Wednesday, November 10, 2010
Friday, November 5, 2010
Three stages of stocks
http://www.fool.com/investing/general/2010/11/03/why-we-sold-this-market-darling.aspx?source=ihpdspmra0000001&lidx=6
Why We Sold This Market Darling
By Adam J. Wiederman | More Articles
November 3, 2010 | Comments (20)
Stock returns come in three stages, according to Million Dollar Portfolio associate advisor David Meier:
1. Mispricing. When a company's stock rises to its estimated intrinsic value.
2. Value creation. When a company's intrinsic value rises, along with its stock price, because of strong operating performance.
3. Market darling. When excessive optimism drives a company's stock to a sky-high premium multiple.
The company I'm writing about today is in the "market darling" stage.
Before I share its name with you, explain why selling is a smart move, and list three other market darlings you might want to sell, let me begin with some of the history we Fools have with the company.
What they saw
In October 2008, this restaurant company was dirt cheap. Its stock was down nearly 70% from its 52-week high because of rising food costs. But it was generating a ton of cash, and trading for less than nine times free cash flow.
The economics of the business were outstanding. It cost roughly $900,000 to launch a new franchise, and stores generated an average of $1.7 million in sales each year. With 22% operating margins, the store paid for itself in less than three years.
Even better, the company's visionary founder owned a significant portion of the company -- nearly $35 million worth, meaning his interests were fully aligned with shareholders.
During the third-quarter conference call that year, the company's CFO announced that the company planned to buy back up to $100 million worth of shares. His rationale? "Because they are on sale."
So, following his lead, the Million Dollar Portfolio team bought shares of the company.
As the company's stock dropped over the next few months, the MDP team bought even more shares, bringing their total allocation to 3%.
What they received
During 2009, the company's stock rose drastically. As it rose, the Million Dollar Portfolio team gradually sold blocks of shares to lock in the gains they achieved.
Just more than a month ago, the team closed out its entire position, making for a total gain of 158%.
Today, Chipotle Mexican Grill (NYSE: CMG) is up more than 400% since its IPO in 2006, and it continues to reach new 52-week highs.
True, it's still firing on all cylinders. But at today's price, too-optimistic growth expectations heavily factor into its share price. Here's a rough picture of Chipotle's valuation: Analysts project 20% growth over the next five years, or approximately half of the company's price-to-earnings and price-to-free cash flow ratios.
Though Chipotle is young and growing, these competitors are much cheaper, and they all come with the safety of a dividend:
Company P/E Ratio P/FCF Ratio
McDonald's (NYSE: MCD) 17 21
Yum! Brands (NYSE: YUM) 22 24
Darden Restaurants (NYSE: DRI) 16 13
Chipotle 42 39
Data from Capital IQ, a division of Standard & Poor's.
That's not to say that investors' optimism won't continue to drive up the price of Chipotle in the short term. But this sort of guessing game is a risky investment process. More importantly, when Chipotle's growth slows, the potential downside could be disastrous if you continue to hold.
Plus, co-CEO Steve Ells sold over $12 million of shares in early September, a move that can indicate an overvalued stock.
The crucial takeaways
There are three important lessons to learn from this example:
1. Sell in stages. The Million Dollar Portfolio team sold their stake in Chipotle over several months. They saw shares were getting overvalued, but they realized that there still could be more upside. Partially selling over time ensures that you secure your gains, while still taking advantage of further gains that might come thanks to the market's irrationality.
2. Remain unemotional. The Million Dollar Portfolio team loved (and still love) the company, even as they sold. I've never seen seven guys eat more burritos than these folks did, dismissing the calories as "research." But though you love a company, its business plan, and its products, you have to be able to distance yourself from all that, and the profits you've earned by investing in it.
3. Continue to monitor the company. The Million Dollar Portfolio team made it clear that they're not done watching Chipotle. In fact, if it takes a huge hit at any point, I'm convinced they'll open up a position again -- or at least add it to their watch list. Just because you sell a company, don't let all your research go to waste -- simply continue to keep an eye on it. Often the price will eventually return to your comfort zone.
These lessons are especially important because Chipotle's not the only market darling out there today. Here are a few other companies that might be market darlings, trading near 52-week highs with hefty multiples:
Company Current price 52-week high P/E Ratio P/FCF Ratio
Apple (Nasdaq: AAPL) $310.12 $319.00 20 17
Panera (Nasdaq: PNRA) $91.46 $95.41 27 15
Buffalo Wild Wings (Nasdaq: BWLD) $48.71 $52.99 24 54
Data from Capital IQ.
I think it's just a matter of time before investors get nervous with these companies (and their products) as well.
Lastly, it's important to have a sounding board for both buying and selling decisions. I'm convinced that's why the Million Dollar Portfolio team is so successful (they're outperforming the S&P 500 by 6%).
We're about to open up the doors to Million Dollar Portfolio for the last time in 2010. To find out more about how you can benefit from their research -- and follow along with their real-money buys and sells -- simply enter your email address in the box below.
Why We Sold This Market Darling
By Adam J. Wiederman | More Articles
November 3, 2010 | Comments (20)
Stock returns come in three stages, according to Million Dollar Portfolio associate advisor David Meier:
1. Mispricing. When a company's stock rises to its estimated intrinsic value.
2. Value creation. When a company's intrinsic value rises, along with its stock price, because of strong operating performance.
3. Market darling. When excessive optimism drives a company's stock to a sky-high premium multiple.
The company I'm writing about today is in the "market darling" stage.
Before I share its name with you, explain why selling is a smart move, and list three other market darlings you might want to sell, let me begin with some of the history we Fools have with the company.
What they saw
In October 2008, this restaurant company was dirt cheap. Its stock was down nearly 70% from its 52-week high because of rising food costs. But it was generating a ton of cash, and trading for less than nine times free cash flow.
The economics of the business were outstanding. It cost roughly $900,000 to launch a new franchise, and stores generated an average of $1.7 million in sales each year. With 22% operating margins, the store paid for itself in less than three years.
Even better, the company's visionary founder owned a significant portion of the company -- nearly $35 million worth, meaning his interests were fully aligned with shareholders.
During the third-quarter conference call that year, the company's CFO announced that the company planned to buy back up to $100 million worth of shares. His rationale? "Because they are on sale."
So, following his lead, the Million Dollar Portfolio team bought shares of the company.
As the company's stock dropped over the next few months, the MDP team bought even more shares, bringing their total allocation to 3%.
What they received
During 2009, the company's stock rose drastically. As it rose, the Million Dollar Portfolio team gradually sold blocks of shares to lock in the gains they achieved.
Just more than a month ago, the team closed out its entire position, making for a total gain of 158%.
Today, Chipotle Mexican Grill (NYSE: CMG) is up more than 400% since its IPO in 2006, and it continues to reach new 52-week highs.
True, it's still firing on all cylinders. But at today's price, too-optimistic growth expectations heavily factor into its share price. Here's a rough picture of Chipotle's valuation: Analysts project 20% growth over the next five years, or approximately half of the company's price-to-earnings and price-to-free cash flow ratios.
Though Chipotle is young and growing, these competitors are much cheaper, and they all come with the safety of a dividend:
Company P/E Ratio P/FCF Ratio
McDonald's (NYSE: MCD) 17 21
Yum! Brands (NYSE: YUM) 22 24
Darden Restaurants (NYSE: DRI) 16 13
Chipotle 42 39
Data from Capital IQ, a division of Standard & Poor's.
That's not to say that investors' optimism won't continue to drive up the price of Chipotle in the short term. But this sort of guessing game is a risky investment process. More importantly, when Chipotle's growth slows, the potential downside could be disastrous if you continue to hold.
Plus, co-CEO Steve Ells sold over $12 million of shares in early September, a move that can indicate an overvalued stock.
The crucial takeaways
There are three important lessons to learn from this example:
1. Sell in stages. The Million Dollar Portfolio team sold their stake in Chipotle over several months. They saw shares were getting overvalued, but they realized that there still could be more upside. Partially selling over time ensures that you secure your gains, while still taking advantage of further gains that might come thanks to the market's irrationality.
2. Remain unemotional. The Million Dollar Portfolio team loved (and still love) the company, even as they sold. I've never seen seven guys eat more burritos than these folks did, dismissing the calories as "research." But though you love a company, its business plan, and its products, you have to be able to distance yourself from all that, and the profits you've earned by investing in it.
3. Continue to monitor the company. The Million Dollar Portfolio team made it clear that they're not done watching Chipotle. In fact, if it takes a huge hit at any point, I'm convinced they'll open up a position again -- or at least add it to their watch list. Just because you sell a company, don't let all your research go to waste -- simply continue to keep an eye on it. Often the price will eventually return to your comfort zone.
These lessons are especially important because Chipotle's not the only market darling out there today. Here are a few other companies that might be market darlings, trading near 52-week highs with hefty multiples:
Company Current price 52-week high P/E Ratio P/FCF Ratio
Apple (Nasdaq: AAPL) $310.12 $319.00 20 17
Panera (Nasdaq: PNRA) $91.46 $95.41 27 15
Buffalo Wild Wings (Nasdaq: BWLD) $48.71 $52.99 24 54
Data from Capital IQ.
I think it's just a matter of time before investors get nervous with these companies (and their products) as well.
Lastly, it's important to have a sounding board for both buying and selling decisions. I'm convinced that's why the Million Dollar Portfolio team is so successful (they're outperforming the S&P 500 by 6%).
We're about to open up the doors to Million Dollar Portfolio for the last time in 2010. To find out more about how you can benefit from their research -- and follow along with their real-money buys and sells -- simply enter your email address in the box below.
Tuesday, October 19, 2010
Monday, September 20, 2010
Spotting the winners
Dora Hoan
Group CEO
Best World International Ltd
I BELIEVE it is crucial to take the pulse of the global economy to be able to make good investments, particularly in a post-crisis world. The prospects for the region however remains bright, as Asian consumption has been leading the global recovery relative to the US, the EU and Japan. I foresee even more opportunities for Asian economic growth in the next 20 years as a result of strong inter-regional and intra-regional trade.
I see ample opportunities in properties, construction, food & beverage and health & lifestyle.
Global markets on the whole are bouncing back but are still in their early stages of fragile recovery. Retail players have demonstrated renewed confidence in investing but they are observed to be more selective and not industry-specific. I would advise investing incremental cash in stocks of companies that have done fairly well over the years, with proven track record that they can withstand minor and major dips in the economy.
Investors must get a feel for a company, their accomplishments, their visions, goals for expansion and direction towards the future. It is particularly important in these uncertain times to look at the business model's scalability and sustainability. Certainly, more than trending and speculations, retail investors will go where real values come into play.
Group CEO
Best World International Ltd
I BELIEVE it is crucial to take the pulse of the global economy to be able to make good investments, particularly in a post-crisis world. The prospects for the region however remains bright, as Asian consumption has been leading the global recovery relative to the US, the EU and Japan. I foresee even more opportunities for Asian economic growth in the next 20 years as a result of strong inter-regional and intra-regional trade.
I see ample opportunities in properties, construction, food & beverage and health & lifestyle.
Global markets on the whole are bouncing back but are still in their early stages of fragile recovery. Retail players have demonstrated renewed confidence in investing but they are observed to be more selective and not industry-specific. I would advise investing incremental cash in stocks of companies that have done fairly well over the years, with proven track record that they can withstand minor and major dips in the economy.
Investors must get a feel for a company, their accomplishments, their visions, goals for expansion and direction towards the future. It is particularly important in these uncertain times to look at the business model's scalability and sustainability. Certainly, more than trending and speculations, retail investors will go where real values come into play.
Beating the market for 15 years
Beating the market for 15 years
BILL Miller may not rank among the Buffetts and Soroses of the world when it comes to being a household name. But the mutual fund manager's 15-year market-beating streak is legendary.
Related stories:
» The 7 deadly investment myths
» How to value a company
Born in Laurinburg, North Carolina in 1950, Mr Miller graduated with honours from the Washington and Lee University in 1972 with a degree in economics. He joined asset management firm Legg Mason in 1981 and took over equity fund management arm Legg Mason Capital Management in 1990.
