From the front page of Investor's Business Daily, "Visa EPS Climbs 40% and Tops Views Raising Outlook for Operating Margins". But the real story from this earnings report actually appeared in this site's 4/27/2009 posting.
Visa cut quarterly operating costs by 50 million dollars while revenues remained stable. This resulted in better than expected income results on a per share basis.
When the economy and the equity markets go into a tailspin, the best public companies, Visa among them, use these times to trim the fat, cut off the dead wood, push back vendors, and emerge more profitable, leaner and more efficient. And for the value investor, these times are really really good because the cost of assets and future earnings is half what it was 12 months ago. (Value Building 4 / 27 / 2009).
Visa is an excellent example for us to analyze from a value perspective for a number of reasons. Visa's executive management really does squeeze the most equity value out of its operations that it can. Here is a company that exists and thrives almost entirely on consumer credit. And when the general equity market trends turned against Visa, and their stock dropped from year ago heights of 85.00 per share to a January 2009 low of 47.00, management steadily cut is operating costs, squeezed its vendors, wrote down its bad loans at times when no company had any influence in their share price, took advantage of a very favorable credit market (FOR COMPANIES WITH GREAT CREDIT RATINGS) and now has emerged leaner and more profitable. Of course to our readers it comes as so surprise that the illustrious Wall Street analysts missed another one. When everyone, businesses and consumers alike needed to rely on credit, Visa was in the financial position to offer it, at a higher price which is why their revenues remained stable.
The problem with Visa is that it is too expensive at its current 54.0 P/E Ratio for any self respecting value investor to approach it. As great a company as this is, are investors really willing to pay a share price equal to 54 years of earnings results to own it? Leave it to the speculators I think, but kudos to management for maintaining such a P / E ratio in this credit market environment.
Its main competitor, American Express sits on a relative value advantage with an 11.0 P/E Ratio. Hmmmm. Get any ideas readers on another company we may need to add to the list? American Express has an even more conservative approach to consumer credit, has much lower and selective market share and is likely trading below its fair value currently. Which means unless there is a systemic issue the company is not reporting, American Express, currently priced at 25.00 should approach $37.00 within 12 months. Let's begin watching it.
DELL - $11.25, Buy in price $10.00, Stop Loss $9.56
GE - $12.22, Buy in price $10.60, Stop Loss $9.70
AXP - $24.95, Buy in price $24.95, Stop Loss $19.96
Build Value Every Day
Brad van Siclen
Thursday, April 30, 2009
Monday, April 27, 2009
Value Creation in the Land of Day Traders - 4 / 27 / 2009
We have recently established that the market gyrations of late amount to deep pocketed day traders trying to beat other speculators into the next index momentum move, up or down. I add to that today's "Swine Flu" concerns. "Futures Lower Based Upon Swine FLU". This is time to be investing people. The financial media has lost its way. And when unsure how to bring value to their viewers and readers, they resort to attaching silly explanations to the momentum trades of the day. Put your value caps on and seek out those great companies you could not afford only a year ago. They are selling at relative bargains.
Meanwhile has any one been paying attention to the earnings announcements from major public companies? Here's what we have learned.
Public Company Executives took advantage of Fall 2008's banking crisis to fool the current crop of shoddy research analysts into reducing their earnings and valuation projections. Then, being masters of operational and profit efficiency, set about restructuring their businesses for a return to profits and profit growth, and "poof" virtually all component companies have beaten earnings expectations for Q1. Still most public company executives are once again cautious about their forward looking earnings commentary. But in truth this is simply more misdirection. I am not suggesting that the economy will improve, just simply that the best companies and executives are excellent in consolidating market share and profits during recessions.
Public company executives have learned long ago that you can't buck the general market trends their common stock trades in. So they have now begun to use this to their advantage and in times like these when their shares should be valued higher they cry the blues, discuss common buzz terms like China's Currency Manipulation, Consumer Confidence, European Protectionism, Health Care and Pension Costs, and my favorite generalization, "Unfavorable Economic Environment".
Well these are the supposed outlooks of companies who continue to operate in an economy that has seen 1) no real wage growth in a decade (labor costs flat), 2) a dramatic rise in out sourcing to cheap wage countries (production costs down), 3) A favorable dollar (low compared to its competitors), 4) inexpensive cost of capital (low low interest rates), 5) supreme financial management software (adds to efficient capital decisions), and 6) a hands off regulatory and tax system.
Sure the systemic banking crisis has created a recession, and has revealed significant issues with our regulatory systems, I don’t belittle this issue in the slightest.
