Behaviour and projections
Published: 2009/04/29
This article intends to explore the behavioural side of those who make stock market projections
THE economic tsunami that has hit the world since late-2007 has left many wondering where it is heading, what to expect, etc. Experts as well as laymen make projections, mostly trying to predict when the stock market will hit bottom. Unfortunately, no one can really provide a definite answer. Setting aside the technical details of the various projections that have been and are being made as we speak, this piece intends to explore the behavioural side of those who make these projections.
Gambler Fallacy
According to Hersh Shefrin, in his book titled "Beyond Greed and Fear", research has shown that strategists and analysts are often caught in a behavioural phenomenon called "gambler fallacy"- the misconception that the law of averages can be applied to even a small sample size.
This is illustrated by a simple coin-tossing game. If five consecutive tosses of a coin come up heads, most people tend to think that the sixth toss should be tails, even though the probability of getting either heads or tails is 50/50. Going by this, some predictions tend to project inappropriate trend reversal as evident by a study done by De Bondt in 1991. Based on published predictions by Wall Street analysts, the study shows that the analysts are overly pessimistic after three-year bull markets and overly optimistic after three-year bear markets.
What does this behaviour mean to you?
It is especially important if you use the projections to make investment decisions. When dealing with a bear market that has yet to touch the bottom, using an overly optimistic projection would lead to the wrong decision. You stand to lose by buying certain stocks believing that their prices are low enough and the downtrend is going to reverse anytime soon, only to find that the prices continue to drop. By the time the market actually hits bottom, you may have already used up your resources.
Naive Extrapolation
Studies have shown that individual investors have the behaviour that is quite the opposite of what has been described above. The retailers in the market, for instance, have the tendency of doing simple extrapolation - projecting the future based on the recent past. As a result, they are overly optimistic during bull markets and overly pessimistic during bear markets.
Seasoned investors would always tell you to prepare to leave the market when you hear that people around you (especially those who've hardly ever talked about investing) start to be active in the stock market. This may indicate that the bull run is about to end. Unfortunately, new and inexperienced investors would naively think that the bull run would continue.
The time to look around hard is when no one is talking about buying stocks. Your golden opportunity in getting good stocks at a bargain surfaces when others steer clear of buying them. As Warren Buffett said, "Most people get interested in stocks when everyone else is. The time to get interested is when no one else is. You can't buy what is popular and do well".
Overconfidence
Both the analysts and individual investors have something in common. They are overconfident when it comes to predicting the future. So, they often end up getting surprises. Interestingly, it has also been found that experience plays an important part here. Those who are inexperienced turn out to be the ones that have greater confidence in their predictions and therefore higher expectations in stock market returns. Seasoned investors and analysts, on the other hand, tread with more caution and are more conservative in their investment approach.
Less Predicting, More Reading!
The combined effect of the behavioural phenomena from the investors drives market sentiment. As an intelligent investor, learn to separate yourself from the herd effect and try not to fall into the biased behaviour described above. You need to be aware of the market direction, but don't waste too much time predicting when the market will bottom out. Instead, spend your valuable time reading more and doing your research on the companies of your interest. Understand the fundamentals well and learn from errors that others have made in the market.
Securities Industry Development Corporation, the leading capital markets education, training and information resource provider in Asean, is the training and development arm of the Securities Commission Malaysia. It was es tablished in 1994 and incorporated in 2007.
Wednesday 29 April 2009
Ten Habits of Highly Successful Value Investors
Ten Habits of Highly Successful Value Investors
Warren Buffett once said, "All there is to investing is picking good stocks at good times and staying with them as long as they remain good companies."
Keeping this in mind, here are ten things to remember as you evolve your value investing style.
Warren Buffett once said, "All there is to investing is picking good stocks at good times and staying with them as long as they remain good companies."
Keeping this in mind, here are ten things to remember as you evolve your value investing style.
- Do the due diligence
- Think independently and trust yourself
- Ignore the market
- Always think long term
- Remember that your're buying a business
- Always buy "on sale"
- Keep emotion out of it
- Invest to meet goals, not to earn bragging rights
- Swing only at good pitches
- Keep your antennae up
Ten Signs of Value
Ten Signs of Value
Looking at five tangible signs of value
Steady or increasing return on equity (ROE)
Strong and growing profitability
Improving productivity
Producer, not consumer, of capital
The right valuation ratios
Understanding five intangible signs of value
A franchise
Price control
Market leadership
Candid management
Customer care
Looking at five tangible signs of value
Steady or increasing return on equity (ROE)
Strong and growing profitability
Improving productivity
Producer, not consumer, of capital
The right valuation ratios
Understanding five intangible signs of value
A franchise
Price control
Market leadership
Candid management
Customer care
Ten Signs of Unvalue
Ten Signs of Unvalue
Looking at five tangible signs of unvalue
Deteriorating margins
Receivables or inventory growth outpacing sales
Poor earnings quality
Inconsistent results
Good business, but stocks is too expensive
Considering five intangible signs of unvalue
Acquisition addiction
On the discount rack
Losing market share
Can't control cost structure
Management in hiding
Looking at five tangible signs of unvalue
Deteriorating margins
Receivables or inventory growth outpacing sales
Poor earnings quality
Inconsistent results
Good business, but stocks is too expensive
Considering five intangible signs of unvalue
Acquisition addiction
On the discount rack
Losing market share
Can't control cost structure
Management in hiding
Take charge and evolve your own investing style
Like most investors, Buffett evolved his investing style, trying different things along the way.
1. Often, Buffett would simply buy shares, hold them, and wait for growth prospects to materialize.
2. Sometimes, his objective was a little more short term in nature, buying to capture arbitrage - small differences between price and value that often emerge in merger, acquisition and liquidation situations. (Capturing arbitrage is value investing, too; it's very shrot term in nature and one had better be good. One is going against other professionals who have access to a lot of information and are betting for something different to happen.)
3. Sometimes Buffett would buy a large stake in an undervalued company, large enough to be noticed and reported to the SEC, usually 5 percent or more. He then would get himself installed on the company's board of direcctors. Many of these companies were having financial problems or problems translating company value into shareholder value. Many welcomed his presence. Buffett would help right these problems and, if necessary, assist in selling or finding a merger partner for the company.
Of course, most ordinary investors can't do this, but the thought process is important.
1. Often, Buffett would simply buy shares, hold them, and wait for growth prospects to materialize.
2. Sometimes, his objective was a little more short term in nature, buying to capture arbitrage - small differences between price and value that often emerge in merger, acquisition and liquidation situations. (Capturing arbitrage is value investing, too; it's very shrot term in nature and one had better be good. One is going against other professionals who have access to a lot of information and are betting for something different to happen.)
3. Sometimes Buffett would buy a large stake in an undervalued company, large enough to be noticed and reported to the SEC, usually 5 percent or more. He then would get himself installed on the company's board of direcctors. Many of these companies were having financial problems or problems translating company value into shareholder value. Many welcomed his presence. Buffett would help right these problems and, if necessary, assist in selling or finding a merger partner for the company.
Of course, most ordinary investors can't do this, but the thought process is important.
Tuesday 28 April 2009
How I Lost $100,000 (Without Even Trying!)
How I Lost $100,000 (Without Even Trying!)
By Rich Smith April 25, 2009 Comments (4)
Once upon a time, I bought a house.
At the time, I thought I had overpaid ... but "the time" was 2001 -- much nearer the start of the housing boom (that's recently turned bust) than its end. Fast forward a few years, and I sat down to my trusty computer, pulled up Zillow.com for a "Zestimate," and was informed that my little brick box was worth more than $500,000. Amazing news? Sure. Gratifying? You bet. Zillow was telling me that my house had more than doubled in value in just five short years.
Sadly, Zillow was on crack.
Welcome to the other side of the looking glass
About a year after receiving the good news from Zillow, I sold the house for far less than the site had told me it was worth. A 25% drop -- $100,000 -- from the top, in fact. Or, if you're a glass-half-full kind of a Fool, a 60% profit beyond what I paid for it.
The real truth, though, is that the house was worth neither what I paid for it, nor what I could have sold it for in 2006 -- nor even what I ultimately pocketed from the whole transaction. The real worth of the house was something unknowable, something that could only be guessed at: its intrinsic value.
"Price is what you pay. Value is what you get."
Leave it to Warren Buffett to sum up the dilemma in a single pithy dichotomy. The world's greatest investor reminds us that the value of an asset -- whether a car, a house, or a stock -- does not necessarily have any relation to the price we pay to own it. Far be it from me to criticize the Oracle's wisdom, but Buffett's observation still leaves us with one crucial question: How exactly do we know the value of the asset?
Benjamin Graham's classic non-answer stated that an asset is worth at least its book value, so you're safe if you pay less than that. There's also a logically impeccable but not very helpful adage that "an asset is worth whatever someone will pay for it." And Professor Aswath Damodaran offers this math-intensive solution: "The value of equity is obtained by discounting expected [residual] cash flows."
A more honest answer, though, is that we simply never know how much anything is worth. Not exactly, at least.
Hunting stocks with an axe
Yet in real life, we don't allow the lack of an exact answer to stop us from buying. Humans need shelter, so we buy a house when the price seems fair. We need cars, so we work from sticker prices and the Kelly Blue Book to pick an acceptable price for those, too.
The same goes for stocks. We shouldn't "measure with a micrometer, mark it off with chalk, then cut it with an axe." We make our best guess at a fair price. We try to buy for significantly less than our estimation. If we guess right more often than wrong, we make money. But where do we start?
Start with common sense
Look in places where you're more likely than not to find bargains:
Low prices: Stocks hitting the new 52-week-lows list may be "down for a reason." Still, a stock selling cheaper today than it's sold any time for the past year is more likely a good bargain than a stock selling for more than it's ever fetched before. Last month, I noted five stocks that had fallen to their 52-week lows. While the S&P trades 12% higher today, all five of those stocks have risen anywhere from 22% (Marvel Entertainment (NYSE: MVL)) to 184% (Republic Airways).
Read the paper: Newspaper headlines offer another superb place to seek bargains. Remember how oil was selling for $150 a barrel last July? Remember how a few months later, it sold for less than $40? How much do you want to bet that the intrinsic values of oil majors such as ExxonMobil (NYSE: XOM) or Chevron (NYSE: CVX) tracked those movements exactly? (Hint: They didn't.) Somewhere between $40 and $150, there was value to be had in the oil majors.
Cheap valuations: Another great way to scan for bargains is to run a stock screener every once in a while. I like to look for stocks that trade for low price-to-free cash flow multiples, exhibit strong growth, and have low debt. In recent weeks, this method has yielded me such unexpected bargains as NetEase.com (Nasdaq: NTES), priceline.com (Nasdaq: PCLN), and eBay (Nasdaq: EBAY).
Foolish takeaway
The key point I want you to take away from all this is simple: Trust your instincts.
When Zillow tells you your house has doubled in value, treat that "Zestimate" with some skepticism. When Suntech Power (NYSE: STP) doubles in price on announcements of industry subsidies from China, be wary. On the other hand, when stocks that have little to do with the financial crisis drop 50% in the space of a year, when stock prices don't match the news they're supposed to reflect, or when you stumble across a stock with a price that looks cheap, you might just have found a bargain.
Fool contributor Rich Smith owns shares of Marvel Entertainment and priceline.com. eBay, Marvel, and priceline.com are Stock Advisor recommendations. eBay is also an Inside Value pick. Netease.com and Suntech Power are Rule Breakers selections. The Motley Fool has a disclosure policy.
http://www.fool.com/investing/value/2009/04/25/how-i-lost-100000-without-even-trying.aspx
By Rich Smith April 25, 2009 Comments (4)
Once upon a time, I bought a house.
At the time, I thought I had overpaid ... but "the time" was 2001 -- much nearer the start of the housing boom (that's recently turned bust) than its end. Fast forward a few years, and I sat down to my trusty computer, pulled up Zillow.com for a "Zestimate," and was informed that my little brick box was worth more than $500,000. Amazing news? Sure. Gratifying? You bet. Zillow was telling me that my house had more than doubled in value in just five short years.
Sadly, Zillow was on crack.
Welcome to the other side of the looking glass
About a year after receiving the good news from Zillow, I sold the house for far less than the site had told me it was worth. A 25% drop -- $100,000 -- from the top, in fact. Or, if you're a glass-half-full kind of a Fool, a 60% profit beyond what I paid for it.
The real truth, though, is that the house was worth neither what I paid for it, nor what I could have sold it for in 2006 -- nor even what I ultimately pocketed from the whole transaction. The real worth of the house was something unknowable, something that could only be guessed at: its intrinsic value.
"Price is what you pay. Value is what you get."
Leave it to Warren Buffett to sum up the dilemma in a single pithy dichotomy. The world's greatest investor reminds us that the value of an asset -- whether a car, a house, or a stock -- does not necessarily have any relation to the price we pay to own it. Far be it from me to criticize the Oracle's wisdom, but Buffett's observation still leaves us with one crucial question: How exactly do we know the value of the asset?
Benjamin Graham's classic non-answer stated that an asset is worth at least its book value, so you're safe if you pay less than that. There's also a logically impeccable but not very helpful adage that "an asset is worth whatever someone will pay for it." And Professor Aswath Damodaran offers this math-intensive solution: "The value of equity is obtained by discounting expected [residual] cash flows."
A more honest answer, though, is that we simply never know how much anything is worth. Not exactly, at least.
Hunting stocks with an axe
Yet in real life, we don't allow the lack of an exact answer to stop us from buying. Humans need shelter, so we buy a house when the price seems fair. We need cars, so we work from sticker prices and the Kelly Blue Book to pick an acceptable price for those, too.
The same goes for stocks. We shouldn't "measure with a micrometer, mark it off with chalk, then cut it with an axe." We make our best guess at a fair price. We try to buy for significantly less than our estimation. If we guess right more often than wrong, we make money. But where do we start?
Start with common sense
Look in places where you're more likely than not to find bargains:
Low prices: Stocks hitting the new 52-week-lows list may be "down for a reason." Still, a stock selling cheaper today than it's sold any time for the past year is more likely a good bargain than a stock selling for more than it's ever fetched before. Last month, I noted five stocks that had fallen to their 52-week lows. While the S&P trades 12% higher today, all five of those stocks have risen anywhere from 22% (Marvel Entertainment (NYSE: MVL)) to 184% (Republic Airways).
