Diary of a private investor: 'The bears have taken the wrong course'
Right now, the same pundits who were wrong six months ago are continuing to offer bearish opinions.
By James Bartholemew
Published: 9:09AM BST 21 Oct 2009
THERE are, I suppose, some people who have never heard of Tom Watson, rather like there are those who have never heard of President Kennedy or Marilyn Monroe.
For those to whom the name means nothing, let me give a brief introduction. He is one of the greatest golfers ever to have walked onto a tee.
He won the Open five times and three other majors. Even more remarkable, this year he came back to Britain at the age of 59, when virtually no golfer is competitive at the highest level, and nearly won the Open again.
He had the equal lowest score and was only beaten in a play-off. What technique!
Deeply impressed by that last thought, I bought one of his old books – published in 1992 – to try to improve my unreliable swing.
The dust-jacket proclaimed, obviously with the expectation that readers would be dazzled, that his career winnings had amounted to over $5million (about £3million).
What struck me about this sum – given his huge success – was how relatively small it was. Admittedly prize money and sponsorship deals have increased. But the value of what was considered a fortune at the time has been destroyed by inflation.
What did he do with his winnings? Did he invest them in shares and property or did he put them in a deposit account at a bank? I don't know, but if he did the latter, the real value has been squished (as my daughter would say). If he invested it, he will have remained a very wealthy man.
He had a key decision in his life. Having achieved fabulous success in the Seventies and Eighties, would he let the fruits fade as he got older?
Being American – share investment is much more normal there – he probably did the right thing. But I have met several intelligent, well-educated people in recent years who seem to have no idea what is at stake.
You can have a wonderfully successful career or a hugely profitable divorce, but the value can be whittled away. You have to get two things right; not just one. You have to make the money and then keep its real value; that is, its purchasing power.
You may say that inflation is yesterday's story. True, it is a fraction of what it used to be. But you need remarkable trust in British governments to be completely confident that it won't come back.
And even if inflation were to stay at a mere 2.5pc a year, the value of your cash would halve over 28 years. Cash is not safe. Inflation means it is a slow crushing of your wealth.
All of which brings me to one of the most remarkable things about this astonishing year in investment.
The massive rise in the stock market and the abrupt recovery in the housing market in certain areas of Britain – particularly London – have been achieved in the face of almost total opposition from pundits in newspapers and financial circles.
Your Money has been a notable exception to that consensus view, but I don't think I have lived through a bull market which took place in the face of such an overwhelming opinion that it would not happen.
Even back in the dark days of 1974, opinion moved in favour of a bull market so fast that I remember that call options – a way of betting on a market rise – became phenomenally expensive.
Right now, the same pundits who were wrong six months ago are continuing to offer bearish opinions.
There are a few who occasionally mention something along the lines of "the short term market strength has been surprising but the fundamental problems remain the same and could lead to major downturn anytime soon".
But most of them seem unabashed. They do not apologise for getting it wrong. It is almost as though some of them live in a parallel world where they remain, in some magical sense, right despite the fact that the market has not – for the time being – done as instructed.
They turn a blind eye to the fact that thousands of people are influenced by them and have, as a consequence, missed out on a major bull run.
There is one financial newspaper – which I worked for years ago – which I cannot remember recommending buying shares at any time over the past 35 years.
My guess is that it has always thought it would look knowing and sophisticated by casting doubt on their prospects. But this has not been clever at all. It has put false sophistication above good advice.
http://www.telegraph.co.uk/finance/personalfinance/investing/6394158/Diary-of-a-private-investor-The-bears-have-taken-the-wrong-course.html
Wednesday 21 October 2009
To win, the first thing you have to do is not lose.
Warren Buffett worked from the first principle he had learned from Graham:
To win, the first thing you have to do is not lose.
If one were to buy shares at depressed level, one is fairly confident that one will not lose, even if the loss is only on paper. Buffett's principle rule for trading is this:
Never count on making a good sale, have the purchase price be so attractive that even a mediocre sale gives good results.
To win, the first thing you have to do is not lose.
If one were to buy shares at depressed level, one is fairly confident that one will not lose, even if the loss is only on paper. Buffett's principle rule for trading is this:
Never count on making a good sale, have the purchase price be so attractive that even a mediocre sale gives good results.
Ignore the Market!
Benjamin Graham's final words of advice are: "Ignore the market!" He suggested that each investor should try to think of investment as if you were in business with a mad partner called 'Mr. Market'. Occasionally, 'Mr. Market' is highly optimistic and he is willing to buy your share of the partnership at any price you name. At other times, 'Mr. Market' is highly pessimistic and is willing to sell you his share of the partnership at any price you offer.
How can one behave rationally in such a situation?
The best approach will be to accept his offer when he is optimistic and buy it back from him when he is pessimistic. Each time your share of the partnership cycles back and forth, you will make a handsome profit. Since the stock market is indeed completely manic-depressive, the only right thing to do is to buy and sell on your own terms and not that of the market.
How can one behave rationally in such a situation?
The best approach will be to accept his offer when he is optimistic and buy it back from him when he is pessimistic. Each time your share of the partnership cycles back and forth, you will make a handsome profit. Since the stock market is indeed completely manic-depressive, the only right thing to do is to buy and sell on your own terms and not that of the market.
Good stock selection and timing works well in any stock market
The stock markets are very unpredictable. It can collapse in the midst of prosperity just as it can zoom upwards in the midst of recession. Some stock markets are often subjected to manipulations. The small investors can lose a very large percentage of their capital if they invest blindly. On the other hand, if the small investors can pick the correct stocks at the correct time, they can make a great deal of money.
Good stock selection and timing works well in any stock market, whether it is American, British or Malaysian. However, good stock selection usually requires careful and meticulous work. Some of the masters of the art take more time while others take less but they all have to work at it consistently. The amount of work they need to put in would depend on how gifted they are. Even the great Warren Buffett works onit on a full-time basis.
Many are very interested in buying shares as an investment. However, many do not have the time or inclination to spend a few hours on it every day. Even if they have the time and inclination, some may not have the necessary training to read company or economic reports and understand what has been written.
It would be much easier for them if they can just pick up newspapers or magazines and follow their advice and recommendations. Almost all newspapers have a columnist or two writing on business or stock market affairs. In addition, there are business magazines which also carry regular features on the stock market and individual companies.
However, experts are also not immune to making serious errors of judgement. In the final analysis, investors will have to draw their conclusions regarding the usefulness of relying upon professional advice.
Arrested for insider trading
Tough boss, brilliant investor, family man, and now under probe
NEW YORK, Oct 21 — On the outside, Raj Rajaratnam was rock hard: a driven, demanding hedge fund boss who called his talented employees “idiots” and worse.
A brilliant player on the world’s technology and health-care markets, he made hundreds of millions of dollars by betting correctly on the direction of stocks and bonds.
Inside, though, was a family man who kept his ageing parents in his sumptuous residence in Manhattan’s Upper East Side, where he lived with his wife and three children.
He loved seeing his kids wear Indian clothes at festivals like Deepavali and donated generously to causes as varied as the Harlem Children’s Zone, the tsunami relief effort in Sri Lanka and the Gates Foundation’s efforts to curb the spread of HIV in India.
Such were the twin worlds that came crashing down around the Sri Lanka- born billionaire last week when New York prosecutors arrested him for insider trading.
As head of Galleon Group, Rajaratnam, 52, presided over an investment empire that totalled some US$7 billion (RM23.8 billion) at its peak last year, perhaps the world’s biggest technology fund.
His own net worth, after he lost about a third of it during the carnage on Wall Street last year, was placed at US$1.3 billion earlier this year just as the recovery was starting.
“When you met him socially, he didn’t let on easily how big a man he was,” says an American private equity specialist who shared a lunch table with Rajaratnam in New York last year. “But then there also were people like Bill Clinton and Jim Wolfenson in the room, so there was no shortage of big egos around the place and it was easy not to be noticed.”
The journey to the top of the hedge fund world for Rajaratnam began in the early 1970s at St Thomas’ Preparatory School in Colombo, the capital of Sri Lanka. The alma mater of all three sons of President Mahinda Rajapakse, the school also has a strong rugby tradition.
Not surprisingly, the burly investor frequently described his role at Galleon as that of a “quarterback”.
At the time, the ethnic conflict that bloodied Sri Lanka for a quarter century had not yet begun, so his days were spent mixing freely with boys from the Sinhala majority although he himself was a Tamil.
That probably explains why three decades later, despite bazaar gossip that he funded the separatist Liberation Tigers of Tamil Eelam (LTTE), Rajaratnam has extended his giving to charitable causes to all groups in Sri Lanka.
When the Boxing Day tsunami hit large parts of Asia in 2004, for instance, he was on holiday with his family in Sri Lanka and had luckily left a beach resort the previous day. He gave US$5 million of his own money for tsunami resettlement that would benefit Sinhalas, Tamils and the smaller Muslim community.
More recently, he offered US$1 million to help resettle young Tamil Tiger guerrillas who had been drafted into the movement — an offer Colombo has been slow to accept.
From Colombo, Rajaratnam moved to Sussex in Britain, and then to the Wharton School of Finance. Since then, he has lived in the United States, and now holds dual nationality, retaining his Sri Lankan passport.
Joining Needham & Co after Wharton, Rajaratnam was promoted to president of the firm when he was just 34.
A few months later, bored with pushing people around, he began a small hedge fund with US$15 million.
Five years later, he bought the fund from Needham, renamed it Galleon and launched out on his own with a bunch of handpicked partners.
Driven by Rajaratnam, Galleon showed impressive results. He was so confident of what he was doing that he sometimes invited key clients to sit in on his 8.45am meetings with his analysts and investment teams.
“They came away impressed,” says a New York-based investment manager who has known some big money figures who attended those meetings.
“This guy clearly had all the smarts in a meeting where some of the fund managers were people with top engineering degrees themselves.”
Yet, all was not well inside Galleon’s galley.
One initial partner, Krishen Sud, quit in 2001, even though he is said to have earned US$48 million that year. Rajaratnam had accused him of removing client lists without authorisation.
Despite the loss of his top health-care investment manager, Rajaratnam prospered. In 2006, his best year, he reputedly made as much as US$400 million.
Thanks in part to his wife, Asha, he also had a rich social life. The Rajaratnams gave freely to charities and became trustees of the America India Foundation. Indeed, in Asian circles in New York, many see Rajaratnam as more Indian than Sri Lankan.
One of his donations however raised eyebrows — a US$400,000 gift in 2005 to the US-based Tamils Rehabilitation Organisation, a Maryland-based NGO. At the time it was a legitimate outfit, but two years later the US government, under pressure from Colombo, shut it down as a front for the LTTE.
It was around that time that the Federal Bureau of Investigation (FBI) assigned a man named B.J. Kang to investigate Rajaratnam. It is possible that it wanted to probe his Tamil Tiger connections, given that the Feds had permission to use wiretaps on him.
Soon, the FBI believed it had stumbled on enough evidence to nail the speculator for insider trading.
“It appears that Raj was careful not to use e-mail for the suspect trades but only the phone,” says a person who has studied transcripts of the phone conversations. “The phone chats, if accurate, could be damning for him.”
To be sure, insider trading charges are not easy to prove. Certainly, the quarterback himself is in no mood to see the opposition slip through.
Yesterday, in a note to clients, Rajaratnam vowed to defend himself.
“I am entirely innocent,” he said. — The Straits Times
NEW YORK, Oct 21 — On the outside, Raj Rajaratnam was rock hard: a driven, demanding hedge fund boss who called his talented employees “idiots” and worse.
A brilliant player on the world’s technology and health-care markets, he made hundreds of millions of dollars by betting correctly on the direction of stocks and bonds.
Inside, though, was a family man who kept his ageing parents in his sumptuous residence in Manhattan’s Upper East Side, where he lived with his wife and three children.
He loved seeing his kids wear Indian clothes at festivals like Deepavali and donated generously to causes as varied as the Harlem Children’s Zone, the tsunami relief effort in Sri Lanka and the Gates Foundation’s efforts to curb the spread of HIV in India.
Such were the twin worlds that came crashing down around the Sri Lanka- born billionaire last week when New York prosecutors arrested him for insider trading.
As head of Galleon Group, Rajaratnam, 52, presided over an investment empire that totalled some US$7 billion (RM23.8 billion) at its peak last year, perhaps the world’s biggest technology fund.
His own net worth, after he lost about a third of it during the carnage on Wall Street last year, was placed at US$1.3 billion earlier this year just as the recovery was starting.
“When you met him socially, he didn’t let on easily how big a man he was,” says an American private equity specialist who shared a lunch table with Rajaratnam in New York last year. “But then there also were people like Bill Clinton and Jim Wolfenson in the room, so there was no shortage of big egos around the place and it was easy not to be noticed.”
The journey to the top of the hedge fund world for Rajaratnam began in the early 1970s at St Thomas’ Preparatory School in Colombo, the capital of Sri Lanka. The alma mater of all three sons of President Mahinda Rajapakse, the school also has a strong rugby tradition.
Not surprisingly, the burly investor frequently described his role at Galleon as that of a “quarterback”.
At the time, the ethnic conflict that bloodied Sri Lanka for a quarter century had not yet begun, so his days were spent mixing freely with boys from the Sinhala majority although he himself was a Tamil.
That probably explains why three decades later, despite bazaar gossip that he funded the separatist Liberation Tigers of Tamil Eelam (LTTE), Rajaratnam has extended his giving to charitable causes to all groups in Sri Lanka.
When the Boxing Day tsunami hit large parts of Asia in 2004, for instance, he was on holiday with his family in Sri Lanka and had luckily left a beach resort the previous day. He gave US$5 million of his own money for tsunami resettlement that would benefit Sinhalas, Tamils and the smaller Muslim community.
More recently, he offered US$1 million to help resettle young Tamil Tiger guerrillas who had been drafted into the movement — an offer Colombo has been slow to accept.
From Colombo, Rajaratnam moved to Sussex in Britain, and then to the Wharton School of Finance. Since then, he has lived in the United States, and now holds dual nationality, retaining his Sri Lankan passport.
Joining Needham & Co after Wharton, Rajaratnam was promoted to president of the firm when he was just 34.
A few months later, bored with pushing people around, he began a small hedge fund with US$15 million.
Five years later, he bought the fund from Needham, renamed it Galleon and launched out on his own with a bunch of handpicked partners.
Driven by Rajaratnam, Galleon showed impressive results. He was so confident of what he was doing that he sometimes invited key clients to sit in on his 8.45am meetings with his analysts and investment teams.
“They came away impressed,” says a New York-based investment manager who has known some big money figures who attended those meetings.
“This guy clearly had all the smarts in a meeting where some of the fund managers were people with top engineering degrees themselves.”
Yet, all was not well inside Galleon’s galley.
One initial partner, Krishen Sud, quit in 2001, even though he is said to have earned US$48 million that year. Rajaratnam had accused him of removing client lists without authorisation.
Despite the loss of his top health-care investment manager, Rajaratnam prospered. In 2006, his best year, he reputedly made as much as US$400 million.
Thanks in part to his wife, Asha, he also had a rich social life. The Rajaratnams gave freely to charities and became trustees of the America India Foundation. Indeed, in Asian circles in New York, many see Rajaratnam as more Indian than Sri Lankan.
One of his donations however raised eyebrows — a US$400,000 gift in 2005 to the US-based Tamils Rehabilitation Organisation, a Maryland-based NGO. At the time it was a legitimate outfit, but two years later the US government, under pressure from Colombo, shut it down as a front for the LTTE.