The rest, as they say, is history. The Legg Mason Value Trust beat the Standard & Poor's 500 index every year from 1991 to 2005, growing from US$750 million (S$1.01 billion) to more than US$20 billion in the same time. Only in 2006 did Mr Miller's streak finally come to an end, with the Value Trust's 5.85 per cent return trailing the S&P 500's 15.75 per cent showing.
Mr Miller, chairman and chief investment officer of Legg Mason Capital Management, also manages the newer Legg Mason Opportunity Trust mutual fund. In total, he handles more than US$60 billion.
As a self-proclaimed value investor, his strategy is founded on analysis. He buys mainly large-cap stocks that he thinks are trading at large discounts to their intrinsic value, and takes a long-term view on them: not just buying and holding, but buying even deeper into stocks that he holds if their prices fall.
Mr Miller himself has played down the significance of his streak, once saying: 'Our so-called 'streak' is a fortunate accident of the calendar.' Be that as it may, the Legg Mason Value Trust averaged returns of 16 per cent for 15 years up to the end of 2005, a track record not to be scoffed at.
What were Mr Miller's strategies in achieving his record-breaking run?
Focus on companies, not trends
Mr Miller begins with the companies in mind, not the market trends. As the man himself has said: 'We don't have a forecast-and-trend approach - meaning we don't make a forecast of what we think is likely to happen, or what trends are likely to occur, and then adjust our portfolio to conform to the forecasts.
Related stories:
» The 7 deadly investment myths
» How to value a company
'We estimate the intrinsic value of our companies and invest where we can get the greatest discount to intrinsic value. Then we try to understand the environment we're operating in. But we start with valuation - that's always number one.'
A famous example of this approach in action is his bid for Google's initial public offer in August 2004. Back then, the prevailing sentiment held that Google was just another over-hyped Internet play.
Never one to follow the crowd, Mr Miller set up a task force to analyse the company. They developed a three-tier bid based on their valuation of Google, which turned out to be much higher than the final price of US$85 a share - meaning that Mr Miller scored 2.3 million shares at US$196 million. That initial investment is now worth over US$1.2 billion.
Look for value
When Mr Miller assesses companies on their own merits, he also looks at their current price relative to what he thinks is their intrinsic value. Value investors are the bargain hunters of the stock market, and Mr Miller looks for stocks trading at large discounts.
Related stories:
» The 7 deadly investment myths
» How to value a company
If a stock that he holds starts to fall, he simply sees it as a better bargain. Hence, his famous reply to the question of when he would stop buying a falling stock: 'When we can no longer get a quote.'
Of course, value investors always face the danger of being left with a value trap, or a stock that appears undervalued but is on the decline. Research and analysis is key to avoid ending up with a value trap on one's hands.
In this area, understanding the background of the industry is also important. Says Mr Miller: 'The trap comes in when there's a secular change, where the fundamental economics of the business are changing or the industry is changing, and the market is slowly incorporating that into the stock price.'
Go for the long-term
Mr Miller is definitely not a short-term speculator, and instead sums up his long-term view on stocks as 'creative non-action'.
Related stories:
» The 7 deadly investment myths
» How to value a company
'We are mostly inert when it comes to shuffling the portfolio around, with turnover that has averaged in the 15 per cent to 20 per cent range, implying holding periods of more than five years,' says Mr Miller.
Market changes seldom affect his decisions, either. 'Many funds have turnover in excess of 100 per cent per year, as they constantly react to events or try to take advantage of short-term price moves. We usually do neither. We believe successful investing involves anticipating change, not reacting to it.'
In the late 1990s, Mr Miller famously bought more and more shares of Internet company AOL, even as its price plummeted. Despite widespread scepticism about the wisdom of that choice, his decision eventually paid off when the stock came back strongly.
Do your own thing
Mr Miller's winning bets on Google and AOL illustrate a key component of his style: never be afraid to think differently.
Related stories:
» The 7 deadly investment myths
» How to value a company
After all, Mr Miller once served as a military intelligence officer in Europe. He also sits on the Board of Trustees at the Santa Fe Institute, a centre for research in complex systems theory. Though that may sound esoteric, analysing systems is part of Mr Miller's investing philosophy.
'What we are really trying to do is to think about thinking,' says Mr Miller. 'Understanding how groups behave is central to understanding how complex adaptive systems - such as the stock market - work.'
In practice, this philosophy means that Mr Miller often buys stocks which most investors would not consider holding, as he believes that the conventional wisdom about them is wrong. Of course, he is not contrary for the sake of being so: his decisions are backed by solid analysis.
Going long may not sound as exciting as speculation. Yet Mr Miller's style is not for the faint-hearted. Investors wishing to emulate his philosophy, whether in rejecting the conventional wisdom or buying even deeper into plummeting stocks, will need confidence in both themselves and their research.
BILL Miller may not rank among the Buffetts and Soroses of the world when it comes to being a household name. But the mutual fund manager's 15-year market-beating streak is legendary.
Related stories:
» The 7 deadly investment myths
» How to value a company
Born in Laurinburg, North Carolina in 1950, Mr Miller graduated with honours from the Washington and Lee University in 1972 with a degree in economics. He joined asset management firm Legg Mason in 1981 and took over equity fund management arm Legg Mason Capital Management in 1990.
The rest, as they say, is history. The Legg Mason Value Trust beat the Standard & Poor's 500 index every year from 1991 to 2005, growing from US$750 million (S$1.01 billion) to more than US$20 billion in the same time. Only in 2006 did Mr Miller's streak finally come to an end, with the Value Trust's 5.85 per cent return trailing the S&P 500's 15.75 per cent showing.
Mr Miller, chairman and chief investment officer of Legg Mason Capital Management, also manages the newer Legg Mason Opportunity Trust mutual fund. In total, he handles more than US$60 billion.
As a self-proclaimed value investor, his strategy is founded on analysis. He buys mainly large-cap stocks that he thinks are trading at large discounts to their intrinsic value, and takes a long-term view on them: not just buying and holding, but buying even deeper into stocks that he holds if their prices fall.
Mr Miller himself has played down the significance of his streak, once saying: 'Our so-called 'streak' is a fortunate accident of the calendar.' Be that as it may, the Legg Mason Value Trust averaged returns of 16 per cent for 15 years up to the end of 2005, a track record not to be scoffed at.
What were Mr Miller's strategies in achieving his record-breaking run?
Focus on companies, not trends
Mr Miller begins with the companies in mind, not the market trends. As the man himself has said: 'We don't have a forecast-and-trend approach - meaning we don't make a forecast of what we think is likely to happen, or what trends are likely to occur, and then adjust our portfolio to conform to the forecasts.
Related stories:
» The 7 deadly investment myths
» How to value a company
'We estimate the intrinsic value of our companies and invest where we can get the greatest discount to intrinsic value. Then we try to understand the environment we're operating in. But we start with valuation - that's always number one.'
A famous example of this approach in action is his bid for Google's initial public offer in August 2004. Back then, the prevailing sentiment held that Google was just another over-hyped Internet play.
Never one to follow the crowd, Mr Miller set up a task force to analyse the company. They developed a three-tier bid based on their valuation of Google, which turned out to be much higher than the final price of US$85 a share - meaning that Mr Miller scored 2.3 million shares at US$196 million. That initial investment is now worth over US$1.2 billion.
Look for value
When Mr Miller assesses companies on their own merits, he also looks at their current price relative to what he thinks is their intrinsic value. Value investors are the bargain hunters of the stock market, and Mr Miller looks for stocks trading at large discounts.
Related stories:
» The 7 deadly investment myths
» How to value a company
If a stock that he holds starts to fall, he simply sees it as a better bargain. Hence, his famous reply to the question of when he would stop buying a falling stock: 'When we can no longer get a quote.'
Of course, value investors always face the danger of being left with a value trap, or a stock that appears undervalued but is on the decline. Research and analysis is key to avoid ending up with a value trap on one's hands.
In this area, understanding the background of the industry is also important. Says Mr Miller: 'The trap comes in when there's a secular change, where the fundamental economics of the business are changing or the industry is changing, and the market is slowly incorporating that into the stock price.'
Go for the long-term
Mr Miller is definitely not a short-term speculator, and instead sums up his long-term view on stocks as 'creative non-action'.
Related stories:
» The 7 deadly investment myths
» How to value a company
'We are mostly inert when it comes to shuffling the portfolio around, with turnover that has averaged in the 15 per cent to 20 per cent range, implying holding periods of more than five years,' says Mr Miller.
Market changes seldom affect his decisions, either. 'Many funds have turnover in excess of 100 per cent per year, as they constantly react to events or try to take advantage of short-term price moves. We usually do neither. We believe successful investing involves anticipating change, not reacting to it.'
In the late 1990s, Mr Miller famously bought more and more shares of Internet company AOL, even as its price plummeted. Despite widespread scepticism about the wisdom of that choice, his decision eventually paid off when the stock came back strongly.
Do your own thing
Mr Miller's winning bets on Google and AOL illustrate a key component of his style: never be afraid to think differently.
Related stories:
» The 7 deadly investment myths
» How to value a company
After all, Mr Miller once served as a military intelligence officer in Europe. He also sits on the Board of Trustees at the Santa Fe Institute, a centre for research in complex systems theory. Though that may sound esoteric, analysing systems is part of Mr Miller's investing philosophy.
'What we are really trying to do is to think about thinking,' says Mr Miller. 'Understanding how groups behave is central to understanding how complex adaptive systems - such as the stock market - work.'
In practice, this philosophy means that Mr Miller often buys stocks which most investors would not consider holding, as he believes that the conventional wisdom about them is wrong. Of course, he is not contrary for the sake of being so: his decisions are backed by solid analysis.
Going long may not sound as exciting as speculation. Yet Mr Miller's style is not for the faint-hearted. Investors wishing to emulate his philosophy, whether in rejecting the conventional wisdom or buying even deeper into plummeting stocks, will need confidence in both themselves and their research.
Monday, September 13, 2010
Finding Lynch's 10-Baggers
Finding Lynch's 10-Baggers
By Tom Gardner | More Articles
May 26, 2004 | Comments (0)
This classic investing column originally ran on Sept. 23, 2003. It has been updated.
Peter Lynch is recognized by investors the world over. More than 1 million read his book One Up on Wall Street -- at least, that many bought it. Sadly, many seem either to have disregarded or forgotten the book's tenets for finding great investments.
And that's a shame. After all, the greatest of these investments -- in his words, the "10- to 40-baggers... even 200-baggers" -- can rise 10-200 times in value.
I haven't forgotten. A "student" of Lynch for years, I don't deny that what I've learned has influenced the way I invest. Nor that, when we conceived of our Motley Fool Hidden Gems newsletter service and online community, digging up just a few of these "10- to 40-baggers" was very much on our minds.
It might be worthwhile, then, to take a look at six of his primary principles, all of which are core components to our Hidden Gems investing approach. I strongly encourage you to consider them when building or fine-tuning your own stock portfolio.
1. Small companies
Lynch loves emerging businesses with strong balance sheets, and so do I. His extraordinary returns in La Quinta Inns came at a time when the company was young and small, traded at a discount to estimated future growth, and sported a healthy balance sheet. Why did he veer away from such dominant franchises as Hilton Hotels (NYSE: HLT) and Marriott International (NYSE: MAR) in favor of the promising upstart? He writes, "Big companies don't have big stock moves... you'll get your biggest moves in smaller companies."
Couldn't have said it better myself. When searching for hidden gems, I focus explicitly on strong, well-run companies capitalized under $2 billion.
2. Fast growers
Among Lynch's favorites are companies whose sales and earnings are expanding 20%-30% per year. The classic Lynch play over the last decade might be Starbucks (Nasdaq: SBUX), which has consistently grown sales and earnings at superior rates. The company has a sterling balance sheet and generates substantial earnings by selling an addictive product, repurchased every day at a premium by its loyal customers.
The real trick is to find fast growers like Starbucks or Krispy Kreme (NYSE: KKD) in their early stages. At the same time, don't shy away from a slower-growth business selling at a truly great price. Hidden gems can take either form.
3. Dull names, dull products, dead industry
You might not think this of the world's greatest -- and arguably, most famous -- mutual fund manager, but Lynch absolutely loved dreary, colorless businesses in stagnant or declining industries. A company like Masco Corporation (NYSE: MAS), which developed the single-handle ball faucet (yawn), rose more than 1,300 times in value from 1958 to 1987.