Read the paper: Newspaper headlines offer another superb place to seek bargains. Remember how oil was selling for $150 a barrel last July? Remember how a few months later, it sold for less than $40? How much do you want to bet that the intrinsic values of oil majors such as ExxonMobil (NYSE: XOM) or Chevron (NYSE: CVX) tracked those movements exactly? (Hint: They didn't.) Somewhere between $40 and $150, there was value to be had in the oil majors.
Cheap valuations: Another great way to scan for bargains is to run a stock screener every once in a while. I like to look for stocks that trade for low price-to-free cash flow multiples, exhibit strong growth, and have low debt. In recent weeks, this method has yielded me such unexpected bargains as NetEase.com (Nasdaq: NTES), priceline.com (Nasdaq: PCLN), and eBay (Nasdaq: EBAY).
Foolish takeaway
The key point I want you to take away from all this is simple: Trust your instincts.
When Zillow tells you your house has doubled in value, treat that "Zestimate" with some skepticism. When Suntech Power (NYSE: STP) doubles in price on announcements of industry subsidies from China, be wary. On the other hand, when stocks that have little to do with the financial crisis drop 50% in the space of a year, when stock prices don't match the news they're supposed to reflect, or when you stumble across a stock with a price that looks cheap, you might just have found a bargain.
Fool contributor Rich Smith owns shares of Marvel Entertainment and priceline.com. eBay, Marvel, and priceline.com are Stock Advisor recommendations. eBay is also an Inside Value pick. Netease.com and Suntech Power are Rule Breakers selections. The Motley Fool has a disclosure policy.
http://www.fool.com/investing/value/2009/04/25/how-i-lost-100000-without-even-trying.aspx
What the Swine Flu Panic Means for Your Portfolio
What the Swine Flu Panic Means for Your Portfolio
By Seth Jayson
April 27, 2009 Comments (6)
It's a delicate subject, and people's lives are at risk, so I'll state right here, up top, that I do not intend to make light of this public health concern. I share the sympathies that we all have for individuals afflicted by the swine flu. (I've experienced a delirium-packed, 10-day version of the usual seasonal flu, and I wouldn't wish this illness on my worst enemy.)
That said, the reactions of the investing community already look ridiculous: "Markets Down on Swine Flu" read the headlines. Other writers will try to convince you to pile into vaccine names like GlaxoSmithKline (NYSE: GSK), or companies like Netflix (Nasdaq: NFLX), for which a simplistic, "stay-at-home" argument can be made. This is simply rank trend speculation in reverse.
How to really profit
If you really want to find opportunities relating to the swine flu story, I suggest you do the opposite of what most people are advocating. For instance, consider inverting one particularly brazen and short-sighted call that was reported by Bloomberg this morning: UBS downgrades Mexican stocks from "top pick" to "underweight" because of the swine flu.
Really? An entire country's strongest businesses will be permanently impaired because of this health crisis? Would you write off entire segments of the U.S. economy if the illness got worse here? Would you sell Procter & Gamble (NYSE: PG)? Ditch Home Depot (NYSE: HD)?
Sure, the Mexican economy is generally more fragile than ours, but most of the big-name firms trading on our exchanges are anything but weak. Beverage and minimart king FEMSA will likely sell fewer soft drinks and beers over the coming weeks. Will Gruma sell fewer tortillas, Industrias Bachoco fewer chicken chunks? Probably.
Will this matter for the long term?
Very unlikely
If you are investing in strong names for the long term -- and that's how you should be investing -- these are the times when you should be more interested in buying stocks, not less. Flu epidemics are terrible, but they're also normal. So are economic cycles and (in Mexico) the occasional currency panic.
Buying good companies when the headline news is bad is the hardest thing to do (psychologically), but it's the simplest way to buy low. And buying low makes it a lot easier to sell high.
That's the takeaway from the two wealthiest investors in the world -- Warren Buffett and Carlos Slim, who made their fortunes buying companies with competitive advantages on the cheap, often during times of uncertainty. Despite recessions, oil shocks, currency convulsions, SARS, and bird flu, Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B), Telmex, and America Movil (NYSE: AMX) have made them very wealthy.
We've recently revamped Motley Fool Hidden Gems, putting real money into small-cap stocks, to enable us to take advantage of exactly this kind of short-term market craziness. At times like this, we're more interested in our favorite Mexican stocks: Grupo Aeroportuario del Sur and Grupo Aeroportuario del Pacifico. As monopoly airport operators with high fixed costs, both would see turbulence due to a temporary dip in air travel (one they're already getting thanks to the economy).
But in the long term, monopolies like these thrive and enrich shareholders. Ditto the major players I mentioned further up. So unless you think Mexico is forever on the wane, it's time to look at buying these stocks, not selling them.
Seth Jayson is co-advisor at Motley Fool Hidden Gems. He owns shares of Grupo Aeroportuario del Sur, FEMSA, and Berkshire Hathaway. Grupo Aeroportuario del Pacifico and Grupo Aeroportuario del Sur are Hidden Gems recommendations. Berkshire Hathaway and Netflix are Motley Fool Stock Advisor selections. Berkshire Hathaway and The Home Depot are Motley Fool Inside Value selections. Procter & Gamble is a Motley Fool Income Investor recommendation. America Movil and FEMSA are Global Gains picks. The Fool owns shares of Procter & Gamble and Berkshire Hathaway. The Fool has a disclosure policy.
http://www.fool.com/investing/small-cap/2009/04/27/what-the-swine-flu-panic-means-for-your-portfolio.aspx
By Seth Jayson
April 27, 2009 Comments (6)
It's a delicate subject, and people's lives are at risk, so I'll state right here, up top, that I do not intend to make light of this public health concern. I share the sympathies that we all have for individuals afflicted by the swine flu. (I've experienced a delirium-packed, 10-day version of the usual seasonal flu, and I wouldn't wish this illness on my worst enemy.)
That said, the reactions of the investing community already look ridiculous: "Markets Down on Swine Flu" read the headlines. Other writers will try to convince you to pile into vaccine names like GlaxoSmithKline (NYSE: GSK), or companies like Netflix (Nasdaq: NFLX), for which a simplistic, "stay-at-home" argument can be made. This is simply rank trend speculation in reverse.
How to really profit
If you really want to find opportunities relating to the swine flu story, I suggest you do the opposite of what most people are advocating. For instance, consider inverting one particularly brazen and short-sighted call that was reported by Bloomberg this morning: UBS downgrades Mexican stocks from "top pick" to "underweight" because of the swine flu.
Really? An entire country's strongest businesses will be permanently impaired because of this health crisis? Would you write off entire segments of the U.S. economy if the illness got worse here? Would you sell Procter & Gamble (NYSE: PG)? Ditch Home Depot (NYSE: HD)?
Sure, the Mexican economy is generally more fragile than ours, but most of the big-name firms trading on our exchanges are anything but weak. Beverage and minimart king FEMSA will likely sell fewer soft drinks and beers over the coming weeks. Will Gruma sell fewer tortillas, Industrias Bachoco fewer chicken chunks? Probably.
Will this matter for the long term?
Very unlikely
If you are investing in strong names for the long term -- and that's how you should be investing -- these are the times when you should be more interested in buying stocks, not less. Flu epidemics are terrible, but they're also normal. So are economic cycles and (in Mexico) the occasional currency panic.
Buying good companies when the headline news is bad is the hardest thing to do (psychologically), but it's the simplest way to buy low. And buying low makes it a lot easier to sell high.
That's the takeaway from the two wealthiest investors in the world -- Warren Buffett and Carlos Slim, who made their fortunes buying companies with competitive advantages on the cheap, often during times of uncertainty. Despite recessions, oil shocks, currency convulsions, SARS, and bird flu, Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B), Telmex, and America Movil (NYSE: AMX) have made them very wealthy.
We've recently revamped Motley Fool Hidden Gems, putting real money into small-cap stocks, to enable us to take advantage of exactly this kind of short-term market craziness. At times like this, we're more interested in our favorite Mexican stocks: Grupo Aeroportuario del Sur and Grupo Aeroportuario del Pacifico. As monopoly airport operators with high fixed costs, both would see turbulence due to a temporary dip in air travel (one they're already getting thanks to the economy).
But in the long term, monopolies like these thrive and enrich shareholders. Ditto the major players I mentioned further up. So unless you think Mexico is forever on the wane, it's time to look at buying these stocks, not selling them.
Seth Jayson is co-advisor at Motley Fool Hidden Gems. He owns shares of Grupo Aeroportuario del Sur, FEMSA, and Berkshire Hathaway. Grupo Aeroportuario del Pacifico and Grupo Aeroportuario del Sur are Hidden Gems recommendations. Berkshire Hathaway and Netflix are Motley Fool Stock Advisor selections. Berkshire Hathaway and The Home Depot are Motley Fool Inside Value selections. Procter & Gamble is a Motley Fool Income Investor recommendation. America Movil and FEMSA are Global Gains picks. The Fool owns shares of Procter & Gamble and Berkshire Hathaway. The Fool has a disclosure policy.
http://www.fool.com/investing/small-cap/2009/04/27/what-the-swine-flu-panic-means-for-your-portfolio.aspx
Stress Test Preview - JPMorgan vs Citigroup
Friday, 24 Apr 2009
David Faber: Stress Test Preview - JPMorgan vs Citigroup
Posted By:CNBC.com
Topics:Nasdaq NYSE Stock Market Stock Options Stock Picks
The banking industry will learn preliminary results of the so-called stress tests today (Friday) — but CNBC's David Faber reports that plenty of questions will remain. (UPDATED: See below.)
"The banks are going to march down there [the NY Fed], and each CFO will be told, 'you've got an A, a B or a C.' But then the next stage, the real questions have to start to be answered," Faber said.
"For instance, how much capital will need to be raised?" Analyst speculation ranges "as high as 7 percent, as low as 3 percent."
Which Banks Are on The Stress Test List?
Faber Report: Regional Banks' Danger Now
And of course, the speculation differs from company to company:
"If you're JPMorgan, you may not need to raise any capital. If you're Goldman Sachs, you may not need to. But if you're Citi, it may be a different story."
And once the numbers are derived, Faber said, "the big question remains: How are you going to do it?"
The stress test methodology will be revealed at approximately 2pm ET.
UPDATE: The Federal Reserve said "most banks" are currently well capitalized but need to hold a "substantial" amount above regulatory requirements in case the recession worsens. “Most banks currently have capital levels well in excess of the amounts needed to be well capitalized," the Fed said in its eagerly awaited report.
See Full CNBC Report
_____________________________
Top TARP Recipients:
JPMorgan Chase
[JPM 32.78 -0.60 (-1.8%) ]
Morgan Stanley
[MS 21.26 -0.70 (-3.19%) ]
Citigroup
[C 3.07 -0.12 (-3.76%) ]
Wells Fargo
[WFC 20.299 -1.101 (-5.14%) ]
Bank of America
[BAC 8.92 -0.18 (-1.98%) ]
_____________________________
Disclaimer
© 2009 CNBC.com
http://www.cnbc.com/id/30388875
David Faber: Stress Test Preview - JPMorgan vs Citigroup
Posted By:CNBC.com
Topics:Nasdaq NYSE Stock Market Stock Options Stock Picks
The banking industry will learn preliminary results of the so-called stress tests today (Friday) — but CNBC's David Faber reports that plenty of questions will remain. (UPDATED: See below.)
"The banks are going to march down there [the NY Fed], and each CFO will be told, 'you've got an A, a B or a C.' But then the next stage, the real questions have to start to be answered," Faber said.
"For instance, how much capital will need to be raised?" Analyst speculation ranges "as high as 7 percent, as low as 3 percent."
Which Banks Are on The Stress Test List?
Faber Report: Regional Banks' Danger Now
And of course, the speculation differs from company to company:
"If you're JPMorgan, you may not need to raise any capital. If you're Goldman Sachs, you may not need to. But if you're Citi, it may be a different story."
And once the numbers are derived, Faber said, "the big question remains: How are you going to do it?"
The stress test methodology will be revealed at approximately 2pm ET.
UPDATE: The Federal Reserve said "most banks" are currently well capitalized but need to hold a "substantial" amount above regulatory requirements in case the recession worsens. “Most banks currently have capital levels well in excess of the amounts needed to be well capitalized," the Fed said in its eagerly awaited report.
See Full CNBC Report
_____________________________
Top TARP Recipients:
JPMorgan Chase
[JPM 32.78 -0.60 (-1.8%) ]
Morgan Stanley
[MS 21.26 -0.70 (-3.19%) ]
Citigroup
[C 3.07 -0.12 (-3.76%) ]
Wells Fargo
[WFC 20.299 -1.101 (-5.14%) ]
Bank of America
[BAC 8.92 -0.18 (-1.98%) ]
_____________________________
Disclaimer
© 2009 CNBC.com
http://www.cnbc.com/id/30388875
Swine flu is a non-recurring event
Move Over Swine, The Bulls & Bears Are Back
Posted By:Bob Pisani
Topics:Swine Flu Wall Street Investment Strategy Stock Market
Companies:General Motors Corp
Stocks show only modest weakness, despite concerns over swine flu. Airlines, hotels, cruise ships and some food processors are down, but the overall market is only fractionally to the downside.
Why? Because after an initial panic Sunday traders have concluded that swine flu is a non-recurring event, which is unlikely to have a long-term impact on the economy.
This view, however, could change if the situation deterioriates dramatically.
Meanwhile, we are closing out the month in a few days, and stocks are up for the second month in a row:
S&P 500: up 7.9 percent
NASDAQ: up 10.3 percent
While most of the gains for the month came in the first half, both the S&P and the NASDAQ are on the verge of breaking out to multi-month highs.
This wasn't in the bears playbook; we were supposed to sell off in the middle of earnings season.
Remember this simple mantra: after the gains since the bottom on March 9th, sideways or up is a victory for the bulls.
Here's who would own what of GM's common shares under the latest GM proposal:
Government 50 percent
Unions 39 percent
Bondholders 10 percent
Current shareholders 1 percent
Two issues are on everyone's mind:
1) Will the bondholders accept an all-equity bond exchange?