It was around that time that the Federal Bureau of Investigation (FBI) assigned a man named B.J. Kang to investigate Rajaratnam. It is possible that it wanted to probe his Tamil Tiger connections, given that the Feds had permission to use wiretaps on him.
Soon, the FBI believed it had stumbled on enough evidence to nail the speculator for insider trading.
“It appears that Raj was careful not to use e-mail for the suspect trades but only the phone,” says a person who has studied transcripts of the phone conversations. “The phone chats, if accurate, could be damning for him.”
To be sure, insider trading charges are not easy to prove. Certainly, the quarterback himself is in no mood to see the opposition slip through.
Yesterday, in a note to clients, Rajaratnam vowed to defend himself.
“I am entirely innocent,” he said. — The Straits Times
Tulipomania: A tulip bulb priced an equivalent of 12 acres of good land became as worthless as an onion
17th century Holland.
Belonging to the onion family, the tulip flowers are grown from bulbs. Propagation is very slow for it takes a season for a plant to reproduce itself.
The 17th century Dutchmen developed a great passion for tulips and rich people showed off their tulip collection with as much pride as their rare paintings.l
As is usual for all speculative manias, there were sound economic reasons to begin with. Tulips are indeed beautiful flowers and were in much demand all over Europe. Growing tulips was indeed a very profitable industry. However, as with all manias, the profits of the pioneers attracted more and more people into the business. (Reminds me of the MLM model too.) The latecomers, not willing to undergo the long period necessary for the establishment of a nursery, bidded up the price of the existing limited supply.
By the 1620s, some of the rare varieties were beginning to command astronomical prices. Semper Augustus (a beautiful white and blue flower with red stripes) were being sold for 1,200 florins. In perspective, this was equivalent to the cost of 10,000 pounds of cheese or 120 sheep! At this price level, the earlier entrants to the business were making incredible profits and tales of such gains naturally pulled in even more people. By 1634, the race among the Dutch to cultivate tulips was so great that the ordinary businesses of the country were neglected. The same Sempler Augustus had by then reached an incredible price of 5,500 florins, an equivalent of 12 acres of good land.
By 1636, the trade in tulips became so great that regular markets were established for them in Amsterdam, Rotterdam, Harleem, Leyden, Alkmar and other towns. For the first time, symptoms of gambling became apparent. The stock brokers, always alert for a new speculation, switched to tulips and used every means at their disposal to cause fluctuations in prices.
As in all manias, confidence and prices soared to their highest just before the collapse of the market. Everyone imagined that the passion for tulips would last forever. Wealthy people from all over the world sent in large sums of money to Holland to invest in the boom. Houses, land, and valuables were sold at ruinously low prices so that their owners could take part in tulip speculation.
However, the seed of its destruction had by then been sown. The huge increase in money supply and the sense of prosperity created by populace's holding of tulip bulbs caused the prices of everyday necessities to increase by considerable degrees.
Like all wonderful dreams or delightful parties, good things do eventually come to an end. On a day in February 1637, about FIFTEEN years after the beginning of the mania, a speculator bought a bulb and found that he could not resell it for a higher price. He was then forced to reduce its price to dispose of it. This move caused a panic among all other speculators and the rush to sell became increasingly intense. The prices fell drastically and within a short time, tulips which once commanded the price of houses became as worthless as onions.
Ref: Stock Market Investment in Malaysia and Singapore by Neoh Soon Kean
Belonging to the onion family, the tulip flowers are grown from bulbs. Propagation is very slow for it takes a season for a plant to reproduce itself.
The 17th century Dutchmen developed a great passion for tulips and rich people showed off their tulip collection with as much pride as their rare paintings.l
As is usual for all speculative manias, there were sound economic reasons to begin with. Tulips are indeed beautiful flowers and were in much demand all over Europe. Growing tulips was indeed a very profitable industry. However, as with all manias, the profits of the pioneers attracted more and more people into the business. (Reminds me of the MLM model too.) The latecomers, not willing to undergo the long period necessary for the establishment of a nursery, bidded up the price of the existing limited supply.
By the 1620s, some of the rare varieties were beginning to command astronomical prices. Semper Augustus (a beautiful white and blue flower with red stripes) were being sold for 1,200 florins. In perspective, this was equivalent to the cost of 10,000 pounds of cheese or 120 sheep! At this price level, the earlier entrants to the business were making incredible profits and tales of such gains naturally pulled in even more people. By 1634, the race among the Dutch to cultivate tulips was so great that the ordinary businesses of the country were neglected. The same Sempler Augustus had by then reached an incredible price of 5,500 florins, an equivalent of 12 acres of good land.
By 1636, the trade in tulips became so great that regular markets were established for them in Amsterdam, Rotterdam, Harleem, Leyden, Alkmar and other towns. For the first time, symptoms of gambling became apparent. The stock brokers, always alert for a new speculation, switched to tulips and used every means at their disposal to cause fluctuations in prices.
As in all manias, confidence and prices soared to their highest just before the collapse of the market. Everyone imagined that the passion for tulips would last forever. Wealthy people from all over the world sent in large sums of money to Holland to invest in the boom. Houses, land, and valuables were sold at ruinously low prices so that their owners could take part in tulip speculation.
However, the seed of its destruction had by then been sown. The huge increase in money supply and the sense of prosperity created by populace's holding of tulip bulbs caused the prices of everyday necessities to increase by considerable degrees.
Like all wonderful dreams or delightful parties, good things do eventually come to an end. On a day in February 1637, about FIFTEEN years after the beginning of the mania, a speculator bought a bulb and found that he could not resell it for a higher price. He was then forced to reduce its price to dispose of it. This move caused a panic among all other speculators and the rush to sell became increasingly intense. The prices fell drastically and within a short time, tulips which once commanded the price of houses became as worthless as onions.
Ref: Stock Market Investment in Malaysia and Singapore by Neoh Soon Kean
Warren Buffett on What's Next in the Payments Industry
Oct 20, 2009, 10:00am
Transcript: Warren Buffett on What's Next in the Payments Industry
To kick off the launch of PYMNTS.com, the "Oracle from Omaha" weighs in on what's next in the payment industry and the economy at large. Business Wire CEO Cathy Baron Tamraz sits down with Mr. Buffett in an exclusive interview. The following is a transcript of the video.
CATHY BARON TAMRAZ: Greetings from San Diego, where we have just completed the Fortune Most Powerful Women’s Summit. I am Cathy Baron Tamraz, CEO of Business Wire, and I am here with the only male that is allowed into this conference and that is Warren Buffett, Chairman of Berkshire Hathaway, which is also the parent company of Business Wire. Warren has graciously agreed to answer some questions today, and kick off a conference that Business Wire and Market Platform Dynamics are holding in New York City, to launch a new Web site about the payment industry callexd PYMNTS.com. We are really excited about this new portal, which will be a primary source of news for the payments industry. It will havebreaking news and regulatory news in the payment industry, new technology and new products.
Because the payment industry is so vital to the economy, we thought it would be relevant to talk to Warren and hear his views on the state of the economy and what we can do to revitalize it. So thank you, Warren, for speaking with us today and agreeing to be interviewed by me.
WARREN BUFFETT: You are my favorite interviewer!
CBT: Thank you very much. That’s on tape, by the way. So, the first question I have for you is about the near-term future of our economy. The last 12 months feels like a really bad dream. This year has been the year that shook the world. It’s been a year since the bankruptcy of Lehman Brothers and it almost sent the economy over a cliff. We had the Bear Stearns fallout, Merrill Lynch sold to Bank of America, the AIG crisis, Fannie and Freddie falling under government control. It’s been a really difficult year. So, what do you think is going to happen now in the fourth quarter of 2009 and also in 2010?
WB: I am not sure about exact quarters or anything of the sort. Who knows about next week or next month? We made enormous progress since a year ago. We had a real panic. And if you didn’t panic, you didn’t understand what was going on. What happened in September and October of 2008 will particularly be remembered for a long, long time. And while the governmental authorities malign things sometimes, they fortunately did some very right things, very important things. They did them properly, and they kept us from going over the cliff. The fallout from that financial panic hit the regular economy in the fourth quarter like a ton of bricks. We are coming back from that. The patient really went into the emergency room and it won’t come out of the hospital entirely for a while.
There are things that have to be cured in the system, but this system works. If you look at this country, we have gone through the Great Depression, we have gone through world wars, we have gone through civil war, and we have progressed like no country in the world. We have the right system. It doesn’t avoid all the problems, but it overcomes all the problems.
CBT: Do you see consumer-spending increasing in the near term?
WB: No, and not for a while. I think people had an experience a year ago that they are not going to get over quickly. But the factories are there, the human potential is there, the system is there. It works over time. Your kids will live better than you and I live, and our grandchildren will live better than they do. This country moves forward.
If you take the 20th century, we had a Great Depression, world wars, a nuclear bomb, a flu epidemic. We had all these things, and at the end of the 20th century, the average American was living seven times better than at the start of the century. It’s amazing. The Dow Jones Average had gone from 66 to 11,400. So the country works, you don’t have to worry about that.
CBT: This latest debacle has also been called a “crisis of confidence.” Five trillion dollars of American wealth has vanished. If confidence is what’s needed to stimulate the economy, how do we put trust back into the financial system? Does the government need to retain a stronger hand?
WB: Well, people became afraid a year ago, and confidence is not going to exist when fear exists. Fear is very contagious. It spreads very quickly, and that’s what happened in the start of the fourth quarter last year. The confidence doesn’t come back as fast as it’s lost, but it does come back. It’s come back a long way already, but it has a ways to go. As people see and really get re‑affirmed about the fact that this system works. We are still tossing out 14 trillion worth of product a year. It will return. It’s already returned with most people in most ways, but it’s not back 100%. It’ll get there.
CBT: Do you have any comment on the unemployment rate?
WB: Well, the unemployment rate will turn around late. It always lags. People who have gone through a period like this are slow to rehire until they really have to. On the other hand, the time will come when they have to. There will be more people working in housing a year or two from now. We have a brick company. We have companies in the carpet business. We have had to let people go in those businesses in the last year, year and a half. We will be adding people at some point, but we won’t do it until we see the demand come back. It’ll be a little slow because we don’t want to go through what we did before. Although, I will guarantee you that three years from now, our brick companies, our carpet company, and our insulation company will all be employing far more people than now.
CBT: That’s good to hear. The next question is about the government. Congress and the administration have been working on reforming financial regulation. Do you think they are on the right track? And will reforms and new rules to protect consumers help restore confidence?
WB: Well, the new rules won out, so the things they have done during the last year fell pretty short of confidence. Not everything is done perfectly, but nobody can do them perfectly. The important thing is that they got things done and people do believe in them, and they’ll believe in them more and more as it goes along. Government has a real role to play and it will not prevent bubbles forever. Human beings do crazy things from time to time, and the real question is how they recover from it. You and I have done things in our life, and the truth is that we came back from them. That’s the important thing.
You can’t rule out human emotions. When people get greedy as a pack, strange things happen. When they get fearful as a pack, strange things happen. (My comment: groupthink) That isn’t the way they exist most of the time, but they do give into that. So rules will help us avoid some of the problems. They’ll help us modify some of the problems, but they won’t eliminate all future problems.
CBT: I was watching a little TV this week and I was listening to William Cohen, who is the author of “The House of Cards.” He said that if you don’t change compensation and how Wall Street is incented, the same thing is going happen all over again. And yet, I recently heard that Wall Street is hiring, and they are also guaranteeing big bonuses and compensation packages, which is a little bit alarming if you ask me. What’s your view is on that?
WB: Well, Wall Street is about trying to make a lot of money. It’s the nature of the system. You get a huge capitalist system, and it raises lots of money and it makes lots of big deals and people – some people get paid very well for it. What you have to change in Wall Street is you have to make sure that in addition to carrots, there are sticks. And it can’t be a one‑way street where they are making ungodly amounts of money when things are good and then they move on to someplace else for a while when things are bad. You have to create a downside. I hope there are some practices put into place – and I’ll have a few thoughts on them myself – but Congress undoubtedly will have a few thoughts too. You have to put in something where there is downside to people who really mess up large institutions and we need some new help in that. Too many people have walked away from the troubles they have created for society, not just for their own institution, and they have walked away rich. They may not be as rich as they were before, but they have walked away better than they should have. There have to be incentives – not only to get rich, but to behave well.
CBT: President Obama said this week that the financial firms “owe a debt to the American people.” And I wasn’t exactly sure how, how they could pay that back to the American people.
WB: It’s interesting. Exactly a year ago when I was at this conference, I had a proposal for the so‑called “toxic assets.” I called three people in the financial world who were going to write Secretary Paulson about it. I wrote them on October 6th. I called three people to help out on this, and it would have required a lot of effort on their part and some commitment of money and time and energy. I asked all three of them if this went forward to do it absolutely pro‑bono. I asked them not to make one dime out of it. And they all said yes to me. So, they are good people. Many are motivated by greed. None of us are perfect, you know? I always say that, “Every saint has a past, every sinner has a future.” We have got some sinners back there, but they are not all bad. They went along with a bubble that they helped create – but the whole American public did. You still have to have the right rewards and penalties for behavior. That’s how you get decent behavior. So, I don’t look at Wall Street as “evil.” I look at Wall Street as given to huge excess sometimes. I don’t want to get rid of it. We need something to allocate capital and distribute securities and all of that throughout the system. We have got a big capitalist system and we have to have a big capital market – but there is plenty of room for improvement.
CBT: Looking into your crystal ball, what will the stock market look like a year from now?
WB: Well, I don’t know about a year from now. Five years from now, it’ll be higher, yeah. Ten years from now, it’ll be higher. One year from now, I don’t know.
CBT: Fair enough. Moving a little bit more closely to the payment and card system. On September 3rd, the The Wall Street Journal had an articled titled “Wal‑Mart to Pay via Check Cards.” Wal‑Mart isn’t going to issue paychecks anymore. So it’s all going to be through a card system, which is actually good for the payment industry and the card industry. And it seems to be a growing movement to use cards to dispense payments. I noticed that on some airlines, if you don’t have a card – a credit card of some kind – you can’t eat or drink anything if you are sitting in economy because they don’t take cash anymore. So that, that’s kind of interesting…
WB: Some restaurant just announced that in New York too, that they weren’t going to take cash.
CBT: That brings us to the next question: Do you think cash is ever going to disappear as a form of payment?
WB: It won’t disappear, but in the end – and that’s the genius of the American system – we do give the consumer what they want. If people want to use the convenience of cards, they will do it. Now there will be enough people that want to use cash, so consumers won’t turn their back on it entirely. They haven’t given up landline phones entirely for cell phones. The American consumer – in the end – is king. You can push them around for a week or a month maybe, but you either figure out what’s in your customers’ mind and decide you are going to serve them; or you are not going to be in business. They are right, and you are wrong. It’s what made this country, to some extent, what it is. Our market system where the customer – 300 million Americans – tell people what to make, where to serve them, and how to do business. Compare that to some totalitarian system, where somebody decides what people are going eat for lunch and we win.
CBT: Well, we are certainly not used to that…
WB: Oh yeah. Mm‑hmm.
CBT: The credit card industry is about 50 years old, and it’s pretty safe to say that it’s going to transform in the next 10 or 15 years. Sometimes I think we’ll have chips in our hands to scan and pay for things. All kinds of things will be transacted electronically.