And if he could find that kind of business with a ridiculous name, like Pep Boys (NYSE: PBY), all the better. No self-respecting Wall Street broker could recommend such an absurdly named unknown to his key clients. And that left the greatest money managers an opportunity to scoop up a truly solid business at a deep discount.
4. Wall Street doesn't care
Lynch's dream stock at Fidelity Magellan was one that hadn't yet attracted any attention from Wall Street. No analysts covered the business, which was less than 20% institutionally owned. None of the big money cared. Toys "R" Us (NYSE: TOY), though it might not be so great an investment today, after being spun out from bankrupt parent Interstate Department Stores, went on in relative obscurity to rise more than 55 times in value.
And Lynch is effusive in explaining the wonderful returns from funeral and cemetery business Service Corporation (NYSE: SRV), which had no analyst coverage. He suggests investors compare that to "the fifty-six brokerage analysts that normally cover IBM (NYSE: IBM) or the forty-four that cover Exxon (NYSE: XOM)."
The point is clear: Small, underfollowed companies present the greatest opportunities to long-term investors.
5. Insider buying and share buybacks
Lynch loves companies whose boards of directors and executive teams put their money where their mouths are. A combination of insider buying and aggressive share buybacks really piqued his interest. He would have given a close look to a tiny company like Spar Group (Nasdaq: SGRP), which has featured persistent insider buying, but also a Moody's (NYSE: MCO), which methodically buys back its shares on the open market.
"Buying back shares," Lynch writes, "is the simplest, best way a company can reward its investors." Bingo.
6. Diversification
Finally, don't forget that Lynch typically owned more than 1,000 stocks at Fidelity Magellan. He embraced diversification and focused his attention on upstart businesses with excellent earnings, sound balance sheets, and little to no Wall Street coverage. He admits that, going in, he never knew which of his investments would rise five or 10 times in value. But the greatest of his investments took three to four years to reward him with smashing returns.
Personally, I anticipate an average holding period of three years, with the greatest of the group being held for a decade or more. I believe you can and should run a broad, diversified portfolio of stocks, if you have the time and the team to do so -- like we do here at the Fool and within our Hidden Gems community.
Finding the next hidden gem
Peter Lynch created loads of millionaires with his Fidelity Magellan Fund -- investors who went on to live comfortably, send their kids to college, and give generously to deserving charities.
You might be surprised to hear that he thinks you can succeed at stock investing without giving your whole life over to financial statement analysis. He's outlined a method whereby the total research time to find a stock "equals a couple hours." And he doesn't think you need to check back on your stocks but once a quarter. Doing more than that might lead to needless hyperactive trading that wears down your portfolio with transaction costs and taxes.
Hidden Gems practices each and every one of these Lynchian precepts. If this is how you like to invest, I guarantee you'll love our newsletter service. Try it free for 30 days and if you don't absolutely love it, you can cancel without paying a tin-lizzy nickel.
The next 10-bagger is out there. Good luck finding it!
By Tom Gardner | More Articles
May 26, 2004 | Comments (0)
This classic investing column originally ran on Sept. 23, 2003. It has been updated.
Peter Lynch is recognized by investors the world over. More than 1 million read his book One Up on Wall Street -- at least, that many bought it. Sadly, many seem either to have disregarded or forgotten the book's tenets for finding great investments.
And that's a shame. After all, the greatest of these investments -- in his words, the "10- to 40-baggers... even 200-baggers" -- can rise 10-200 times in value.
I haven't forgotten. A "student" of Lynch for years, I don't deny that what I've learned has influenced the way I invest. Nor that, when we conceived of our Motley Fool Hidden Gems newsletter service and online community, digging up just a few of these "10- to 40-baggers" was very much on our minds.
It might be worthwhile, then, to take a look at six of his primary principles, all of which are core components to our Hidden Gems investing approach. I strongly encourage you to consider them when building or fine-tuning your own stock portfolio.
1. Small companies
Lynch loves emerging businesses with strong balance sheets, and so do I. His extraordinary returns in La Quinta Inns came at a time when the company was young and small, traded at a discount to estimated future growth, and sported a healthy balance sheet. Why did he veer away from such dominant franchises as Hilton Hotels (NYSE: HLT) and Marriott International (NYSE: MAR) in favor of the promising upstart? He writes, "Big companies don't have big stock moves... you'll get your biggest moves in smaller companies."
Couldn't have said it better myself. When searching for hidden gems, I focus explicitly on strong, well-run companies capitalized under $2 billion.
2. Fast growers
Among Lynch's favorites are companies whose sales and earnings are expanding 20%-30% per year. The classic Lynch play over the last decade might be Starbucks (Nasdaq: SBUX), which has consistently grown sales and earnings at superior rates. The company has a sterling balance sheet and generates substantial earnings by selling an addictive product, repurchased every day at a premium by its loyal customers.
The real trick is to find fast growers like Starbucks or Krispy Kreme (NYSE: KKD) in their early stages. At the same time, don't shy away from a slower-growth business selling at a truly great price. Hidden gems can take either form.
3. Dull names, dull products, dead industry
You might not think this of the world's greatest -- and arguably, most famous -- mutual fund manager, but Lynch absolutely loved dreary, colorless businesses in stagnant or declining industries. A company like Masco Corporation (NYSE: MAS), which developed the single-handle ball faucet (yawn), rose more than 1,300 times in value from 1958 to 1987.
And if he could find that kind of business with a ridiculous name, like Pep Boys (NYSE: PBY), all the better. No self-respecting Wall Street broker could recommend such an absurdly named unknown to his key clients. And that left the greatest money managers an opportunity to scoop up a truly solid business at a deep discount.
4. Wall Street doesn't care
Lynch's dream stock at Fidelity Magellan was one that hadn't yet attracted any attention from Wall Street. No analysts covered the business, which was less than 20% institutionally owned. None of the big money cared. Toys "R" Us (NYSE: TOY), though it might not be so great an investment today, after being spun out from bankrupt parent Interstate Department Stores, went on in relative obscurity to rise more than 55 times in value.
And Lynch is effusive in explaining the wonderful returns from funeral and cemetery business Service Corporation (NYSE: SRV), which had no analyst coverage. He suggests investors compare that to "the fifty-six brokerage analysts that normally cover IBM (NYSE: IBM) or the forty-four that cover Exxon (NYSE: XOM)."
The point is clear: Small, underfollowed companies present the greatest opportunities to long-term investors.
5. Insider buying and share buybacks
Lynch loves companies whose boards of directors and executive teams put their money where their mouths are. A combination of insider buying and aggressive share buybacks really piqued his interest. He would have given a close look to a tiny company like Spar Group (Nasdaq: SGRP), which has featured persistent insider buying, but also a Moody's (NYSE: MCO), which methodically buys back its shares on the open market.
"Buying back shares," Lynch writes, "is the simplest, best way a company can reward its investors." Bingo.
6. Diversification
Finally, don't forget that Lynch typically owned more than 1,000 stocks at Fidelity Magellan. He embraced diversification and focused his attention on upstart businesses with excellent earnings, sound balance sheets, and little to no Wall Street coverage. He admits that, going in, he never knew which of his investments would rise five or 10 times in value. But the greatest of his investments took three to four years to reward him with smashing returns.
Personally, I anticipate an average holding period of three years, with the greatest of the group being held for a decade or more. I believe you can and should run a broad, diversified portfolio of stocks, if you have the time and the team to do so -- like we do here at the Fool and within our Hidden Gems community.
Finding the next hidden gem
Peter Lynch created loads of millionaires with his Fidelity Magellan Fund -- investors who went on to live comfortably, send their kids to college, and give generously to deserving charities.
You might be surprised to hear that he thinks you can succeed at stock investing without giving your whole life over to financial statement analysis. He's outlined a method whereby the total research time to find a stock "equals a couple hours." And he doesn't think you need to check back on your stocks but once a quarter. Doing more than that might lead to needless hyperactive trading that wears down your portfolio with transaction costs and taxes.
Hidden Gems practices each and every one of these Lynchian precepts. If this is how you like to invest, I guarantee you'll love our newsletter service. Try it free for 30 days and if you don't absolutely love it, you can cancel without paying a tin-lizzy nickel.
The next 10-bagger is out there. Good luck finding it!
Wednesday, September 1, 2010
Monday, August 16, 2010
Berkshire Hathaway & Buffett’s Latest Stock Holdings
http://247wallst.com/2010/08/16/berkshire-hathaway-buffetts-latest-stock-holdings-h-to-r-brk-b-hog-hd-ir-irm-jnj-kft-low-mco-nrg-nlc-nke-pg-pg-rsg/
The Crisis & What to Do About It
The Crisis & What to Do About It
By George Soros
1.
The salient feature of the current financial crisis is that it was not caused by some external shock like OPEC raising the price of oil or a particular country or financial institution defaulting. The crisis was generated by the financial system itself. This fact—that the defect was inherent in the system —contradicts the prevailing theory, which holds that financial markets tend toward equilibrium and that deviations from the equilibrium either occur in a random manner or are caused by some sudden external event to which markets have difficulty adjusting. The severity and amplitude of the crisis provides convincing evidence that there is something fundamentally wrong with this prevailing theory and with the approach to market regulation that has gone with it. To understand what has happened, and what should be done to avoid such a catastrophic crisis in the future, will require a new way of thinking about how markets work.
Consider how the crisis has unfolded over the past eighteen months. The proximate cause is to be found in the housing bubble or more exactly in the excesses of the subprime mortgage market. The longer a double-digit rise in house prices lasted, the more lax the lending practices became. In the end, people could borrow 100 percent of inflated house prices with no money down. Insiders referred to subprime loans as ninja loans—no income, no job, no questions asked.
The excesses became evident after house prices peaked in 2006 and subprime mortgage lenders began declaring bankruptcy around March 2007. The problems reached crisis proportions in August 2007. The Federal Reserve and other financial authorities had believed that the subprime crisis was an isolated phenomenon that might cause losses of around $100 billion. Instead, the crisis spread with amazing rapidity to other markets. Some highly leveraged hedge funds collapsed and some lightly regulated financial institutions, notably the largest mortgage originator in the US, Countrywide Financial, had to be acquired by other institutions in order to survive.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Confidence in the creditworthiness of many financial institutions was shaken and interbank lending was disrupted. In quick succession, a variety of esoteric credit markets—ranging from collateralized debt obligations (CDOs) to auction-rated municipal bonds—broke down one after another. After periods of relative calm and partial recovery, crisis episodes recurred in January 2008, precipitated by a rogue trader at Société Générale; in March, associated with the demise of Bear Stearns; and then in July, when IndyMac Bank, the largest savings bank in the Los Angeles area, went into receivership, becoming the fourth-largest bank failure in US history. The deepest fall of all came in September, caused by the disorderly bankruptcy of Lehman Brothers in which holders of commercial paper—for example, short-term, unsecured promissory notes—issued by Lehman lost their money.
Then the inconceivable occurred: the financial system actually melted down. A large money market fund that had invested in commercial paper issued by Lehman Brothers "broke the buck," i.e., its asset value fell below the dollar amount deposited, breaking an implicit promise that deposits in such funds are totally safe and liquid. This started a run on money market funds and the funds stopped buying commercial paper. Since they were the largest buyers, the commercial paper market ceased to function. The issuers of commercial paper were forced to draw down their credit lines, bringing interbank lending to a standstill. Credit spreads—i.e., the risk premium over and above the riskless rate of interest—widened to unprecedented levels and eventually the stock market was also overwhelmed by panic. All this happened in the space of a week.
With the financial system in cardiac arrest, resuscitating it took precedence over considerations of moral hazard—i.e., the danger that coming to the rescue of a financial institution in difficulties would reward and encourage reckless behavior in the future—and the authorities injected ever larger quantities of money. The balance sheet of the Federal Reserve ballooned from $800 billion to $1,800 billion in a couple of weeks. When that was not enough, the American and European financial authorities committed themselves not to allow any other major financial institution to fail.
These unprecedented measures have begun to have an effect: interbank lending has resumed and the London Interbank Offered Rate (LIBOR) has improved. The financial crisis has shown signs of abating. But guaranteeing that the banks at the center of the global financial system will not fail has precipitated a new crisis that caught the authorities unawares: countries at the periphery, whether in Eastern Europe, Asia, or Latin America, could not offer similarly credible guarantees, and financial capital started fleeing from the periphery to the center. All currencies fell against the dollar and the yen, some of them precipitously. Commodity prices dropped like a stone and interest rates in emerging markets soared. So did premiums on insurance against credit default. Hedge funds and other leveraged investors suffered enormous losses, precipitating margin calls and forced selling that have also spread to markets at the center.