The unions are on board, but 90 percent of the bondholders have to approve the deal by the May 26th deadline.
Many traders think it would be better to hold out for bankruptcy.
Why? Because bondholders feel they are getting the short end of the stick. Bondholders are being asked to exchange $27 billion in debt for 10 percent of the company; the unions are getting $10 billion in cash (half of the $20 billion they are owed) AND a 39 percent stake in the company.
Most analysts feel the same way. Brian Johnson at Barclays said "the offer is unlikely to be accepted by bondholders, who are in effect being asked to sacrifice most of their claims in order to help GM satisfy commitments to the UAW."
John Murphy at Bank of America/Merrill Lynch, who said back in November that bankruptcy was the most likely outcome for GM, repeated that assertion this morning.
2) Is the latest GM restructuring more realistic than the prior plans?
On the surface, it certainly appears to be: the last plan in February assumed they would be breakeven at 15 million in seasonally adjusted annual car sales; this one assumes 10 million would be breakeven.
Hardly discussed is whether the new core strategy of concentrating on Chevy, Cadillac, Buick and GMC will work; most analysts believe they should concentrate on at most 3 brands.
http://www.cnbc.com/id/30437791
http://www.youtube.com/watch?v=MdIfefLcdoU
Posted By:Bob Pisani
Topics:Swine Flu Wall Street Investment Strategy Stock Market
Companies:General Motors Corp
Stocks show only modest weakness, despite concerns over swine flu. Airlines, hotels, cruise ships and some food processors are down, but the overall market is only fractionally to the downside.
Why? Because after an initial panic Sunday traders have concluded that swine flu is a non-recurring event, which is unlikely to have a long-term impact on the economy.
This view, however, could change if the situation deterioriates dramatically.
Meanwhile, we are closing out the month in a few days, and stocks are up for the second month in a row:
S&P 500: up 7.9 percent
NASDAQ: up 10.3 percent
While most of the gains for the month came in the first half, both the S&P and the NASDAQ are on the verge of breaking out to multi-month highs.
This wasn't in the bears playbook; we were supposed to sell off in the middle of earnings season.
Remember this simple mantra: after the gains since the bottom on March 9th, sideways or up is a victory for the bulls.
Here's who would own what of GM's common shares under the latest GM proposal:
Government 50 percent
Unions 39 percent
Bondholders 10 percent
Current shareholders 1 percent
Two issues are on everyone's mind:
1) Will the bondholders accept an all-equity bond exchange?
The unions are on board, but 90 percent of the bondholders have to approve the deal by the May 26th deadline.
Many traders think it would be better to hold out for bankruptcy.
Why? Because bondholders feel they are getting the short end of the stick. Bondholders are being asked to exchange $27 billion in debt for 10 percent of the company; the unions are getting $10 billion in cash (half of the $20 billion they are owed) AND a 39 percent stake in the company.
Most analysts feel the same way. Brian Johnson at Barclays said "the offer is unlikely to be accepted by bondholders, who are in effect being asked to sacrifice most of their claims in order to help GM satisfy commitments to the UAW."
John Murphy at Bank of America/Merrill Lynch, who said back in November that bankruptcy was the most likely outcome for GM, repeated that assertion this morning.
2) Is the latest GM restructuring more realistic than the prior plans?
On the surface, it certainly appears to be: the last plan in February assumed they would be breakeven at 15 million in seasonally adjusted annual car sales; this one assumes 10 million would be breakeven.
Hardly discussed is whether the new core strategy of concentrating on Chevy, Cadillac, Buick and GMC will work; most analysts believe they should concentrate on at most 3 brands.
http://www.cnbc.com/id/30437791
http://www.youtube.com/watch?v=MdIfefLcdoU
Prophetic words that predicted the greatest financial collapse
House of Cards - Origins of the Financial Crisis ''Then and Now''
"Let's hope we are all wealthy and retired by the time this house of cards falters."--Internal email, Wall Street, 12/15/06
Prophetic words that predicted the greatest financial collapse since the Great Depression. The current global economic collapse has its roots in the sub-prime mortgage crisis.
http://www.cnbc.com/id/28993790
"House of Cards" Show Times
"Let's hope we are all wealthy and retired by the time this house of cards falters."--Internal email, Wall Street, 12/15/06
Prophetic words that predicted the greatest financial collapse since the Great Depression. The current global economic collapse has its roots in the sub-prime mortgage crisis.
http://www.cnbc.com/id/28993790
"House of Cards" Show Times
US National Debt
US National Debt
$11,046,247,657,049.48 (According to US Treasury Direct, 3/26/09)
The mounting US National debt, growing by billions every day, has recently topped the $11 trillion mark. If denominated in $1 bills, the cash would stack as high as the tallest building in the world, the 2683.7 foot Burj Dubai skyscraper… 1,474,918 times. At this height, it would create a block of bills with a base approximately twice the size of the Empire State Building's, which is just under the size of three American football fields.
If consolidated into a single stack of $1 bills, it would measure about 749,666 miles, which is enough to reach from the earth to the moon twice (at perigee), with a few billion dollars left to spare. If the amount was laid out, the area of the $1 bills would cover the state of Rhode Island three times over, and in $100 bills the amount would carpet about 3/4 the area of Washington DC.
It is also interesting to note that this number is approximately 13 times the amount of US currency in circulation, according to the Treasury bulletin, which lists the amount at $853.6 billion as of December 31, 2008.
$11,046,247,657,049.48 (According to US Treasury Direct, 3/26/09)
The mounting US National debt, growing by billions every day, has recently topped the $11 trillion mark. If denominated in $1 bills, the cash would stack as high as the tallest building in the world, the 2683.7 foot Burj Dubai skyscraper… 1,474,918 times. At this height, it would create a block of bills with a base approximately twice the size of the Empire State Building's, which is just under the size of three American football fields.
If consolidated into a single stack of $1 bills, it would measure about 749,666 miles, which is enough to reach from the earth to the moon twice (at perigee), with a few billion dollars left to spare. If the amount was laid out, the area of the $1 bills would cover the state of Rhode Island three times over, and in $100 bills the amount would carpet about 3/4 the area of Washington DC.
It is also interesting to note that this number is approximately 13 times the amount of US currency in circulation, according to the Treasury bulletin, which lists the amount at $853.6 billion as of December 31, 2008.
Monday 27 April 2009
Swine flu outbreak
April 27, 2009
Swine flu outbreak
The swine flu outbreak is more worrying than bird flu because it is spread much more readily between humans.
SYDNEY - THE swine flu outbreak is more worrying than bird flu because it is spread much more readily between humans, an Australian infectious diseases expert said on Monday.
Australian National University epidemiology specialist professor Paul Kelly said swine flu had a lower mortality rate than bird flu but warned this was a mixed blessing because it would help the virus spread more quickly.
VIDEO
Pandemic fears grow(2:02)
He said bird flu had remained relatively contained because human-to-human transmission was difficult, while swine flu was highly infectious.
'(Bird flu) has been limited - to a limited extent that has happened in Indonesia and other places, but it's never been on the sort of scale as this,' Ms Kelly told ABC radio. 'This is actually really more worrying.'
He said swine flu appeared to be a form of the virus that epidemiologists had feared for years - a combination of strains from various animals that was easily transmitted between humans.
'In terms of an epidemic, for the virus to be able to spread it's actually better for the virus for humans to remain alive because that can spread it more quickly and to a greater extent geographically,' he said.
Professor John Mackenzie, a biosecurity expert from Perth's Curtin University, said the latest flu threat appeared to be a combination of at least two types of swine virus and an avian virus gene.
He said the next few days would be crucial in determining whether the world was facing a pandemic.
'I guess we're at that 'grey' stage where we don't know if it is going to be a pandemic strain or not,' he said.
'We're certainly concerned but at the same time Australia is in a better position than most other countries to be able to withstand or cope with a pandemic.' -- AFP
Read also:
Global alarm as flu spreads
Asia acts against flu threat
EU calls urgent flu meeting
Swine flu outbreak
The swine flu outbreak is more worrying than bird flu because it is spread much more readily between humans.
SYDNEY - THE swine flu outbreak is more worrying than bird flu because it is spread much more readily between humans, an Australian infectious diseases expert said on Monday.
Australian National University epidemiology specialist professor Paul Kelly said swine flu had a lower mortality rate than bird flu but warned this was a mixed blessing because it would help the virus spread more quickly.
VIDEO
Pandemic fears grow(2:02)
He said bird flu had remained relatively contained because human-to-human transmission was difficult, while swine flu was highly infectious.
'(Bird flu) has been limited - to a limited extent that has happened in Indonesia and other places, but it's never been on the sort of scale as this,' Ms Kelly told ABC radio. 'This is actually really more worrying.'
He said swine flu appeared to be a form of the virus that epidemiologists had feared for years - a combination of strains from various animals that was easily transmitted between humans.
'In terms of an epidemic, for the virus to be able to spread it's actually better for the virus for humans to remain alive because that can spread it more quickly and to a greater extent geographically,' he said.
Professor John Mackenzie, a biosecurity expert from Perth's Curtin University, said the latest flu threat appeared to be a combination of at least two types of swine virus and an avian virus gene.
He said the next few days would be crucial in determining whether the world was facing a pandemic.
'I guess we're at that 'grey' stage where we don't know if it is going to be a pandemic strain or not,' he said.
'We're certainly concerned but at the same time Australia is in a better position than most other countries to be able to withstand or cope with a pandemic.' -- AFP
Read also:
Global alarm as flu spreads
Asia acts against flu threat
EU calls urgent flu meeting
World Markets Struck by Swine Flu Fears
World Markets Struck by Swine Flu Fears
By THE ASSOCIATED PRESS
Published: April 27, 2009
Filed at 5:49 a.m. ET
LONDON (AP) -- World stock markets fell Monday as investors worried that a possible deadly outbreak of swine flu, which has already killed more than 100 people in Mexico alone, could go global and derail any global economic recovery.
Airlines took the brunt of the selling amid concerns passengers could hold back from flying for fear of catching the virus, which has already reportedly spread as far as New Zealand.
''News over the weekend of a deadly flu outbreak is rocking financial markets,'' said Matt Buckland, a dealer at CMC Markets.
By mid-morning London time, the FTSE 100 index of leading British shares was down 48.53 points, or 1.2 percent, at 4,107.46, while Germany's DAX fell 81.11 points, or 1.7 percent, to 4,593.21. The CAC-40 in France was 44.15 points, or 1.4 percent, lower at 3,058.70.
Earlier, most of Asia's markets were hit by the pandemic fears, with Hong Kong -- one of the main focal points of the SARS virus concerns just six years ago -- closing down 418.43 points, or 2.7 percent, to 14,840.42. Japan's Nikkei 225 stock average managed a gain of 18.35, or 0.2 percent, to close at 8,726.34 in back-and-forth trade.
In Europe, Deutsche Lufthansa AG fell 10 percent, while British Airways PLC was down more than 7 percent. Earlier, Australia's Qantas Airways fell 4 percent while Hong Kong-based Cathay Pacific Airways slid 8 percent.
Travel and hotel companies were also heavily sold off, with British cruise line firm Carnival PLC down more than 7 percent and French hotel group Accor SA down more than 6 percent.
While airlines tanked, pharmaceutical companies enjoyed a modest rally in falling markets amid expectations that demand for anti-viral drugs would rise. Swiss drugmaker Roche Holding AG -- the maker of Tamiflu -- was up 4 percent, while GlaxoSmithkline PLC, which manufactures the Relenza drug, rose 3 percent.
Worries about the epidemic's spread will likely remain at the forefront of investors' mind over the coming days and overshadowed any hopes generated over the weekend by the announcement from the Group of Seven finance ministers that the worst of the world recession may be over and that recovery may emerge by the end of the year.
''It's really going to be a case of watching how this Mexican flu issue develops before deciding if these already bruised markets have another big fall coming up,'' said CMC's Buckland.
Hopes that a recovery of sorts is on its way has helped world stock markets rally off multiyear lows in early March. Despite some range trading over the last couple of weeks, stocks began to rally strongly again at the end of last week, with the Dow Jones industrial average, for example, advancing 1.5 percent to 8,076.29 on Friday.
Selling is expected to be the name of the game when Wall Street opens, with Dow futures down 124 points, or 1.5 percent, at 7,932 and the broader Standard & Poor's 500 futures 15 points, or 1.7 percent, lower at 851.50.
''At the moment we are expecting the Dow to open down around 90 points lower from Friday's close -- again on swine flu concerns,'' said David Jones, chief market strategist at IG Index.
Elsewhere in Asia, Australia's stock measure gained 0.5 percent while Shanghai's fell 1.8 percent. Markets in Singapore, Taiwan and India retreated.
Oil prices dropped sharply as investors mulled comments from OPEC suggesting the price was too low for companies to justify new investments in crude production. Benchmark crude for June delivery fell $2.78 to $48.77. The contract jumped $1.93 to settle at $51.55 last week.
In currencies, the dollar weakened to 96.55 yen from 97.17 yen. The euro traded lower at $1.3141 from $1.3161.
--------
AP Business Writer Jeremiah Marquez in Hong Kong contributed to this report.
http://www.nytimes.com/aponline/2009/04/27/business/AP-World-Markets.html
By THE ASSOCIATED PRESS
Published: April 27, 2009
Filed at 5:49 a.m. ET
LONDON (AP) -- World stock markets fell Monday as investors worried that a possible deadly outbreak of swine flu, which has already killed more than 100 people in Mexico alone, could go global and derail any global economic recovery.
Airlines took the brunt of the selling amid concerns passengers could hold back from flying for fear of catching the virus, which has already reportedly spread as far as New Zealand.
''News over the weekend of a deadly flu outbreak is rocking financial markets,'' said Matt Buckland, a dealer at CMC Markets.
By mid-morning London time, the FTSE 100 index of leading British shares was down 48.53 points, or 1.2 percent, at 4,107.46, while Germany's DAX fell 81.11 points, or 1.7 percent, to 4,593.21. The CAC-40 in France was 44.15 points, or 1.4 percent, lower at 3,058.70.