WB: Cathy, I met Ralph Schneider who was the founder of the Diners Club back in the 1950s. He had just designed an IRA, and they are just using it around New York. They used to charge the merchants 10 percent and the card was very low priced then. American Express went into the business originally defensively. They had the Travelers Check and they were worried about what the credit card would do to it. In 1964, when American Express had what they called the great Salad Oil Scandal, we became this little outfit in Omaha and became the largest shareholders of the American Express Company. I went around to restaurants and service stations, and asked people about whether the Card was losing its appeal because of the scandal that was going around. They said the Card wasn’t losing it but that it was growing in appeal. So, I watched the credit card industry almost from the beginning in that respect. We got in early. I could see it was a powerful tool. First Data was in Omaha, and I have watched them all. Carte Blanche, the Hilton Card – some of those have disappeared over the years. Of course, Visa and MasterCard have been successful. There have been all kinds of developments, but the truth is, the American public likes to be able to go into their pocket and pull out a card.
CBT: Well, that was a really great lead into a question I had about American Express. Everyone knows here that Berkshire Hathaway has an investment in American Express, as you just said. So, you obviously know a lot about the payment industry and that company in particular. Can you tell us what attracted you to that company?
WB: Well, what originally attracted me back in 1964 was that Diners Club got the jump. They were way ahead of American Express. American Express came in with a very interesting market and concept. People already were carrying Diners Club, and American Express wanted to enter the field. They charged more than Diners Club did for their product. Diners Club had this card that had a bunch of flashy little symbols and everything on it. American Express brought out that centurion, and originally it was the green card with the guy that looked like Mr. Integrity. If you went into a restaurant, and you were buying dinner for somebody, and you had a choice of pulling out this Diners Club card that looked like you were giving a check from your mother or pulling out this centurion that made it look you were J.P. Morgan or something – you went with Mr. Integrity. They actually took over the field by establishing themselves not as the low‑priced competitor but, but as the class competitor. It was a great marketing arrangement. Then it swept the country. The card I carry in my pocket says, “Member Since 1964.”
CBT: Mine says “Member Since 1983.”
WB: Well, that was the year you were born, I was 40 years old or something when I did this.
CBT: Last question. We would like you to impart a little bit of advice and tell us what is the one lesson that we should take away from this economic Pearl Harbor?
WB: Well, I think that it goes back what I have told my manager to do: Just keep taking care of the customer. We have got a lot of customers in this country. Since 1886, Coca‑Cola has been selling a product that people like, and they just keep taking care of them. It’s what you have done at Business Wire. In the end, nobody that’s ever taken good care of the customer has ever lost; I mean, that, that is the name of the game.
CBT: That is great advice. I want to thank you for your time, Warren, it’s been a pleasure talking to you, and allowing me to interview you.
WB: It's been fun. Thanks, Cathy.
http://pymnts.com/transcript-warren-buffett-on-what-s-next-in-the-payments-industry/
Transcript: Warren Buffett on What's Next in the Payments Industry
To kick off the launch of PYMNTS.com, the "Oracle from Omaha" weighs in on what's next in the payment industry and the economy at large. Business Wire CEO Cathy Baron Tamraz sits down with Mr. Buffett in an exclusive interview. The following is a transcript of the video.
CATHY BARON TAMRAZ: Greetings from San Diego, where we have just completed the Fortune Most Powerful Women’s Summit. I am Cathy Baron Tamraz, CEO of Business Wire, and I am here with the only male that is allowed into this conference and that is Warren Buffett, Chairman of Berkshire Hathaway, which is also the parent company of Business Wire. Warren has graciously agreed to answer some questions today, and kick off a conference that Business Wire and Market Platform Dynamics are holding in New York City, to launch a new Web site about the payment industry callexd PYMNTS.com. We are really excited about this new portal, which will be a primary source of news for the payments industry. It will havebreaking news and regulatory news in the payment industry, new technology and new products.
Because the payment industry is so vital to the economy, we thought it would be relevant to talk to Warren and hear his views on the state of the economy and what we can do to revitalize it. So thank you, Warren, for speaking with us today and agreeing to be interviewed by me.
WARREN BUFFETT: You are my favorite interviewer!
CBT: Thank you very much. That’s on tape, by the way. So, the first question I have for you is about the near-term future of our economy. The last 12 months feels like a really bad dream. This year has been the year that shook the world. It’s been a year since the bankruptcy of Lehman Brothers and it almost sent the economy over a cliff. We had the Bear Stearns fallout, Merrill Lynch sold to Bank of America, the AIG crisis, Fannie and Freddie falling under government control. It’s been a really difficult year. So, what do you think is going to happen now in the fourth quarter of 2009 and also in 2010?
WB: I am not sure about exact quarters or anything of the sort. Who knows about next week or next month? We made enormous progress since a year ago. We had a real panic. And if you didn’t panic, you didn’t understand what was going on. What happened in September and October of 2008 will particularly be remembered for a long, long time. And while the governmental authorities malign things sometimes, they fortunately did some very right things, very important things. They did them properly, and they kept us from going over the cliff. The fallout from that financial panic hit the regular economy in the fourth quarter like a ton of bricks. We are coming back from that. The patient really went into the emergency room and it won’t come out of the hospital entirely for a while.
There are things that have to be cured in the system, but this system works. If you look at this country, we have gone through the Great Depression, we have gone through world wars, we have gone through civil war, and we have progressed like no country in the world. We have the right system. It doesn’t avoid all the problems, but it overcomes all the problems.
CBT: Do you see consumer-spending increasing in the near term?
WB: No, and not for a while. I think people had an experience a year ago that they are not going to get over quickly. But the factories are there, the human potential is there, the system is there. It works over time. Your kids will live better than you and I live, and our grandchildren will live better than they do. This country moves forward.
If you take the 20th century, we had a Great Depression, world wars, a nuclear bomb, a flu epidemic. We had all these things, and at the end of the 20th century, the average American was living seven times better than at the start of the century. It’s amazing. The Dow Jones Average had gone from 66 to 11,400. So the country works, you don’t have to worry about that.
CBT: This latest debacle has also been called a “crisis of confidence.” Five trillion dollars of American wealth has vanished. If confidence is what’s needed to stimulate the economy, how do we put trust back into the financial system? Does the government need to retain a stronger hand?
WB: Well, people became afraid a year ago, and confidence is not going to exist when fear exists. Fear is very contagious. It spreads very quickly, and that’s what happened in the start of the fourth quarter last year. The confidence doesn’t come back as fast as it’s lost, but it does come back. It’s come back a long way already, but it has a ways to go. As people see and really get re‑affirmed about the fact that this system works. We are still tossing out 14 trillion worth of product a year. It will return. It’s already returned with most people in most ways, but it’s not back 100%. It’ll get there.
CBT: Do you have any comment on the unemployment rate?
WB: Well, the unemployment rate will turn around late. It always lags. People who have gone through a period like this are slow to rehire until they really have to. On the other hand, the time will come when they have to. There will be more people working in housing a year or two from now. We have a brick company. We have companies in the carpet business. We have had to let people go in those businesses in the last year, year and a half. We will be adding people at some point, but we won’t do it until we see the demand come back. It’ll be a little slow because we don’t want to go through what we did before. Although, I will guarantee you that three years from now, our brick companies, our carpet company, and our insulation company will all be employing far more people than now.
CBT: That’s good to hear. The next question is about the government. Congress and the administration have been working on reforming financial regulation. Do you think they are on the right track? And will reforms and new rules to protect consumers help restore confidence?
WB: Well, the new rules won out, so the things they have done during the last year fell pretty short of confidence. Not everything is done perfectly, but nobody can do them perfectly. The important thing is that they got things done and people do believe in them, and they’ll believe in them more and more as it goes along. Government has a real role to play and it will not prevent bubbles forever. Human beings do crazy things from time to time, and the real question is how they recover from it. You and I have done things in our life, and the truth is that we came back from them. That’s the important thing.
You can’t rule out human emotions. When people get greedy as a pack, strange things happen. When they get fearful as a pack, strange things happen. (My comment: groupthink) That isn’t the way they exist most of the time, but they do give into that. So rules will help us avoid some of the problems. They’ll help us modify some of the problems, but they won’t eliminate all future problems.
CBT: I was watching a little TV this week and I was listening to William Cohen, who is the author of “The House of Cards.” He said that if you don’t change compensation and how Wall Street is incented, the same thing is going happen all over again. And yet, I recently heard that Wall Street is hiring, and they are also guaranteeing big bonuses and compensation packages, which is a little bit alarming if you ask me. What’s your view is on that?
WB: Well, Wall Street is about trying to make a lot of money. It’s the nature of the system. You get a huge capitalist system, and it raises lots of money and it makes lots of big deals and people – some people get paid very well for it. What you have to change in Wall Street is you have to make sure that in addition to carrots, there are sticks. And it can’t be a one‑way street where they are making ungodly amounts of money when things are good and then they move on to someplace else for a while when things are bad. You have to create a downside. I hope there are some practices put into place – and I’ll have a few thoughts on them myself – but Congress undoubtedly will have a few thoughts too. You have to put in something where there is downside to people who really mess up large institutions and we need some new help in that. Too many people have walked away from the troubles they have created for society, not just for their own institution, and they have walked away rich. They may not be as rich as they were before, but they have walked away better than they should have. There have to be incentives – not only to get rich, but to behave well.
CBT: President Obama said this week that the financial firms “owe a debt to the American people.” And I wasn’t exactly sure how, how they could pay that back to the American people.
WB: It’s interesting. Exactly a year ago when I was at this conference, I had a proposal for the so‑called “toxic assets.” I called three people in the financial world who were going to write Secretary Paulson about it. I wrote them on October 6th. I called three people to help out on this, and it would have required a lot of effort on their part and some commitment of money and time and energy. I asked all three of them if this went forward to do it absolutely pro‑bono. I asked them not to make one dime out of it. And they all said yes to me. So, they are good people. Many are motivated by greed. None of us are perfect, you know? I always say that, “Every saint has a past, every sinner has a future.” We have got some sinners back there, but they are not all bad. They went along with a bubble that they helped create – but the whole American public did. You still have to have the right rewards and penalties for behavior. That’s how you get decent behavior. So, I don’t look at Wall Street as “evil.” I look at Wall Street as given to huge excess sometimes. I don’t want to get rid of it. We need something to allocate capital and distribute securities and all of that throughout the system. We have got a big capitalist system and we have to have a big capital market – but there is plenty of room for improvement.
CBT: Looking into your crystal ball, what will the stock market look like a year from now?
WB: Well, I don’t know about a year from now. Five years from now, it’ll be higher, yeah. Ten years from now, it’ll be higher. One year from now, I don’t know.
CBT: Fair enough. Moving a little bit more closely to the payment and card system. On September 3rd, the The Wall Street Journal had an articled titled “Wal‑Mart to Pay via Check Cards.” Wal‑Mart isn’t going to issue paychecks anymore. So it’s all going to be through a card system, which is actually good for the payment industry and the card industry. And it seems to be a growing movement to use cards to dispense payments. I noticed that on some airlines, if you don’t have a card – a credit card of some kind – you can’t eat or drink anything if you are sitting in economy because they don’t take cash anymore. So that, that’s kind of interesting…
WB: Some restaurant just announced that in New York too, that they weren’t going to take cash.
CBT: That brings us to the next question: Do you think cash is ever going to disappear as a form of payment?
WB: It won’t disappear, but in the end – and that’s the genius of the American system – we do give the consumer what they want. If people want to use the convenience of cards, they will do it. Now there will be enough people that want to use cash, so consumers won’t turn their back on it entirely. They haven’t given up landline phones entirely for cell phones. The American consumer – in the end – is king. You can push them around for a week or a month maybe, but you either figure out what’s in your customers’ mind and decide you are going to serve them; or you are not going to be in business. They are right, and you are wrong. It’s what made this country, to some extent, what it is. Our market system where the customer – 300 million Americans – tell people what to make, where to serve them, and how to do business. Compare that to some totalitarian system, where somebody decides what people are going eat for lunch and we win.
CBT: Well, we are certainly not used to that…
WB: Oh yeah. Mm‑hmm.
CBT: The credit card industry is about 50 years old, and it’s pretty safe to say that it’s going to transform in the next 10 or 15 years. Sometimes I think we’ll have chips in our hands to scan and pay for things. All kinds of things will be transacted electronically.
WB: Cathy, I met Ralph Schneider who was the founder of the Diners Club back in the 1950s. He had just designed an IRA, and they are just using it around New York. They used to charge the merchants 10 percent and the card was very low priced then. American Express went into the business originally defensively. They had the Travelers Check and they were worried about what the credit card would do to it. In 1964, when American Express had what they called the great Salad Oil Scandal, we became this little outfit in Omaha and became the largest shareholders of the American Express Company. I went around to restaurants and service stations, and asked people about whether the Card was losing its appeal because of the scandal that was going around. They said the Card wasn’t losing it but that it was growing in appeal. So, I watched the credit card industry almost from the beginning in that respect. We got in early. I could see it was a powerful tool. First Data was in Omaha, and I have watched them all. Carte Blanche, the Hilton Card – some of those have disappeared over the years. Of course, Visa and MasterCard have been successful. There have been all kinds of developments, but the truth is, the American public likes to be able to go into their pocket and pull out a card.
CBT: Well, that was a really great lead into a question I had about American Express. Everyone knows here that Berkshire Hathaway has an investment in American Express, as you just said. So, you obviously know a lot about the payment industry and that company in particular. Can you tell us what attracted you to that company?
WB: Well, what originally attracted me back in 1964 was that Diners Club got the jump. They were way ahead of American Express. American Express came in with a very interesting market and concept. People already were carrying Diners Club, and American Express wanted to enter the field. They charged more than Diners Club did for their product. Diners Club had this card that had a bunch of flashy little symbols and everything on it. American Express brought out that centurion, and originally it was the green card with the guy that looked like Mr. Integrity. If you went into a restaurant, and you were buying dinner for somebody, and you had a choice of pulling out this Diners Club card that looked like you were giving a check from your mother or pulling out this centurion that made it look you were J.P. Morgan or something – you went with Mr. Integrity. They actually took over the field by establishing themselves not as the low‑priced competitor but, but as the class competitor. It was a great marketing arrangement. Then it swept the country. The card I carry in my pocket says, “Member Since 1964.”
CBT: Mine says “Member Since 1983.”
WB: Well, that was the year you were born, I was 40 years old or something when I did this.
CBT: Last question. We would like you to impart a little bit of advice and tell us what is the one lesson that we should take away from this economic Pearl Harbor?
WB: Well, I think that it goes back what I have told my manager to do: Just keep taking care of the customer. We have got a lot of customers in this country. Since 1886, Coca‑Cola has been selling a product that people like, and they just keep taking care of them. It’s what you have done at Business Wire. In the end, nobody that’s ever taken good care of the customer has ever lost; I mean, that, that is the name of the game.
CBT: That is great advice. I want to thank you for your time, Warren, it’s been a pleasure talking to you, and allowing me to interview you.
WB: It's been fun. Thanks, Cathy.
http://pymnts.com/transcript-warren-buffett-on-what-s-next-in-the-payments-industry/
Revenue Growth is Key
Digesting Earnings: Revenue Growth is Key
Published: Monday, 19 Oct 2009 | 3:14 AM ET Text Size
Michael Yoshikami
President & Chief Investment Strategist
YCMNET Advisors
It's a busy week ahead for earnings from US Bellwethers and investors will be watching for indications that optimism in the markets is justified by corporate results.
