, Microsoft, Wal-Mart, Pfizer, JP Morgan Chase. Big names, great companies. But here is a key problem. The entire research world spends hundreds of thousands of hours quarterly on these very same companies. The result is that each of the shares of these companies are fully valued and fairly valued by any metric that the equities research world bases their recommendations on. And fairly valued or fully valued shares UNDER PERFORM MARKET INDEXES. (P.S. We am not forgetting the dividend factor. But people, these companies pay very poor dividends which, upon announcement, reduce the price per share equivalent by the dividend amount. Its a zero sum to the holder. In our opinion, dividends that are not equal to 33% of the companies earnings are not dividends at all.)
If you invest in one of these companies or "hold" your position in one of these companies you are in fact speculating that the global industry these companies address will grow. That the economic environment that each of these companies operate in will continue to grow. And we all know now that speculation leaves you and your investment wide open for a market corrections and loss. Or does it?
There are simple preventative measures that all of us, fund managers included, can use to protect large losses. We will review these periodically, but the easiest one to remember is called a stop-loss order. In this type of order the investor in say Microsoft can enter an order to sell all or part of a position at a pre-set price that is below the current price of the stock. Thus should a interim correction occur, that ultimately becomes a bear market free fall, you as an investor have pre-set your gains or at least your selling price and therefor are protected from significant future loss.
Now People, we do not want to hear, "yes, but if my position is sold and the market for that position rallies, an hour later I could lose my upside". Because if that is your perspective you are a speculator, not an investor, and that means you are willing to risk your principal investment and perhaps your savings in order to have a chance to participate in a speculative market rally.
This brings us back to "professional" fund management. How is it that managers entrusted with your investments would rather speculate with your money than build its value incrementally? How is it that any of them shows a loss of more than 20% last year? Unfortunately its not for lack of ability of lack of training. It is complete lack of perspective. And hopefully, through this daily piece, we are building real perspective and therefore real value incrementally and over time.
Build Value Every Day.
Brad van Siclen
We Need a Perspective Reset - 3 / 23 / 2009
We Need a Perspective Reset People. 4 months ago, before President Obama took office, before Tim Geitner became Treasury Secretary, Hank Paulson recommended the very bail out plan we are hearing about today. Readers know that I am no fan of Paulson. He is a very capable and persuasive manager, but when caught in this historic and unprecedented financial crisis, his solution was to rely on answers from the same market cronies (CEOs) who were asleep at the switch when the train went roaring by.
During that uneasy time, the Summer of 2008, I was asked by the BBC to make a statement on my position for the first bail out. This was the late summer bailout that created a blind pool of money that was flexible enough to acquire "whatever" needed to be acquired to stabilize what seemed like a banking sector nose dive to zero value. Hours before the congressional vote I stated that "The President (Bush) has made an international statement that we must bailout bank balance sheets. If we do not the world's faith in US economic leadership will be shattered and the US will lose whatever leadership role it has." Congress declined it. The markets dove, the US dollar dropped. Five days later the Senate approved it, along with the Executive branch, and in a re-vote touted by many as full of pork, Congress approved the bail out 10 days after its first failed approval.
So finally, here it is. And ahead of its announcement, President Obama sat, yet again with the media, 60 minutes. His statement "I think that systemic risks are still out there. And if we did nothing you could still have some big problems. There are certain institutions that are so big that if they fail, they bring a lot of other financial institutions down with them. And if all those financial institutions fail all at the same time, then you could see an even more destructive recession and potentially depression." A very political way of saying, "That's my answer to the statements that AIG is nothing more than a pass through Hank's and Tim's favorite banks."
I credit the Opinion Editor of the New York Times this Sunday in permitting Frank Rich the space to properly call out the systemic cronyism which first created this problem and now continues to benefit from the "solutions". It allowed Governor Corzine (a former Goldman Sach's CEO) to tell it like it is, "The people have a right to be angry. We are rewarding failure with bailouts and bonuses."
He could not be more right about this. A significant reason for the mess we find ourselves in is the short sighted reward strategy put in place by CEO's and Board Members who continued to adjust their strategy to suit the shareholder's desires for quarterly results. It created a culture that produced short term gains at the expense of long term sustainability. And then paid them for leveraging their business model in the short term in order to produce quarterly earnings and annual bonuses. Well, we know now for certain that these business strategies end badly. Enron, Countrywide, AIG, Citibank, Merrill, Fifth Third Bank, Lehman Brothers, Bear Sterns. Will this list ever end? No.