Earlier, most of Asia's markets were hit by the pandemic fears, with Hong Kong -- one of the main focal points of the SARS virus concerns just six years ago -- closing down 418.43 points, or 2.7 percent, to 14,840.42. Japan's Nikkei 225 stock average managed a gain of 18.35, or 0.2 percent, to close at 8,726.34 in back-and-forth trade.
In Europe, Deutsche Lufthansa AG fell 10 percent, while British Airways PLC was down more than 7 percent. Earlier, Australia's Qantas Airways fell 4 percent while Hong Kong-based Cathay Pacific Airways slid 8 percent.
Travel and hotel companies were also heavily sold off, with British cruise line firm Carnival PLC down more than 7 percent and French hotel group Accor SA down more than 6 percent.
While airlines tanked, pharmaceutical companies enjoyed a modest rally in falling markets amid expectations that demand for anti-viral drugs would rise. Swiss drugmaker Roche Holding AG -- the maker of Tamiflu -- was up 4 percent, while GlaxoSmithkline PLC, which manufactures the Relenza drug, rose 3 percent.
Worries about the epidemic's spread will likely remain at the forefront of investors' mind over the coming days and overshadowed any hopes generated over the weekend by the announcement from the Group of Seven finance ministers that the worst of the world recession may be over and that recovery may emerge by the end of the year.
''It's really going to be a case of watching how this Mexican flu issue develops before deciding if these already bruised markets have another big fall coming up,'' said CMC's Buckland.
Hopes that a recovery of sorts is on its way has helped world stock markets rally off multiyear lows in early March. Despite some range trading over the last couple of weeks, stocks began to rally strongly again at the end of last week, with the Dow Jones industrial average, for example, advancing 1.5 percent to 8,076.29 on Friday.
Selling is expected to be the name of the game when Wall Street opens, with Dow futures down 124 points, or 1.5 percent, at 7,932 and the broader Standard & Poor's 500 futures 15 points, or 1.7 percent, lower at 851.50.
''At the moment we are expecting the Dow to open down around 90 points lower from Friday's close -- again on swine flu concerns,'' said David Jones, chief market strategist at IG Index.
Elsewhere in Asia, Australia's stock measure gained 0.5 percent while Shanghai's fell 1.8 percent. Markets in Singapore, Taiwan and India retreated.
Oil prices dropped sharply as investors mulled comments from OPEC suggesting the price was too low for companies to justify new investments in crude production. Benchmark crude for June delivery fell $2.78 to $48.77. The contract jumped $1.93 to settle at $51.55 last week.
In currencies, the dollar weakened to 96.55 yen from 97.17 yen. The euro traded lower at $1.3141 from $1.3161.
--------
AP Business Writer Jeremiah Marquez in Hong Kong contributed to this report.
http://www.nytimes.com/aponline/2009/04/27/business/AP-World-Markets.html
Swine flu: the UK shares affected
Swine flu: the UK shares affected
Pharmaceuticals
GlaxoSmithKline: its shares rose as much as 44p, or 4.4pc to 1,050p. Glaxo makes a flu drug called Relenza, which could be bought up by governments seeking to treat and halt the spread of swine flu. Relenza has been shown to work against viral samples of the disease.
Roche: The shares rose in Swiss trading. Roche's Tamiflu drug can reduce the symptoms of swine flu and said it has an ample supply of the drug as the outbreak spread outside Mexico.
Shire: the drugs company’s shares rose in sympathy with Glaxo's.
Airlines:
British Airways: The airline has been hit along with others in the sector, on fear the swine flu outbreak will reduce demand for travel.
easyJet: The low-cost airline fell.
Ryanair: the Irish budget airline was also under pressure.
Travel companies:
Thomas Cook: The holiday company fell on concern the spread of swine fever will curb foreign travel. Mexico has been a popular destination for holidaymakers trying to avoid countries using the euro while it remains so strong against the pound.
TUI Travel: The Thomson holiday group also declined.
Carnival: the cruise operator, whose Caribben cruises take in Mexico, dropped.
Intercontinental: Shares in the hotel operator also fell.
Agriculture:
Cranswick: The food firm, which has just bought a Norfolk-based supplier of pork for Tesco and a number of other major retailers, fell on concern shoppers will avoid pork products as a result of swine flu.
Genus: The pig breeding specialist declined.
The outbreak of swine flu, which has killed more than 100 people in Mexico and spread to the US, Canada and New Zealand, has hit UK shares linked to travel and agriculture, and give a boost to pharmaceuticals companies. Some of the biggest companies affected are listed below.
By Amy Wilson
Last Updated: 10:26AM BST 27 Apr 2009
By Amy Wilson
Last Updated: 10:26AM BST 27 Apr 2009
GlaxoSmithKline
Shire
British Airways
Easyjet
Thomas Cook Group
TUI Travel
Carnival
InterContinental Hotels Group
Cranswick
Genus
Shire
British Airways
Easyjet
Thomas Cook Group
TUI Travel
Carnival
InterContinental Hotels Group
Cranswick
Genus
Pharmaceuticals
GlaxoSmithKline: its shares rose as much as 44p, or 4.4pc to 1,050p. Glaxo makes a flu drug called Relenza, which could be bought up by governments seeking to treat and halt the spread of swine flu. Relenza has been shown to work against viral samples of the disease.
Roche: The shares rose in Swiss trading. Roche's Tamiflu drug can reduce the symptoms of swine flu and said it has an ample supply of the drug as the outbreak spread outside Mexico.
Shire: the drugs company’s shares rose in sympathy with Glaxo's.
Airlines:
British Airways: The airline has been hit along with others in the sector, on fear the swine flu outbreak will reduce demand for travel.
easyJet: The low-cost airline fell.
Ryanair: the Irish budget airline was also under pressure.
Travel companies:
Thomas Cook: The holiday company fell on concern the spread of swine fever will curb foreign travel. Mexico has been a popular destination for holidaymakers trying to avoid countries using the euro while it remains so strong against the pound.
TUI Travel: The Thomson holiday group also declined.
Carnival: the cruise operator, whose Caribben cruises take in Mexico, dropped.
Intercontinental: Shares in the hotel operator also fell.
Agriculture:
Cranswick: The food firm, which has just bought a Norfolk-based supplier of pork for Tesco and a number of other major retailers, fell on concern shoppers will avoid pork products as a result of swine flu.
Genus: The pig breeding specialist declined.
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GlaxoSmithKline leads pharmaceutical shares higher on swine flu outbreak
Drugs companies prepare for swine flu epidemic
British passengers screened for swine flu amid fears that disease has spread worldwide
Swine flu: what are the symptoms?
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Gold hits four-week high as swine flu fears grow and China builds reserves
Gold hits four-week high as swine flu fears grow and China builds reserves
Gold has climbed to its highest in almost a month as fears of a global flu pandemic prompted investors to seek safer assets, according to a report from Reuters.
Last Updated: 10:44AM BST 27 Apr 2009
Gold, which has registered four straight sessions of gains, has risen by 5pc over the past week
Fears of a global swine flu pandemic grew with new infections in the US and Canada on Sunday, while millions of Mexicans have stayed indoors to avoid a virus that has killed more than 100 people.
Gold hit an "intra-day" high (in other words, not a closing price) of $918.25 an ounce, its highest since April 2. The price had been boosted on Friday by the revelation that China had secretly raised its gold reserves by 75pc since 2003, confirming years of speculation that it had been buying.
Gold, which has registered four straight sessions of gains, has risen by 5pc over the past week and is just 8pc below an 11-month high above $1,000 hit in February.
Darren Heathcote of Investec Australia said: "I am not too sure how the swine flu will play out. The problem is the potential for this to explode to pandemic proportions, leaving a lot of people very wary. It may well benefit gold, as gold would be seen as a safe haven.”
Dealers expected gold to face resistance around $932 – an intra-day high seen in early April. "Ultimately, we could well be targeting that mid $960s again, which is that peak in the middle of March," added Heathcote.
http://www.telegraph.co.uk/finance/personalfinance/investing/gold/5229027/Gold-hits-four-week-high-as-swine-flu-fears-grow-and-China-builds-reserves.html
Gold has climbed to its highest in almost a month as fears of a global flu pandemic prompted investors to seek safer assets, according to a report from Reuters.
Last Updated: 10:44AM BST 27 Apr 2009
Gold, which has registered four straight sessions of gains, has risen by 5pc over the past week
Fears of a global swine flu pandemic grew with new infections in the US and Canada on Sunday, while millions of Mexicans have stayed indoors to avoid a virus that has killed more than 100 people.
Gold hit an "intra-day" high (in other words, not a closing price) of $918.25 an ounce, its highest since April 2. The price had been boosted on Friday by the revelation that China had secretly raised its gold reserves by 75pc since 2003, confirming years of speculation that it had been buying.
Gold, which has registered four straight sessions of gains, has risen by 5pc over the past week and is just 8pc below an 11-month high above $1,000 hit in February.
Darren Heathcote of Investec Australia said: "I am not too sure how the swine flu will play out. The problem is the potential for this to explode to pandemic proportions, leaving a lot of people very wary. It may well benefit gold, as gold would be seen as a safe haven.”
Dealers expected gold to face resistance around $932 – an intra-day high seen in early April. "Ultimately, we could well be targeting that mid $960s again, which is that peak in the middle of March," added Heathcote.
http://www.telegraph.co.uk/finance/personalfinance/investing/gold/5229027/Gold-hits-four-week-high-as-swine-flu-fears-grow-and-China-builds-reserves.html
Estimates of economic costs of a flu pandemic
Estimates of economic costs of a flu pandemic
If the outbreak of swine flu in Mexico becomes a pandemic, the economic consequences could be great. Below are estimates of the costs of such a disaster:
Reuters
Last Updated: 10:25AM BST 27 Apr 2009
* The World Bank estimated in 2008 that a flu pandemic could cost $3 trillion (£2 trillion) and result in a nearly 5pc drop in world gross domestic product. The World Bank has estimated that more than 70m people could die worldwide in a severe pandemic.
* Australian independent think-tank Lowy Institute for International Policy estimated in 2006 that in the worst-case scenario, a flu pandemic could wipe $4.4 trillion off global economic output.
* Two reports in the United States in 2005 estimated that a flu pandemic could cause a serious recession of the US economy, with immediate costs of $500bn-$675bn.
* SARS in 2003 disrupted travel, trade and the workplace and cost the Asia Pacific region $40bn. It lasted for six months, killing 775 of the 8,000 people it infected in 25 countries.
If the outbreak of swine flu in Mexico becomes a pandemic, the economic consequences could be great. Below are estimates of the costs of such a disaster:
Reuters
Last Updated: 10:25AM BST 27 Apr 2009
* The World Bank estimated in 2008 that a flu pandemic could cost $3 trillion (£2 trillion) and result in a nearly 5pc drop in world gross domestic product. The World Bank has estimated that more than 70m people could die worldwide in a severe pandemic.
* Australian independent think-tank Lowy Institute for International Policy estimated in 2006 that in the worst-case scenario, a flu pandemic could wipe $4.4 trillion off global economic output.
* Two reports in the United States in 2005 estimated that a flu pandemic could cause a serious recession of the US economy, with immediate costs of $500bn-$675bn.
* SARS in 2003 disrupted travel, trade and the workplace and cost the Asia Pacific region $40bn. It lasted for six months, killing 775 of the 8,000 people it infected in 25 countries.
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Asian markets retreat on swine flu fears
Asian markets retreat on swine flu fears
Asian stock markets retreated on Monday as investors worried the outbreak of swine flu in North America could grow into a worldwide pandemic that deepens the global recession.
Last Updated: 10:26AM BST 27 Apr 2009
Fears over a virus that has already made hundreds ill, and possibly killed more than 100 in Mexico, led investors to buy drug makers and dump airlines such as Qantas Airways (-4pc) and Cathay Pacific (-9pc).
In Asia, investors are painfully aware of the toll an epidemic can exact on companies and industries after SARS battered regional economies from Hong Kong to Singapore in 2003.
The markets were still more cautious than panicked, analysts said, yet mindful that the disease could derail what many believe are the beginnings of a recovery in a global economy reeling from its worst downturn in years. With the markets up sharply since March, the disease could cause more selling should it continue to spread.
"Investors are already sitting nervously looking for excuse to sell off and what better than swine flu," said Miles Remington, head of Asian sales trading at BNP Paribas Securities in Hong Kong.
In Hong Kong, the Hang Seng fell 413.63, or 2.7pc, to 14,845.22. Korea's Kospi lost 13.36 points, or 1pc, to 1,340.07, while Japan, the Nikkei 225 stock average dropped in early trading before edging up 18.3 points - or 0.2pc - to 8726.
Elsewhere, Australia's index shed 0.5pc, Shanghai's benchmark dropped 1.2pc and Taiwan's stock measure plummeted 3.2pc.
The outbreak offset optimism on Wall Street on Friday over the US Federal Reserve's announcement that 19 major banks won't be allowed to fail — even if they fared poorly on the government's 'stress tests' of banking health.
The Dow rose 119.23, or 1.5pc, to 8,076.29, after rising by as many as 170 points.
Oil prices slipped in Asian trade as investors mulled comments from OPEC suggesting the price was too low for companies to justify new investments in crude production. Benchmark crude for June delivery fell $1.28 to $50.25. The contract jumped $1.93 to settle at $51.55 last week.
Related Articles
Drugs companies prepare for epidemic
GlaxoSmithKline leads pharmaceutical shares higher on swine flu outbreak
Mexico swine flu deaths raise fears of global epidemic
Asian shares mostly higher but caution lingers
British passengers screened for swine flu amid fears that disease has spread worldwide
Asian stock markets retreated on Monday as investors worried the outbreak of swine flu in North America could grow into a worldwide pandemic that deepens the global recession.
Last Updated: 10:26AM BST 27 Apr 2009
Fears over a virus that has already made hundreds ill, and possibly killed more than 100 in Mexico, led investors to buy drug makers and dump airlines such as Qantas Airways (-4pc) and Cathay Pacific (-9pc).
In Asia, investors are painfully aware of the toll an epidemic can exact on companies and industries after SARS battered regional economies from Hong Kong to Singapore in 2003.
The markets were still more cautious than panicked, analysts said, yet mindful that the disease could derail what many believe are the beginnings of a recovery in a global economy reeling from its worst downturn in years. With the markets up sharply since March, the disease could cause more selling should it continue to spread.