We are fast leaving behind the time that beating earnings because of cost efficiencies is sufficient to justify current multiples. Revenue growth must also return.
No one is looking for a return to revenue numbers from two years ago, but improvement during the last six or 12 months is certainly needed; this outcome would fuel further optimism in the market if these numbers are exceeded.
However, as you listen to the numbers, it's just important to watch for the language used by management.
And don't, for a second, assume that they will be necessarily transparent when they describe what they see the future to be in terms of earnings potential.
Company executives tend to be fairly conservative after a dramatic downturn as evidenced by the earnings calls from Caterpillar [CAT 59.61 1.76 (+3.04%) ]over the last two quarters.
Management was extremely gloomy six months ago when discussing future prospects. Now they appear to have evolved to cautious which is a vast psychological improvement. It's no wonder Caterpillar stock has done well the last 6 months - their outlook has become less dire and management was conscious in discussing future prospects.
Douglas C. Pizac / AP
--------------------------------------------------------------------------------
With Microsoft [MSFT 26.37 0.01 (+0.04%) ]releasing Windows 7 this week, there will be a major impact on technology players in the retail segment if the operating system is adopted widely. Watch for indications from Microsoft that they are beginning to see light in business segments despite last quarter's tough report.
Apple [AAPL 198.76 8.90 (+4.69%) ]reports this week and everyone wonders if iPhone momentum will start to slow. The company has been priced to perfection and at this point that's what's been occurring in the earnings numbers - almost perfection. We shall see this week if that trend continues.
Other companies to monitor include Texas Instruments [TXN 23.66 0.14 (+0.6%) ]and 3M[MMM 75.92 -0.40 (-0.52%) ]. They will both provide a view on the health of the overall economy as both companies fortunes are tied to macro economic growth.
So watch for revenue versus earnings performance, company comments, and future projections about business and industry recovery expectations. The answers to these questions will drive earnings results. And very well could drive market returns.
___________________
Michael A. Yoshikami, Ph.D., CFP®, is Founder, President, and Chief Investment Strategist of YCMNET Advisors, Inc., a registered investment advisory firm (www.ycmnet.com). He oversees all investment and research activities of YCMNET. He is a respected lecturer speaking frequently on market issues, tactical asset allocation, and investment strategy. Michael and YCMNET were ranked as one of the top investment 100 advisors in the United States for 2009 by Barrons. He appears regularly on CNBC and CNBC Asia and can be reached directly at m@ycmnet.com.
http://www.cnbc.com/id/33375612
Published: Monday, 19 Oct 2009 | 3:14 AM ET Text Size
Michael Yoshikami
President & Chief Investment Strategist
YCMNET Advisors
It's a busy week ahead for earnings from US Bellwethers and investors will be watching for indications that optimism in the markets is justified by corporate results.
We are fast leaving behind the time that beating earnings because of cost efficiencies is sufficient to justify current multiples. Revenue growth must also return.
No one is looking for a return to revenue numbers from two years ago, but improvement during the last six or 12 months is certainly needed; this outcome would fuel further optimism in the market if these numbers are exceeded.
However, as you listen to the numbers, it's just important to watch for the language used by management.
And don't, for a second, assume that they will be necessarily transparent when they describe what they see the future to be in terms of earnings potential.
Company executives tend to be fairly conservative after a dramatic downturn as evidenced by the earnings calls from Caterpillar [CAT 59.61 1.76 (+3.04%) ]over the last two quarters.
Management was extremely gloomy six months ago when discussing future prospects. Now they appear to have evolved to cautious which is a vast psychological improvement. It's no wonder Caterpillar stock has done well the last 6 months - their outlook has become less dire and management was conscious in discussing future prospects.
Douglas C. Pizac / AP
--------------------------------------------------------------------------------
With Microsoft [MSFT 26.37 0.01 (+0.04%) ]releasing Windows 7 this week, there will be a major impact on technology players in the retail segment if the operating system is adopted widely. Watch for indications from Microsoft that they are beginning to see light in business segments despite last quarter's tough report.
Apple [AAPL 198.76 8.90 (+4.69%) ]reports this week and everyone wonders if iPhone momentum will start to slow. The company has been priced to perfection and at this point that's what's been occurring in the earnings numbers - almost perfection. We shall see this week if that trend continues.
Other companies to monitor include Texas Instruments [TXN 23.66 0.14 (+0.6%) ]and 3M[MMM 75.92 -0.40 (-0.52%) ]. They will both provide a view on the health of the overall economy as both companies fortunes are tied to macro economic growth.
So watch for revenue versus earnings performance, company comments, and future projections about business and industry recovery expectations. The answers to these questions will drive earnings results. And very well could drive market returns.
___________________
Michael A. Yoshikami, Ph.D., CFP®, is Founder, President, and Chief Investment Strategist of YCMNET Advisors, Inc., a registered investment advisory firm (www.ycmnet.com). He oversees all investment and research activities of YCMNET. He is a respected lecturer speaking frequently on market issues, tactical asset allocation, and investment strategy. Michael and YCMNET were ranked as one of the top investment 100 advisors in the United States for 2009 by Barrons. He appears regularly on CNBC and CNBC Asia and can be reached directly at m@ycmnet.com.
http://www.cnbc.com/id/33375612
Basically, the market has gone up on proof of earnings
Week Ahead: Earnings Could Keep the Bulls Running
Published: Friday, 16 Oct 2009
8:42 PM ET Text Size
By: Patti Domm
Executive Editor
Corporate earnings will trump almost everything for the stock market in the coming week.
A string of better-than-expected third quarter earnings reports have helped fuel the stock market rally, taking the Dow above 10,000 for the first time in a year.
About half the Dow 30 and a quarter of the S&P 500 report in the week ahead. Analysts expect the majority of these companies to continue to beat expectations.
Traders are also watching the dollar, which continues to weaken as stocks and other risk assets move higher. They are also keeping an eye on the quick boil in oil prices, which moved sharply higher in the past week and are beginning to make some investors cautious.
"Basically, the market has gone up on proof of earnings, so after this earnings season, there's not going to be another catalyst before earnings early next year," said Binky Chadha, chief U.S. equities strategist at Deutsche Bank.
"It's the second quarter of sequential top line growth, and we also should have the third quarter of bottom line growth. In the fourth quarter, year on year earnings will be positive because Q4 of '08 was so bad...Q4 earnings should mark the end of the earnings recession," he said.
Of the 61 S&P companies that reported so far, 79 percent have reported better than expected earnings. Chadha said, however, companies are also beating on the top line, and as of Thursday, 65.5 of a smaller sampling had better than expected sales results.
Chadha, like a number of strategists, believes the stock market is set to move higher, for now. But he also thinks it will take a breather after the earnings season. He expects the S&P to reach 1125 by the end of the earnings season but it could pull back into the year end, reaching a level of about 1075, close to its current level. His target for the end of next year is 1260.
http://www.cnbc.com/id/33351707/
Published: Friday, 16 Oct 2009
8:42 PM ET Text Size
By: Patti Domm
Executive Editor
Corporate earnings will trump almost everything for the stock market in the coming week.
A string of better-than-expected third quarter earnings reports have helped fuel the stock market rally, taking the Dow above 10,000 for the first time in a year.
About half the Dow 30 and a quarter of the S&P 500 report in the week ahead. Analysts expect the majority of these companies to continue to beat expectations.
Traders are also watching the dollar, which continues to weaken as stocks and other risk assets move higher. They are also keeping an eye on the quick boil in oil prices, which moved sharply higher in the past week and are beginning to make some investors cautious.
"Basically, the market has gone up on proof of earnings, so after this earnings season, there's not going to be another catalyst before earnings early next year," said Binky Chadha, chief U.S. equities strategist at Deutsche Bank.
"It's the second quarter of sequential top line growth, and we also should have the third quarter of bottom line growth. In the fourth quarter, year on year earnings will be positive because Q4 of '08 was so bad...Q4 earnings should mark the end of the earnings recession," he said.
Of the 61 S&P companies that reported so far, 79 percent have reported better than expected earnings. Chadha said, however, companies are also beating on the top line, and as of Thursday, 65.5 of a smaller sampling had better than expected sales results.
Chadha, like a number of strategists, believes the stock market is set to move higher, for now. But he also thinks it will take a breather after the earnings season. He expects the S&P to reach 1125 by the end of the earnings season but it could pull back into the year end, reaching a level of about 1075, close to its current level. His target for the end of next year is 1260.
http://www.cnbc.com/id/33351707/
Power from wind
Wind Farms: eleven UK sites marked for development
Eleven sites around the English, Scottish and Welsh coastline have been earmarked as suitable to house ranks of giant wind turbines.
By Paul Eccleston
Published: 10:34PM BST 04 Jun 2008
It is the latest phase of an ambitious scheme to meet more of the UK's energy needs from natural and sustainable sources.
The government is committed to obtaining 20 per cent of all its energy from renewables by 2020 and offshore wind power has been identified as the key factor in reaching the target.
Related Articles
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The UK is about to overtake Denmark as the world's largest generator of wind power and within five years we will be able to obtain as much power from wind as we do from nuclear plants.
Announcing the potential new sites the Crown Estate - which is responsible for managing the sea bed - said it will play a much bigger part in getting wind farms up and running in time to meet the 2020 deadline.
It will meet up to 50 per cent of the start up costs of new farms by helping developers get through complicated planning processes and with sourcing suitable turbines and getting them hooked up to the electricity grid.
Bidding for the new sites - round three of a long-term plan to increase the number of offshore wind farms - will begin almost immediately and contracts could be signed as early as next year.
If all the new farms are built it will more than triple the 8GW of power being developed offshore under rounds one and two of the scheme to 25GW and 33GW by 2020 which would be enough to theoretically provide enough power for every home in Britain.
Rob Hastings, the Crown Estate's director of marine estates, said "We recognise that the 2020 EU renewable energy target is a major challenge for the UK. It will demand a strategic vision, combining innovation in technology and energy infrastructure with sympathy for environmental concerns.
In partnership with wind farm developers, we will need to establish the best location for wind farms within the programme and gain consensus with key stakeholders to deliver each scheme. :
"We need to be sensitive to other marine users and conservation interests, and we have to deliver all this in the context of worldwide competition and a limited supply of new wind turbines.
Energy Minister Malcolm Wicks said wind power would help tackle two of the big challenges facing the country - climate change and energy security.
"The expansion of wind energy is already a real success story for the UK. We will shortly become the leading country in the world in terms of the number of wind farms operating offshore," he said.
"The Government is aware of the costs and supply challenges facing the industry and it's hoped the Crown Estate's investment and leasing programme for round three will provide developers with confidence to make investments much earlier on, like signing grid connection agreements or ordering turbines."
Maria McCaffery, Chief Executive of the industry body British Wind Energy Authority, said: "This is fantastic news for the UK wind industry, with Britain's seas now officially opened for business. This announcement has brought delivery of the 2020 renewable energy targets a great deal closer".
She added: "Wind energy is no longer a minority pursuit. With nearly half a gigawatt already installed and a further 8GW of schemes in the pipeline we are now a mainstream energy supplier."
The head of Greenpeace UK's climate campaign Robin Oakley said: "Offshore wind is a 21st century, frontier technology that can deliver clean electricity to every home in Britain and secure our energy supplies for years to come. Our country could be the Saudi Arabia of offshore wind - and John Hutton knows it.
Instead, he's lost in a nuclear fantasy and flatly refuses to introduce the policies that have delivered huge economic benefits for Germany and Spain, who now lead the world in renewable energy. Britain is sitting on a treasure chest of green collar jobs and clean, renewable energy - now we need to unlock it."
http://www.telegraph.co.uk/news/uknews/2075531/Wind-Farms-eleven-UK-sites-marked-for-development.html
Eleven sites around the English, Scottish and Welsh coastline have been earmarked as suitable to house ranks of giant wind turbines.
By Paul Eccleston
Published: 10:34PM BST 04 Jun 2008
It is the latest phase of an ambitious scheme to meet more of the UK's energy needs from natural and sustainable sources.
The government is committed to obtaining 20 per cent of all its energy from renewables by 2020 and offshore wind power has been identified as the key factor in reaching the target.
Related Articles
Offshore UK wind farm sites announced
Crown Estate did not tell locals about huge off-shore windfarm
World's largest wind farm scrapped in financial downturn
Wind farms could supply planet's power
Climate Change Act: Now the world faces its biggest ever bill
The UK is about to overtake Denmark as the world's largest generator of wind power and within five years we will be able to obtain as much power from wind as we do from nuclear plants.
Announcing the potential new sites the Crown Estate - which is responsible for managing the sea bed - said it will play a much bigger part in getting wind farms up and running in time to meet the 2020 deadline.
It will meet up to 50 per cent of the start up costs of new farms by helping developers get through complicated planning processes and with sourcing suitable turbines and getting them hooked up to the electricity grid.
Bidding for the new sites - round three of a long-term plan to increase the number of offshore wind farms - will begin almost immediately and contracts could be signed as early as next year.
If all the new farms are built it will more than triple the 8GW of power being developed offshore under rounds one and two of the scheme to 25GW and 33GW by 2020 which would be enough to theoretically provide enough power for every home in Britain.
Rob Hastings, the Crown Estate's director of marine estates, said "We recognise that the 2020 EU renewable energy target is a major challenge for the UK. It will demand a strategic vision, combining innovation in technology and energy infrastructure with sympathy for environmental concerns.
In partnership with wind farm developers, we will need to establish the best location for wind farms within the programme and gain consensus with key stakeholders to deliver each scheme. :
"We need to be sensitive to other marine users and conservation interests, and we have to deliver all this in the context of worldwide competition and a limited supply of new wind turbines.
Energy Minister Malcolm Wicks said wind power would help tackle two of the big challenges facing the country - climate change and energy security.
"The expansion of wind energy is already a real success story for the UK. We will shortly become the leading country in the world in terms of the number of wind farms operating offshore," he said.
"The Government is aware of the costs and supply challenges facing the industry and it's hoped the Crown Estate's investment and leasing programme for round three will provide developers with confidence to make investments much earlier on, like signing grid connection agreements or ordering turbines."
Maria McCaffery, Chief Executive of the industry body British Wind Energy Authority, said: "This is fantastic news for the UK wind industry, with Britain's seas now officially opened for business. This announcement has brought delivery of the 2020 renewable energy targets a great deal closer".
She added: "Wind energy is no longer a minority pursuit. With nearly half a gigawatt already installed and a further 8GW of schemes in the pipeline we are now a mainstream energy supplier."
The head of Greenpeace UK's climate campaign Robin Oakley said: "Offshore wind is a 21st century, frontier technology that can deliver clean electricity to every home in Britain and secure our energy supplies for years to come. Our country could be the Saudi Arabia of offshore wind - and John Hutton knows it.
Instead, he's lost in a nuclear fantasy and flatly refuses to introduce the policies that have delivered huge economic benefits for Germany and Spain, who now lead the world in renewable energy. Britain is sitting on a treasure chest of green collar jobs and clean, renewable energy - now we need to unlock it."
http://www.telegraph.co.uk/news/uknews/2075531/Wind-Farms-eleven-UK-sites-marked-for-development.html
The Qataris profiting handsomely for taking the risk
Qataris bank £615m profit on rescue of Barclays
One of Barclays' Middle Eastern saviours has bagged a £615m cash profit from its £1.75bn gamble on the bank's recovery last year.