But the best companies, the smartest companies, the companies with the most value use these events to trim the fat, cut off the dead wood, push back vendors, and emerge more profitable, leaner and more efficient. And for the value investor, these times are really really good because the cost of assets and future earnings is half what it was 12 months ago.
So let’s dust of our financial texts books and go bargain hunting. Sell your failed, professionally managed equity funds. And buy the great companies you always wanted to own. They will be the leaders out of this recession. They will be the leaders in earnings growth.
Set realistic investment return expectations. Select companies with a solid price base (we’ll discuss this later). Then sit back and let the speculators extend your returns. As you are hopefully a bit more expert in how the best company execs use Wall Street research experts as just another tool in managing their value creation.
Build Value Every Day
Brad van Siclen
Meanwhile has any one been paying attention to the earnings announcements from major public companies? Here's what we have learned.
Public Company Executives took advantage of Fall 2008's banking crisis to fool the current crop of shoddy research analysts into reducing their earnings and valuation projections. Then, being masters of operational and profit efficiency, set about restructuring their businesses for a return to profits and profit growth, and "poof" virtually all component companies have beaten earnings expectations for Q1. Still most public company executives are once again cautious about their forward looking earnings commentary. But in truth this is simply more misdirection. I am not suggesting that the economy will improve, just simply that the best companies and executives are excellent in consolidating market share and profits during recessions.
Public company executives have learned long ago that you can't buck the general market trends their common stock trades in. So they have now begun to use this to their advantage and in times like these when their shares should be valued higher they cry the blues, discuss common buzz terms like China's Currency Manipulation, Consumer Confidence, European Protectionism, Health Care and Pension Costs, and my favorite generalization, "Unfavorable Economic Environment".
Well these are the supposed outlooks of companies who continue to operate in an economy that has seen 1) no real wage growth in a decade (labor costs flat), 2) a dramatic rise in out sourcing to cheap wage countries (production costs down), 3) A favorable dollar (low compared to its competitors), 4) inexpensive cost of capital (low low interest rates), 5) supreme financial management software (adds to efficient capital decisions), and 6) a hands off regulatory and tax system.
Sure the systemic banking crisis has created a recession, and has revealed significant issues with our regulatory systems, I don’t belittle this issue in the slightest.
But the best companies, the smartest companies, the companies with the most value use these events to trim the fat, cut off the dead wood, push back vendors, and emerge more profitable, leaner and more efficient. And for the value investor, these times are really really good because the cost of assets and future earnings is half what it was 12 months ago.
So let’s dust of our financial texts books and go bargain hunting. Sell your failed, professionally managed equity funds. And buy the great companies you always wanted to own. They will be the leaders out of this recession. They will be the leaders in earnings growth.
Set realistic investment return expectations. Select companies with a solid price base (we’ll discuss this later). Then sit back and let the speculators extend your returns. As you are hopefully a bit more expert in how the best company execs use Wall Street research experts as just another tool in managing their value creation.
Build Value Every Day
Brad van Siclen
Friday, April 24, 2009
At a Loss For Words - 4 / 24 / 2009
Yesterday's announcement concerning Paulson, Bernanke, and Bank of America CEO Ken Lewis may have sent shock waves through a less savvy market. But the US markets took it all in stride. I will use this fact, again, as proof that traders are running the indexes now. That new investment money is still on the sidelines. And lastly as a reminder that the US Government sees Wall Street firms and the Commercial Banks that acted like them, as speculators and taxation profit centers, and not value builders.
Essentially, Paulson and Bernanke told Bank America that the American public should be kept in the dark concerning the condition of Merrill Lynch. That saving Merrill Lynch and its shareholders was more important than lying to and damaging Bank of America's shareholders. That Bank of America had enjoyed the favorable economic and regulatory conditions of the US markets for many years by the good graces of the US Government, and now the US Government was telling them it was pay back time. Oh, and if you are not happy with the US Government's position on this matter, we will remove you and your board and put another Liddy (AIG's government appointed CEO) in charge. I am truly at a loss for words. This public revelation essentially tells all CEO's that the cost of capitalism is, at any time, at the bidding of the US Governement and that the shareholders rights are nearly worthless in the Government's mind. That is a terrible precident.
Perhaps more shocking is that Paulson, a man who benefited enourmously from the government's lax regulations when working for Goldman Sachs, was able to lead the charge in the selection of survivors among AIG, Citibank, Lehman, Bear, Merrill Lynch, and now Bank of America, while maintianing and funding via government requirement, the stability of Goldman Sachs. One can only imagine the books that will be written on this era in the future.