"Investors are already sitting nervously looking for excuse to sell off and what better than swine flu," said Miles Remington, head of Asian sales trading at BNP Paribas Securities in Hong Kong.
In Hong Kong, the Hang Seng fell 413.63, or 2.7pc, to 14,845.22. Korea's Kospi lost 13.36 points, or 1pc, to 1,340.07, while Japan, the Nikkei 225 stock average dropped in early trading before edging up 18.3 points - or 0.2pc - to 8726.
Elsewhere, Australia's index shed 0.5pc, Shanghai's benchmark dropped 1.2pc and Taiwan's stock measure plummeted 3.2pc.
The outbreak offset optimism on Wall Street on Friday over the US Federal Reserve's announcement that 19 major banks won't be allowed to fail — even if they fared poorly on the government's 'stress tests' of banking health.
The Dow rose 119.23, or 1.5pc, to 8,076.29, after rising by as many as 170 points.
Oil prices slipped in Asian trade as investors mulled comments from OPEC suggesting the price was too low for companies to justify new investments in crude production. Benchmark crude for June delivery fell $1.28 to $50.25. The contract jumped $1.93 to settle at $51.55 last week.
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'Nothing is an all-the-time good investment. Certainly not cash'
'Nothing is an all-the-time good investment. Certainly not cash'
People have been going back to risk and leaving the bomb shelters.
By James Bartholomew
Last Updated: 7:10AM BST 23 Apr 2009
I have to admit that I find the extreme ups and downs in the markets in recent months rather exciting. I am sorry that fortunes have been lost and people have suffered. I myself have lost a considerable amount.
But this has been exciting in a similar way, I imagine, as the view of London burning in the blitz was once thrilling for my mother when she recklessly went to the roof of Broadcasting House, where she was working, to have a look.
It is a jolly sight more fun, to be sure, when things are going well and they have certainly been a lot better since the rally started early last month.
I have had an extraordinary time with my shares in the pub-owning company, Enterprise Inns. Some readers may remember that 11 weeks ago, I wrote here, "I don't normally manage to lose money quite so quickly…"
I had bought shares in Enterprise at 69.75p. By the end of the week, they had halved. They reached a low of 32p.
Then they stabilised and eventually rose somewhat. But at the beginning of the week before last, I was still nursing a loss. Then, suddenly, whoosh! Up they went, leaping upward like a drug-enhanced mountain goat. A 15pc rise, then another 20pc. Out of the blue, I found myself in profit and still climbing.
The shares zoomed up to over 100p. They then fell back hard but got another lease of life. Having failed to buy more when they had been 32p, I found the courage to buy again when they were 93.5p.
There is human nature for you. As to whether this further purchase was wise, you can find out if you go to the business section of the main paper and look at the stock market prices under Travel and Leisure. They were trading at 117p on Monday.
The amazing downs and ups of Enterprise Inns reflect the abrupt return, since early March, of the appetite for risk. My defensive shares, such as Telecom Plus, a utility provider, have been shunned.
But shares that were heavily sold down because the companies are cyclical or heavily indebted, revived strongly. I also have shares in Tolent, a building company. It has performed like an investment Lazarus, leaving death's door at high speed.
Meanwhile, my investment in yen, through bonds, has done badly in the last couple of months. The yen has weakened precisely for the same reason as Enterprise Inns strengthened.
People have been going back to risk and leaving the bomb shelters. I have lightened my holdings in the yen, at least for the time being. This is because my view of what is going to happen in the economy and to investments has shifted a bit.
My rough idea, currently, of how things will pan out is this:
People have been going back to risk and leaving the bomb shelters.
By James Bartholomew
Last Updated: 7:10AM BST 23 Apr 2009
I have to admit that I find the extreme ups and downs in the markets in recent months rather exciting. I am sorry that fortunes have been lost and people have suffered. I myself have lost a considerable amount.
But this has been exciting in a similar way, I imagine, as the view of London burning in the blitz was once thrilling for my mother when she recklessly went to the roof of Broadcasting House, where she was working, to have a look.
It is a jolly sight more fun, to be sure, when things are going well and they have certainly been a lot better since the rally started early last month.
I have had an extraordinary time with my shares in the pub-owning company, Enterprise Inns. Some readers may remember that 11 weeks ago, I wrote here, "I don't normally manage to lose money quite so quickly…"
I had bought shares in Enterprise at 69.75p. By the end of the week, they had halved. They reached a low of 32p.
Then they stabilised and eventually rose somewhat. But at the beginning of the week before last, I was still nursing a loss. Then, suddenly, whoosh! Up they went, leaping upward like a drug-enhanced mountain goat. A 15pc rise, then another 20pc. Out of the blue, I found myself in profit and still climbing.
The shares zoomed up to over 100p. They then fell back hard but got another lease of life. Having failed to buy more when they had been 32p, I found the courage to buy again when they were 93.5p.
There is human nature for you. As to whether this further purchase was wise, you can find out if you go to the business section of the main paper and look at the stock market prices under Travel and Leisure. They were trading at 117p on Monday.
The amazing downs and ups of Enterprise Inns reflect the abrupt return, since early March, of the appetite for risk. My defensive shares, such as Telecom Plus, a utility provider, have been shunned.
But shares that were heavily sold down because the companies are cyclical or heavily indebted, revived strongly. I also have shares in Tolent, a building company. It has performed like an investment Lazarus, leaving death's door at high speed.
Meanwhile, my investment in yen, through bonds, has done badly in the last couple of months. The yen has weakened precisely for the same reason as Enterprise Inns strengthened.
People have been going back to risk and leaving the bomb shelters. I have lightened my holdings in the yen, at least for the time being. This is because my view of what is going to happen in the economy and to investments has shifted a bit.
My rough idea, currently, of how things will pan out is this:
- first, the "quantitative easing" will work in ending the economic decline. The stock market will respond positively and go higher.
- Second, after a lag, inflation will pick up strongly. This will cause a flight to gold and inflation index-linked government stocks (and perhaps the yen).
- Third, in response to the inflation, interest rates will rise which will hurt shares somewhat – though it is difficult to tell how much.
- And finally, when inflation seems to be coming down and interest rates fall back again, there will be big rises in shares and property.
This forecast could easily be partly or completely wrong. But even if this guess/forecast of the future is right, the timing is uncertain. How long will the lag be before inflation? How much will people anticipate it and buy gold beforehand? It is hard to predict.
I have already bought some gold in the form of units in an exchange traded fund, ETFS Physical Gold and I have bought some Treasury 2.5pc 2024 inflation index-linked stock. But, at the time of writing, they have done nothing.
Yes, there is a risk of hyper-inflation, but a rush for inflation-protection investments may not really get going until the danger is clear and present. In the meantime, I suspect that shares are the investments that may do best.
That is why I bought extra shares in Enterprise Inns. I have also increased my holding in Home Products, a Thai company that runs DIY stores.
Its latest results were surprisingly good and the shares have risen by a third in the last two months but even at the price I paid, 4.59 baht, the shares have a historic dividend yield of 7.5pc.
I had better add that, of course, I could be completely wrong. Many people think this is a bear market rally. We each must make our own judgements and arrange our investments accordingly.
But in these financially dangerous times, I believe that anyone with savings should be thinking hard about it. Nothing is an all-the-time good investment. Certainly not cash.
http://www.telegraph.co.uk/finance/personalfinance/investing/5202598/Nothing-is-an-all-the-time-good-investment.-Certainly-not-cash.html
Berkshire profit plunges 96% on stock market bets
Berkshire profit plunges 96% on stock market bets
Tags: Berkshire Buffett Omaha
Written by Bloomberg
Monday, 02 March 2009 10:32
NEW YORK: Warren Buffett’s Berkshire Hathaway Inc posted a fifth-straight profit drop, the longest streak of quarterly declines in at least 17 years, on losses from derivative bets tied to stock markets.
Fourth-quarter net income fell 96% to US$117 million (RM433 million), or US$76 a share, from US$2.95 billion, or US$1,904 a share, in the same period a year earlier, the Omaha, Nebraska-based firm said in its annual report. Book value per share, a measure of assets minus liabilities that Buffett highlights in his yearly letter to shareholders, slipped 9.6% for all of 2008, the worst performance since Buffett took control in 1965.
“The credit crisis, coupled with tumbling home and stock prices, had produced a paralysing fear that engulfed the country” at the end of 2008, Buffett in his letter to shareholders yesterday. “A freefall in business activity ensued, accelerating at a pace that I have never before witnessed.”
Berkshire, where Buffett serves as chairman, chief executive officer and head of investing, suffered as the benchmark Standard & Poor’s 500 Index turned in its worst year since 1937. Liabilities on derivatives linked to world equity markets widened by 49% to US$10 billion in the three months ended Dec 31, though the contracts don’t require Berkshire to pay out until at least 2019, if at all.
Berkshire shares have fallen 44% in the past year as the value of the firm’s top equity holdings dropped and losses increased on the derivatives. Nineteen of the top 20 stocks in Berkshire’s US portfolio declined last year.
Coca-Cola Co, Berkshire’s top holding, dropped 26%.American Express Co plunged 64%. Oil producer ConocoPhillips fell 41%, and Buffett said in his shareholder letter that he made a “major mistake” in buying shares when oil and gas prices were near their peak.
The decline in book value per share, a figure Buffett provides in a chart at the start of his annual report, still outperformed the S&P. Berkshire’s only other annual decrease in book value during Buffett’s tenure was a 6.2% drop in 2001; the company outperformed the S&P in 38 of the 44 years he’s run the firm. Book value has dropped by about US$8 billion this year, from US$109.3 billion on Dec 31, the report said.
“You can call it the worst year ever if you want, but the fact is, the results compared to the 30% to 50% declines in the world stock markets show just how defensive Berkshire is,” said Tom Russo, a partner at Gardner Russo & Gardner, whose largest holding is Berkshire shares. “In the face of the maelstrom, he did alright.”
In his “owner’s manual” for Berkshire shareholders, Buffett says he considers book value to be an objective substitute for the best, albeit subjective, measure of a firm’s success: a metric he calls intrinsic value. Buffett doesn’t provide a number for intrinsic value.
Net income fell 62% to US$4.99 billion for all of 2008, with storm claims from Hurricanes Ike and Gustav contributing to a decline at Berkshire’s insurance operations.
Industrywide, insurers faced US$25.2 billion in claims on natural disasters in 2008, the most since the record storm season of 2005, a trade group said last month.
Berkshire, which owns National Indemnity Co, General Re Corp and Geico Corp, said fourth-quarter profit from underwriting policies more than doubled to US$1.18 billion.
Pretax underwriting profit at Berkshire Hathaway Reinsurance Group jumped four-fold, in part because Buffett booked US$224 million after winning a bet with the state of Florida. Berkshire had pocketed the fee with the agreement that the company would buy bonds from the state if a hurricane forced the state to issue debt. No storms hit.
Profit from selling policies at car insurer Geico rose 18% to US$186 million before taxes as premium revenue increased. The unit added about 206,000 new policyholders in the quarter and 665,000 for the year.
Earnings from Berkshire’s energy and utilities unit, which includes MidAmerican Energy Holdings Co. and PacifiCorp, more than tripled to US$856 million in part from a breakup fee earned when Constellation Energy Group Inc backed out of a deal to be acquired by Berkshire.
Berkshire’s equity derivatives were sold to undisclosed buyers for US$4.85 billion as of Sept 30. The derivatives are tied to four indexes — the S&P, the UK’s FTSE 100 Index, the Dow Jones Euro Stoxx 50 Index and Japan’s Nikkei 225 Stock Average. The indexes would all have to fall to zero for Berkshire to be liable for the entire amount at risk, which was US$37.1 billion as of Dec 31 and can fluctuate with currency valuations. Buffett previously identified only the S&P.
Under the agreements, Berkshire must pay out if, on specific dates starting in 2019, the four benchmarks are below the point where they were when he made the agreements. Buffett, recognised as one of the world’s pre-eminent investors, gets to use the money in the interim. The liabilities on the derivatives are accounting losses that reflect the falling value of the stock indexes, not cash Berkshire has paid out.
“Derivatives are dangerous,” Buffett said in the annual letter.
“Our expectation, though it is far from a sure thing, is that we will do better than break even and that the substantial investment income we earn on the funds will be frosting on the cake.”
The worldwide recession and global contraction of the credit markets are giving Buffett, 78, opportunities to invest some of the firm’s cash hoard, which was about US$25.5 billion at yearend, down from US$33.4 billion three months earlier.
Berkshire agreed in the past six months to purchase preferred shares of General Electric Co. and Goldman Sachs Group Inc, and made deals to buy debt in firms including motorcycle-maker Harley-Davidson Inc, luxury jeweler Tiffany & Co and Sealed Air Corp, the maker of Bubble Wrap shipping products.
Berkshire is commanding yields as high as 15% at a time when potential rivals are no longer able to make such investments. In his letter, Buffett described the 10%yield on the Goldman and GE investments as “more than satisfactory”. — Bloomberg
Tags: Berkshire Buffett Omaha
Written by Bloomberg
Monday, 02 March 2009 10:32
NEW YORK: Warren Buffett’s Berkshire Hathaway Inc posted a fifth-straight profit drop, the longest streak of quarterly declines in at least 17 years, on losses from derivative bets tied to stock markets.
Fourth-quarter net income fell 96% to US$117 million (RM433 million), or US$76 a share, from US$2.95 billion, or US$1,904 a share, in the same period a year earlier, the Omaha, Nebraska-based firm said in its annual report. Book value per share, a measure of assets minus liabilities that Buffett highlights in his yearly letter to shareholders, slipped 9.6% for all of 2008, the worst performance since Buffett took control in 1965.
“The credit crisis, coupled with tumbling home and stock prices, had produced a paralysing fear that engulfed the country” at the end of 2008, Buffett in his letter to shareholders yesterday. “A freefall in business activity ensued, accelerating at a pace that I have never before witnessed.”
Berkshire, where Buffett serves as chairman, chief executive officer and head of investing, suffered as the benchmark Standard & Poor’s 500 Index turned in its worst year since 1937. Liabilities on derivatives linked to world equity markets widened by 49% to US$10 billion in the three months ended Dec 31, though the contracts don’t require Berkshire to pay out until at least 2019, if at all.