Unfortunately the authorities are always lagging behind events. The International Monetary Fund is establishing a new credit facility that allows financially sound periphery countries to borrow without any conditions up to five times their annual quota, but that is too little too late. A much larger pool of money is needed to reassure markets. And if the top tier of periphery countries is saved, what happens to the lower-tier countries? The race to save the international financial system is still ongoing. Even if it is successful, consumers, investors, and businesses are undergoing a traumatic experience whose full impact on global economic activity is yet to be felt. A deep recession is now inevitable and the possibility of a depression cannot be ruled out. When I predicted earlier this year that we were facing the worst financial crisis since the 1930s, I did not anticipate that conditions would deteriorate so badly.
2.
This remarkable sequence of events can be understood only if we abandon the prevailing theory of market behavior. As a way of explaining financial markets, I propose an alternative paradigm that differs from the current one in two respects. First, financial markets do not reflect prevailing conditions accurately; they provide a picture that is always biased or distorted in one way or another. Second, the distorted views held by market participants and expressed in market prices can, under certain circumstances, affect the so-called fundamentals that market prices are supposed to reflect. This two-way circular connection between market prices and the underlying reality I call reflexivity.
While the two-way connection is present at all times, it is only occasionally, and in special circumstances, that it gives rise to financial crises. Usually markets correct their own mistakes, but occasionally there is a misconception or misinterpretation that finds a way to reinforce a trend that is already present in reality and by doing so it also reinforces itself. Such self- reinforcing processes may carry markets into far-from-equilibrium territory. Unless something happens to abort the reflexive interaction sooner, it may persist until the misconception becomes so glaring that it has to be recognized as such. When that happens the trend becomes unsustainable and when it is reversed the self-reinforcing process starts working in the opposite direction, causing a sharp downward movement.
The typical sequence of boom and bust has an asymmetric shape. The boom develops slowly and accelerates gradually. The bust, when it occurs, tends to be short and sharp. The asymmetry is due to the role that credit plays. As prices rise, the same collateral can support a greater amount of credit. Rising prices also tend to generate optimism and encourage a greater use of leverage—borrowing for investment purposes. At the peak of the boom both the value of the collateral and the degree of leverage reach a peak. When the price trend is reversed participants are vulnerable to margin calls and, as we've seen in 2008, the forced liquidation of collateral leads to a catastrophic acceleration on the downside.
Bubbles thus have two components: a trend that prevails in reality and a misconception relating to that trend. The simplest and most common example is to be found in real estate. The trend consists of an increased willingness to lend and a rise in prices. The misconception is that the value of the real estate is independent of the willingness to lend. That misconception encourages bankers to become more lax in their lending practices as prices rise and defaults on mortgage payments diminish. That is how real estate bubbles, including the recent housing bubble, are born. It is remarkable how the misconception continues to recur in various guises in spite of a long history of real estate bubbles bursting.
Bubbles are not the only manifestations of reflexivity in financial markets, but they are the most spectacular. Bubbles always involve the expansion and contraction of credit and they tend to have catastrophic consequences. Since financial markets are prone to produce bubbles and bubbles cause trouble, financial markets have become regulated by the financial authorities. In the United States they include the Federal Reserve, the Treasury, the Securities and Exchange Commission, and many other agencies.
It is important to recognize that regulators base their decisions on a distorted view of reality just as much as market participants—perhaps even more so because regulators are not only human but also bureaucratic and subject to political influences. So the interplay between regulators and market participants is also reflexive in character. In contrast to bubbles, which occur only infrequently, the cat-and-mouse game between regulators and markets goes on continuously. As a consequence reflexivity is at work at all times and it is a mistake to ignore its influence. Yet that is exactly what the prevailing theory of financial markets has done and that mistake is ultimately responsible for the severity of the current crisis.
3.
In my book The New Paradigm for Financial Markets,[*] I argue that the current crisis differs from the various financial crises that preceded it. I base that assertion on the hypothesis that the explosion of the US housing bubble acted as the detonator for a much larger "super-bubble" that has been developing since the 1980s. The underlying trend in the super-bubble has been the ever-increasing use of credit and leverage. Credit—whether extended to consumers or speculators or banks—has been growing at a much faster rate than the GDP ever since the end of World War II. But the rate of growth accelerated and took on the characteristics of a bubble when it was reinforced by a misconception that became dominant in 1980 when Ronald Reagan became president and Margaret Thatcher was prime minister in the United Kingdom.
The misconception is derived from the prevailing theory of financial markets, which, as mentioned earlier, holds that financial markets tend toward equilibrium and that deviations are random and can be attributed to external causes. This theory has been used to justify the belief that the pursuit of self-interest should be given free rein and markets should be deregulated. I call that belief market fundamentalism and claim that it employs false logic. Just because regulations and all other forms of governmental interventions have proven to be faulty, it does not follow that markets are perfect.
Although market fundamentalism is based on false premises, it has served well the interests of the owners and managers of financial capital. The globalization of financial markets allowed financial capital to move around freely and made it difficult for individual states to tax it or regulate it. Deregulation of financial transactions also served the interests of the managers of financial capital; and the freedom to innovate enhanced the profitability of financial enterprises. The financial industry grew to a point where it represented 25 percent of the stock market capitalization in the United States and an even higher percentage in some other countries.
Since market fundamentalism is built on false assumptions, its adoption in the 1980s as the guiding principle of economic policy was bound to have negative consequences. Indeed, we have experienced a series of financial crises since then, but the adverse consequences were suffered principally by the countries that lie on the periphery of the global financial system, not by those at the center. The system is under the control of the developed countries, especially the United States, which enjoys veto rights in the International Monetary Fund.
Whenever a crisis endangered the prosperity of the United States—as for example the savings and loan crisis in the late 1980s, or the collapse of the hedge fund Long Term Capital Management in 1998—the authorities intervened, finding ways for the failing institutions to merge with others and providing monetary and fiscal stimulus when the pace of economic activity was endangered. Thus the periodic crises served, in effect, as successful tests that reinforced both the underlying trend of ever-greater credit expansion and the prevailing misconception that financial markets should be left to their own devices.
It was of course the intervention of the financial authorities that made the tests successful, not the ability of financial markets to correct their own excesses. But it was convenient for investors and governments to deceive themselves. The relative safety and stability of the United States, compared to the countries at the periphery, allowed the United States to suck up the savings of the rest of the world and run a current account deficit that reached nearly 7 percent of GNP at its peak in the first quarter of 2006. Eventually even the Federal Reserve and other regulators succumbed to the market fundamentalist ideology and abdicated their responsibility to regulate. They ought to have known better since it was their actions that kept the United States economy on an even keel. Alan Greenspan, in particular, believed that giving users of financial innovations such as derivatives free rein brought such great benefits that having to clean up behind the occasional financial mishap was a small price to pay. And his analysis of the costs and benefits of his permissive policies was not totally wrong while the super-bubble lasted. Only now has he been forced to acknowledge that there was a flaw in his argument.
Financial engineering involved the creation of increasingly sophisticated instruments, or derivatives, for leveraging credit and "managing" risk in order to increase potential profit. An alphabet soup of synthetic financial instruments was concocted: CDOs, CDO squareds, CDSs, ABXs, CMBXs, etc. This engineering reached such heights of complexity that the regulators could no longer calculate the risks and came to rely on the risk management models of the financial institutions themselves. The rating companies followed a similar path in rating synthetic financial instruments, deriving considerable additional revenues from their proliferation. The esoteric financial instruments and techniques for risk management were based on the false premise that, in the behavior of the market, deviations from the mean occur in a random fashion. But the increased use of financial engineering set in motion a process of boom and bust. So eventually there was hell to pay. At first the occasional financial crises served as successful tests. But the subprime crisis came to play a different role: it served as the culmination or reversal point of the super-bubble.
It should be emphasized that this interpretation of the current situation does not necessarily follow from my model of boom and bust. Had the financial authorities succeeded in containing the subprime crisis—as they thought at the time they would be able to do—this would have been seen as just another successful test instead of the reversal point. I have cried wolf three times: first with The Alchemy of Finance in 1987, then with The Crisis of Global Capitalism in 1998, and now. Only now did the wolf arrive.
My interpretation of financial markets based on reflexivity can explain events better than it can predict them. It is less ambitious than the previous theory. It does not claim to determine the outcome as equilibrium theory does. It can assert that a boom must eventually lead to a bust, but it cannot determine either the extent or the duration of a boom. Indeed, those of us who recognized that there was a housing bubble expected it to burst much sooner. Had it done so, the damage would have been much smaller and the super-bubble may have remained intact. Most of the damage was caused by mortgage-related securities issued in the last two years of the housing boom.
The fact that the new paradigm does not claim to predict the future explains why it did not make any headway until now, but in the light of recent experience it can no longer be ignored. We must come to terms with the fact that reflexivity introduces an element of uncertainty into financial markets that the previous theory left out of account. That theory was used to establish mathematical models for calculating risk and converting bundles of subprime mortgages into tradable securities, as well as other forms of debt. Uncertainty by definition cannot be quantified. Excessive reliance on those mathematical models did untold harm.
4.
The new paradigm has far-reaching implications for the regulation of financial markets. Since they are prone to create asset bubbles, regulators such as the Fed, the Treasury, and the SEC must accept responsibility for preventing bubbles from growing too big. Until now financial authorities have explicitly rejected that responsibility.
It is impossible to prevent bubbles from forming, but it should be possible to keep them within tolerable bounds. It cannot be done by controlling only the money supply. Regulators must also take into account credit conditions because money and credit do not move in lockstep. Markets have moods and biases and it falls to regulators to counterbalance them. That requires the use of judgment and since regulators are also human, they are bound to make mistakes. They have the advantage, however, of getting feedback from the market and that should enable them to correct their mistakes. If a tightening of margin and minimum capital requirements does not deflate a bubble, they can tighten them some more. But the process is not foolproof because markets can also be wrong. The search for the optimum equilibrium has to be a never-ending process of trial and error.
The cat-and-mouse game between regulators and market participants is already ongoing, but its true nature has not yet been acknowledged. Alan Greenspan was a past master of manipulation with his Delphic utterances, but instead of acknowledging what he was doing he pretended that he was merely a passive observer of the facts. Reflexivity remained a state secret. That is why the super-bubble could develop so far during his tenure.
Since money and credit do not move in lockstep and asset bubbles cannot be controlled purely by monetary means, additional tools must be employed, or more accurately reactivated, since they were in active use in the 1950s and 1960s. I refer to variable margin requirements and minimal capital requirements, which are meant to control the amount of leverage market participants can employ. Central banks even used to issue guidance to banks about how they should allocate loans to specific sectors of the economy. Such directives may be preferable to the blunt instruments of monetary policy in combating "irrational exuberance" in particular sectors, such as information technology or real estate.
Sophisticated financial engineering of the kind I have mentioned can render the calculation of margin and capital requirements extremely difficult if not impossible. In order to activate such requirements, financial engineering must also be regulated and new products must be registered and approved by the appropriate authorities before they can be used. Such regulation should be a high priority of the new Obama administration. It is all the more necessary because financial engineering often aims at circumventing regulations.
Take for example credit default swaps (CDSs), instruments intended to insure against the possibility of bonds and other forms of debt going into default, and whose price captures the perceived risk of such a possibility occurring. These instruments grew like Topsy because they required much less capital than owning or shorting the underlying bonds. Eventually they grew to more than $50 trillion in nominal size, which is a many-fold multiple of the underlying bonds and five times the entire US national debt. Yet the market in credit default swaps has remained entirely unregulated. AIG, the insurance company, lost a fortune selling credit default swaps as a form of insurance and had to be bailed out, costing the Treasury $126 billion so far. Although the CDS market may be eventually saved from the meltdown that has occurred in many other markets, the sheer existence of an unregulated market of this size has been a major factor in increasing risk throughout the entire financial system.