By Philip Aldrick, Banking Editor
Published: 8:51PM BST 20 Oct 2009
Comments 1 | Comment on this article
Towering profit: Qatar's sovereign wealth fund has banked £615m in a year from its investment in Barclays Photo: Ian Jones Qatar Holdings, the country's sovereign wealth fund, on Tuesday cashed in half of the £1.5bn of warrants it received in return for supporting last October's £7bn rescue fund-raising to keep the lender out of UK Government hands.
The warrants, which Qatar exercised at 197.775p a share, were sold in the market at 360p, realising a £615m cash profit for the Middle Eastern investor.
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Standard Chartered share price fall triggers capital review
UKFI rules out quick sale of bank sharesQatar is sitting on a £615m paper profit for the other half of the warrants it holds and a further £690m profit on the £500m of shares acquired at 153.276p. It has also been paid £175m in interest for the £1.25bn of reserve capital instruments that formed the bulk of the deal.
In total, Qatar has made a £2.14bn cash and paper profit on its £1.75bn investment in just one year.
Qatar was one of three Middle Eastern investors that came to Barclays' rescue after UK institutions shunned management attempts to raise capital when Lloyds Banking Group and Royal Bank of Scotland were part-nationalised last year. Barclays stayed out of state hands, but it had to offer highly generous terms to the three investors.
Between them, they have made a cash and paper profit of £5.4bn on a combined £5.3bn investment in just one year. His Highness Sheikh Mansour bin Zayed al-Nahyan, a member of the Abu Dhabi royal family, sold £2bn of his investment for a £1.45bn profit in June but has retained £1.5bn of warrants that are currently £1.2bn in profit.
Challenger, a vehicle owned by the Qatari royal family, is sitting on a £410m paper profit and has earned £25m in interest on its investment.
Credit Suisse placed Qatar's shares at an average of 360p largely with UK institutions.
Analysts pointed out that Barclays' shareholders were offered the chance to support the bank but declined and are now paying more than twice as much for the stock.
They were also given the opportunity at the time of the rescue refinancing to buy £1.5bn of manadatory convertible notes that switched into shares in June at 153.276p, under the same terms as the Middle Eastern investors. Only £1.25bn was taken up.
"They missed an opportunity and the Qataris are profiting handsomely for taking the risk," one analyst said
Qatar stressed that it remained "a long-term strategic shareholder in Barclays". It continues to be the bank's largest shareholder with a 7.1pc stake, diluted from 7.4pc due to the issue of 379m new shares as a result of the warrants being exercised.
John Varley, Barclays chief executive said the placing "will further broaden the base of our share register" and added: "Qatar is our largest shareholder and a key partner of the Barclays group."
The deal will also improve Barclays' core tier one ratio, the key measure of financial strength, from 8.8pc in June to roughly 8.95pc. The boost came about because Qatar had to pay the bank £750m for the new shares before selling them at a profit.
Bringing the Middle East investors on to the share register was highly controversial last year. The price paid was significantly more than what it would have cost to raise similar funds from the Government and the speed of the deal meant shareholders were not given first refusal on the deal, as is best practice.
However, the strategy of remaining independent has proved a success. Barclays shares have recovered from around 200p to 363¾p, down 18.3p yesterday due to the dilutive effect of the deal, while RBS shares have fallen from 66p to 46.58p and Lloyds from around 200p to 91.35p in the same period.
http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/6390133/Qataris-bank-615m-profit-on-rescue-of-Barclays.html
One of Barclays' Middle Eastern saviours has bagged a £615m cash profit from its £1.75bn gamble on the bank's recovery last year.
By Philip Aldrick, Banking Editor
Published: 8:51PM BST 20 Oct 2009
Comments 1 | Comment on this article
Towering profit: Qatar's sovereign wealth fund has banked £615m in a year from its investment in Barclays Photo: Ian Jones Qatar Holdings, the country's sovereign wealth fund, on Tuesday cashed in half of the £1.5bn of warrants it received in return for supporting last October's £7bn rescue fund-raising to keep the lender out of UK Government hands.
The warrants, which Qatar exercised at 197.775p a share, were sold in the market at 360p, realising a £615m cash profit for the Middle Eastern investor.
Related Articles
Sainsbury's rises on renewed talk of bid by Qatari Investment Authority
Abu Dhabi sheikh cashes in Barclays stake for £1.5bn profit
Barclays shares surge on iShare sale hope
Staveley bags herself a late stocking filler
Standard Chartered share price fall triggers capital review
UKFI rules out quick sale of bank sharesQatar is sitting on a £615m paper profit for the other half of the warrants it holds and a further £690m profit on the £500m of shares acquired at 153.276p. It has also been paid £175m in interest for the £1.25bn of reserve capital instruments that formed the bulk of the deal.
In total, Qatar has made a £2.14bn cash and paper profit on its £1.75bn investment in just one year.
Qatar was one of three Middle Eastern investors that came to Barclays' rescue after UK institutions shunned management attempts to raise capital when Lloyds Banking Group and Royal Bank of Scotland were part-nationalised last year. Barclays stayed out of state hands, but it had to offer highly generous terms to the three investors.
Between them, they have made a cash and paper profit of £5.4bn on a combined £5.3bn investment in just one year. His Highness Sheikh Mansour bin Zayed al-Nahyan, a member of the Abu Dhabi royal family, sold £2bn of his investment for a £1.45bn profit in June but has retained £1.5bn of warrants that are currently £1.2bn in profit.
Challenger, a vehicle owned by the Qatari royal family, is sitting on a £410m paper profit and has earned £25m in interest on its investment.
Credit Suisse placed Qatar's shares at an average of 360p largely with UK institutions.
Analysts pointed out that Barclays' shareholders were offered the chance to support the bank but declined and are now paying more than twice as much for the stock.
They were also given the opportunity at the time of the rescue refinancing to buy £1.5bn of manadatory convertible notes that switched into shares in June at 153.276p, under the same terms as the Middle Eastern investors. Only £1.25bn was taken up.
"They missed an opportunity and the Qataris are profiting handsomely for taking the risk," one analyst said
Qatar stressed that it remained "a long-term strategic shareholder in Barclays". It continues to be the bank's largest shareholder with a 7.1pc stake, diluted from 7.4pc due to the issue of 379m new shares as a result of the warrants being exercised.
John Varley, Barclays chief executive said the placing "will further broaden the base of our share register" and added: "Qatar is our largest shareholder and a key partner of the Barclays group."
The deal will also improve Barclays' core tier one ratio, the key measure of financial strength, from 8.8pc in June to roughly 8.95pc. The boost came about because Qatar had to pay the bank £750m for the new shares before selling them at a profit.
Bringing the Middle East investors on to the share register was highly controversial last year. The price paid was significantly more than what it would have cost to raise similar funds from the Government and the speed of the deal meant shareholders were not given first refusal on the deal, as is best practice.
However, the strategy of remaining independent has proved a success. Barclays shares have recovered from around 200p to 363¾p, down 18.3p yesterday due to the dilutive effect of the deal, while RBS shares have fallen from 66p to 46.58p and Lloyds from around 200p to 91.35p in the same period.
http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/6390133/Qataris-bank-615m-profit-on-rescue-of-Barclays.html
Return of high oil prices threatens real damage
Return of high oil prices threatens real damage
By Jeremy Warner Economics Last updated: October 20th, 2009
Interest rates at close to zero are driving the price of virtually everything else wild, so it should come as little surprise to see oil back above twelve month highs. OK, so it is still a long way from the crucifying $140 a barrel it reached in the summer of last year, but prices have nearly doubled so far this year and at more than $80 a barrel, they are again high enough to cause real economic damage.
By common agreement, it was the collapse of Lehman Brothers which plunged the world into deep recession, and no doubt the destruction of confidence in the banking system was a major cause. But what’s often over looked is the role played by high energy prices. These had reached crippling levels by the summer of 2008, and were causing real damage to industry and business. American consumers took one look at prices at the pumps and collectively decided to stop spending. This collapse in consumer and business confidence preceded the Lehman debacle.
The world economy is said to be a great deal less vulnerable to high oil prices than it was 30 or 40 years ago, but they still self evidently have the power to shock. Most post war recessions have been preceded by a spike in the oil price. So to see the price back at elevated levels (see accompanying chart) before a proper economic recovery has even taken hold is a cause for some concern.
Having peaked in the summer of last year at over $140 a barrel, the oil price then plunged. But now it is back up to over $80.
In part, today’s relatively high price is merely a function of dollar weakness. Abdallah El-Badri, Secretary General of OPEC, insists that there is no shortage of oil. The rally to more than $80 a barrel is driven by higher equity prices, the sliding dollar and speculation”, he told Bloomberg News.
There are plainly fundamental forces at work too. Emerging market economies, particularly those of China and India, are once more booming. Yet I suspect the main mischief is again speculation. With interest rates at close to zero, you cannot get a return on cash right now, so money is being poured into riskier assets, including commodities and oil.
An interesting article in the Financial Times this morning puts the near term upward pressure on oil prices down to heavy trading in options contracts ahead of the year end. Quite a lot of this activity is driven by forward hedging for real economy clients. But there is also a significant amount which is purely speculative in nature.
Is it right that speculators should once more be putting the health of the world economy at risk? Speculation, it is often said, only reflects underlying realities. The speculator only makes money if his bets mirror the real economy pressures of supply and demand. Maybe, but cheap money in the quantities now being provided by central bankers and governments creates distortions which stand to upset these delicate balances.
If the price gets back to $100 or more, a double dip recession in advanced economies would seem a virtual certainty. They are all still too fragile to be able to tolerate such a rise in costs.
Tags: Abdall El-Badri, banking crisis, Lehman Brothers, oil, oil price spikes, OPEC, recession, speculation
http://blogs.telegraph.co.uk/finance/jeremywarner/100001422/return-of-high-oil-prices-threatens-real-damage/?utm_source=Telegraph.co.uk&utm_medium=TD_oil&utm_campaign=Finance2110
By Jeremy Warner Economics Last updated: October 20th, 2009
Interest rates at close to zero are driving the price of virtually everything else wild, so it should come as little surprise to see oil back above twelve month highs. OK, so it is still a long way from the crucifying $140 a barrel it reached in the summer of last year, but prices have nearly doubled so far this year and at more than $80 a barrel, they are again high enough to cause real economic damage.
By common agreement, it was the collapse of Lehman Brothers which plunged the world into deep recession, and no doubt the destruction of confidence in the banking system was a major cause. But what’s often over looked is the role played by high energy prices. These had reached crippling levels by the summer of 2008, and were causing real damage to industry and business. American consumers took one look at prices at the pumps and collectively decided to stop spending. This collapse in consumer and business confidence preceded the Lehman debacle.
The world economy is said to be a great deal less vulnerable to high oil prices than it was 30 or 40 years ago, but they still self evidently have the power to shock. Most post war recessions have been preceded by a spike in the oil price. So to see the price back at elevated levels (see accompanying chart) before a proper economic recovery has even taken hold is a cause for some concern.
Having peaked in the summer of last year at over $140 a barrel, the oil price then plunged. But now it is back up to over $80.
In part, today’s relatively high price is merely a function of dollar weakness. Abdallah El-Badri, Secretary General of OPEC, insists that there is no shortage of oil. The rally to more than $80 a barrel is driven by higher equity prices, the sliding dollar and speculation”, he told Bloomberg News.
There are plainly fundamental forces at work too. Emerging market economies, particularly those of China and India, are once more booming. Yet I suspect the main mischief is again speculation. With interest rates at close to zero, you cannot get a return on cash right now, so money is being poured into riskier assets, including commodities and oil.
An interesting article in the Financial Times this morning puts the near term upward pressure on oil prices down to heavy trading in options contracts ahead of the year end. Quite a lot of this activity is driven by forward hedging for real economy clients. But there is also a significant amount which is purely speculative in nature.
Is it right that speculators should once more be putting the health of the world economy at risk? Speculation, it is often said, only reflects underlying realities. The speculator only makes money if his bets mirror the real economy pressures of supply and demand. Maybe, but cheap money in the quantities now being provided by central bankers and governments creates distortions which stand to upset these delicate balances.
If the price gets back to $100 or more, a double dip recession in advanced economies would seem a virtual certainty. They are all still too fragile to be able to tolerate such a rise in costs.
Tags: Abdall El-Badri, banking crisis, Lehman Brothers, oil, oil price spikes, OPEC, recession, speculation
http://blogs.telegraph.co.uk/finance/jeremywarner/100001422/return-of-high-oil-prices-threatens-real-damage/?utm_source=Telegraph.co.uk&utm_medium=TD_oil&utm_campaign=Finance2110
Former Big Bear Turns Baby Bull
Former Big Bear Turns Baby Bull
Posted By:Lee Brodie
Topics:Consumers | Economy (U.S.) | Recession | Stock Market | Stock Picks
It seems even the most bearish market mavens can’t fight the bullish momentum in this stock market. Wait until you find out who’s now a buyer of stocks.
Richard Bernstein, the former Merrill Lynch chief investment strategist, and one of the biggest bears we know is changing his tune.
People like me have underestimated the rebound, Bernstein says. What’s made him a believer?
You might remember the last time Bernstein was on Fast Money he told the traders – at the foundation of the stock market and the recovery is jobs. The market can’t sustain itself unless people are bringing home the bacon.
And although the unemployment rate continues to rise Bernstein is more focused on initial jobless claims which he and many others consider a leading indicator. And that number has started to decline.
In fact, when they were reported last week new jobless claims dropped to the lowest level since January. And that trend combined with low inflation likely means Americans will regain their appetite for spending.
Another way of saying that is – the economy is slowly getting better. “if you believe in the recovery this is the prime time to be a value investor.”
What’s the trade?
Bernstein says the best value are in junky names. “The companies that you’d hate to own tend to perform the best. In almost every industry go for lower quality companies."
Huh?
"In 1991 - a time period that was similar to now - 'C' and 'D' rated stocks by S&P went up 90% that year and continued to outperform for 4 years after that," he says.
Why?
"As the economy continues to improve investors shift from focussing on the balance sheet to focussing on the income statement and cash flow. And the junkiest companies have the greatest operating leverage so their cash flow just explodes," he says.
Although Bernstein doesn't reveal names he does says "consumer cyclical stocks probably have strong upside potential.
"History shows that as long as initial jobless claims trend downward the performance of consumer discretionary stocks [XLY 28.35 -0.30 (-1.05%) ] trend up," he concludes.
http://www.cnbc.com/id/33397834
Posted By:Lee Brodie
Topics:Consumers | Economy (U.S.) | Recession | Stock Market | Stock Picks
It seems even the most bearish market mavens can’t fight the bullish momentum in this stock market. Wait until you find out who’s now a buyer of stocks.
Richard Bernstein, the former Merrill Lynch chief investment strategist, and one of the biggest bears we know is changing his tune.
People like me have underestimated the rebound, Bernstein says. What’s made him a believer?
You might remember the last time Bernstein was on Fast Money he told the traders – at the foundation of the stock market and the recovery is jobs. The market can’t sustain itself unless people are bringing home the bacon.
And although the unemployment rate continues to rise Bernstein is more focused on initial jobless claims which he and many others consider a leading indicator. And that number has started to decline.
In fact, when they were reported last week new jobless claims dropped to the lowest level since January. And that trend combined with low inflation likely means Americans will regain their appetite for spending.