Berkshire shares have fallen 44% in the past year as the value of the firm’s top equity holdings dropped and losses increased on the derivatives. Nineteen of the top 20 stocks in Berkshire’s US portfolio declined last year.
Coca-Cola Co, Berkshire’s top holding, dropped 26%.American Express Co plunged 64%. Oil producer ConocoPhillips fell 41%, and Buffett said in his shareholder letter that he made a “major mistake” in buying shares when oil and gas prices were near their peak.
The decline in book value per share, a figure Buffett provides in a chart at the start of his annual report, still outperformed the S&P. Berkshire’s only other annual decrease in book value during Buffett’s tenure was a 6.2% drop in 2001; the company outperformed the S&P in 38 of the 44 years he’s run the firm. Book value has dropped by about US$8 billion this year, from US$109.3 billion on Dec 31, the report said.
“You can call it the worst year ever if you want, but the fact is, the results compared to the 30% to 50% declines in the world stock markets show just how defensive Berkshire is,” said Tom Russo, a partner at Gardner Russo & Gardner, whose largest holding is Berkshire shares. “In the face of the maelstrom, he did alright.”
In his “owner’s manual” for Berkshire shareholders, Buffett says he considers book value to be an objective substitute for the best, albeit subjective, measure of a firm’s success: a metric he calls intrinsic value. Buffett doesn’t provide a number for intrinsic value.
Net income fell 62% to US$4.99 billion for all of 2008, with storm claims from Hurricanes Ike and Gustav contributing to a decline at Berkshire’s insurance operations.
Industrywide, insurers faced US$25.2 billion in claims on natural disasters in 2008, the most since the record storm season of 2005, a trade group said last month.
Berkshire, which owns National Indemnity Co, General Re Corp and Geico Corp, said fourth-quarter profit from underwriting policies more than doubled to US$1.18 billion.
Pretax underwriting profit at Berkshire Hathaway Reinsurance Group jumped four-fold, in part because Buffett booked US$224 million after winning a bet with the state of Florida. Berkshire had pocketed the fee with the agreement that the company would buy bonds from the state if a hurricane forced the state to issue debt. No storms hit.
Profit from selling policies at car insurer Geico rose 18% to US$186 million before taxes as premium revenue increased. The unit added about 206,000 new policyholders in the quarter and 665,000 for the year.
Earnings from Berkshire’s energy and utilities unit, which includes MidAmerican Energy Holdings Co. and PacifiCorp, more than tripled to US$856 million in part from a breakup fee earned when Constellation Energy Group Inc backed out of a deal to be acquired by Berkshire.
Berkshire’s equity derivatives were sold to undisclosed buyers for US$4.85 billion as of Sept 30. The derivatives are tied to four indexes — the S&P, the UK’s FTSE 100 Index, the Dow Jones Euro Stoxx 50 Index and Japan’s Nikkei 225 Stock Average. The indexes would all have to fall to zero for Berkshire to be liable for the entire amount at risk, which was US$37.1 billion as of Dec 31 and can fluctuate with currency valuations. Buffett previously identified only the S&P.
Under the agreements, Berkshire must pay out if, on specific dates starting in 2019, the four benchmarks are below the point where they were when he made the agreements. Buffett, recognised as one of the world’s pre-eminent investors, gets to use the money in the interim. The liabilities on the derivatives are accounting losses that reflect the falling value of the stock indexes, not cash Berkshire has paid out.
“Derivatives are dangerous,” Buffett said in the annual letter.
“Our expectation, though it is far from a sure thing, is that we will do better than break even and that the substantial investment income we earn on the funds will be frosting on the cake.”
The worldwide recession and global contraction of the credit markets are giving Buffett, 78, opportunities to invest some of the firm’s cash hoard, which was about US$25.5 billion at yearend, down from US$33.4 billion three months earlier.
Berkshire agreed in the past six months to purchase preferred shares of General Electric Co. and Goldman Sachs Group Inc, and made deals to buy debt in firms including motorcycle-maker Harley-Davidson Inc, luxury jeweler Tiffany & Co and Sealed Air Corp, the maker of Bubble Wrap shipping products.
Berkshire is commanding yields as high as 15% at a time when potential rivals are no longer able to make such investments. In his letter, Buffett described the 10%yield on the Goldman and GE investments as “more than satisfactory”. — Bloomberg
Saturday 25 April 2009
The Ultimate Signal to Load Up on Stocks?
The Ultimate Signal to Load Up on Stocks?
By Brian Richards and Tim Hanson April 20, 2009 Comments (22)
Legendary fund manager Peter Lynch famously said that if investors spend 13 minutes thinking about the economy, they've wasted 10 minutes.
Granted, Lynch wasn't managing money during a mega-macroeconomic crisis of the sort we're facing today. Plus, Lynch was likely being funny and hyperbolic -- surely some thought to macroeconomic events is useful for investors. (Anyone thought about buying a bank stock lately?)
So when we read the other day that lipstick sales rose more than 4% in 2008, we nodded our heads. Here it was again: the leading lipstick indicator.
How lipstick explains the economy
The ... what?
The leading lipstick indicator, is a scientific measure of the sale of, well, lipstick. The theory goes as follows: When times are tough, women will purchase lipstick rather than purchasing new threads or splurging for a new necklace. During the Great Depression, lipstick sales reportedly rose 25%!
The term was introduced by Estee Lauder (NYSE: EL) Chairman Leonard Lauder, who created it with nothing more than years on the job and astute observation.
Of course, lipstick sales are a comically unreliable economic indicator and lipstick alone can't save Estee Lauder investors from a downturn in consumer discretionary spending. But the obvious absurdity of judging the state of the U.S. economy by sales of this single product should at least suggest that other market "indicators" that judge our economy by a single metric are equally dubious.
New home sales? New home starts? Jobless claims? Non-farm payroll numbers? Durable goods report? They all make for interesting morning segments on CNBC, but they're unreliable, subject to revision, and not worth much without loads and loads of context. That means they're nothing but obnoxious noise to the ears of long-term-focused investors.
Turning to Buffett -- who else?
So imagine our surprise when we read a Fortune piece a few weeks back with the following headline: "Buffett's Metric Says It's Time to Buy."
Would Warren Buffett -- the patron saint of fundamental-focused value investing -- really suggest broad market indicators are relevant to a buy decision?
As it turns out, it can be.
His signal looks at total stock market value compared to gross domestic product. In 2001, when the percentage was over 130%, Buffett said that "if the percentage falls to the 70% or 80% area, buying stocks is likely to work very well for you."
At the end of January, Fortune reported, the ratio was at 75%.
The ultimate signal to load up on stocks?
Not so fast. This is, after all, the same Warren Buffett who told Berkshire Hathaway shareholders that "We try to price, rather than time, purchases."
He went on to say:
In our view, it is folly to forego buying shares in an outstanding business whose long-term future is predictable, because of short-term worries about an economy or a stock market that we know to be unpredictable. Why scrap an informed decision because of an uninformed guess? ... We have usually made our best purchases when apprehensions about some macro event were at a peak. Fear is the foe of the faddist, but the friend of the fundamentalist.
In other words, it's foolish to abstain from buying because stocks in general appear "overheated," just as it's foolish to buy willy-nilly because stocks appear "cheap." Investing the Buffett way (which seems to have worked out pretty well for him) is about bottoms-up fundamental analysis with a focus on long-term competitive advantages.
Which brings us to an analogy
But look, it'd be daft to ignore the fact that it's better to go fishing at some times of the day than others and that that optimal time of day is determined by the weather and moon. If you go out at the wrong time with the best bait, your chances of hooking a fish are diminished; if you go out at the right time with nothing more than hook and a string, your chances are improved.
Similarly, in investing, you're more likely to earn great returns if you buy when stocks across the board are cheap than if you try to find the one or two bargains at a time when stocks across the board are expensive. And that's why some macroeconomic analysis can be useful: It tells you the best times to go fishing.
And today is one of those times. As we mentioned earlier, the market is broadly trading for just 75% of GDP, and on an individual level, many of the market's most impressive companies are trading at enormous discounts relative to their norms:
Company
Current P/E ..... 5-Year Average P/E
Google (Nasdaq: GOOG)
29.5 ..... 67.1
Johnson & Johnson (NYSE: JNJ)
11.6 ..... 17.8
Boeing (NYSE: BA)
10.5 ..... 20.9
Intuitive Surgical (Nasdaq: ISRG)
25.4 ..... 53.8
IBM (NYSE: IBM)
11.3 ..... 15.5
Disney (NYSE: DIS)
9.7 ..... 17.3
Data from Morningstar.
So, I buy those six stocks? Now, this doesn't mean that all of these stocks will beat the market from here on out, but it does mean that now is a great time to go fishing for top stocks in your portfolio.
Brian Richards does not own shares of any companies mentioned. Tim Hanson owns shares of Berkshire Hathaway. Google and Intuitive Surgical are Motley Fool Rule Breakers picks. Berkshire and Disney are Stock Advisor and Inside Value recommendations. Johnson & Johnson is an Income Investor selection. The Fool owns shares of Berkshire Hathaway. The Fool's disclosure policy says that if you're looking for fishing advice, try arkansasstripers.com -- but be careful when typing in the URL -- it learned the hard way and ended up having a talk with our IT department.
http://www.fool.com/investing/general/2009/04/20/the-ultimate-signal-to-load-up-on-stocks.aspx
By Brian Richards and Tim Hanson April 20, 2009 Comments (22)
Legendary fund manager Peter Lynch famously said that if investors spend 13 minutes thinking about the economy, they've wasted 10 minutes.
Granted, Lynch wasn't managing money during a mega-macroeconomic crisis of the sort we're facing today. Plus, Lynch was likely being funny and hyperbolic -- surely some thought to macroeconomic events is useful for investors. (Anyone thought about buying a bank stock lately?)
So when we read the other day that lipstick sales rose more than 4% in 2008, we nodded our heads. Here it was again: the leading lipstick indicator.
How lipstick explains the economy
The ... what?
The leading lipstick indicator, is a scientific measure of the sale of, well, lipstick. The theory goes as follows: When times are tough, women will purchase lipstick rather than purchasing new threads or splurging for a new necklace. During the Great Depression, lipstick sales reportedly rose 25%!
The term was introduced by Estee Lauder (NYSE: EL) Chairman Leonard Lauder, who created it with nothing more than years on the job and astute observation.
Of course, lipstick sales are a comically unreliable economic indicator and lipstick alone can't save Estee Lauder investors from a downturn in consumer discretionary spending. But the obvious absurdity of judging the state of the U.S. economy by sales of this single product should at least suggest that other market "indicators" that judge our economy by a single metric are equally dubious.
New home sales? New home starts? Jobless claims? Non-farm payroll numbers? Durable goods report? They all make for interesting morning segments on CNBC, but they're unreliable, subject to revision, and not worth much without loads and loads of context. That means they're nothing but obnoxious noise to the ears of long-term-focused investors.
Turning to Buffett -- who else?
So imagine our surprise when we read a Fortune piece a few weeks back with the following headline: "Buffett's Metric Says It's Time to Buy."
Would Warren Buffett -- the patron saint of fundamental-focused value investing -- really suggest broad market indicators are relevant to a buy decision?
As it turns out, it can be.
His signal looks at total stock market value compared to gross domestic product. In 2001, when the percentage was over 130%, Buffett said that "if the percentage falls to the 70% or 80% area, buying stocks is likely to work very well for you."
At the end of January, Fortune reported, the ratio was at 75%.
The ultimate signal to load up on stocks?
Not so fast. This is, after all, the same Warren Buffett who told Berkshire Hathaway shareholders that "We try to price, rather than time, purchases."
He went on to say:
In our view, it is folly to forego buying shares in an outstanding business whose long-term future is predictable, because of short-term worries about an economy or a stock market that we know to be unpredictable. Why scrap an informed decision because of an uninformed guess? ... We have usually made our best purchases when apprehensions about some macro event were at a peak. Fear is the foe of the faddist, but the friend of the fundamentalist.
In other words, it's foolish to abstain from buying because stocks in general appear "overheated," just as it's foolish to buy willy-nilly because stocks appear "cheap." Investing the Buffett way (which seems to have worked out pretty well for him) is about bottoms-up fundamental analysis with a focus on long-term competitive advantages.
Which brings us to an analogy
But look, it'd be daft to ignore the fact that it's better to go fishing at some times of the day than others and that that optimal time of day is determined by the weather and moon. If you go out at the wrong time with the best bait, your chances of hooking a fish are diminished; if you go out at the right time with nothing more than hook and a string, your chances are improved.
Similarly, in investing, you're more likely to earn great returns if you buy when stocks across the board are cheap than if you try to find the one or two bargains at a time when stocks across the board are expensive. And that's why some macroeconomic analysis can be useful: It tells you the best times to go fishing.
And today is one of those times. As we mentioned earlier, the market is broadly trading for just 75% of GDP, and on an individual level, many of the market's most impressive companies are trading at enormous discounts relative to their norms:
Company
Current P/E ..... 5-Year Average P/E
Google (Nasdaq: GOOG)
29.5 ..... 67.1
Johnson & Johnson (NYSE: JNJ)
11.6 ..... 17.8
Boeing (NYSE: BA)
10.5 ..... 20.9
Intuitive Surgical (Nasdaq: ISRG)
25.4 ..... 53.8
IBM (NYSE: IBM)
11.3 ..... 15.5
Disney (NYSE: DIS)
9.7 ..... 17.3
Data from Morningstar.
So, I buy those six stocks? Now, this doesn't mean that all of these stocks will beat the market from here on out, but it does mean that now is a great time to go fishing for top stocks in your portfolio.
Brian Richards does not own shares of any companies mentioned. Tim Hanson owns shares of Berkshire Hathaway. Google and Intuitive Surgical are Motley Fool Rule Breakers picks. Berkshire and Disney are Stock Advisor and Inside Value recommendations. Johnson & Johnson is an Income Investor selection. The Fool owns shares of Berkshire Hathaway. The Fool's disclosure policy says that if you're looking for fishing advice, try arkansasstripers.com -- but be careful when typing in the URL -- it learned the hard way and ended up having a talk with our IT department.
http://www.fool.com/investing/general/2009/04/20/the-ultimate-signal-to-load-up-on-stocks.aspx
Quality check to weed out company with an insatiable demand for capital.