Since the risk management models used until now ignored the uncertainties inherent in reflexivity, limits on credit and leverage will have to be set substantially lower than those that were tolerated in the recent past. This means that financial institutions in the aggregate will be less profitable than they have been during the super-bubble and some business models that depended on excessive leverage will become uneconomical. The financial industry has already dropped from 25 percent of total market capitalization to 16 percent. This ratio is unlikely to recover to anywhere near its previous high; indeed, it is likely to end lower. This may be considered a healthy adjustment, but not by those who are losing their jobs.
In view of the tremendous losses suffered by the general public, there is a real danger that excessive deregulation will be succeeded by punitive reregulation. That would be unfortunate because regulations are liable to be even more deficient than the market mechanism. As I have suggested, regulators are not only human but also bureaucratic and susceptible to lobbying and corruption. It is to be hoped that the reforms outlined here will preempt a regulatory overkill.
—November 6, 2008
By George Soros
1.
The salient feature of the current financial crisis is that it was not caused by some external shock like OPEC raising the price of oil or a particular country or financial institution defaulting. The crisis was generated by the financial system itself. This fact—that the defect was inherent in the system —contradicts the prevailing theory, which holds that financial markets tend toward equilibrium and that deviations from the equilibrium either occur in a random manner or are caused by some sudden external event to which markets have difficulty adjusting. The severity and amplitude of the crisis provides convincing evidence that there is something fundamentally wrong with this prevailing theory and with the approach to market regulation that has gone with it. To understand what has happened, and what should be done to avoid such a catastrophic crisis in the future, will require a new way of thinking about how markets work.
Consider how the crisis has unfolded over the past eighteen months. The proximate cause is to be found in the housing bubble or more exactly in the excesses of the subprime mortgage market. The longer a double-digit rise in house prices lasted, the more lax the lending practices became. In the end, people could borrow 100 percent of inflated house prices with no money down. Insiders referred to subprime loans as ninja loans—no income, no job, no questions asked.
The excesses became evident after house prices peaked in 2006 and subprime mortgage lenders began declaring bankruptcy around March 2007. The problems reached crisis proportions in August 2007. The Federal Reserve and other financial authorities had believed that the subprime crisis was an isolated phenomenon that might cause losses of around $100 billion. Instead, the crisis spread with amazing rapidity to other markets. Some highly leveraged hedge funds collapsed and some lightly regulated financial institutions, notably the largest mortgage originator in the US, Countrywide Financial, had to be acquired by other institutions in order to survive.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Confidence in the creditworthiness of many financial institutions was shaken and interbank lending was disrupted. In quick succession, a variety of esoteric credit markets—ranging from collateralized debt obligations (CDOs) to auction-rated municipal bonds—broke down one after another. After periods of relative calm and partial recovery, crisis episodes recurred in January 2008, precipitated by a rogue trader at Société Générale; in March, associated with the demise of Bear Stearns; and then in July, when IndyMac Bank, the largest savings bank in the Los Angeles area, went into receivership, becoming the fourth-largest bank failure in US history. The deepest fall of all came in September, caused by the disorderly bankruptcy of Lehman Brothers in which holders of commercial paper—for example, short-term, unsecured promissory notes—issued by Lehman lost their money.
Then the inconceivable occurred: the financial system actually melted down. A large money market fund that had invested in commercial paper issued by Lehman Brothers "broke the buck," i.e., its asset value fell below the dollar amount deposited, breaking an implicit promise that deposits in such funds are totally safe and liquid. This started a run on money market funds and the funds stopped buying commercial paper. Since they were the largest buyers, the commercial paper market ceased to function. The issuers of commercial paper were forced to draw down their credit lines, bringing interbank lending to a standstill. Credit spreads—i.e., the risk premium over and above the riskless rate of interest—widened to unprecedented levels and eventually the stock market was also overwhelmed by panic. All this happened in the space of a week.
With the financial system in cardiac arrest, resuscitating it took precedence over considerations of moral hazard—i.e., the danger that coming to the rescue of a financial institution in difficulties would reward and encourage reckless behavior in the future—and the authorities injected ever larger quantities of money. The balance sheet of the Federal Reserve ballooned from $800 billion to $1,800 billion in a couple of weeks. When that was not enough, the American and European financial authorities committed themselves not to allow any other major financial institution to fail.
These unprecedented measures have begun to have an effect: interbank lending has resumed and the London Interbank Offered Rate (LIBOR) has improved. The financial crisis has shown signs of abating. But guaranteeing that the banks at the center of the global financial system will not fail has precipitated a new crisis that caught the authorities unawares: countries at the periphery, whether in Eastern Europe, Asia, or Latin America, could not offer similarly credible guarantees, and financial capital started fleeing from the periphery to the center. All currencies fell against the dollar and the yen, some of them precipitously. Commodity prices dropped like a stone and interest rates in emerging markets soared. So did premiums on insurance against credit default. Hedge funds and other leveraged investors suffered enormous losses, precipitating margin calls and forced selling that have also spread to markets at the center.
Unfortunately the authorities are always lagging behind events. The International Monetary Fund is establishing a new credit facility that allows financially sound periphery countries to borrow without any conditions up to five times their annual quota, but that is too little too late. A much larger pool of money is needed to reassure markets. And if the top tier of periphery countries is saved, what happens to the lower-tier countries? The race to save the international financial system is still ongoing. Even if it is successful, consumers, investors, and businesses are undergoing a traumatic experience whose full impact on global economic activity is yet to be felt. A deep recession is now inevitable and the possibility of a depression cannot be ruled out. When I predicted earlier this year that we were facing the worst financial crisis since the 1930s, I did not anticipate that conditions would deteriorate so badly.
2.
This remarkable sequence of events can be understood only if we abandon the prevailing theory of market behavior. As a way of explaining financial markets, I propose an alternative paradigm that differs from the current one in two respects. First, financial markets do not reflect prevailing conditions accurately; they provide a picture that is always biased or distorted in one way or another. Second, the distorted views held by market participants and expressed in market prices can, under certain circumstances, affect the so-called fundamentals that market prices are supposed to reflect. This two-way circular connection between market prices and the underlying reality I call reflexivity.
While the two-way connection is present at all times, it is only occasionally, and in special circumstances, that it gives rise to financial crises. Usually markets correct their own mistakes, but occasionally there is a misconception or misinterpretation that finds a way to reinforce a trend that is already present in reality and by doing so it also reinforces itself. Such self- reinforcing processes may carry markets into far-from-equilibrium territory. Unless something happens to abort the reflexive interaction sooner, it may persist until the misconception becomes so glaring that it has to be recognized as such. When that happens the trend becomes unsustainable and when it is reversed the self-reinforcing process starts working in the opposite direction, causing a sharp downward movement.
The typical sequence of boom and bust has an asymmetric shape. The boom develops slowly and accelerates gradually. The bust, when it occurs, tends to be short and sharp. The asymmetry is due to the role that credit plays. As prices rise, the same collateral can support a greater amount of credit. Rising prices also tend to generate optimism and encourage a greater use of leverage—borrowing for investment purposes. At the peak of the boom both the value of the collateral and the degree of leverage reach a peak. When the price trend is reversed participants are vulnerable to margin calls and, as we've seen in 2008, the forced liquidation of collateral leads to a catastrophic acceleration on the downside.
Bubbles thus have two components: a trend that prevails in reality and a misconception relating to that trend. The simplest and most common example is to be found in real estate. The trend consists of an increased willingness to lend and a rise in prices. The misconception is that the value of the real estate is independent of the willingness to lend. That misconception encourages bankers to become more lax in their lending practices as prices rise and defaults on mortgage payments diminish. That is how real estate bubbles, including the recent housing bubble, are born. It is remarkable how the misconception continues to recur in various guises in spite of a long history of real estate bubbles bursting.
Bubbles are not the only manifestations of reflexivity in financial markets, but they are the most spectacular. Bubbles always involve the expansion and contraction of credit and they tend to have catastrophic consequences. Since financial markets are prone to produce bubbles and bubbles cause trouble, financial markets have become regulated by the financial authorities. In the United States they include the Federal Reserve, the Treasury, the Securities and Exchange Commission, and many other agencies.
It is important to recognize that regulators base their decisions on a distorted view of reality just as much as market participants—perhaps even more so because regulators are not only human but also bureaucratic and subject to political influences. So the interplay between regulators and market participants is also reflexive in character. In contrast to bubbles, which occur only infrequently, the cat-and-mouse game between regulators and markets goes on continuously. As a consequence reflexivity is at work at all times and it is a mistake to ignore its influence. Yet that is exactly what the prevailing theory of financial markets has done and that mistake is ultimately responsible for the severity of the current crisis.
3.
In my book The New Paradigm for Financial Markets,[*] I argue that the current crisis differs from the various financial crises that preceded it. I base that assertion on the hypothesis that the explosion of the US housing bubble acted as the detonator for a much larger "super-bubble" that has been developing since the 1980s. The underlying trend in the super-bubble has been the ever-increasing use of credit and leverage. Credit—whether extended to consumers or speculators or banks—has been growing at a much faster rate than the GDP ever since the end of World War II. But the rate of growth accelerated and took on the characteristics of a bubble when it was reinforced by a misconception that became dominant in 1980 when Ronald Reagan became president and Margaret Thatcher was prime minister in the United Kingdom.
The misconception is derived from the prevailing theory of financial markets, which, as mentioned earlier, holds that financial markets tend toward equilibrium and that deviations are random and can be attributed to external causes. This theory has been used to justify the belief that the pursuit of self-interest should be given free rein and markets should be deregulated. I call that belief market fundamentalism and claim that it employs false logic. Just because regulations and all other forms of governmental interventions have proven to be faulty, it does not follow that markets are perfect.
Although market fundamentalism is based on false premises, it has served well the interests of the owners and managers of financial capital. The globalization of financial markets allowed financial capital to move around freely and made it difficult for individual states to tax it or regulate it. Deregulation of financial transactions also served the interests of the managers of financial capital; and the freedom to innovate enhanced the profitability of financial enterprises. The financial industry grew to a point where it represented 25 percent of the stock market capitalization in the United States and an even higher percentage in some other countries.
Since market fundamentalism is built on false assumptions, its adoption in the 1980s as the guiding principle of economic policy was bound to have negative consequences. Indeed, we have experienced a series of financial crises since then, but the adverse consequences were suffered principally by the countries that lie on the periphery of the global financial system, not by those at the center. The system is under the control of the developed countries, especially the United States, which enjoys veto rights in the International Monetary Fund.
Whenever a crisis endangered the prosperity of the United States—as for example the savings and loan crisis in the late 1980s, or the collapse of the hedge fund Long Term Capital Management in 1998—the authorities intervened, finding ways for the failing institutions to merge with others and providing monetary and fiscal stimulus when the pace of economic activity was endangered. Thus the periodic crises served, in effect, as successful tests that reinforced both the underlying trend of ever-greater credit expansion and the prevailing misconception that financial markets should be left to their own devices.
It was of course the intervention of the financial authorities that made the tests successful, not the ability of financial markets to correct their own excesses. But it was convenient for investors and governments to deceive themselves. The relative safety and stability of the United States, compared to the countries at the periphery, allowed the United States to suck up the savings of the rest of the world and run a current account deficit that reached nearly 7 percent of GNP at its peak in the first quarter of 2006. Eventually even the Federal Reserve and other regulators succumbed to the market fundamentalist ideology and abdicated their responsibility to regulate. They ought to have known better since it was their actions that kept the United States economy on an even keel. Alan Greenspan, in particular, believed that giving users of financial innovations such as derivatives free rein brought such great benefits that having to clean up behind the occasional financial mishap was a small price to pay. And his analysis of the costs and benefits of his permissive policies was not totally wrong while the super-bubble lasted. Only now has he been forced to acknowledge that there was a flaw in his argument.
Financial engineering involved the creation of increasingly sophisticated instruments, or derivatives, for leveraging credit and "managing" risk in order to increase potential profit. An alphabet soup of synthetic financial instruments was concocted: CDOs, CDO squareds, CDSs, ABXs, CMBXs, etc. This engineering reached such heights of complexity that the regulators could no longer calculate the risks and came to rely on the risk management models of the financial institutions themselves. The rating companies followed a similar path in rating synthetic financial instruments, deriving considerable additional revenues from their proliferation. The esoteric financial instruments and techniques for risk management were based on the false premise that, in the behavior of the market, deviations from the mean occur in a random fashion. But the increased use of financial engineering set in motion a process of boom and bust. So eventually there was hell to pay. At first the occasional financial crises served as successful tests. But the subprime crisis came to play a different role: it served as the culmination or reversal point of the super-bubble.