In the past you may remember that JP Morgan bailed out the government. Well these days are long gone. And in their place seems to have arisen the greatest theft from American shareholders and investors ever perpetrated. It may not seem like it, but I really am at a loss for words on this subject.
But one thing is true. The President I voted for has proven to be a greater light weight than the most conservative media could ever have guessed at. Virtually all of Wall Street's value has been consolidated by this government's direct decisions into 2 banks, Goldman Sachs and Morgan Stanley. That, people was not through survival of the fittest, but through government selection led by former Goldman Sachs partners and consultants. This President has permitted this to happen and has yet to show that was his vision or even by his influence or approval that this consolidation occured.
So what good has come from all this? Perspective. You can rely on no one to make proper invesment decisions but yourself. And even when you make them the government may, at some point in the future determine that your equity position does not deserve the proper free market information its agency, the SEC, requires of its public companies by law. You have learned that the government has always been working with these large banks, and only during a bear market is that marriage exposed.
Wall Street professionals always knew this, they just didn't tell you. And that is why the markets shrugged off this news of forced collusion of public entities and the government at its highest levels.
I wonder, who other than Goldman Sachs will ultimately benefit from this government's efforts in the US economy? I also think we now know the conversation that was had with Warren Buffet and the US Government prior to his preferred investments in GE and Goldman Sachs.
GE closed yesterday at $12.03. Dell at $10.20 no changes needed.
Build Value Every Day, become more expert.
Brad van Siclen
Essentially, Paulson and Bernanke told Bank America that the American public should be kept in the dark concerning the condition of Merrill Lynch. That saving Merrill Lynch and its shareholders was more important than lying to and damaging Bank of America's shareholders. That Bank of America had enjoyed the favorable economic and regulatory conditions of the US markets for many years by the good graces of the US Government, and now the US Government was telling them it was pay back time. Oh, and if you are not happy with the US Government's position on this matter, we will remove you and your board and put another Liddy (AIG's government appointed CEO) in charge. I am truly at a loss for words. This public revelation essentially tells all CEO's that the cost of capitalism is, at any time, at the bidding of the US Governement and that the shareholders rights are nearly worthless in the Government's mind. That is a terrible precident.
Perhaps more shocking is that Paulson, a man who benefited enourmously from the government's lax regulations when working for Goldman Sachs, was able to lead the charge in the selection of survivors among AIG, Citibank, Lehman, Bear, Merrill Lynch, and now Bank of America, while maintianing and funding via government requirement, the stability of Goldman Sachs. One can only imagine the books that will be written on this era in the future.
In the past you may remember that JP Morgan bailed out the government. Well these days are long gone. And in their place seems to have arisen the greatest theft from American shareholders and investors ever perpetrated. It may not seem like it, but I really am at a loss for words on this subject.
But one thing is true. The President I voted for has proven to be a greater light weight than the most conservative media could ever have guessed at. Virtually all of Wall Street's value has been consolidated by this government's direct decisions into 2 banks, Goldman Sachs and Morgan Stanley. That, people was not through survival of the fittest, but through government selection led by former Goldman Sachs partners and consultants. This President has permitted this to happen and has yet to show that was his vision or even by his influence or approval that this consolidation occured.
So what good has come from all this? Perspective. You can rely on no one to make proper invesment decisions but yourself. And even when you make them the government may, at some point in the future determine that your equity position does not deserve the proper free market information its agency, the SEC, requires of its public companies by law. You have learned that the government has always been working with these large banks, and only during a bear market is that marriage exposed.
Wall Street professionals always knew this, they just didn't tell you. And that is why the markets shrugged off this news of forced collusion of public entities and the government at its highest levels.
I wonder, who other than Goldman Sachs will ultimately benefit from this government's efforts in the US economy? I also think we now know the conversation that was had with Warren Buffet and the US Government prior to his preferred investments in GE and Goldman Sachs.
GE closed yesterday at $12.03. Dell at $10.20 no changes needed.
Build Value Every Day, become more expert.
Brad van Siclen
Tuesday, April 21, 2009
You Are Officially Alone - 4 / 22 / 2003
Citibank. If you are invested in a fund or index, you own some. How? Your fund certainly owns a few index spiders. Citi is a part of most portfolios and equity indexes. And those in charge of managing your investments in equity funds have just officially vacated all fiduciary responsibility to you, the investors.