Quality check to weed out company with an insatiable demand for capital.
Benjamin Graham and followers placed great emphasis on financial strength, liquidity, debt coverage and so on. It was the tune of the times.
Credit analysis today continue to check all manner of coverage (e.g. interest coverage) and debt ratios, but for most companies reporting a profit, it maybe overkill.
Here are a few checks to provide a margin of safety and a further test of whether the company has an insatiable demand for capital:
1. Are current assets (besides cash) rising faster than the business is growing?
This ties to the asset productivity and turnover measures but it is worth one last check to see whether a company is buying business by extending too much credit.
More receivables result from extending credit.
Losing channel structure and supply chain battles (customers and distributors won't carry inventory; suppliers are making them carry more inventory) result in increased inventories.
In a soft construction environment, distributors and retailers like Home Depot and Lowe's simply aren't taking as much inventory, pushing it back up the supply chain. The main supplier's risk is greater capital requirements and expensive impairments downstream.
2. Is debt growing faster than the business growth?
Over a sustained period, debt rising faster than business growth is a problem.
If the owners won't kick in to grow the business, and if retained earnings aren't sufficient to meet growth, what does that tell you? The business is forced to seek capital.
3. Repeated trips to the financial markets?
If the business continually has to approach the capital markets (other than in startup phases), that again is a sign that internally generated earnings and cash flows are not sufficient.
Once in a while it is okay, but again one is looking to weed out chronic capital consumers.
Benjamin Graham and followers placed great emphasis on financial strength, liquidity, debt coverage and so on. It was the tune of the times.
Credit analysis today continue to check all manner of coverage (e.g. interest coverage) and debt ratios, but for most companies reporting a profit, it maybe overkill.
Here are a few checks to provide a margin of safety and a further test of whether the company has an insatiable demand for capital:
1. Are current assets (besides cash) rising faster than the business is growing?
This ties to the asset productivity and turnover measures but it is worth one last check to see whether a company is buying business by extending too much credit.
More receivables result from extending credit.
Losing channel structure and supply chain battles (customers and distributors won't carry inventory; suppliers are making them carry more inventory) result in increased inventories.
In a soft construction environment, distributors and retailers like Home Depot and Lowe's simply aren't taking as much inventory, pushing it back up the supply chain. The main supplier's risk is greater capital requirements and expensive impairments downstream.
2. Is debt growing faster than the business growth?
Over a sustained period, debt rising faster than business growth is a problem.
If the owners won't kick in to grow the business, and if retained earnings aren't sufficient to meet growth, what does that tell you? The business is forced to seek capital.
3. Repeated trips to the financial markets?
If the business continually has to approach the capital markets (other than in startup phases), that again is a sign that internally generated earnings and cash flows are not sufficient.
Once in a while it is okay, but again one is looking to weed out chronic capital consumers.
Two important things in the capital structure of the business
Capital Structure
When looking at capital structure, try to determine two things:
1. Is the business a consumer or producer of capital? Does it constantly require capital infusions to build growth or replace assets? Warren Buffett - and many other value investors - shun businesses that cannot generate sufficient capital on their own. In fact, one of the guiding principles behind Berkshire Hathaway is the generation of excess capital by subsidiary businesses that can be deployed elsewhere.
2. Is the business properly leveraged? Overleveraged businesses are at risk and additionally burden earnings with interest payments. Under-leveraged businesses, while better than overleveraged, may not be maximizing potential returns to shareholders.
When looking at capital structure, try to determine two things:
1. Is the business a consumer or producer of capital? Does it constantly require capital infusions to build growth or replace assets? Warren Buffett - and many other value investors - shun businesses that cannot generate sufficient capital on their own. In fact, one of the guiding principles behind Berkshire Hathaway is the generation of excess capital by subsidiary businesses that can be deployed elsewhere.
2. Is the business properly leveraged? Overleveraged businesses are at risk and additionally burden earnings with interest payments. Under-leveraged businesses, while better than overleveraged, may not be maximizing potential returns to shareholders.
Buy low, improve your chances
Buy low, improve your chances
Value investors buy cheap. Why? Two reasons:
1. Provide a margin of safety.
2. Allow for proportionally better returns on dollars invested.
The most common investing mistake is throwing good money after bad. (This refers to buying a lousy company.)
The second most common investing mistake is finding and buying a great company (with growth, intrinsic value, supporting fundamentals, and intangibles all there), but paying too much for it.
Paying too much simultaneously creates downside vulnerability and limits upside potential.
The mathematics of underperformance should be reason enough to buy cheap and provide oneself with that safety margin.
Value investors buy cheap. Why? Two reasons:
1. Provide a margin of safety.
2. Allow for proportionally better returns on dollars invested.
The most common investing mistake is throwing good money after bad. (This refers to buying a lousy company.)
The second most common investing mistake is finding and buying a great company (with growth, intrinsic value, supporting fundamentals, and intangibles all there), but paying too much for it.
Paying too much simultaneously creates downside vulnerability and limits upside potential.
The mathematics of underperformance should be reason enough to buy cheap and provide oneself with that safety margin.
Deja Vu: 5 "New" Rules For Safe Investing
Deja Vu: 5 "New" Rules For Safe Investing
by James E. McWhinney (Contact Author Biography)
Investors were hammered by massive declines as a recession swept the globe in 2008 and 2009. In the midst of the chaos, experts began calling many decades-old investment practices into question.
Is it time to try a new approach?
Let's take a look at five trusted investment strategies to examine whether they still hold up in a post-credit crisis. (For background reading, see Recession-Proof Your Portfolio.)
1. Buy and Hold
By 2009, the global economic malaise had erased a decade's worth of gains. Buying and holding turned out to be a one-way ticket to massive losses. From 2007 to 2008, many investors who followed this strategy saw their investments lose at least 50%. So does a down market mean that buy and hold is done and gone? The answer is "no". In fact, history has repeatedly proved the market's ability to recover. The markets came back after the bear market of 2000-2002. They came back after the bear market of 1990, and the crash of 1987. The markets even came back after the Great Depression, just as they have after every market downturn in history, regardless of its severity. (To learn more, read A Review Of Past Recessions.)
Assuming you have a solid portfolio, waiting for recovery can be well worth your time. A down market may even present an excellent opportunity to add holdings to your positions, and accelerate your recovery through dollar-cost averaging. (For more insight, see DCA: It Gets You In At The Bottom.)
2. Know Your Risk Appetite
The aftermath of a recession is a good time to reevaluate your appetite for risk. Ask yourself this: When the markets crashed, did you buy, hold or sell your stocks and lock in losses? Your behavior says more about your tolerance for risk than any "advice" you received from that risk quiz you took when you enrolled in your 401(k) plan at work. (For more insight, see Risk Tolerance Only Tells Half The Story.)
Once you're over the shock of the market decline, it's time to assess the damage, take at look what you have left, and figure out how long you will need to continue investing to achieve your goals. Is it time to take on more risk to make up for lost ground? Or should you rethink your goals?
3. Diversify
Diversification failed in 2008 as stock markets around the world swooned. Hedge funds and commodities tumbled too. Bond markets didn't fare much better as only U.S. Treasuries and cash offered shelter. Even real estate declined. Diversification is dead … or is it? While markets generally moved in one direction, they didn't all make moves of similar magnitude. So, while a diversified portfolio may not have staved off losses altogether, it could have helped reduce the damage. (For more insight, see The Importance Of Diversification.)
Fixed annuities, on the other hand, had their day in the sun in 2009 - after all, a 3% guarantee sure beat holding a portfolio that fell by half. Holding a bit of cash, a few certificates of deposit or a fixed annuity can help take the traditional strategic asset allocation diversification models a step further.
4. Know When to Sell
Indefinite growth is not a realistic expectation, yet investors often expect rising stocks to gain forever. Putting a price on the upside and the downside can provide solid guidelines for getting out while the getting is good. Similarly, if a company or an industry appears to be headed for trouble, it may be time to take your gains off of the table. There's no harm in walking away when you are ahead of the game. (To learn more about when to get out of a stock, see To Sell Or Not To Sell.)
5. Use Caution When Using Leverage
The events that occurred following the subprime mortgage meltdown in 2007 had many investors running from the use of leverage. As the banks learned, making massive financial bets with money you don't have, buying and selling complex investments that you don't fully understand and making loans to people who can't afford to repay them are bad ideas. (For background reading, check out The Fuel That Fed The Subprime Meltdown.)
On the other hand, leverage isn't all bad if it's used to maximize returns, while avoiding potentially catastrophic losses. This is where options come into the picture. If used wisely as a hedging strategy and not as speculation, options can provide protection. (For more on this strategy, see Reducing Risk With Options.)
Everything Old Is New Again
In hindsight, not one of these concepts is new. They just make a lot more sense now that they've been put in a real-world context. In the early stages of the 2008-2009 U.S. economic downturn, experts argued that the Europe and Asia were "decoupled" from America and that the rest of the world could continue to grow while the U.S. shrank. They were wrong. When America sneezed, the rest of the world got the flu, just like always.
Now think back to the dotcom bubble of the late 1990s, when the pundits argued that technology offered unlimited promise and that companies like America Online (AOL) were the wave of the future, even when many of these companies had no profits and no hope of generating any, but still traded at hundreds of times their cash flows. When the bubble burst and the dust settled, nothing had changed. The markets worked the same way they always had.
It's Different This Time – Or Is It?
In 2009, the global economy fell into recession and international markets fell in lockstep. Diversification couldn't provide adequate downside protection. Once again, the "experts" proclaim that the old rules of investing have failed. "It's different this time," they say. Maybe … but don't bet on it. These tried and true principles of wealth creation have withstood the test of time.
by James E. McWhinney, (Contact Author Biography)
James McWhinney has been a professional writer for nearly two decades. He has worked for many of the nation's top mutual fund providers and banks in addition to numerous magazines, websites and other publications. He specializes in financial services and travel.
by James E. McWhinney (Contact Author Biography)
Investors were hammered by massive declines as a recession swept the globe in 2008 and 2009. In the midst of the chaos, experts began calling many decades-old investment practices into question.
Is it time to try a new approach?
Let's take a look at five trusted investment strategies to examine whether they still hold up in a post-credit crisis. (For background reading, see Recession-Proof Your Portfolio.)
1. Buy and Hold
By 2009, the global economic malaise had erased a decade's worth of gains. Buying and holding turned out to be a one-way ticket to massive losses. From 2007 to 2008, many investors who followed this strategy saw their investments lose at least 50%. So does a down market mean that buy and hold is done and gone? The answer is "no". In fact, history has repeatedly proved the market's ability to recover. The markets came back after the bear market of 2000-2002. They came back after the bear market of 1990, and the crash of 1987. The markets even came back after the Great Depression, just as they have after every market downturn in history, regardless of its severity. (To learn more, read A Review Of Past Recessions.)
Assuming you have a solid portfolio, waiting for recovery can be well worth your time. A down market may even present an excellent opportunity to add holdings to your positions, and accelerate your recovery through dollar-cost averaging. (For more insight, see DCA: It Gets You In At The Bottom.)
2. Know Your Risk Appetite
The aftermath of a recession is a good time to reevaluate your appetite for risk. Ask yourself this: When the markets crashed, did you buy, hold or sell your stocks and lock in losses? Your behavior says more about your tolerance for risk than any "advice" you received from that risk quiz you took when you enrolled in your 401(k) plan at work. (For more insight, see Risk Tolerance Only Tells Half The Story.)
Once you're over the shock of the market decline, it's time to assess the damage, take at look what you have left, and figure out how long you will need to continue investing to achieve your goals. Is it time to take on more risk to make up for lost ground? Or should you rethink your goals?
3. Diversify
Diversification failed in 2008 as stock markets around the world swooned. Hedge funds and commodities tumbled too. Bond markets didn't fare much better as only U.S. Treasuries and cash offered shelter. Even real estate declined. Diversification is dead … or is it? While markets generally moved in one direction, they didn't all make moves of similar magnitude. So, while a diversified portfolio may not have staved off losses altogether, it could have helped reduce the damage. (For more insight, see The Importance Of Diversification.)
Fixed annuities, on the other hand, had their day in the sun in 2009 - after all, a 3% guarantee sure beat holding a portfolio that fell by half. Holding a bit of cash, a few certificates of deposit or a fixed annuity can help take the traditional strategic asset allocation diversification models a step further.
4. Know When to Sell
Indefinite growth is not a realistic expectation, yet investors often expect rising stocks to gain forever. Putting a price on the upside and the downside can provide solid guidelines for getting out while the getting is good. Similarly, if a company or an industry appears to be headed for trouble, it may be time to take your gains off of the table. There's no harm in walking away when you are ahead of the game. (To learn more about when to get out of a stock, see To Sell Or Not To Sell.)
5. Use Caution When Using Leverage
The events that occurred following the subprime mortgage meltdown in 2007 had many investors running from the use of leverage. As the banks learned, making massive financial bets with money you don't have, buying and selling complex investments that you don't fully understand and making loans to people who can't afford to repay them are bad ideas. (For background reading, check out The Fuel That Fed The Subprime Meltdown.)
On the other hand, leverage isn't all bad if it's used to maximize returns, while avoiding potentially catastrophic losses. This is where options come into the picture. If used wisely as a hedging strategy and not as speculation, options can provide protection. (For more on this strategy, see Reducing Risk With Options.)
Everything Old Is New Again
In hindsight, not one of these concepts is new. They just make a lot more sense now that they've been put in a real-world context. In the early stages of the 2008-2009 U.S. economic downturn, experts argued that the Europe and Asia were "decoupled" from America and that the rest of the world could continue to grow while the U.S. shrank. They were wrong. When America sneezed, the rest of the world got the flu, just like always.
Now think back to the dotcom bubble of the late 1990s, when the pundits argued that technology offered unlimited promise and that companies like America Online (AOL) were the wave of the future, even when many of these companies had no profits and no hope of generating any, but still traded at hundreds of times their cash flows. When the bubble burst and the dust settled, nothing had changed. The markets worked the same way they always had.