It should be emphasized that this interpretation of the current situation does not necessarily follow from my model of boom and bust. Had the financial authorities succeeded in containing the subprime crisis—as they thought at the time they would be able to do—this would have been seen as just another successful test instead of the reversal point. I have cried wolf three times: first with The Alchemy of Finance in 1987, then with The Crisis of Global Capitalism in 1998, and now. Only now did the wolf arrive.
My interpretation of financial markets based on reflexivity can explain events better than it can predict them. It is less ambitious than the previous theory. It does not claim to determine the outcome as equilibrium theory does. It can assert that a boom must eventually lead to a bust, but it cannot determine either the extent or the duration of a boom. Indeed, those of us who recognized that there was a housing bubble expected it to burst much sooner. Had it done so, the damage would have been much smaller and the super-bubble may have remained intact. Most of the damage was caused by mortgage-related securities issued in the last two years of the housing boom.
The fact that the new paradigm does not claim to predict the future explains why it did not make any headway until now, but in the light of recent experience it can no longer be ignored. We must come to terms with the fact that reflexivity introduces an element of uncertainty into financial markets that the previous theory left out of account. That theory was used to establish mathematical models for calculating risk and converting bundles of subprime mortgages into tradable securities, as well as other forms of debt. Uncertainty by definition cannot be quantified. Excessive reliance on those mathematical models did untold harm.
4.
The new paradigm has far-reaching implications for the regulation of financial markets. Since they are prone to create asset bubbles, regulators such as the Fed, the Treasury, and the SEC must accept responsibility for preventing bubbles from growing too big. Until now financial authorities have explicitly rejected that responsibility.
It is impossible to prevent bubbles from forming, but it should be possible to keep them within tolerable bounds. It cannot be done by controlling only the money supply. Regulators must also take into account credit conditions because money and credit do not move in lockstep. Markets have moods and biases and it falls to regulators to counterbalance them. That requires the use of judgment and since regulators are also human, they are bound to make mistakes. They have the advantage, however, of getting feedback from the market and that should enable them to correct their mistakes. If a tightening of margin and minimum capital requirements does not deflate a bubble, they can tighten them some more. But the process is not foolproof because markets can also be wrong. The search for the optimum equilibrium has to be a never-ending process of trial and error.
The cat-and-mouse game between regulators and market participants is already ongoing, but its true nature has not yet been acknowledged. Alan Greenspan was a past master of manipulation with his Delphic utterances, but instead of acknowledging what he was doing he pretended that he was merely a passive observer of the facts. Reflexivity remained a state secret. That is why the super-bubble could develop so far during his tenure.
Since money and credit do not move in lockstep and asset bubbles cannot be controlled purely by monetary means, additional tools must be employed, or more accurately reactivated, since they were in active use in the 1950s and 1960s. I refer to variable margin requirements and minimal capital requirements, which are meant to control the amount of leverage market participants can employ. Central banks even used to issue guidance to banks about how they should allocate loans to specific sectors of the economy. Such directives may be preferable to the blunt instruments of monetary policy in combating "irrational exuberance" in particular sectors, such as information technology or real estate.
Sophisticated financial engineering of the kind I have mentioned can render the calculation of margin and capital requirements extremely difficult if not impossible. In order to activate such requirements, financial engineering must also be regulated and new products must be registered and approved by the appropriate authorities before they can be used. Such regulation should be a high priority of the new Obama administration. It is all the more necessary because financial engineering often aims at circumventing regulations.
Take for example credit default swaps (CDSs), instruments intended to insure against the possibility of bonds and other forms of debt going into default, and whose price captures the perceived risk of such a possibility occurring. These instruments grew like Topsy because they required much less capital than owning or shorting the underlying bonds. Eventually they grew to more than $50 trillion in nominal size, which is a many-fold multiple of the underlying bonds and five times the entire US national debt. Yet the market in credit default swaps has remained entirely unregulated. AIG, the insurance company, lost a fortune selling credit default swaps as a form of insurance and had to be bailed out, costing the Treasury $126 billion so far. Although the CDS market may be eventually saved from the meltdown that has occurred in many other markets, the sheer existence of an unregulated market of this size has been a major factor in increasing risk throughout the entire financial system.
Since the risk management models used until now ignored the uncertainties inherent in reflexivity, limits on credit and leverage will have to be set substantially lower than those that were tolerated in the recent past. This means that financial institutions in the aggregate will be less profitable than they have been during the super-bubble and some business models that depended on excessive leverage will become uneconomical. The financial industry has already dropped from 25 percent of total market capitalization to 16 percent. This ratio is unlikely to recover to anywhere near its previous high; indeed, it is likely to end lower. This may be considered a healthy adjustment, but not by those who are losing their jobs.
In view of the tremendous losses suffered by the general public, there is a real danger that excessive deregulation will be succeeded by punitive reregulation. That would be unfortunate because regulations are liable to be even more deficient than the market mechanism. As I have suggested, regulators are not only human but also bureaucratic and susceptible to lobbying and corruption. It is to be hoped that the reforms outlined here will preempt a regulatory overkill.
—November 6, 2008
Friday, August 13, 2010
News Blitz 13 Aug 2010
What an exciting ride... to see the roller coaster ride of Genting!
News Blitz
Genting S'pore gets a billion reasons to smile
Q2 revenue rockets and profit hits S$397m as RWS churns out the cash
Fed resorting to tools Japan used in past decade
Quantitative easing - credit easing to Fed - failed to spur lending in Japan
(WASHINGTON) The Federal Reserve's decision to sustain the current level of its assets intensifies the focus of the central bank on policy tools similar to those used with little impact by Japan last decade.
July growth in Australian employment slows
(SYDNEY) Australian employment growth slowed in July, driving down the nation's currency as investors bet that the central bank would extend a pause in the most aggressive round of interest-rate increases by a member-nation of Group of 20.
Japan manuf mood at near 3-yr high: Reuters Tankan
TOKYO - Japanese manufacturers' confidence rose to the highest in nearly three years in August due to government stimulus, but companies forecast for the first time in three years that their sentiment will deteriorate as the strong yen threatens exporters' earnings, a Reuters poll showed.
China 'will not halt property tightening'
BEIJING - China will not relax its policies aimed at curbing speculation in the property market, Vice-Premier Li Keqiang said on Friday, according to state radio.
On an inspection of low-income housing in Beijing, Mr Li also reiterated that the government would step up its efforts to build more affordable housing.
Preparing for deflation
After worrying about inflation for months, many economists are now talking about deflation in the US. What should investors do to hedge against such a scenario?
Go for blue chips
Investors who want to maintain their stock weightings should consider 'high-quality, large, blue-chip companies that have balance-sheet strength', said Brian McMahon, chief investment officer at Thornburg Investment Management in Santa Fe, New Mexico. He said companies like Google and Microsoft often have an added advantage: dominance over their industries, enabling them to maintain their prices even if others in the industry start to lower theirs.
Stocks that pay dividends would also make sense, because the cash thrown off by these shares would be quite valuable in a deflationary environment.
In fact, said Mr Inker of GMO, if investors really fear deflation, they might consider increasing the cash in their portfolios. 'There's a strong case for building up dry powder,' he said. 'If something bad happens economically - whether it's deflation or inflation - that generally provides a good buying opportunity for investors who have some cash to put to work.' - NYT
US consumer prices rise 0.3% in July
WASHINGTON - Higher energy costs helped lift US consumer prices in July, the first rise in four months, according to a government report on Friday that could ease concerns about deflation.
US retail sales rebound in July, softness lingers
WASHINGTON - US retail sales rose in July in a hopeful sign for the economy, but the gains were concentrated in auto and petrol station sales, suggesting underlying momentum in consumer spending remains tame.
Sales climbed 0.4 per cent last month following a revised 0.3 per cent drop in June, the Commerce Department said on Friday. Economists polled by Reuters had been looking for a slightly firmer 0.5 per cent gain.
Germany posts record second quarter growth
FRANKFURT - A global economic recovery pushed German quarterly growth to a record 2.2 per cent in the second quarter of the year, data released Friday by the national statistics office showed.
Others
August 9, 2010, 12.18 pm (Singapore time)
China extends Japanese debt buying spree in June
TOKYO - China extended a record buying spree of Japanese debt in June as sovereign debt concerns buffeted the euro, purchasing a net US$5.9 billion of short-term bills although it was a net seller of longer dated notes.
News Blitz
Genting S'pore gets a billion reasons to smile
Q2 revenue rockets and profit hits S$397m as RWS churns out the cash
Fed resorting to tools Japan used in past decade
Quantitative easing - credit easing to Fed - failed to spur lending in Japan
(WASHINGTON) The Federal Reserve's decision to sustain the current level of its assets intensifies the focus of the central bank on policy tools similar to those used with little impact by Japan last decade.
July growth in Australian employment slows
(SYDNEY) Australian employment growth slowed in July, driving down the nation's currency as investors bet that the central bank would extend a pause in the most aggressive round of interest-rate increases by a member-nation of Group of 20.
Japan manuf mood at near 3-yr high: Reuters Tankan
TOKYO - Japanese manufacturers' confidence rose to the highest in nearly three years in August due to government stimulus, but companies forecast for the first time in three years that their sentiment will deteriorate as the strong yen threatens exporters' earnings, a Reuters poll showed.
China 'will not halt property tightening'
BEIJING - China will not relax its policies aimed at curbing speculation in the property market, Vice-Premier Li Keqiang said on Friday, according to state radio.
On an inspection of low-income housing in Beijing, Mr Li also reiterated that the government would step up its efforts to build more affordable housing.
Preparing for deflation
After worrying about inflation for months, many economists are now talking about deflation in the US. What should investors do to hedge against such a scenario?
Go for blue chips
Investors who want to maintain their stock weightings should consider 'high-quality, large, blue-chip companies that have balance-sheet strength', said Brian McMahon, chief investment officer at Thornburg Investment Management in Santa Fe, New Mexico. He said companies like Google and Microsoft often have an added advantage: dominance over their industries, enabling them to maintain their prices even if others in the industry start to lower theirs.
Stocks that pay dividends would also make sense, because the cash thrown off by these shares would be quite valuable in a deflationary environment.
In fact, said Mr Inker of GMO, if investors really fear deflation, they might consider increasing the cash in their portfolios. 'There's a strong case for building up dry powder,' he said. 'If something bad happens economically - whether it's deflation or inflation - that generally provides a good buying opportunity for investors who have some cash to put to work.' - NYT
US consumer prices rise 0.3% in July
WASHINGTON - Higher energy costs helped lift US consumer prices in July, the first rise in four months, according to a government report on Friday that could ease concerns about deflation.
US retail sales rebound in July, softness lingers
WASHINGTON - US retail sales rose in July in a hopeful sign for the economy, but the gains were concentrated in auto and petrol station sales, suggesting underlying momentum in consumer spending remains tame.
Sales climbed 0.4 per cent last month following a revised 0.3 per cent drop in June, the Commerce Department said on Friday. Economists polled by Reuters had been looking for a slightly firmer 0.5 per cent gain.
Germany posts record second quarter growth
FRANKFURT - A global economic recovery pushed German quarterly growth to a record 2.2 per cent in the second quarter of the year, data released Friday by the national statistics office showed.
Others
August 9, 2010, 12.18 pm (Singapore time)
China extends Japanese debt buying spree in June
TOKYO - China extended a record buying spree of Japanese debt in June as sovereign debt concerns buffeted the euro, purchasing a net US$5.9 billion of short-term bills although it was a net seller of longer dated notes.