They have done this by allowing the Citibank board to be unanimously re-elected. These board members, super smart people, are paid to ensure that the executives of the company manage the corporation for the benefit of the shareholders. Do you think they upheld their end of the contract? This Board has sat back and done absolutely nothing for 2 years and presided over one of the greatest loses in value and operational in competence in the history of American Banking. And guess what? The professionals you pay to manage your investment and to cast your votes by proxy decided to reconfirm this excellent board.
It's official people, you are alone. Professional management of your money does not exist. And fiduciary responsibility is not at all a requirement in the eyes of Fidelity, Janus, Vanguard. I am terribly sorry if I offend some readers who work for these named funds and really do a great job for investors. But at some point they need to ask themselves if they take any responsibility for the record redemptions they have seen at their funds in the last 12 months. Those redemptions are investors casting their votes on the fund managers. Its that simple. Perhaps if fund managers had taken more responsibility in looking out for their investors money, had remained disciplined, had not been caught up in the speculative momentum of the last few years, and had made the necessary public statements and actions to ensure the boards of companies they invest your money in were beholden to the shareholders first, we would recognize their value in the process. Instead the vast majority of equity fund managers are little more than clearing houses for your investment money. They are not expert, or they were once but now take credit when the markets go up, and point fingers when the markets go down.
This is the very reason you must be more expert. You must learn some investment basics. You must decide your investment profile. And you must act on it. It's called taking responsibility. Because if these results of the Citibank Board re-election tell you anything, its professionals you pay to watch your financial back are not going to do it at all. Read future and past postings, send in your comments or questions or suggestions. Together we can become more expert.
Learn. Be Conservative. You worked very hard for your 401k.
Build Value Every Day (on your own).
Brad van Siclen
They have done this by allowing the Citibank board to be unanimously re-elected. These board members, super smart people, are paid to ensure that the executives of the company manage the corporation for the benefit of the shareholders. Do you think they upheld their end of the contract? This Board has sat back and done absolutely nothing for 2 years and presided over one of the greatest loses in value and operational in competence in the history of American Banking. And guess what? The professionals you pay to manage your investment and to cast your votes by proxy decided to reconfirm this excellent board.
It's official people, you are alone. Professional management of your money does not exist. And fiduciary responsibility is not at all a requirement in the eyes of Fidelity, Janus, Vanguard. I am terribly sorry if I offend some readers who work for these named funds and really do a great job for investors. But at some point they need to ask themselves if they take any responsibility for the record redemptions they have seen at their funds in the last 12 months. Those redemptions are investors casting their votes on the fund managers. Its that simple. Perhaps if fund managers had taken more responsibility in looking out for their investors money, had remained disciplined, had not been caught up in the speculative momentum of the last few years, and had made the necessary public statements and actions to ensure the boards of companies they invest your money in were beholden to the shareholders first, we would recognize their value in the process. Instead the vast majority of equity fund managers are little more than clearing houses for your investment money. They are not expert, or they were once but now take credit when the markets go up, and point fingers when the markets go down.
This is the very reason you must be more expert. You must learn some investment basics. You must decide your investment profile. And you must act on it. It's called taking responsibility. Because if these results of the Citibank Board re-election tell you anything, its professionals you pay to watch your financial back are not going to do it at all. Read future and past postings, send in your comments or questions or suggestions. Together we can become more expert.
Learn. Be Conservative. You worked very hard for your 401k.
Build Value Every Day (on your own).
Brad van Siclen
The Volatile Legacy of Netscape - 4 / 21 / 2009
We have a significant perspective issue that over took the equities markets in 1995. And we fear this perspective will haunt the markets for many years to come.
This was the dawning of the the internet bubble, and Netscape was the band leader. It was followed by companies like EBAY, Amazon, and AOL. These Companies were treated by IPO bankers as high risk propositions. And their IPO process and structure were all very standard for unprofitable, modest revenue concerns that were unable to raise the capital their business models needed to become profitable from the private markets. The IPO bankers offered a small amount of shares, typically between 5 and 7 million shares, to the public representing 10 - 20% of the company's total shares outstanding. The thinking was fairly sound at the time, no one knew when or in most cases how these companies would become profitable. All, including the companies, believed that more money would need to be raised in future secondary rounds from the public. So a modest IPO issue of a modest amount of Company equity, leaving more equity on the table for future public offerings was the preferred route. This was a sound model in an uncertain era not yet realizing it was the leading indicator of an explosion of new money, new share structures, new shareholder / management relationships.