Another way of saying that is – the economy is slowly getting better. “if you believe in the recovery this is the prime time to be a value investor.”
What’s the trade?
Bernstein says the best value are in junky names. “The companies that you’d hate to own tend to perform the best. In almost every industry go for lower quality companies."
Huh?
"In 1991 - a time period that was similar to now - 'C' and 'D' rated stocks by S&P went up 90% that year and continued to outperform for 4 years after that," he says.
Why?
"As the economy continues to improve investors shift from focussing on the balance sheet to focussing on the income statement and cash flow. And the junkiest companies have the greatest operating leverage so their cash flow just explodes," he says.
Although Bernstein doesn't reveal names he does says "consumer cyclical stocks probably have strong upside potential.
"History shows that as long as initial jobless claims trend downward the performance of consumer discretionary stocks [XLY 28.35 -0.30 (-1.05%) ] trend up," he concludes.
http://www.cnbc.com/id/33397834
Improving Global Economy Shows Up in Earnings
Improving Global Economy Shows Up in Earnings
Published: Tuesday, 20 Oct 2009 | 9:27 AM ET Text Size By: Bob Pisani
CNBC Reporter
Topline beats take back seat to positive 2010 commentary. Six big names beat earnings estimates: Apple [AAPL 198.76 8.90 (+4.69%) ], Coke, Pfizer, United Technologies and Caterpillar all beat on the bottom line.
But something's different this time: a higher percentage are beating on the topline as well. Apple did. Even Dupont, Pfizer and UTX did.
What is different this time is that the big multinationals have reaped the benefits of an improving overseas market, along with the weaker dollar.
The improving global economy is showing up in several of today's comments.
Caterpillar's Jim Owens:
1) "the third quarter marked the low point for Caterpillar sales and revenues"
2) "we are seeing encouraging signs that indicate a recovery may be underway"
3) 2010: "we've already started planning for an upturn"
Elsewhere:
1) futures dropped at 8:30 AM ET as September Housing Starts and Permits were below expectations.
2) Caterpillar [CAT 59.61 1.76 (+3.04%) ] up 6 percent pre-open, came in at $0.64, way above the $0.06 expected. Sales were not a blowout: $7.3 billion vs. $7.49 billion consensus.
The bull consensus seems to be playing out: Q2-Q3 may indeed be the trough for production, and with inventories lean even a small improvement in orders will help the top and bottom line.
2010 preliminary guidance of an increase of 10 to 25 percent for sales is also a positive surprise.
3) UTX [UTX 65.34 -0.10 (-0.15%) ] at $1.14 beat by $0.02, and while revenues were a tad better than consensus cost cutting was the major factor in the beat. CEO Louis Chenevert said orders had "stabilized."
4) DuPont [DD Loading... () ] beat consensus by two cents and talked about improving demand across key markets. Here's an interesting stat: profit is up 11 percent, but top line dropped 18.3 percent. They narrowed their earnings outlook for the year...it now expects earnings of $1.95 to $2.05 per share versus previous estimate of $1.70 - $2.10.
5) Strong earnings from Texas Instruments [TXN 23.66 0.14 (+0.6%) ], as well as earlier strong report from Intel [INTC 20.18 -0.23 (-1.13%) ] and Apple should keep the semiconductors going. The SMH (Semiconductor HOLDR, the main ETF-type instrument professionals use to trade semis) has been strong all year, bottomed earlier than the S&P 500, and has had a stronger recovery in the past year.
6) Coca-Cola [KO 54.06 -0.73 (-1.33%) ] topped Street estimates by a penny. The soft drink maker says higher sales volume and cost cuts helped pop Q3 profits. Sales by volume rose 2%.
7) Pfizer [PFE 17.93 -0.05 (-0.28%) ] also beat the Street. The drug maker came in at $0.51 for Q3 excluding items vs. estimate of $0.48. Aggressive cost-cutting helped offset the negative foreign exchange and competition from cheaper generics.
http://www.cnbc.com/id/33395059
Published: Tuesday, 20 Oct 2009 | 9:27 AM ET Text Size By: Bob Pisani
CNBC Reporter
Topline beats take back seat to positive 2010 commentary. Six big names beat earnings estimates: Apple [AAPL 198.76 8.90 (+4.69%) ], Coke, Pfizer, United Technologies and Caterpillar all beat on the bottom line.
But something's different this time: a higher percentage are beating on the topline as well. Apple did. Even Dupont, Pfizer and UTX did.
What is different this time is that the big multinationals have reaped the benefits of an improving overseas market, along with the weaker dollar.
The improving global economy is showing up in several of today's comments.
Caterpillar's Jim Owens:
1) "the third quarter marked the low point for Caterpillar sales and revenues"
2) "we are seeing encouraging signs that indicate a recovery may be underway"
3) 2010: "we've already started planning for an upturn"
Elsewhere:
1) futures dropped at 8:30 AM ET as September Housing Starts and Permits were below expectations.
2) Caterpillar [CAT 59.61 1.76 (+3.04%) ] up 6 percent pre-open, came in at $0.64, way above the $0.06 expected. Sales were not a blowout: $7.3 billion vs. $7.49 billion consensus.
The bull consensus seems to be playing out: Q2-Q3 may indeed be the trough for production, and with inventories lean even a small improvement in orders will help the top and bottom line.
2010 preliminary guidance of an increase of 10 to 25 percent for sales is also a positive surprise.
3) UTX [UTX 65.34 -0.10 (-0.15%) ] at $1.14 beat by $0.02, and while revenues were a tad better than consensus cost cutting was the major factor in the beat. CEO Louis Chenevert said orders had "stabilized."
4) DuPont [DD Loading... () ] beat consensus by two cents and talked about improving demand across key markets. Here's an interesting stat: profit is up 11 percent, but top line dropped 18.3 percent. They narrowed their earnings outlook for the year...it now expects earnings of $1.95 to $2.05 per share versus previous estimate of $1.70 - $2.10.
5) Strong earnings from Texas Instruments [TXN 23.66 0.14 (+0.6%) ], as well as earlier strong report from Intel [INTC 20.18 -0.23 (-1.13%) ] and Apple should keep the semiconductors going. The SMH (Semiconductor HOLDR, the main ETF-type instrument professionals use to trade semis) has been strong all year, bottomed earlier than the S&P 500, and has had a stronger recovery in the past year.
6) Coca-Cola [KO 54.06 -0.73 (-1.33%) ] topped Street estimates by a penny. The soft drink maker says higher sales volume and cost cuts helped pop Q3 profits. Sales by volume rose 2%.
7) Pfizer [PFE 17.93 -0.05 (-0.28%) ] also beat the Street. The drug maker came in at $0.51 for Q3 excluding items vs. estimate of $0.48. Aggressive cost-cutting helped offset the negative foreign exchange and competition from cheaper generics.
http://www.cnbc.com/id/33395059
Market rebound continues confound analysts
BEHIND THE MONEY: Analysts Give Companies Easy Earnings Ride
Posted By:John Melloy
Topics:Recession
Earnings
Stock Market
Stock Picks
Companies:Goldman Sachs Group Inc.
Caterpillar Inc
There was a great Monty Python sketch called the "Twit Olympics" where one of the events entailed jumping over a row of matchbooks. Perhaps that's what we should rename this earnings season after looking at the parade of earnings beats this morning, which follow the incredible estimate-pounding performance so far this season.
For example, Caterpillar [CAT 59.61 1.76 (+3.04%) ] reported a profit of 64 cents a share, compared to the Thomson Reuters consensus estimate of 6 cents a share. Were Caterpillar analysts asleep at the switch? Maybe, because despite a 60 percent jump in Caterpillar shares in the quarter, they didn't raise their forecast one iota, according to Birinyi & Associates.
CATERPILLAR INC(CAT)
59.61 1.76 (+3.04%%)
NYSE
It seems that was the trend for the whole market too. As the S&P 500 [.SPX 1091.06 -6.85 (-0.62%) ] surged 15 percent in the third quarter, analysts kept lowering their earnings estimates for the period.
They expected a 21% drop in earnings for the quarter on July 1 and bumped that down to a 25% decline by the time the quarter ended, with the biggest downward revisions coming in the financial, industrial and energy sectors, according to Thomson Reuters. The biggest surprises we've seen so far have come from those sectors in Goldman Sachs [GS 184.89 -0.61 (-0.33%) ] last week and Caterpillar today.
Jon Najarian, co-founder of Optionmonster.com, said this makes sense because since analysts set the bar so low, the so-called whisper numbers out there are much higher this reporting season then he can last remember.
The Fast Money traders keep bringing up on our conference calls how one concern of theirs is that the momentum of this market rebound continues to confound credible strategists they follow, such as Doug Kass, President of Seabreeze Partners and T2 Partners' Whitney Tilson, that have called for its end. Maybe this relentless rally is puzzling because the numbers it's based upon aren't as good as they appear.
Posted By:John Melloy
Topics:Recession
Earnings
Stock Market
Stock Picks
Companies:Goldman Sachs Group Inc.
Caterpillar Inc
There was a great Monty Python sketch called the "Twit Olympics" where one of the events entailed jumping over a row of matchbooks. Perhaps that's what we should rename this earnings season after looking at the parade of earnings beats this morning, which follow the incredible estimate-pounding performance so far this season.
For example, Caterpillar [CAT 59.61 1.76 (+3.04%) ] reported a profit of 64 cents a share, compared to the Thomson Reuters consensus estimate of 6 cents a share. Were Caterpillar analysts asleep at the switch? Maybe, because despite a 60 percent jump in Caterpillar shares in the quarter, they didn't raise their forecast one iota, according to Birinyi & Associates.
CATERPILLAR INC(CAT)
59.61 1.76 (+3.04%%)
NYSE
It seems that was the trend for the whole market too. As the S&P 500 [.SPX 1091.06 -6.85 (-0.62%) ] surged 15 percent in the third quarter, analysts kept lowering their earnings estimates for the period.
Jon Najarian, co-founder of Optionmonster.com, said this makes sense because since analysts set the bar so low, the so-called whisper numbers out there are much higher this reporting season then he can last remember.
The Fast Money traders keep bringing up on our conference calls how one concern of theirs is that the momentum of this market rebound continues to confound credible strategists they follow, such as Doug Kass, President of Seabreeze Partners and T2 Partners' Whitney Tilson, that have called for its end. Maybe this relentless rally is puzzling because the numbers it's based upon aren't as good as they appear.
U.S. stocks, buoyed by optimism for an economic recovery, are instead poised to fall.
Hedge fund manager Tilson doubled bets vs stocks
Wed Oct 14, 2009 2:35pm EDT
NEW YORK, Oct 14 (Reuters) - Whitney Tilson, manager of hedge fund T2 Partners LLC, said on Wednesday he has doubled his bets that U.S. stocks, buoyed by optimism for an economic recovery, are instead poised to fall.
"We've doubled our short book from 30 percent to 60 percent and we've trimmed our long book from 120 percent to about 90 percent," Tilson said in an interview with Reuters.
Tilson predicted stocks would give back gains even as the Dow Jones Industrial Average .DJI briefly climbed above the psychologically important 10,000 level early Wednesday afternoon -- part of a stunning rebound for markets that were dominated by fear as recently as March.
"Investors have now gone from being too pessimistic to too optimistic in general," he said.
But Tilson said the Dow touching 10,000 does not translate into the real economy. He predicted that banks, particularly small and regional lenders, would be hobbled by loan losses for up to five years.
"Investors are thinking that the losses are going to start to diminish fairly quickly over the next year or two, and our best guess is that losses remain very high for the next couple of years," he said. (Reporting by Jennifer Ablan and Joseph A. Giannone, editing by Leslie Gevirtz)
http://www.reuters.com/article/bankruptcyNews/idUSWEN467420091014
Wed Oct 14, 2009 2:35pm EDT
NEW YORK, Oct 14 (Reuters) - Whitney Tilson, manager of hedge fund T2 Partners LLC, said on Wednesday he has doubled his bets that U.S. stocks, buoyed by optimism for an economic recovery, are instead poised to fall.
"We've doubled our short book from 30 percent to 60 percent and we've trimmed our long book from 120 percent to about 90 percent," Tilson said in an interview with Reuters.
Tilson predicted stocks would give back gains even as the Dow Jones Industrial Average .DJI briefly climbed above the psychologically important 10,000 level early Wednesday afternoon -- part of a stunning rebound for markets that were dominated by fear as recently as March.
"Investors have now gone from being too pessimistic to too optimistic in general," he said.
But Tilson said the Dow touching 10,000 does not translate into the real economy. He predicted that banks, particularly small and regional lenders, would be hobbled by loan losses for up to five years.
"Investors are thinking that the losses are going to start to diminish fairly quickly over the next year or two, and our best guess is that losses remain very high for the next couple of years," he said. (Reporting by Jennifer Ablan and Joseph A. Giannone, editing by Leslie Gevirtz)
http://www.reuters.com/article/bankruptcyNews/idUSWEN467420091014
Investors Are Getting Overly Enthusiastic
Wednesday, 16 Sep 2009
Investors Are Getting Overly Enthusiastic, Says Tilson
Posted By:Lee Brodie
Topics:Employment | Housing | Stock Market | Stock Picks
Companies:Berkshire Hathaway Inc. | Regions Financial Corp | Zions Bancorporation
All this week Fast Money is speaking with the handful of investors who saw the Wall Street crisis coming.
Whitney Tilson, the founder of T2 Partners, is widely known for predicting the mortgage meltdown. What does he see down the road from here?
He’s still bearish, very bearish.
"I'm worried that investors are getting overly enthusiastic. They see a couple of month-to-month sequential home price increases, (and they get excited). We saw the exact same thing a year ago. Don't get faked out by the seasonality."
"We think home prices have another year to go before they bottom and that's going to impact any stock that has exposure to the housing sector."
His outlook comes in stark contrast to what we've been hearing from countless market mavens and even Fed Chief Ben Bernanke who all seem to agree the recession is over.
The Wild Card
Although it appears the economy is improving, unemployment is not and Tilson thinks jobs are the wildcard that could derail the whole kit and kiboodle.
When people lose their jobs they’re able to hang on for a while. They may not pay credit cards but try and keep up with the mortgage. But after a while it become impossible to pay the mortgage.
"What happens to underwater homeowners when they're underwater? Do they walk away from their homes if its economically rational to do so?"
Tilson is betting they do.
As a result Tilson predicts that mortgage defaults are about to skyrocket— the same with consumer loans. In fact, the damage Tilson forecasts is kind of scary.
“There are probably going to be $700 billion of losses in total over the next 8 years and we’ve only seen a few billion of it because those loans haven’t reset,” he tells the traders.
Also Tilson fully expects trouble in commercial real estate. In a past interview he told the desk that "the reason it hasn’t suffered badly so far is that they’re dealing with interest only loans with 5 and 10 year re-sets. Borrowers have been able to make interest payments. It’s upon re-set that they probably won’t be able to refinance."
What’s the trade?
I'd look at regional banks. 50% of their assets are in commercial real estate which is just starting to tip over. I'd short the weaker players such as Regions [RF 5.83 0.13 (+2.28%) ] and Zions [ZION 17.23 -1.10 (-6%) ].
And in case you're wondering, Tilson's largest long position is Berkshire Hathaway [BRK.A 100270.00 --- UNCH (0) ].
What do you think? We want to know.
Do you think a massive number of mortgages and consumer loans are about to default because of rising unemployment?