Wednesday, August 4, 2010
Food for thought on 4 Aug 2010
August 2, 2010
Earnings Season: Worry About Next Year, The Second Quarter Is History
I think some of it is expectation management as you put it out, but remember what the comparisons were, we are talking about the second quarter of 2009, when the world essentially was coming to an end. Remember, at the end of 2008, beginning of 2009 we all thought the world had ended. The markets hit bottom in March 2009, well those were the comparisons we were up against. So things are actually better then people were expecting, but they should have looked back to see what the comparisons were and remember, the governments were spending huge amounts of money and that money has been flowing into the system in the last couple of quarters. Worry about next year, don`t worry about the second quarter now, that`s history.
in CNBC
Related ETFs: iShares FTSE/Xinhua China 25 Index (ETF) (NYSE:FXI), iShares MSCI Brazil Index (ETF) (NYSE:EWZ), iShares MSCI South Korea Index Fund(ETF) (NYSE:EWY), iShares MSCI Emerging Markets Indx (ETF) (NYSE:EEM)
Jim Rogers is an author, financial commentator and successful international investor. He has been frequently featured in Time, The New York Times, Barron’s, Forbes, Fortune, The Wall Street Journal, The Financial Times and is a regular guest on Bloomberg and CNBC.
Earnings Season: Worry About Next Year, The Second Quarter Is History
I think some of it is expectation management as you put it out, but remember what the comparisons were, we are talking about the second quarter of 2009, when the world essentially was coming to an end. Remember, at the end of 2008, beginning of 2009 we all thought the world had ended. The markets hit bottom in March 2009, well those were the comparisons we were up against. So things are actually better then people were expecting, but they should have looked back to see what the comparisons were and remember, the governments were spending huge amounts of money and that money has been flowing into the system in the last couple of quarters. Worry about next year, don`t worry about the second quarter now, that`s history.
in CNBC
Related ETFs: iShares FTSE/Xinhua China 25 Index (ETF) (NYSE:FXI), iShares MSCI Brazil Index (ETF) (NYSE:EWZ), iShares MSCI South Korea Index Fund(ETF) (NYSE:EWY), iShares MSCI Emerging Markets Indx (ETF) (NYSE:EEM)
Jim Rogers is an author, financial commentator and successful international investor. He has been frequently featured in Time, The New York Times, Barron’s, Forbes, Fortune, The Wall Street Journal, The Financial Times and is a regular guest on Bloomberg and CNBC.
Sunday, August 1, 2010
News Bites 1 Aug 2010
- SHAWN Bergerson, founder of Waterstone Capital Management LP, bet against convertible bonds of Advanced Micro Devices Inc in June 2007. More than a year later, he reversed course and bought the securities. After riding the rebound by markets in 2009, he's wagering against consumer-related stocks because he sees Americans curtailing spending and reducing debt amid high unemployment.
- Mr O'Shea, who runs COMAC Capital LLP, and Laurence Benedict of Banyan Equity Management LLC said they have reduced the size of their investments because it's hard to know how markets will behave.
- Mr Gerstenhaber is planning to bet against industries that do poorly when the economy loses steam, such as materials, energy and homebuilders. 'Our expectation is that we will continue to see downward revisions to growth forecasts in advanced economies,' Mr Gerstenhaber, 49, said. The US$1 billion Argonaut Macro returned a cumulative 48 per cent from the start of 2007 through June 2010.
- The winning-streak managers made money through a combination of prescient investment calls, having smaller trades for shorter periods of time, which enabled them to get out of unprofitable positions sooner, and raising cash before markets slumped in the second half of 2008.
- In a 60 Minutes interview on June 7last year, US Federal Reserve Chairman Ben S Bernanke said: 'Well, I absolutely agree that confidence is key. People don't know what's happening. And they're afraid. And they're not sure what, you know, whether or not the system is going to recover. So, how do you get confidence, that's the question. And I think the way to get confidence is to show progress.'
- Thomson Reuters/University of Michigan preliminary index of consumer sentiment fell to 66.5 in July from 76 a month earlier, below forecasts. Readings on consumer expectations and current conditions also fell in early July from June. The expectations reading fell to 60.6, the lowest level since March 2009, from 69.8. Meanwhile, the current-conditions reading declined to 75.5, the lowest since November, from 85.6.
- This week, the Conference Board's consumer confidence index, which had declined in June, retreated even further in July. The index now stands at 50.4, down from 54.3 in June. It is made up of the present situation index, which decreased to 26.1 from 26.8, and the expectations index, which, relating to conditions six months ahead, fell to 66.6 from 72.7 last month.
- Mr O'Shea, who runs COMAC Capital LLP, and Laurence Benedict of Banyan Equity Management LLC said they have reduced the size of their investments because it's hard to know how markets will behave.
- Mr Gerstenhaber is planning to bet against industries that do poorly when the economy loses steam, such as materials, energy and homebuilders. 'Our expectation is that we will continue to see downward revisions to growth forecasts in advanced economies,' Mr Gerstenhaber, 49, said. The US$1 billion Argonaut Macro returned a cumulative 48 per cent from the start of 2007 through June 2010.
- The winning-streak managers made money through a combination of prescient investment calls, having smaller trades for shorter periods of time, which enabled them to get out of unprofitable positions sooner, and raising cash before markets slumped in the second half of 2008.
- In a 60 Minutes interview on June 7last year, US Federal Reserve Chairman Ben S Bernanke said: 'Well, I absolutely agree that confidence is key. People don't know what's happening. And they're afraid. And they're not sure what, you know, whether or not the system is going to recover. So, how do you get confidence, that's the question. And I think the way to get confidence is to show progress.'
- Thomson Reuters/University of Michigan preliminary index of consumer sentiment fell to 66.5 in July from 76 a month earlier, below forecasts. Readings on consumer expectations and current conditions also fell in early July from June. The expectations reading fell to 60.6, the lowest level since March 2009, from 69.8. Meanwhile, the current-conditions reading declined to 75.5, the lowest since November, from 85.6.
- This week, the Conference Board's consumer confidence index, which had declined in June, retreated even further in July. The index now stands at 50.4, down from 54.3 in June. It is made up of the present situation index, which decreased to 26.1 from 26.8, and the expectations index, which, relating to conditions six months ahead, fell to 66.6 from 72.7 last month.
Wednesday, July 28, 2010
News Bites 29 July 2010
-Global growth may average 3.25 per cent to 3.5 per cent in the next three to five years, well below the 4.7 per cent pace of the five years leading up to the 2008 slump, estimates Stephen Roach, non-executive chairman of Morgan Stanley Asia.
- The fair value of the Standard & Poor's 500 Index is 900, according to Jeremy Grantham, chief investment strategist in Boston at Grantham Mayo Van Otterloo & Co. That's 22.5 per cent below the July 23 close of 1,102.66 in New York. He says developed economies will be 'lucky' to grow 2 per cent annually for the next seven years, and he favours stocks of companies with high, stable returns and less debt.
-In a sign of strength, data last week showed the UK economy expanded 1.1 per cent in the second quarter, the fastest pace in four years and almost twice economists' forecasts. German business confidence unexpectedly surged to a three-year high this month, according to the Ifo institute in Munich. Its index based on a survey of 7,000 executives jumped to 106.2 from 101.8 in June, the biggest gain since 1990.
-'There will be possibly a period of slower growth beginning in end markets later this year,' George Buckley, chief executive officer of 3M Co, told analysts on July 22. 'This isn't a double-dip per se,' he added. 'It's just a soft spot and very normal as economic growth takes a breather for a while and adjusts to new circumstances.' The St Paul, Minnesota-based company is considered an economic bellwether because its product range spans the automotive, consumer and health-care markets.
-Much of the deceleration in underlying growth appears likely to come in the industrial world. US consumers are still working off the debts they built up during the housing boom. Since hitting a record US$1.39 trillion in the second quarter of 2008, household debt has fallen steadily to US$1.35 trillion in the first quarter, according to Fed figures.
-SINCE the start of the year, investment sentiment has swung between optimism and fear, buffeted by myriad issues ranging from European debt to US unemployment. Barclays Wealth's investment view reflects this dichotomy - a 'bimodal' world, as chief investment officer Aaron Gurwitz puts it, where the probability of the potential outcome is almost evenly split between a positive market where stocks deliver a double-digit return, and a negative one where deflation ensues.
-In a statement, Michael Hartnett, chief global equity strategist at BofA Merrill Lynch Global Research, said: 'Growth and profit expectations have double-dipped. Should upcoming data fail to confirm a double-dip, risk assets will have a much better third quarter.'
-Barclays Wealth Asia strategist Manpreet Gill also advises a 'barbell' approach to a stock portfolio. The bank's buy list, for instance, favours two segments - relatively defensive and income oriented names which can be found among Singapore stocks; and Hong Kong stocks which are more cyclical and recovery oriented. Some examples include A-Reit, DBS, and M1; and Hong Kong's China Shenhua and Beijing Enterprise.
- Shares rebounded in the past three weeks as 84 per cent of the 149 S&P 500 companies that reported results since July 12 topped the average analyst earnings estimates, Bloomberg data show. Profits may rise an average 35 per cent in 2010 and 17 per cent in 2011, according to forecasts tracked by Bloomberg. More than 160 S&P 500 companies are scheduled to post quarterly results this week, including Irving, Texas-based ExxonMobil Corp, the biggest US oil producer.
- Property- Property plays benefiting from tourism boom
The Singapore Tourism Board (STB) released yet another good set of tourism
numbers for June yesterday, indicating we are on the brink of touching the last
tourism peak in 2006. We believe 3Q performances will top 2Q performances with
mega-events lined up in Singapore. Top property beneficiaries of the tourism boom
will be hospitality stocks with maximum re-pricing ability; followed by retail-related stocks which are able to capture sales upside in gross turnover rent. Hotels and retail malls in prime locations or near tourist hotspots such as the Marina Bay area, Sentosa and Orchard Road should do markedly better than other locations, in our
view.
-Net inflows in June. Net inflows for EM Asia came up to US$0.76bn in June, a reversalfrom the sharp US$2.8bn outflows in May. Asean-4 markets all benefited from netinflows in June, with Malaysia receiving net inflows for the first time since Nov 09.Cumulatively, only Indonesia and India drew positive net inflows in 1H10. There werecumulative outflows in China, followed by Hong Kong, Taiwan and Singapore. While
cash holdings climbed marginally in June, the risk appetite may be picking up with
weightings raised for cyclical stocks across Asean.
-Choppy markets. European debt concerns linger in the background. We maintain that
while moderating growth is to be expected, risks of a double-dip recession remain low.Markets would likely continue to trade around mid-cycle P/E and P/BV valuations, withup to 8% upside expected to end the year. On a regional sector basis, tech, financials,utilities and small-cap offshore & marine remain attractive on a market-adjusted ROE toP/BV basis.
-
- The fair value of the Standard & Poor's 500 Index is 900, according to Jeremy Grantham, chief investment strategist in Boston at Grantham Mayo Van Otterloo & Co. That's 22.5 per cent below the July 23 close of 1,102.66 in New York. He says developed economies will be 'lucky' to grow 2 per cent annually for the next seven years, and he favours stocks of companies with high, stable returns and less debt.
-In a sign of strength, data last week showed the UK economy expanded 1.1 per cent in the second quarter, the fastest pace in four years and almost twice economists' forecasts. German business confidence unexpectedly surged to a three-year high this month, according to the Ifo institute in Munich. Its index based on a survey of 7,000 executives jumped to 106.2 from 101.8 in June, the biggest gain since 1990.
-'There will be possibly a period of slower growth beginning in end markets later this year,' George Buckley, chief executive officer of 3M Co, told analysts on July 22. 'This isn't a double-dip per se,' he added. 'It's just a soft spot and very normal as economic growth takes a breather for a while and adjusts to new circumstances.' The St Paul, Minnesota-based company is considered an economic bellwether because its product range spans the automotive, consumer and health-care markets.
-Much of the deceleration in underlying growth appears likely to come in the industrial world. US consumers are still working off the debts they built up during the housing boom. Since hitting a record US$1.39 trillion in the second quarter of 2008, household debt has fallen steadily to US$1.35 trillion in the first quarter, according to Fed figures.
-SINCE the start of the year, investment sentiment has swung between optimism and fear, buffeted by myriad issues ranging from European debt to US unemployment. Barclays Wealth's investment view reflects this dichotomy - a 'bimodal' world, as chief investment officer Aaron Gurwitz puts it, where the probability of the potential outcome is almost evenly split between a positive market where stocks deliver a double-digit return, and a negative one where deflation ensues.
-In a statement, Michael Hartnett, chief global equity strategist at BofA Merrill Lynch Global Research, said: 'Growth and profit expectations have double-dipped. Should upcoming data fail to confirm a double-dip, risk assets will have a much better third quarter.'