The problem began when the demand for Netscape shares exceeded the availability of these shares by multiples. Some bankers believed that for each share offered in the initial offering, 20x that amount was requested by the investment public. Thus created an IPO issuance that doubled from $14 to $28 per share initial pricing and soon, once available for public buying, became $75.00 a share. This for a company who reported revenues of less than $1.0 million US in the 12 months prior to its IPO and had spent nearly all its money invested to date, accumulating losses of nearly $7.0 million dollars.
The question is why did the stock trade to $75.00 within a few days of its IPO given the historic financial performance of the company. The real reason - an imbalance of shares offered to satisfy the public demand. But Wall Street can't tell you that. It would be admitting to a mistake in the greatest IPO in more than 20 years. Instead, Wall Street set about using Netscape as an example of its forward looking genius. Its analysts spoke of new paradigms, future valuation models that proved the stock was under valued. And raving about a market capitalization value which exceeded 6.0 billion dollars based upon expected future earnings.
The reality was that Netscape's market value on a per share basis was more than 80% based upon shares that would never trade or be available to the public, held by insiders who were restricted by both the IPO bankers and the SEC's regulations from selling their shares. Had those insider shares been available for sale, it is highly unlikely that the shares of Netscape would have reached even $30.00.
But what was created was a new model that IPO bankers replicated for years during the tech bubble. By creating supply / demand imbalances in the public markets for interesting tech companies, investors were forced to go to the public markets to acquire shares, rather than the company directly, and share prices for IPO's soared. Now analysts were faced with the task of justifying the public prices and market values of these capitalization challenged firms. They wheeled out Excel spread sheets and began creating new rationale for value. And while this occurred these same valuation applications (Projected Revenue Multiples, Projected future customers, Discounted Cash Flow with Terminal Earnings Multiples) were being applied to the tried and true cash flowing companies of the S & P 100 index whose values soared with the markets.
It became normal to see a company trading at 25.0x earnings. Or to see a company trading at 3.0x projected revenues. And now today we are left with this legacy. Because who would pay 25.0x (or 25 years times) a company's earnings in order to own a company? The answer unfortunately is today's fund managers. They are caught in a cycle of over valuation that will take many many years to get to equilibrium, and until then, volatility in the markets of the last six months won't be an aberration, it will be the norm.
GE - $11.35, maintain stop loss at $9.90
Dell - 10.37, maintain stop loss at $8.50
Build Value Every Day
Brad van Siclen
This was the dawning of the the internet bubble, and Netscape was the band leader. It was followed by companies like EBAY, Amazon, and AOL. These Companies were treated by IPO bankers as high risk propositions. And their IPO process and structure were all very standard for unprofitable, modest revenue concerns that were unable to raise the capital their business models needed to become profitable from the private markets. The IPO bankers offered a small amount of shares, typically between 5 and 7 million shares, to the public representing 10 - 20% of the company's total shares outstanding. The thinking was fairly sound at the time, no one knew when or in most cases how these companies would become profitable. All, including the companies, believed that more money would need to be raised in future secondary rounds from the public. So a modest IPO issue of a modest amount of Company equity, leaving more equity on the table for future public offerings was the preferred route. This was a sound model in an uncertain era not yet realizing it was the leading indicator of an explosion of new money, new share structures, new shareholder / management relationships.
The problem began when the demand for Netscape shares exceeded the availability of these shares by multiples. Some bankers believed that for each share offered in the initial offering, 20x that amount was requested by the investment public. Thus created an IPO issuance that doubled from $14 to $28 per share initial pricing and soon, once available for public buying, became $75.00 a share. This for a company who reported revenues of less than $1.0 million US in the 12 months prior to its IPO and had spent nearly all its money invested to date, accumulating losses of nearly $7.0 million dollars.
The question is why did the stock trade to $75.00 within a few days of its IPO given the historic financial performance of the company. The real reason - an imbalance of shares offered to satisfy the public demand. But Wall Street can't tell you that. It would be admitting to a mistake in the greatest IPO in more than 20 years. Instead, Wall Street set about using Netscape as an example of its forward looking genius. Its analysts spoke of new paradigms, future valuation models that proved the stock was under valued. And raving about a market capitalization value which exceeded 6.0 billion dollars based upon expected future earnings.
The reality was that Netscape's market value on a per share basis was more than 80% based upon shares that would never trade or be available to the public, held by insiders who were restricted by both the IPO bankers and the SEC's regulations from selling their shares. Had those insider shares been available for sale, it is highly unlikely that the shares of Netscape would have reached even $30.00.