Shareholders do not see themselves as owners of businesses, they see themselves as participants in the gains and losses of these businesses over short periods of time. If they saw themselves as owners, which they are, shareholders would be running at the corporate offices of these businesses listed in the last paragraph with torches and pitchforks. Calling for legal action against Board members and Executives who illegally transferred 100's of millions of profits from their shareholders into their own pockets. In certain circumstances, that's embezzlement.
But shareholders are not taking action. These "brilliant" fund managers who run your investments are simply repeating the same tired mantras. "Unforeseen market environments and historic changes have led to the losses in the companies we invest in and in the value of their stock." No one needs a fund manager who does not see historic changes coming. These historic market moves were being called for 24 months ago. These fund managers simply created index funds weighted in sectors they were comfortable with sat back and watched. Do the words "Fiduciary Responsibility" apply to any of these so called CFA fund managers? ITS A JOKE. Shareholders must must begin to act like owners policing the companies they own to build real value over time. Otherwise you are a speculator, a gambler.
Seek out and invest in companies that are building value. I think it has become apparent that the biggest companies are not building value they are acquiring value and then leveraging it. In a default or failed business model, it's the shareholders that lose. Not the employees who receive cash bonuses that far exceed the value they created for their shareholders.
Wake up people.
Build Value Every Day.
Brad van Siclen
During that uneasy time, the Summer of 2008, I was asked by the BBC to make a statement on my position for the first bail out. This was the late summer bailout that created a blind pool of money that was flexible enough to acquire "whatever" needed to be acquired to stabilize what seemed like a banking sector nose dive to zero value. Hours before the congressional vote I stated that "The President (Bush) has made an international statement that we must bailout bank balance sheets. If we do not the world's faith in US economic leadership will be shattered and the US will lose whatever leadership role it has." Congress declined it. The markets dove, the US dollar dropped. Five days later the Senate approved it, along with the Executive branch, and in a re-vote touted by many as full of pork, Congress approved the bail out 10 days after its first failed approval.
So finally, here it is. And ahead of its announcement, President Obama sat, yet again with the media, 60 minutes. His statement "I think that systemic risks are still out there. And if we did nothing you could still have some big problems. There are certain institutions that are so big that if they fail, they bring a lot of other financial institutions down with them. And if all those financial institutions fail all at the same time, then you could see an even more destructive recession and potentially depression." A very political way of saying, "That's my answer to the statements that AIG is nothing more than a pass through Hank's and Tim's favorite banks."
I credit the Opinion Editor of the New York Times this Sunday in permitting Frank Rich the space to properly call out the systemic cronyism which first created this problem and now continues to benefit from the "solutions". It allowed Governor Corzine (a former Goldman Sach's CEO) to tell it like it is, "The people have a right to be angry. We are rewarding failure with bailouts and bonuses."
He could not be more right about this. A significant reason for the mess we find ourselves in is the short sighted reward strategy put in place by CEO's and Board Members who continued to adjust their strategy to suit the shareholder's desires for quarterly results. It created a culture that produced short term gains at the expense of long term sustainability. And then paid them for leveraging their business model in the short term in order to produce quarterly earnings and annual bonuses. Well, we know now for certain that these business strategies end badly. Enron, Countrywide, AIG, Citibank, Merrill, Fifth Third Bank, Lehman Brothers, Bear Sterns. Will this list ever end? No.
Shareholders do not see themselves as owners of businesses, they see themselves as participants in the gains and losses of these businesses over short periods of time. If they saw themselves as owners, which they are, shareholders would be running at the corporate offices of these businesses listed in the last paragraph with torches and pitchforks. Calling for legal action against Board members and Executives who illegally transferred 100's of millions of profits from their shareholders into their own pockets. In certain circumstances, that's embezzlement.
But shareholders are not taking action. These "brilliant" fund managers who run your investments are simply repeating the same tired mantras. "Unforeseen market environments and historic changes have led to the losses in the companies we invest in and in the value of their stock." No one needs a fund manager who does not see historic changes coming. These historic market moves were being called for 24 months ago. These fund managers simply created index funds weighted in sectors they were comfortable with sat back and watched. Do the words "Fiduciary Responsibility" apply to any of these so called CFA fund managers? ITS A JOKE. Shareholders must must begin to act like owners policing the companies they own to build real value over time. Otherwise you are a speculator, a gambler.