-Barclays Wealth Asia strategist Manpreet Gill also advises a 'barbell' approach to a stock portfolio. The bank's buy list, for instance, favours two segments - relatively defensive and income oriented names which can be found among Singapore stocks; and Hong Kong stocks which are more cyclical and recovery oriented. Some examples include A-Reit, DBS, and M1; and Hong Kong's China Shenhua and Beijing Enterprise.
- Shares rebounded in the past three weeks as 84 per cent of the 149 S&P 500 companies that reported results since July 12 topped the average analyst earnings estimates, Bloomberg data show. Profits may rise an average 35 per cent in 2010 and 17 per cent in 2011, according to forecasts tracked by Bloomberg. More than 160 S&P 500 companies are scheduled to post quarterly results this week, including Irving, Texas-based ExxonMobil Corp, the biggest US oil producer.
- Property- Property plays benefiting from tourism boom
The Singapore Tourism Board (STB) released yet another good set of tourism
numbers for June yesterday, indicating we are on the brink of touching the last
tourism peak in 2006. We believe 3Q performances will top 2Q performances with
mega-events lined up in Singapore. Top property beneficiaries of the tourism boom
will be hospitality stocks with maximum re-pricing ability; followed by retail-related stocks which are able to capture sales upside in gross turnover rent. Hotels and retail malls in prime locations or near tourist hotspots such as the Marina Bay area, Sentosa and Orchard Road should do markedly better than other locations, in our
view.
-Net inflows in June. Net inflows for EM Asia came up to US$0.76bn in June, a reversalfrom the sharp US$2.8bn outflows in May. Asean-4 markets all benefited from netinflows in June, with Malaysia receiving net inflows for the first time since Nov 09.Cumulatively, only Indonesia and India drew positive net inflows in 1H10. There werecumulative outflows in China, followed by Hong Kong, Taiwan and Singapore. While
cash holdings climbed marginally in June, the risk appetite may be picking up with
weightings raised for cyclical stocks across Asean.
-Choppy markets. European debt concerns linger in the background. We maintain that
while moderating growth is to be expected, risks of a double-dip recession remain low.Markets would likely continue to trade around mid-cycle P/E and P/BV valuations, withup to 8% upside expected to end the year. On a regional sector basis, tech, financials,utilities and small-cap offshore & marine remain attractive on a market-adjusted ROE toP/BV basis.
-
Saturday, July 24, 2010
Singapore Airport Trml Svcs Ltd (S58)
Date: 20-Jul-10
Company: Singapore Airport Trml Svcs Ltd
Current P/E: 15.83
Current Price: 2.81
Core Business
The company is the leading provider of integrated ground handling and inflight catering services at Singapore Changi Airport. Through joint ventures, SAT' network of ground handling and airline catering operations spans 15 airports in the Asia Pacific region.
The company provides the following services to its airline clients:
- Ground handling services, including: air freight handling services; passenger services; baggage handling services; and apron services;
- Inflight catering services, including aircraft interior cleaning and cabin handling;
- Aviation security services;
- Airline laundry services; and
- Air cargo delivery and management services.
SATS has more than 50 years of experience in the business and was listed on the SGX Mainboard in May 2000.
Management Strategies
Singapore Airport Terminal Services Limited (SATS) is an investment holding company. The Company's other activities include rental of premises and provision of management services to related companies. As of March 31, 2010, the Company handles 80% of the scheduled flights and serves about 50 of the 68 scheduled airlines out of Singapore Changi Airport. It has a presence in 31 airports in nine countries in Asia. The Company is an associated company of Venezio Investments Pte Ltd, a subsidiary of Temasek Holdings (Private) Limited. The Company ceased to be a subsidiary of Singapore Airlines Limited effective September 1, 2009.
Business Risk
1. Aviation Demand 2. Economy and Sentiments 3. Tourism 4.Food Solutions
Company: Singapore Airport Trml Svcs Ltd
Current P/E: 15.83
Current Price: 2.81
Core Business
The company is the leading provider of integrated ground handling and inflight catering services at Singapore Changi Airport. Through joint ventures, SAT' network of ground handling and airline catering operations spans 15 airports in the Asia Pacific region.
The company provides the following services to its airline clients:
- Ground handling services, including: air freight handling services; passenger services; baggage handling services; and apron services;
- Inflight catering services, including aircraft interior cleaning and cabin handling;
- Aviation security services;
- Airline laundry services; and
- Air cargo delivery and management services.
SATS has more than 50 years of experience in the business and was listed on the SGX Mainboard in May 2000.
Management Strategies
Singapore Airport Terminal Services Limited (SATS) is an investment holding company. The Company's other activities include rental of premises and provision of management services to related companies. As of March 31, 2010, the Company handles 80% of the scheduled flights and serves about 50 of the 68 scheduled airlines out of Singapore Changi Airport. It has a presence in 31 airports in nine countries in Asia. The Company is an associated company of Venezio Investments Pte Ltd, a subsidiary of Temasek Holdings (Private) Limited. The Company ceased to be a subsidiary of Singapore Airlines Limited effective September 1, 2009.
Business Risk
1. Aviation Demand 2. Economy and Sentiments 3. Tourism 4.Food Solutions
Friday, July 16, 2010
FRENCKEN GROUP LIMITED
if you had saw their financial report in May, would you have buy it? Now that sudden shot up from 2.5 to 3.5.. since May there have been alot of share buy back...
z says:
past 4 yrs revenue: dropping from 222.2,246.2,227 to 206.9
operating income dropped from 31.7, 25.5, 15.9 to -1.1
net income dropping from 26.3,23,14.7 to 9.2,
touch economical environment for technology business
good thing: at may, cash 59m, total borrowing 38m,NAV at 51.9,PE at 9.6.PB at 0.7
got extra cash to do buy back to increase per share value, price still ok
concern:can they improve the revenue and bottom line in the long run?
inventory went up from 55m to 71m, another concern about efficiency too
anyway, technology company quite cyclical,
now got quite a number of companies with low PE, PB with extra cash, my concern is their long tern earning ability
take a look at Avi-Tech Electronics
similiar, latest PE at 12,PB at 1, has about 50m cash, debt only about 12m,
z says:
past 4 yrs revenue: dropping from 222.2,246.2,227 to 206.9
operating income dropped from 31.7, 25.5, 15.9 to -1.1
net income dropping from 26.3,23,14.7 to 9.2,
touch economical environment for technology business
good thing: at may, cash 59m, total borrowing 38m,NAV at 51.9,PE at 9.6.PB at 0.7
got extra cash to do buy back to increase per share value, price still ok
concern:can they improve the revenue and bottom line in the long run?
inventory went up from 55m to 71m, another concern about efficiency too
anyway, technology company quite cyclical,
now got quite a number of companies with low PE, PB with extra cash, my concern is their long tern earning ability
take a look at Avi-Tech Electronics
similiar, latest PE at 12,PB at 1, has about 50m cash, debt only about 12m,
Tuesday, July 13, 2010
Value investment 4
In case you plan to invest in stocks then, you should follow the below mentioned tips to increase your chances of profit and lower your risks of loss.
* In case you are new to the stock market, or if you already have investments but would like to decrease your costs, then you should select a broker.
* Acquire sufficient knowledge regarding stocks and the market. Attend a seminar or class on basics of investing.
* Review various online financial sites.
* Create financial goals and an investing plan, before you get started.
* Before investing, you must read annual or quarterly reports and also other documents with the Securities and Exchange Commission and research individual stocks.
* Always invest in the stocks which you know. You must consider investing in the stocks of local companies which you are well versed with, and in which you have trust.
* The holdings of few successful mutual fund companies should be examined.
* You must diversify your investments in stock. Refrain from investing money in just one or two stocks.
* To save commissions, you can utilize a discount brokerage to purchase stocks, in case you are confident in your investment skills.
* You should purchase stocks which you are comfortable holding for three to five years.
* Avoid dumping a stock the moment its prices drop by some points. You should have patience to wait for the points of the share to further increase.
* Prior to the investment in stocks you must always judge the risk that you can bear.
* In case you can’t research and review stocks regularly then you must invest in mutual funds.
* You must invest for long terms to generate greater profits.
Hence, investing in stocks is not to be done in haste and under any influence. You need to analyze the details of the company thoroughly before investing in the shares of that particular company.
* In case you are new to the stock market, or if you already have investments but would like to decrease your costs, then you should select a broker.
* Acquire sufficient knowledge regarding stocks and the market. Attend a seminar or class on basics of investing.
* Review various online financial sites.
* Create financial goals and an investing plan, before you get started.
* Before investing, you must read annual or quarterly reports and also other documents with the Securities and Exchange Commission and research individual stocks.
* Always invest in the stocks which you know. You must consider investing in the stocks of local companies which you are well versed with, and in which you have trust.
* The holdings of few successful mutual fund companies should be examined.
* You must diversify your investments in stock. Refrain from investing money in just one or two stocks.
* To save commissions, you can utilize a discount brokerage to purchase stocks, in case you are confident in your investment skills.
* You should purchase stocks which you are comfortable holding for three to five years.
* Avoid dumping a stock the moment its prices drop by some points. You should have patience to wait for the points of the share to further increase.
* Prior to the investment in stocks you must always judge the risk that you can bear.
* In case you can’t research and review stocks regularly then you must invest in mutual funds.
* You must invest for long terms to generate greater profits.
Hence, investing in stocks is not to be done in haste and under any influence. You need to analyze the details of the company thoroughly before investing in the shares of that particular company.
Value investment 3
Words of Wisdom
Some Things Cannot Be Foreseen
"The ability to foresee that some things cannot be foreseen is a very important quality"
Jean Jacques Rosseau
July 13, 2010
We Are Going To Have Another Recession In The Next 2 Or 3 Years
We are certainly going to have another recession in the next two or three years. We have had recessions every four to six years since the beginning of time. So by 2012, we are getting ready to have another one, if history is any guide. I suspect it will happen before then, because there are still so may imbalances in the world which have to be sorted out.
Jim Rogers is an author, financial commentator and successful international investor. He has been frequently featured in Time, The New York Times, Barron’s, Forbes, Fortune, The Wall Street Journal, The Financial Times and is a regular guest on Bloomberg and CNBC.
Some Things Cannot Be Foreseen
"The ability to foresee that some things cannot be foreseen is a very important quality"
Jean Jacques Rosseau
July 13, 2010
We Are Going To Have Another Recession In The Next 2 Or 3 Years
We are certainly going to have another recession in the next two or three years. We have had recessions every four to six years since the beginning of time. So by 2012, we are getting ready to have another one, if history is any guide. I suspect it will happen before then, because there are still so may imbalances in the world which have to be sorted out.
Jim Rogers is an author, financial commentator and successful international investor. He has been frequently featured in Time, The New York Times, Barron’s, Forbes, Fortune, The Wall Street Journal, The Financial Times and is a regular guest on Bloomberg and CNBC.
Saturday, July 10, 2010
Super Group
Group started in 1987 with the founding of Super Coffeemix Marketing Enterprises. On 20 June 1994, the Company was converted into a public limited company and took on its present name. The principal activities of the Company are those of manufacturer of instant cereal flakes, packers and distributors of instant beverages and convenience food products. Today, Super's products are distributed to more than 50 countries worldwide through its distribution network comprising of local retailers and distributors. Super has 13 manufacturing plants located in Singapore, Malaysia, China, Myanmar and Thailand.
Strength
- Numerous awards and accolades as good track record
- Well recognized brands. Strong marketing strategy
- Excellent manufacturing capability, a global distribution network
- Veteran management tean
- Minimal affect by the recent global financial crisis. Key market where instant coffeemix is preferred for its price and convenience.
Quantitative Analysis
Share Capital
| Number of Issued Shares (excluding Treasury Shares) | 537,738,980 |
| Number/Percentage of Treasury Shares | 4,804,000 (0.89%) |
Gross Profit Margin : In FY 09, the gross profit margin was 34.9%, 1.7 percentage points from 33.2% in FY 08 due to production efficiency and better cost control. Boosted profit to $41.7 million.
Debt and cash in hand: Cash and cash equivalent: 70.5M as at 31 Dec 2009. Decreasing trend of debt to equity ratio.
1. What is the margin of safety?
2. what is the intrinsic value?
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