But what was created was a new model that IPO bankers replicated for years during the tech bubble. By creating supply / demand imbalances in the public markets for interesting tech companies, investors were forced to go to the public markets to acquire shares, rather than the company directly, and share prices for IPO's soared. Now analysts were faced with the task of justifying the public prices and market values of these capitalization challenged firms. They wheeled out Excel spread sheets and began creating new rationale for value. And while this occurred these same valuation applications (Projected Revenue Multiples, Projected future customers, Discounted Cash Flow with Terminal Earnings Multiples) were being applied to the tried and true cash flowing companies of the S & P 100 index whose values soared with the markets.
It became normal to see a company trading at 25.0x earnings. Or to see a company trading at 3.0x projected revenues. And now today we are left with this legacy. Because who would pay 25.0x (or 25 years times) a company's earnings in order to own a company? The answer unfortunately is today's fund managers. They are caught in a cycle of over valuation that will take many many years to get to equilibrium, and until then, volatility in the markets of the last six months won't be an aberration, it will be the norm.
GE - $11.35, maintain stop loss at $9.90
Dell - 10.37, maintain stop loss at $8.50
Build Value Every Day
Brad van Siclen
Thursday, April 16, 2009
Dow Jones No Longer A Good Thing - 4 / 17 / 2009
I have not written in 3 days for the following reason - nothing has happened in these markets that is surprising to traders, to you, or to me. Ask yourself why the market has traded sideways (compared to recent weeks) amid earnings season reports. Traders have learned to limit their own exposure in this market, not get caught by intraday market reversals, and now we have a market that reacts independently of Large Cap and Dow Component earnings surprises. It continues to amaze me that research groups find any value in paying Banking sector research analysts, and frankly that they continue to appear in the media restating what every other bank analyst has said and that is considered at all valuable.
What we do have is a problem. Dow Jones Components will trade in relative collusion so long as traders continue to enjoy the liquidity and expected volatility the index DIA offers. The only breakouts we are likely to see in any of the shares of these companies in the index will be to the down side as short sellers pile in against earnings misses. But unless there is a bankruptcy fear, funds will use these short term down swings to cost average their existing positions and modest price swings will occur. Here's the problem: membership in the Dow Jones index will reduce a company's upside share price potential. It would seem that Dow Jones Index inclusion, in anything other than a bull market, is detrimental to shareholders. Look what happened to the mighty Intel and Microsoft (MSFT) when they became Dow Components. Their earnings increased dramatically, but their multiple to earnings decreased dramatically reflective of the super stable growth of its Dow Component co-members. MSFT was so beaten down, even though their growth opportunity remained dramatic, that they announced a dividend. Forced by the Dow Jones investors to behave like Du Pont.
Meanwhile I have already heard the talking heads justifying the lack of market upswing in individual stocks that have dramatically beaten earnings expectations, by stating "there was no surprise in results". Have traders and fund managers already decided to ignore research analysts in favor of their own analysis? No. Unfortunately we have proven our Dow Theory for this period of market history. Dow Index day traders are in control of the value of our economy. And their sentiment is "How do I make money today with the least amount of risk". I don't see this changing for many months to come. Stick with components that have been unfairly beaten down on a P/E relative basis, expect 30% appreciation in those components over the next 12 months, and be happy with those returns. Momentum, bad, Value, good.
Build Value Every Day
Brad van Siclen
What we do have is a problem. Dow Jones Components will trade in relative collusion so long as traders continue to enjoy the liquidity and expected volatility the index DIA offers. The only breakouts we are likely to see in any of the shares of these companies in the index will be to the down side as short sellers pile in against earnings misses. But unless there is a bankruptcy fear, funds will use these short term down swings to cost average their existing positions and modest price swings will occur. Here's the problem: membership in the Dow Jones index will reduce a company's upside share price potential. It would seem that Dow Jones Index inclusion, in anything other than a bull market, is detrimental to shareholders. Look what happened to the mighty Intel and Microsoft (MSFT) when they became Dow Components. Their earnings increased dramatically, but their multiple to earnings decreased dramatically reflective of the super stable growth of its Dow Component co-members. MSFT was so beaten down, even though their growth opportunity remained dramatic, that they announced a dividend. Forced by the Dow Jones investors to behave like Du Pont.