It's Different This Time – Or Is It?
In 2009, the global economy fell into recession and international markets fell in lockstep. Diversification couldn't provide adequate downside protection. Once again, the "experts" proclaim that the old rules of investing have failed. "It's different this time," they say. Maybe … but don't bet on it. These tried and true principles of wealth creation have withstood the test of time.
by James E. McWhinney, (Contact Author Biography)
James McWhinney has been a professional writer for nearly two decades. He has worked for many of the nation's top mutual fund providers and banks in addition to numerous magazines, websites and other publications. He specializes in financial services and travel.
Book Value: Theory Vs. Reality
Book Value: Theory Vs. Reality
by Andrew Beattie (Contact Author Biography)
Earnings, debt and assets are the building blocks of any public company's financial statements. For the purpose of disclosure, companies break these three elements into more refined figures for investors to examine. Investors can calculate valuation ratios from these to make it easier to compare companies. Among these, the book value and the price-to-book ratio (P/B ratio) are staples for value investors. But does book value deserve all the fanfare? Read on to find out.
What Is Book Value?
Book value is a measure of all of a company's assets: stocks, bonds, inventory, manufacturing equipment, real estate, etc. In theory, book value should include everything down to the pencils and staples used by employees, but for simplicity's sake companies generally only include large assets that are easily quantified. (For more information, check out Value By The Book.)
Companies with lots of machinery, like railroads, or lots of financial instruments, like banks, tend to have large book values. In contrast, video game companies, fashion designers or trading firms may have little or no book value because they are only as good as the people who work there.
Book value is not very useful in the latter case, but for companies with solid assets it's often the No.1 figure for investors.
A simple calculation dividing the company's current stock price by its stated book value per share gives you the P/B ratio. If a P/B ratio is less than one, the shares are selling for less than the value of the company's assets assets. This means that, in the worst-case scenario of bankruptcy, the company's assets will be sold off and the investor will still make a profit. Failing bankruptcy, other investors would ideally see that the book value was worth more than the stock and also buy in, pushing the price up to match the book value. That said, this approach has many flaws that can trap a careless investor.
Value Play or Value Trap?
If it's obvious that a company is trading for less than its book value, you have to ask yourself why other investors haven't noticed and pushed the price back to book value or even higher. The P/B ratio is an easy calculation, and it's published in stock summaries on any major stock research website. The answer could be that the market is unfairly battering the company, but it's equally probable that the stated book value does not represent the real value of the assets. Companies account for their assets in different ways in different industries, and sometimes even within the same industry. This muddles book value, creating as many value traps as value opportunities. (Find out how to avoid getting sucked in by a deceiving bargain stock in Value Traps: Bargain Hunters Beware!)
Deceptive Depreciation
You need to know how aggressively a company has been depreciating its assets. This involves going back through several years of financial statements. If quality assets have been depreciated faster than the drop in their true market value, you've found a hidden value that may help hold up the stock price in the future. If assets are being depreciated slower than the drop in market value, then the book value will be above the true value, creating a value trap for investors who only glance at the P/B ratio. (Appreciate the different methods used to describe how book value is "used up"; read Valuing Depreciation With Straight-Line Or Double-Declining Methods.)
Manufacturing companies offer a good example of how depreciation can affect book value. These companies have to pay huge amounts of money for their equipment, but the resale value for equipment usually goes down faster than a company is required to depreciate it under accounting rules. As the equipment becomes outdated, it moves closer to being worthless. With book value, it doesn't matter what companies paid for the equipment - it matters what they can sell it for. If the book value is based largely on equipment rather than something that doesn't rapidly depreciate (oil, land, etc), it's vital that you look beyond the ratio and into the components. Even when the assets are financial in nature and not prone to depreciation manipulation, the mark-to-market (MTM) rules can lead to overstated book values in bull markets and understated values in bear markets. (Read more about this accounting rule in Mark-To-Market Mayhem.)
Loans, Liens and Lies
An investor looking to make a book value play has to be aware of any claims on the assets, especially if the company is a bankruptcy candidate. Usually, links between assets and debts are clear, but this information can sometimes be played down or hidden in the footnotes. Like a person securing a car loan using his house as collateral, a company might use valuable assets to secure loans when it is struggling financially. In this case, the value of the assets should be reduced by the size of any secured loans tied to them. This is especially important in bankruptcy candidates because the book value may be the only thing going for the company, so you can't expect strong earnings to bail out the stock price when the book value turns out to be inflated. (Footnotes to the financial statements contain very important information, but reading them takes skill. Check out An Investor's Checklist To Financial Footnotes for more insight.)
Huge, Old and Ugly
Critics of book value are quick to point out that finding genuine book value plays has become difficult in the heavily analyzed U.S. stock market. Oddly enough, this has been a constant refrain heard since the 1950s, yet value investors still continue to find book value plays. The companies that have hidden values share some characteristics:
Cashing In
Even if you've found a company that has true hidden value without any claims on it, you have to wait for the market to come to the same conclusion before you can sell for a profit. Corporate raiders or activist shareholders with large holdings can speed up the process, but an investor can't always depend on inside help. For this reason, buying purely on book value can actually result in a loss - even when you're right. If a company is selling 15% below book value, but it takes several years for the price to catch up, then you might have been better off with a 5% bond. The lower-risk bond would have similar results over the same period of time. Ideally, the price difference will be noticed much more quickly, but there is too much uncertainty in guessing the time it will take the market to realize a book value mistake, and that has to be factored in as a risk. (Learn more in Could Your Company Be A Target For Activist Investors? Or read about activist shareholder Carl Icahn in Can You Invest Like Carl Icahn?)
The Good News
Book value shopping is no easier than other types of investing, it just involves a different type of research. The best strategy is to make book value one part of what you look for. You shouldn't judge a book by its cover and you shouldn't judge a company by the cover it puts on its book value. In theory, a low price-to-book-value ratio means you have a cushion against poor performance. In practice it is much less certain. Outdated equipment may still add to book value, whereas appreciation in property may not be included. If you are going to invest based on book value, you have to find out the real state of those assets.
That said, looking deeper into book value will give you a better understanding of the company. In some cases, a company will use excess earnings to update equipment rather than pay out dividends or expand operations. While this dip in earnings may drop the value of the company in the short term, it creates long-term book value because the company's equipment is worth more and the costs have already been discounted. On the other hand, if a company with outdated equipment has consistently put off repairs, those repairs will eat into profits at some future date. This tells you something about book value as well as the character of the company and its management. You won't get this information from the P/B ratio, but it is one of the main benefits from digging into book value numbers, and is well worth the time. (For more information, check out Investment Valuation Ratios: Price/Book Value Ratio.)
by Andrew Beattie, (Contact Author Biography)
Andrew Beattie is a freelance writer and self-educated investor. He worked for Investopedia as an editor and staff writer before moving to Japan in 2003. Andrew still lives in Japan with his wife, Rie. Since leaving Investopedia, he has continued to study and write about the financial world's tics and charms. Although his interests have been necessarily broad while learning and writing at the same time, perennial favorites include economic history, index funds, Warren Buffett and personal finance. He may also be the only financial writer who can claim to have read "The Encyclopedia of Business and Finance" cover to cover.
http://www.investopedia.com/articles/fundamental-analysis/09/book-value-basics.asp
Also read: Nets and net net
by Andrew Beattie (Contact Author Biography)
Earnings, debt and assets are the building blocks of any public company's financial statements. For the purpose of disclosure, companies break these three elements into more refined figures for investors to examine. Investors can calculate valuation ratios from these to make it easier to compare companies. Among these, the book value and the price-to-book ratio (P/B ratio) are staples for value investors. But does book value deserve all the fanfare? Read on to find out.
What Is Book Value?
Book value is a measure of all of a company's assets: stocks, bonds, inventory, manufacturing equipment, real estate, etc. In theory, book value should include everything down to the pencils and staples used by employees, but for simplicity's sake companies generally only include large assets that are easily quantified. (For more information, check out Value By The Book.)
Companies with lots of machinery, like railroads, or lots of financial instruments, like banks, tend to have large book values. In contrast, video game companies, fashion designers or trading firms may have little or no book value because they are only as good as the people who work there.
Book value is not very useful in the latter case, but for companies with solid assets it's often the No.1 figure for investors.
A simple calculation dividing the company's current stock price by its stated book value per share gives you the P/B ratio. If a P/B ratio is less than one, the shares are selling for less than the value of the company's assets assets. This means that, in the worst-case scenario of bankruptcy, the company's assets will be sold off and the investor will still make a profit. Failing bankruptcy, other investors would ideally see that the book value was worth more than the stock and also buy in, pushing the price up to match the book value. That said, this approach has many flaws that can trap a careless investor.
Value Play or Value Trap?
If it's obvious that a company is trading for less than its book value, you have to ask yourself why other investors haven't noticed and pushed the price back to book value or even higher. The P/B ratio is an easy calculation, and it's published in stock summaries on any major stock research website. The answer could be that the market is unfairly battering the company, but it's equally probable that the stated book value does not represent the real value of the assets. Companies account for their assets in different ways in different industries, and sometimes even within the same industry. This muddles book value, creating as many value traps as value opportunities. (Find out how to avoid getting sucked in by a deceiving bargain stock in Value Traps: Bargain Hunters Beware!)
Deceptive Depreciation
You need to know how aggressively a company has been depreciating its assets. This involves going back through several years of financial statements. If quality assets have been depreciated faster than the drop in their true market value, you've found a hidden value that may help hold up the stock price in the future. If assets are being depreciated slower than the drop in market value, then the book value will be above the true value, creating a value trap for investors who only glance at the P/B ratio. (Appreciate the different methods used to describe how book value is "used up"; read Valuing Depreciation With Straight-Line Or Double-Declining Methods.)
Manufacturing companies offer a good example of how depreciation can affect book value. These companies have to pay huge amounts of money for their equipment, but the resale value for equipment usually goes down faster than a company is required to depreciate it under accounting rules. As the equipment becomes outdated, it moves closer to being worthless. With book value, it doesn't matter what companies paid for the equipment - it matters what they can sell it for. If the book value is based largely on equipment rather than something that doesn't rapidly depreciate (oil, land, etc), it's vital that you look beyond the ratio and into the components. Even when the assets are financial in nature and not prone to depreciation manipulation, the mark-to-market (MTM) rules can lead to overstated book values in bull markets and understated values in bear markets. (Read more about this accounting rule in Mark-To-Market Mayhem.)
Loans, Liens and Lies
An investor looking to make a book value play has to be aware of any claims on the assets, especially if the company is a bankruptcy candidate. Usually, links between assets and debts are clear, but this information can sometimes be played down or hidden in the footnotes. Like a person securing a car loan using his house as collateral, a company might use valuable assets to secure loans when it is struggling financially. In this case, the value of the assets should be reduced by the size of any secured loans tied to them. This is especially important in bankruptcy candidates because the book value may be the only thing going for the company, so you can't expect strong earnings to bail out the stock price when the book value turns out to be inflated. (Footnotes to the financial statements contain very important information, but reading them takes skill. Check out An Investor's Checklist To Financial Footnotes for more insight.)
Huge, Old and Ugly
Critics of book value are quick to point out that finding genuine book value plays has become difficult in the heavily analyzed U.S. stock market. Oddly enough, this has been a constant refrain heard since the 1950s, yet value investors still continue to find book value plays. The companies that have hidden values share some characteristics:
- They are old. Old companies have usually had enough time for assets like real estate to appreciate substantially.
- They are big. Big companies with international operations, and thus with international assets, can create book value through growth in overseas land prices or other foreign assets.
- They are ugly. A third class of book value buys are the ugly companies that do something dirty or boring. The value of wood, gravel and oil go up with inflation, but many investors overlook these asset plays because the companies don't have the dazzle and flash of growth stocks.
Cashing In
Even if you've found a company that has true hidden value without any claims on it, you have to wait for the market to come to the same conclusion before you can sell for a profit. Corporate raiders or activist shareholders with large holdings can speed up the process, but an investor can't always depend on inside help. For this reason, buying purely on book value can actually result in a loss - even when you're right. If a company is selling 15% below book value, but it takes several years for the price to catch up, then you might have been better off with a 5% bond. The lower-risk bond would have similar results over the same period of time. Ideally, the price difference will be noticed much more quickly, but there is too much uncertainty in guessing the time it will take the market to realize a book value mistake, and that has to be factored in as a risk. (Learn more in Could Your Company Be A Target For Activist Investors? Or read about activist shareholder Carl Icahn in Can You Invest Like Carl Icahn?)
The Good News
Book value shopping is no easier than other types of investing, it just involves a different type of research. The best strategy is to make book value one part of what you look for. You shouldn't judge a book by its cover and you shouldn't judge a company by the cover it puts on its book value. In theory, a low price-to-book-value ratio means you have a cushion against poor performance. In practice it is much less certain. Outdated equipment may still add to book value, whereas appreciation in property may not be included. If you are going to invest based on book value, you have to find out the real state of those assets.
That said, looking deeper into book value will give you a better understanding of the company. In some cases, a company will use excess earnings to update equipment rather than pay out dividends or expand operations. While this dip in earnings may drop the value of the company in the short term, it creates long-term book value because the company's equipment is worth more and the costs have already been discounted. On the other hand, if a company with outdated equipment has consistently put off repairs, those repairs will eat into profits at some future date. This tells you something about book value as well as the character of the company and its management. You won't get this information from the P/B ratio, but it is one of the main benefits from digging into book value numbers, and is well worth the time. (For more information, check out Investment Valuation Ratios: Price/Book Value Ratio.)
by Andrew Beattie, (Contact Author Biography)
Andrew Beattie is a freelance writer and self-educated investor. He worked for Investopedia as an editor and staff writer before moving to Japan in 2003. Andrew still lives in Japan with his wife, Rie. Since leaving Investopedia, he has continued to study and write about the financial world's tics and charms. Although his interests have been necessarily broad while learning and writing at the same time, perennial favorites include economic history, index funds, Warren Buffett and personal finance. He may also be the only financial writer who can claim to have read "The Encyclopedia of Business and Finance" cover to cover.
http://www.investopedia.com/articles/fundamental-analysis/09/book-value-basics.asp
Also read: Nets and net net
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