Vote:
1. Yes, people can't keep up.
2. No, most people have jobs and that won't change.
http://www.reuters.com/article/bankruptcyNews/idUSWEN467420091014
Investors Are Getting Overly Enthusiastic, Says Tilson
Posted By:Lee Brodie
Topics:Employment | Housing | Stock Market | Stock Picks
Companies:Berkshire Hathaway Inc. | Regions Financial Corp | Zions Bancorporation
All this week Fast Money is speaking with the handful of investors who saw the Wall Street crisis coming.
Whitney Tilson, the founder of T2 Partners, is widely known for predicting the mortgage meltdown. What does he see down the road from here?
He’s still bearish, very bearish.
"I'm worried that investors are getting overly enthusiastic. They see a couple of month-to-month sequential home price increases, (and they get excited). We saw the exact same thing a year ago. Don't get faked out by the seasonality."
"We think home prices have another year to go before they bottom and that's going to impact any stock that has exposure to the housing sector."
His outlook comes in stark contrast to what we've been hearing from countless market mavens and even Fed Chief Ben Bernanke who all seem to agree the recession is over.
The Wild Card
Although it appears the economy is improving, unemployment is not and Tilson thinks jobs are the wildcard that could derail the whole kit and kiboodle.
When people lose their jobs they’re able to hang on for a while. They may not pay credit cards but try and keep up with the mortgage. But after a while it become impossible to pay the mortgage.
"What happens to underwater homeowners when they're underwater? Do they walk away from their homes if its economically rational to do so?"
Tilson is betting they do.
As a result Tilson predicts that mortgage defaults are about to skyrocket— the same with consumer loans. In fact, the damage Tilson forecasts is kind of scary.
“There are probably going to be $700 billion of losses in total over the next 8 years and we’ve only seen a few billion of it because those loans haven’t reset,” he tells the traders.
Also Tilson fully expects trouble in commercial real estate. In a past interview he told the desk that "the reason it hasn’t suffered badly so far is that they’re dealing with interest only loans with 5 and 10 year re-sets. Borrowers have been able to make interest payments. It’s upon re-set that they probably won’t be able to refinance."
What’s the trade?
I'd look at regional banks. 50% of their assets are in commercial real estate which is just starting to tip over. I'd short the weaker players such as Regions [RF 5.83 0.13 (+2.28%) ] and Zions [ZION 17.23 -1.10 (-6%) ].
And in case you're wondering, Tilson's largest long position is Berkshire Hathaway [BRK.A 100270.00 --- UNCH (0) ].
What do you think? We want to know.
Do you think a massive number of mortgages and consumer loans are about to default because of rising unemployment?
Vote:
1. Yes, people can't keep up.
2. No, most people have jobs and that won't change.
http://www.reuters.com/article/bankruptcyNews/idUSWEN467420091014
Diversifying your investment overseas
Which country/countries to invest in?
Take your pick: Vietnam, China, Indonesia, Thailand, Singapore, Hong Kong, Australia, US or UK.
Consider the 3 drivers in any stock markets:
1. Re-rating by analysts
2. Currency strengthening
3. Earnings re-rating
Take your pick: Vietnam, China, Indonesia, Thailand, Singapore, Hong Kong, Australia, US or UK.
Consider the 3 drivers in any stock markets:
1. Re-rating by analysts
2. Currency strengthening
3. Earnings re-rating
Tuesday 20 October 2009
There is intelligent speculation as there is intelligent investing.
April 14, 2009
Wellcare Group – An Intelligent Speculation?
Filed under: From the co-founders — Tags: Marcelo Lima, WCG, Wellcare Group — Jane Scottsdale @ 1:11 pm
Common stock investing is inherently risky, and those risks cannot be divorced from the rewards that come with them. Often, it isn’t easy to separate the speculative from the investment component of a common stock commitment. On this topic, Ben Graham, author of the classic The Intelligent Investor, has written most clearly:
Outright speculation is neither illegal, immoral, nor (for most people) fattening to the pocketbook. More than that, some speculation is necessary and unavoidable, for in many common-stock situations there are substantial possibilities of both profit and loss, and the risks therein must be assumed by someone. There is intelligent speculation as there is intelligent investing. But there are many ways in which speculation may be unintelligent. Of these the foremost are:
(1) speculating when you think you are investing;
(2) speculating seriously instead of as a pastime, when you lack proper knowledge and skill for it; and
(3) risking more money in speculation than you can afford to lose.
With that caveat, here’s Wellcare Group (WCG), a stock that has a reasonable chance of going higher once its legal problems are resolved and its earnings normalized. As such, it may present an intelligent speculation.
First, a quick background. Wellcare is a healthcare management organization focused on Medicare and Medicaid, government-run entitlement programs for the elderly and low-income population. It has over 2.5 million members enrolled in its programs nationwide, with a large portion of them in Florida.
Its stock hovered around $120 per share when in October 2007 about 200 FBI agents raided its Tampa campus. The stock collapsed to $40, wiping out $3.3bn in shareholder value. The uncertainty was large; there was no official word of what the FBI raid was for, although newspaper reports stated that one of Wellcare’s subsidiaries had overbilled the government by $35m. In this context, the share price collapse was wildly overdone.
A quick resolution of the problem didn’t happen. Instead, the company went “dark,” not filing its quarterly and yearly financial statements and risking stock exchange delisting for its non-compliance. Periodic SEC filings kept shareholders apprised of the slow progress, but it wasn’t until early 2009 that things became clearer. The company finally filed all of its late financial statements and set a shareholder’s meeting – the first since the FBI raid – for July 30.
Wellcare is well capitalized. As of 12/31/2008, it had about $1.2 billion in cash and $153 million in debt. This debt proved to be another Achilles heel for the stock. When the company reported in 2008 that it was in technical default for not having filed its financial statements, the price dropped precipitously yet again. Fairholme Capital, which owns nearly 20% of the stock, bought a majority of the debt, likely in a move to protect its equity investment.
Throughout this misadventure, the stock has swung wildly, hitting a low of $6.12 in November and $6.23 in March of this year. Yet Wellcare’s core business remains sound, generating substantial free cash flows. The exact number for 2008 involves reversing a goodwill write-down and removing a non-recurring $103m in litigation expenses, but a normalized estimate of $4 in free cash flow per share is probably on the conservative side. While there is significant regulatory uncertainty surrounding its Medicare and Medicaid businesses, at the current price of around $13.80, it’s hard to find a way to lose.
Yet all of these uncertainties – particularly those surrounding the FBI investigation – are still large, which is where the speculative component of this investment comes in. There might be a probability of the government’s penalties being larger than expected. The company is also facing various lawsuits related to its illegal activities, including a class-action lawsuit. Defending against these will cost management’s time and shareholders’ cash.
On the other hand, Wellcare may soon begin conducting conference calls with shareholders and analysts, may soon settle with the government by paying a fine, and may ultimately get sold to a larger competitor, such as UnitedHealth Group. After it fired its disgraced former management, the board brought in Charles Berg, formerly a UnitedHealth executive, Oxford Health Plans CEO and “deal guy.”
With these factors in mind, and taking into account Graham’s three points above, Wellcare may seem like an intelligent speculation after all.
Marcelo P. Lima is a securities analyst. He may be reached at MPL4@cornell.edu
http://blog.valueinvestingcongress.com/2009/04/14/wellcare-group-%e2%80%93-an-intelligent-speculation/
http://blog.valueinvestingcongress.com/?utm_source=VIC&utm_medium=W&utm_campaign=BLOGLA09T
Wellcare Group – An Intelligent Speculation?
Filed under: From the co-founders — Tags: Marcelo Lima, WCG, Wellcare Group — Jane Scottsdale @ 1:11 pm
Common stock investing is inherently risky, and those risks cannot be divorced from the rewards that come with them. Often, it isn’t easy to separate the speculative from the investment component of a common stock commitment. On this topic, Ben Graham, author of the classic The Intelligent Investor, has written most clearly:
Outright speculation is neither illegal, immoral, nor (for most people) fattening to the pocketbook. More than that, some speculation is necessary and unavoidable, for in many common-stock situations there are substantial possibilities of both profit and loss, and the risks therein must be assumed by someone. There is intelligent speculation as there is intelligent investing. But there are many ways in which speculation may be unintelligent. Of these the foremost are:
(1) speculating when you think you are investing;
(2) speculating seriously instead of as a pastime, when you lack proper knowledge and skill for it; and
(3) risking more money in speculation than you can afford to lose.
With that caveat, here’s Wellcare Group (WCG), a stock that has a reasonable chance of going higher once its legal problems are resolved and its earnings normalized. As such, it may present an intelligent speculation.
First, a quick background. Wellcare is a healthcare management organization focused on Medicare and Medicaid, government-run entitlement programs for the elderly and low-income population. It has over 2.5 million members enrolled in its programs nationwide, with a large portion of them in Florida.
Its stock hovered around $120 per share when in October 2007 about 200 FBI agents raided its Tampa campus. The stock collapsed to $40, wiping out $3.3bn in shareholder value. The uncertainty was large; there was no official word of what the FBI raid was for, although newspaper reports stated that one of Wellcare’s subsidiaries had overbilled the government by $35m. In this context, the share price collapse was wildly overdone.
A quick resolution of the problem didn’t happen. Instead, the company went “dark,” not filing its quarterly and yearly financial statements and risking stock exchange delisting for its non-compliance. Periodic SEC filings kept shareholders apprised of the slow progress, but it wasn’t until early 2009 that things became clearer. The company finally filed all of its late financial statements and set a shareholder’s meeting – the first since the FBI raid – for July 30.
Wellcare is well capitalized. As of 12/31/2008, it had about $1.2 billion in cash and $153 million in debt. This debt proved to be another Achilles heel for the stock. When the company reported in 2008 that it was in technical default for not having filed its financial statements, the price dropped precipitously yet again. Fairholme Capital, which owns nearly 20% of the stock, bought a majority of the debt, likely in a move to protect its equity investment.
Throughout this misadventure, the stock has swung wildly, hitting a low of $6.12 in November and $6.23 in March of this year. Yet Wellcare’s core business remains sound, generating substantial free cash flows. The exact number for 2008 involves reversing a goodwill write-down and removing a non-recurring $103m in litigation expenses, but a normalized estimate of $4 in free cash flow per share is probably on the conservative side. While there is significant regulatory uncertainty surrounding its Medicare and Medicaid businesses, at the current price of around $13.80, it’s hard to find a way to lose.
Yet all of these uncertainties – particularly those surrounding the FBI investigation – are still large, which is where the speculative component of this investment comes in. There might be a probability of the government’s penalties being larger than expected. The company is also facing various lawsuits related to its illegal activities, including a class-action lawsuit. Defending against these will cost management’s time and shareholders’ cash.
On the other hand, Wellcare may soon begin conducting conference calls with shareholders and analysts, may soon settle with the government by paying a fine, and may ultimately get sold to a larger competitor, such as UnitedHealth Group. After it fired its disgraced former management, the board brought in Charles Berg, formerly a UnitedHealth executive, Oxford Health Plans CEO and “deal guy.”
With these factors in mind, and taking into account Graham’s three points above, Wellcare may seem like an intelligent speculation after all.
Marcelo P. Lima is a securities analyst. He may be reached at MPL4@cornell.edu
http://blog.valueinvestingcongress.com/2009/04/14/wellcare-group-%e2%80%93-an-intelligent-speculation/
http://blog.valueinvestingcongress.com/?utm_source=VIC&utm_medium=W&utm_campaign=BLOGLA09T
Value Investing Congress 19th - 20th October, 2009
http://www.valueinvestingcongress.com/
An advanced seminar on value investing
How to Decipher Financial Statements, Avoid Value Traps and Pick Investment Winners
MONday MAY 4, 2009
7:30 - 8:00 AM
Registration
8:00 - 10:00 AM
How to Profit From the Mortgage Crisis:
Long Investments
• A beaten-down blue-chip
Case study: American Express
• Growth at a reasonable price (GARP)
and a beaten-down blue-chip
Case studies: Berkshire Hathaway & Wesco
• Out of favor financial
Case study: Resource America
• Distressed Debt
Case study: Subprime mortgage tranche
10:00 - 10:15 AM Break
10:15 - 10:45 AM
How to Not Lose Money in the Mortgage Crisis:
Stocks to Avoid
• Aggressive accounting, inadequate
reserving and the structure of CDOs
Case study: MBIA
10:45 - 11:30 am
Different Types of Value — Part One:
Piggybacking on Activism
• Piggybacking on structural activism
Case study: Wendy’s (Ackman)
• Piggybacking on operational activism
Case study: Wendy’s (Peltz)
• Catalyzing activism
Case study: CNET
11:30 AM - 12:00 Pm
Investor Irrationality and the Current
Market Meltdown
12:00 - 1:00 pm Lunch
1:00 - 3:00 Pm
Different Types of Value — Part Two:
Out of Favor Sectors (Retail/Consumer)
• Beaten down blue chip retailer and
piggybacking on activism
Case study: Target
• Profiting from a liquidation
Case study: Footstar
• Betting on a turnaround under new
leadership (1)
Case study: Borders Group
• Betting on a turnaround under new
leadership (2)
Case study: Wendy’s
3:00 - 3:15 pM Break
3:15 - 4:00 pM
Warning Flags
• Overvaluation
Case study: Netflix
• Overvaluation and unsustainable
business model
Case study: VistaPrint
4:00 - 5:00 pM
Different Types of Value —
Part Three
• An out-of-favor cyclical with too much debt
Case study: Huntsman
• Mispriced options
Case studies: dELiA*s, Ambassadors
International, TravelCenters of America,
PhotoChannel Networks, Proliance
International, General Growth Properties
5:00 - 6:00 pM
Networking Cocktail Reception
http://www.valueinvestingcongress.com/downloads/VICP09_Workshop_Agenda3.pdf
AGENDA
An advanced seminar on value investing
How to Decipher Financial Statements, Avoid Value Traps and Pick Investment Winners
MONday MAY 4, 2009
7:30 - 8:00 AM
Registration
8:00 - 10:00 AM
How to Profit From the Mortgage Crisis:
Long Investments
• A beaten-down blue-chip
Case study: American Express
• Growth at a reasonable price (GARP)
and a beaten-down blue-chip
Case studies: Berkshire Hathaway & Wesco
• Out of favor financial
Case study: Resource America
• Distressed Debt
Case study: Subprime mortgage tranche
10:00 - 10:15 AM Break
10:15 - 10:45 AM
How to Not Lose Money in the Mortgage Crisis:
Stocks to Avoid
• Aggressive accounting, inadequate
reserving and the structure of CDOs
Case study: MBIA
10:45 - 11:30 am
Different Types of Value — Part One:
Piggybacking on Activism
• Piggybacking on structural activism
Case study: Wendy’s (Ackman)
• Piggybacking on operational activism
Case study: Wendy’s (Peltz)
• Catalyzing activism
Case study: CNET
11:30 AM - 12:00 Pm
Investor Irrationality and the Current
Market Meltdown
12:00 - 1:00 pm Lunch
1:00 - 3:00 Pm
Different Types of Value — Part Two:
Out of Favor Sectors (Retail/Consumer)
• Beaten down blue chip retailer and
piggybacking on activism
Case study: Target
• Profiting from a liquidation
Case study: Footstar
• Betting on a turnaround under new
leadership (1)
Case study: Borders Group
• Betting on a turnaround under new
leadership (2)
Case study: Wendy’s
3:00 - 3:15 pM Break
3:15 - 4:00 pM
Warning Flags
• Overvaluation
Case study: Netflix
• Overvaluation and unsustainable
business model
Case study: VistaPrint
4:00 - 5:00 pM
Different Types of Value —
Part Three
• An out-of-favor cyclical with too much debt
Case study: Huntsman
• Mispriced options
Case studies: dELiA*s, Ambassadors
International, TravelCenters of America,
PhotoChannel Networks, Proliance
International, General Growth Properties
5:00 - 6:00 pM
Networking Cocktail Reception
http://www.valueinvestingcongress.com/downloads/VICP09_Workshop_Agenda3.pdf
Most Companies Yet To Disclose Remuneration Levels
October 20, 2009 20:03 PM
Most Companies Yet To Disclose Remuneration Levels, Says Ernst & Young
KUALA LUMPUR, Oct 20 (Bernama) -- Most Malaysian companies have yet to disclose the remuneration level of their executive directors and relate it with performance, according to an international public accounting firm.