Meanwhile I have already heard the talking heads justifying the lack of market upswing in individual stocks that have dramatically beaten earnings expectations, by stating "there was no surprise in results". Have traders and fund managers already decided to ignore research analysts in favor of their own analysis? No. Unfortunately we have proven our Dow Theory for this period of market history. Dow Index day traders are in control of the value of our economy. And their sentiment is "How do I make money today with the least amount of risk". I don't see this changing for many months to come. Stick with components that have been unfairly beaten down on a P/E relative basis, expect 30% appreciation in those components over the next 12 months, and be happy with those returns. Momentum, bad, Value, good.
Build Value Every Day
Brad van Siclen
Monday, April 13, 2009
More Banking Upside Surprises - Analysts Caught Napping Again - 4 / 14 / 2009
First: Followers should move stop loss on GE from $7.95 to $9.60, maintaining the 20%down side protection. GE closed yesterday at $12.20. Dell at $10.40 needs no chnages.
Talk of the day surrounds Goldman Sachs and the PPI. Goldman has clearly hired excellent PR representatives to manage its new found national recognition as being the smartest, best commercial and investment bank the world has ever seen. Goldman now calls its need to pay back TARP funds a "Duty". Goldman like other stable commercial banks has enjoyed the same no-cost-of-capital advantages that Wells Fargo recently dined on. It must be great to have fired ten's of thousand's of employees, reducing the largest portion of its variable costs, and then have the Government hand you essentially no cost money from which to access the capital markets on a proprietary trading basis. (If you note only a hint of sarcasm, you are not reading my posts daily.) This is akin to a farmer not having to pay for seeds, fertilizer or feed, and then selling everything for pure profit minus the value of his own sweat labor - all in 90 days..amazing.
Does anyone know where Goldman's profits came from this quarter? Trading profits. During the first quarter, markets were up 25% across the board. Goldman took its share of the TARP money and money at 0.25% interest on federal interbank loans and invested it in the stock markets. Bang, $1.9 Billion in profits. Profits that will ultimately go to its remaining executives pockets in salary and bonuses. They are raising funds now by selling equity to repay the TARP loans. Then they ride their commercial bank designation and low, low cost of capital all the way to the Bank. Isn't US Government Led Capitalism great?
At least Wells Fargo made their surprise profits from fees generated in refinancings of business and home loans, and in capturing the increased spread from the same $0.25 interbank rate. That TARP and Federal Reserve money at least trickled down to you and me.
But I must ask readers of yesterday's posting...where were the banking experts on Goldman Sachs? The "experts" again did not do their homework and instead took the easy way out by following the herd all the way to a significant under estimate of Goldman's 1st quarter profits. Banking analysts are beginning to remind me of tech analysts of the late '90s. Except being banking analysts and more conservative by nature, they wildly underestimate bank operational performance. Worse it would appear they follow the same pack leaders that missed the banking stock crater of 2008. Just last week (4/7) Mike Mayo, esteemed banking analytical expert, who you may recall launched coverage on the banking sector with extraordinary bearishness sending the banking industry stocks into a tailspin. This was followed by Richard Bove, another "great" banking sector analyst who answered Mayo with an "agreed" except for Citibank, JP Morgan Chase and Bank of America. Neither one of these analysts said buy Goldman or Wells Fargo. Am I making myself clear? If you want to follow the herd read the Wall Street Journal and listen to analysts who follow large cap banks and continue to play the momentum game with your investment decisions. Or you can keep reading and become more expert yourself.*
Now for the PPI. Bernanke should be very very concerned, as should we all, about the level of unexpected drop in the PPI. This index is used to gauge the prices producers earn for their goods available for sale. And what it suggests is huge price slashes to generate sales across the board. I like to call price slashes at the retail level forced devaluation of inventory. And we are all left to wonder, have the federal stimulus packages already begun to hint at the future negative effects of massive currency printing? We all live in a global economy, but it is clear that US Business and the US consumer remain the targeted buyers of products made in other countries. So massive inflation (or reduced value) of the US dollar forces other nations who sell to the US to ultimately devalue their own currency simply to make sales to the US. Did the reduced PPI hint at that after effect? Doubtful yet, but it must be a great concern to Bernanke. Deflation has a nasty habit of making everything less valuable and making workers and savers less motivated.
Initially when a government prints massive amounts of money, economists fear inflation. That's an easy concept to get, there is more money out there representing the Full Faith and Credit of the US Government. So if you assume, like most do in this analysis, that the Full Faith and Credit of the US Government is based upon its ability to increase its revenues through tax collections on an domestic economy that is growing slowly, and, there are more dollars now than there were 3 month ago, each dollar is worth a bit less as a representation of the Full Faith and Credit of the US Government. Which means sellers of goods need to raise their prices to maintain the same relative profitability. That's inflation. And that's step one in a long process of global currency devaluation (which I'll discuss in more detail another day).