Seek out and invest in companies that are building value. I think it has become apparent that the biggest companies are not building value they are acquiring value and then leveraging it. In a default or failed business model, it's the shareholders that lose. Not the employees who receive cash bonuses that far exceed the value they created for their shareholders.
Wake up people.
Build Value Every Day.
Brad van Siclen
Friday, March 20, 2009
Who is Driving this Bus? 3 / 20 / 2009
Readers, we are desperate for leaders. I like you have been searching for answers in the financial media. And I have been heartened by the fact that CNBC, Bloomberg, Fox Business and the Wall Street Journal have been doing their best to put long term performing, great Wall Street minds on their programs and in their pages. Unfortunately, not one of these greatest minds has any interest in taking a stand or even making more than a cursory prediction as to the economy. Terms like "very unusual period", "historic" and "unprecedented" are typical in any of these interviews. Not one is willing to risk their reputation with the investment world by making a solid prediction.
This is understandable in a way. Every day seems to bring swift and massive Federal and Congressional actions. And every day the trading psyche (and not the investment psyche) that is nearly 100% of capital markets action these days reacts to the US Government moves. I think it is safe to say that this Government has yet to recognize that it is still chasing a capital market's sentiment led by the same trading psyche that in large part is responsible for the crazed buying frenzy that bid the Dow Jones to record highs in October 2007, and extreme lows just 16 months later, wiping out value that had been building really since October 2002. Its the same trading psyche that took oil from near $150.00 per barrel in July 2008 to $38.00 per barrel 8 months later.
These are but a small fraction of illogical valuation run ups and run downs that say one thing to me. Traders and momentum have taken over the Capital markets. Where are the value investors? Where are the buy and hold investors? They don't exist. And without fundamental investors, that buy based upon historic and single digit deviation projection assumptions traders will continue to run the markets and ultimately direct this Government's intervention plans.
So what are we to do here? First the government has got to stop making historic decisions without real public discussion and description. We need more than feel good "we are determined, we will rise above this" speeches from Bernanke and the President. What we need is detailed rational that 90 percent of non-financial professionals will not understand. But that 90 percent of financial professionals will understand. Financial pros need to know the details, the good and the bad, so that their decisions can be based on an information foundation that looks planned, looks logical, and does not look reactive. Reactive in the financial markets means trouble people. This Government is reactive.
We are expecting to hear from Bernanke later today. I'll write the conclusion to this daily piece after he speaks.
Until then, try to
Build Value Every Day
Brad van Siclen
This is understandable in a way. Every day seems to bring swift and massive Federal and Congressional actions. And every day the trading psyche (and not the investment psyche) that is nearly 100% of capital markets action these days reacts to the US Government moves. I think it is safe to say that this Government has yet to recognize that it is still chasing a capital market's sentiment led by the same trading psyche that in large part is responsible for the crazed buying frenzy that bid the Dow Jones to record highs in October 2007, and extreme lows just 16 months later, wiping out value that had been building really since October 2002. Its the same trading psyche that took oil from near $150.00 per barrel in July 2008 to $38.00 per barrel 8 months later.
These are but a small fraction of illogical valuation run ups and run downs that say one thing to me. Traders and momentum have taken over the Capital markets. Where are the value investors? Where are the buy and hold investors? They don't exist. And without fundamental investors, that buy based upon historic and single digit deviation projection assumptions traders will continue to run the markets and ultimately direct this Government's intervention plans.
So what are we to do here? First the government has got to stop making historic decisions without real public discussion and description. We need more than feel good "we are determined, we will rise above this" speeches from Bernanke and the President. What we need is detailed rational that 90 percent of non-financial professionals will not understand. But that 90 percent of financial professionals will understand. Financial pros need to know the details, the good and the bad, so that their decisions can be based on an information foundation that looks planned, looks logical, and does not look reactive. Reactive in the financial markets means trouble people. This Government is reactive.
We are expecting to hear from Bernanke later today. I'll write the conclusion to this daily piece after he speaks.
Until then, try to
Build Value Every Day
Brad van Siclen
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