*in fairness to Mayo and Bove, they rely on discussions and review of historic performance data provided them, in large part, by executives of the same banks they cover. Making their foundation of information modest at best.
Build Value Every Day
Brad van Siclen
Talk of the day surrounds Goldman Sachs and the PPI. Goldman has clearly hired excellent PR representatives to manage its new found national recognition as being the smartest, best commercial and investment bank the world has ever seen. Goldman now calls its need to pay back TARP funds a "Duty". Goldman like other stable commercial banks has enjoyed the same no-cost-of-capital advantages that Wells Fargo recently dined on. It must be great to have fired ten's of thousand's of employees, reducing the largest portion of its variable costs, and then have the Government hand you essentially no cost money from which to access the capital markets on a proprietary trading basis. (If you note only a hint of sarcasm, you are not reading my posts daily.) This is akin to a farmer not having to pay for seeds, fertilizer or feed, and then selling everything for pure profit minus the value of his own sweat labor - all in 90 days..amazing.
Does anyone know where Goldman's profits came from this quarter? Trading profits. During the first quarter, markets were up 25% across the board. Goldman took its share of the TARP money and money at 0.25% interest on federal interbank loans and invested it in the stock markets. Bang, $1.9 Billion in profits. Profits that will ultimately go to its remaining executives pockets in salary and bonuses. They are raising funds now by selling equity to repay the TARP loans. Then they ride their commercial bank designation and low, low cost of capital all the way to the Bank. Isn't US Government Led Capitalism great?
At least Wells Fargo made their surprise profits from fees generated in refinancings of business and home loans, and in capturing the increased spread from the same $0.25 interbank rate. That TARP and Federal Reserve money at least trickled down to you and me.
But I must ask readers of yesterday's posting...where were the banking experts on Goldman Sachs? The "experts" again did not do their homework and instead took the easy way out by following the herd all the way to a significant under estimate of Goldman's 1st quarter profits. Banking analysts are beginning to remind me of tech analysts of the late '90s. Except being banking analysts and more conservative by nature, they wildly underestimate bank operational performance. Worse it would appear they follow the same pack leaders that missed the banking stock crater of 2008. Just last week (4/7) Mike Mayo, esteemed banking analytical expert, who you may recall launched coverage on the banking sector with extraordinary bearishness sending the banking industry stocks into a tailspin. This was followed by Richard Bove, another "great" banking sector analyst who answered Mayo with an "agreed" except for Citibank, JP Morgan Chase and Bank of America. Neither one of these analysts said buy Goldman or Wells Fargo. Am I making myself clear? If you want to follow the herd read the Wall Street Journal and listen to analysts who follow large cap banks and continue to play the momentum game with your investment decisions. Or you can keep reading and become more expert yourself.*
Now for the PPI. Bernanke should be very very concerned, as should we all, about the level of unexpected drop in the PPI. This index is used to gauge the prices producers earn for their goods available for sale. And what it suggests is huge price slashes to generate sales across the board. I like to call price slashes at the retail level forced devaluation of inventory. And we are all left to wonder, have the federal stimulus packages already begun to hint at the future negative effects of massive currency printing? We all live in a global economy, but it is clear that US Business and the US consumer remain the targeted buyers of products made in other countries. So massive inflation (or reduced value) of the US dollar forces other nations who sell to the US to ultimately devalue their own currency simply to make sales to the US. Did the reduced PPI hint at that after effect? Doubtful yet, but it must be a great concern to Bernanke. Deflation has a nasty habit of making everything less valuable and making workers and savers less motivated.
Initially when a government prints massive amounts of money, economists fear inflation. That's an easy concept to get, there is more money out there representing the Full Faith and Credit of the US Government. So if you assume, like most do in this analysis, that the Full Faith and Credit of the US Government is based upon its ability to increase its revenues through tax collections on an domestic economy that is growing slowly, and, there are more dollars now than there were 3 month ago, each dollar is worth a bit less as a representation of the Full Faith and Credit of the US Government. Which means sellers of goods need to raise their prices to maintain the same relative profitability. That's inflation. And that's step one in a long process of global currency devaluation (which I'll discuss in more detail another day).
*in fairness to Mayo and Bove, they rely on discussions and review of historic performance data provided them, in large part, by executives of the same banks they cover. Making their foundation of information modest at best.
Build Value Every Day
Brad van Siclen
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