Ernst & Young Malaysia, in its 2009 executive and board remuneration report, said though the level of disclosure on remuneration of executive directors increased, there was still a lack of information on the correlation between level of remuneration and company's performance.
Ernst & Young's performance and reward leader for the Far East, Dharma Chandran, said majority of the companies that were assessed did not report on performance measures.
"They tell you what they paid the executives last year and how much they paid remuneration (but) they did not say much in terms of what kind of performance measures that they used, whether revenue, profit or economic values as benchmark," he told a media briefing here Tuesday.
The report was made based on analysis of information in the annual reports of the top 100 companies on Bursa Malaysia's Main Market with the financial years ended 2008 and 2007.
According to the report, only 23 per cent of companies disclosed remuneration details for all individual directors as recommended in the Malaysian Code of Corporate Governance.
Though there was still lack of disclosure, Dharma said the increasing weighting towards variable pay indicated that Malaysian companies were responding to international trends and reviewing their strategies to ensure alignment with their business strategy and shareholder value creation.
However, there was a need for long-term incentives for these executive directors to create long-term values and keep real talent in the company, he said.
Dharma said most Malaysian companies offered short-term incentives based on company's performance rather than long-term incentives to these directors.
"For the remuneration to be balanced, a mixed of short-term and long-term incentives could drive better future for the company," he said.
Short-term incentives are usually in the form of annual bonuses while long-term incentives can be equity- or cash-based programme with a vesting period of more than one year.
Moving forward, total remuneration levels are expected to remain stagnant or assumed downward trend this year as Malaysian companies are still feeling the effects of a weak global economy, the report said.
-- BERNAMA
Most Companies Yet To Disclose Remuneration Levels, Says Ernst & Young
KUALA LUMPUR, Oct 20 (Bernama) -- Most Malaysian companies have yet to disclose the remuneration level of their executive directors and relate it with performance, according to an international public accounting firm.
Ernst & Young Malaysia, in its 2009 executive and board remuneration report, said though the level of disclosure on remuneration of executive directors increased, there was still a lack of information on the correlation between level of remuneration and company's performance.
Ernst & Young's performance and reward leader for the Far East, Dharma Chandran, said majority of the companies that were assessed did not report on performance measures.
"They tell you what they paid the executives last year and how much they paid remuneration (but) they did not say much in terms of what kind of performance measures that they used, whether revenue, profit or economic values as benchmark," he told a media briefing here Tuesday.
The report was made based on analysis of information in the annual reports of the top 100 companies on Bursa Malaysia's Main Market with the financial years ended 2008 and 2007.
According to the report, only 23 per cent of companies disclosed remuneration details for all individual directors as recommended in the Malaysian Code of Corporate Governance.
Though there was still lack of disclosure, Dharma said the increasing weighting towards variable pay indicated that Malaysian companies were responding to international trends and reviewing their strategies to ensure alignment with their business strategy and shareholder value creation.
However, there was a need for long-term incentives for these executive directors to create long-term values and keep real talent in the company, he said.
Dharma said most Malaysian companies offered short-term incentives based on company's performance rather than long-term incentives to these directors.
"For the remuneration to be balanced, a mixed of short-term and long-term incentives could drive better future for the company," he said.
Short-term incentives are usually in the form of annual bonuses while long-term incentives can be equity- or cash-based programme with a vesting period of more than one year.
Moving forward, total remuneration levels are expected to remain stagnant or assumed downward trend this year as Malaysian companies are still feeling the effects of a weak global economy, the report said.
-- BERNAMA
Graham's view of people who trade continuously
"Everyone knows that most people who trade in the market lose money at the end. The peopl,e who persist in trying it are either unintelligent, or willing to lose money for the fun of the game, or gifted with some uncommon and incommunicable talent. In any case, they are not investors."
"Too many clever and experienced people are engaged simultaneously in tryng to outwit one another in the market. The result, we believe, is that all their work and effort 'cancel out', so that ... each conclusion ends up by being no more dependable than the toss of a coin ... the activities of the stock market analysts are the same as the activities of a tournament of bridge expert. Everyone is very brilliant indeed, but scarcely anyone is so superior to the rest as to be certain of winning a prize .... because the analysts communicate freely with each other, it is as if all the contestants in the bridge tournament gathered around and argued with each other what strategy each should use."
"Too many clever and experienced people are engaged simultaneously in tryng to outwit one another in the market. The result, we believe, is that all their work and effort 'cancel out', so that ... each conclusion ends up by being no more dependable than the toss of a coin ... the activities of the stock market analysts are the same as the activities of a tournament of bridge expert. Everyone is very brilliant indeed, but scarcely anyone is so superior to the rest as to be certain of winning a prize .... because the analysts communicate freely with each other, it is as if all the contestants in the bridge tournament gathered around and argued with each other what strategy each should use."
All the clocks have no hands
We are all at a wonderful ball where champagne sparkles in every glass and soft laughter falls upon the summer air. We know, by the rules, that at some moment, terrorists will burst in through the terrace doors, killing many and scattering the survivors. Those who leave early will be saved, but the ball is so splended that no one wants to leave while there is still time. Everyone wants to enjoy one more dance and sip one more glass of champagne. So everyone keeps asking: "What time is it? What time is it?" We look around and find that all the clocks have no hands.
Final answer to stock values
There is no such thing as a final answer to stock values. A dozen experts will arrive at twelve different conclusions - Gerald Loeb
The barriers to success are psychological rather than physical.
What can an individual investor do?
Though it is believed that investment can be a very profitable field, it is only profitable to those who are strong of will and are prepared to work at it. There is no simple way to get rich quick in the stock market.
The barriers to success are psychological rather than physical. Psychological barriers are so much harder to cross for so few of us can bear the thought of not being part of a crowd.
Here are the words of advice from Dreman in his book Psychology and the Stockmarket.
".... the best chance an investor has is to stand apart from popular thinking. He must be willing to forego the thrill of being in unison with the market, in agreement with the expert opinion and with the exciting, seemingly surefire ideas currently in vogue.... This is no small sacrifice. To own the 'right' stocks in a rising market is a heady experience. There is a wonderful blend of monetary gain and ego satisfaction in being right in a popular manner.
Man is a social animal. To succeed, the investor has to be able to withstand the tremendous pressure leading to conformity... (he) will face a continuing flow of negative feedback from the market, from experts and from groups of people whom he respects. The reader may feel a little like the patient whose doctor has advised him to give up sex for this health. Some of us might just prefer to die happy."
Though it is believed that investment can be a very profitable field, it is only profitable to those who are strong of will and are prepared to work at it. There is no simple way to get rich quick in the stock market.
The barriers to success are psychological rather than physical. Psychological barriers are so much harder to cross for so few of us can bear the thought of not being part of a crowd.
Here are the words of advice from Dreman in his book Psychology and the Stockmarket.
".... the best chance an investor has is to stand apart from popular thinking. He must be willing to forego the thrill of being in unison with the market, in agreement with the expert opinion and with the exciting, seemingly surefire ideas currently in vogue.... This is no small sacrifice. To own the 'right' stocks in a rising market is a heady experience. There is a wonderful blend of monetary gain and ego satisfaction in being right in a popular manner.
Man is a social animal. To succeed, the investor has to be able to withstand the tremendous pressure leading to conformity... (he) will face a continuing flow of negative feedback from the market, from experts and from groups of people whom he respects. The reader may feel a little like the patient whose doctor has advised him to give up sex for this health. Some of us might just prefer to die happy."
Bulls versus Bears
"Only own those rare stocks whose earnings yield over the next few years will be much higher than the bond yields against which stock valuations must compete." Kenneth Fisher, son of Philip Fisher. Just like his father, the young Fisher is a conservative investor.
"When the earnings yield on stocks is very low relative to bond yields, stocks will fall. "
"No one can precisely 'time' the market. As PEs moved up from levels that were historically cheap to a range somewhat above long-term norms, pocket some of your equity profits now and build up your cash reserves to the 10%, then 15% and then 20% level."
"As the dream merchants continue to drive prices higher rapidly, raise more cash."
"The near term nod still goes to the bulls. Firstly, both Newton and experience have shown that a body in motion continues in motion until stopped by something more formidable than anything one can see at present. Second, there is simply too much liquidity in the world with no better place to flow."
"The market has only recently gotten carried away, and it can still correct these excesses in a mild, orderly fashion."
"When the earnings yield on stocks is very low relative to bond yields, stocks will fall. "
"No one can precisely 'time' the market. As PEs moved up from levels that were historically cheap to a range somewhat above long-term norms, pocket some of your equity profits now and build up your cash reserves to the 10%, then 15% and then 20% level."
"As the dream merchants continue to drive prices higher rapidly, raise more cash."
"The near term nod still goes to the bulls. Firstly, both Newton and experience have shown that a body in motion continues in motion until stopped by something more formidable than anything one can see at present. Second, there is simply too much liquidity in the world with no better place to flow."
"The market has only recently gotten carried away, and it can still correct these excesses in a mild, orderly fashion."
Hong Leong group in focus
Hong Leong group in focus
Written by Joseph Chin
Tuesday, 20 October 2009 13:23
KUALA LUMPUR: Shares of several companies in the Hong Leong group topped the gainers list at the midday break on Tuesday, Oct 20 while the broader market was mixed
Hong Leong Industries rose 34 sen to RM4.50, Hong Leong Financial Group 31 sen to RM6.49 and Hong Leong Bank 16 sen to RM7.41. Cement maker Tasek-PA gained 26 sen to RM3.50 but Tasek shares fell seven sen to RM3.73.
Written by Joseph Chin
Tuesday, 20 October 2009 13:23
KUALA LUMPUR: Shares of several companies in the Hong Leong group topped the gainers list at the midday break on Tuesday, Oct 20 while the broader market was mixed
Hong Leong Industries rose 34 sen to RM4.50, Hong Leong Financial Group 31 sen to RM6.49 and Hong Leong Bank 16 sen to RM7.41. Cement maker Tasek-PA gained 26 sen to RM3.50 but Tasek shares fell seven sen to RM3.73.
Singapore fund exits KFCH
Singapore fund exits KFCH
Tags: Arisaig Asean Fund Ltd | Lembaga Tabung Haji | QSR Brands Bhd
Written by Financial Daily
Tuesday, 20 October 2009 11:00
KUALA LUMPUR: Singapore-based Arisaig Asean Fund Ltd has exited KFC Holdings (Malaysia) Bhd after it sold all its 6.89% stake or 13.65 million shares last Thursday.
A filing with Bursa Malaysia showed the fund sold the shares in a married deal for an undisclosed price. The buyer of the stake was not revealed.
Arisaig Asean Fund was the third largest shareholder in KFCH and the share price had performed well in recent months. KFCH closed at RM7.50 on that day. Analysts said Arisaig Asean Fund had been reducing its stakes in several Malaysian companies to meet redemptions.
The single largest shareholder in KFCH is QSR BRANDS BHD [] which owns 50.25% or 99.63 million shares. The second largest shareholder is Lembaga Tabung Haji with 24.87% or 49.31 million shares. KFCH yesterday closed 50 sen higher at RM8, the highest since Nov 13, 2007.
This article appeared in The Edge Financial Daily, October 20, 2009.
Tags: Arisaig Asean Fund Ltd | Lembaga Tabung Haji | QSR Brands Bhd
Written by Financial Daily
Tuesday, 20 October 2009 11:00
KUALA LUMPUR: Singapore-based Arisaig Asean Fund Ltd has exited KFC Holdings (Malaysia) Bhd after it sold all its 6.89% stake or 13.65 million shares last Thursday.
A filing with Bursa Malaysia showed the fund sold the shares in a married deal for an undisclosed price. The buyer of the stake was not revealed.
Arisaig Asean Fund was the third largest shareholder in KFCH and the share price had performed well in recent months. KFCH closed at RM7.50 on that day. Analysts said Arisaig Asean Fund had been reducing its stakes in several Malaysian companies to meet redemptions.
The single largest shareholder in KFCH is QSR BRANDS BHD [] which owns 50.25% or 99.63 million shares. The second largest shareholder is Lembaga Tabung Haji with 24.87% or 49.31 million shares. KFCH yesterday closed 50 sen higher at RM8, the highest since Nov 13, 2007.
This article appeared in The Edge Financial Daily, October 20, 2009.
Lion Div further cuts stake in Parkson to 1.45%
Lion Div further cuts stake in Parkson to 1.45%
Tags: Amsteel Corp Bhd | Excel Step Investments Ltd | LDHB | Lion Corp Bhd | Lion Diversified Holdings Bhd | Megasteel Sdn Bhd | Parkson Holdings Bhd
Written by Ellina Badri
Monday, 19 October 2009 22:30
KUALA LUMPUR: LION DIVERSIFIED HOLDINGS BHD []'s (LDHB) subsidiary Excel Step Investments Ltd disposed of a total 36.74 million shares representing a 3.62% stake in PARKSON HOLDINGS BHD [] between June 29, 2009, and Oct 19, 2009, for RM185.8 million cash, to partly settle its deferred cash payments.
In a statement today, LDHB said 16.74 million shares were sold in the open market, with the remaining 20 million disposed off via a placement through JPMorgan Securities (Malaysia) Sdn Bhd.
It said its deferred cash payments payable were from its RM100 million acquisition of a 11.1% stake in Megasteel Sdn Bhd in February this year and its purchase of RM450 million Lion Corp Bhd Class B(b) bonds from Amsteel Corp Bhd, also in February.
It also said the balance of the proceeds from its share disposal would be used to repay borrowings and for working capital.
LDHB said following the disposal, its stake in Parkson was now reduced to 1.45%, adding that Excel Step held RM228.8 million redeemable convertible secured loan stocks 2007/2010 convertible into 57.2 million new Parkson shares.
"The LDHB group's original costs of investment in the 36.74 million Parkson shares was approximately RM147 million and the investment was made in Sept 2007," it added.
It said as of today, it had disposed of a total of 55.24 million Parkson shares, or a 5.44% stake, for a total cash consideration of RM272.3 million.
Between Apr 24 and June 26, it had disposed of a 1.82% interest in Parkson via the open market for RM86.5 million cash.
Tags: Amsteel Corp Bhd | Excel Step Investments Ltd | LDHB | Lion Corp Bhd | Lion Diversified Holdings Bhd | Megasteel Sdn Bhd | Parkson Holdings Bhd
Written by Ellina Badri
Monday, 19 October 2009 22:30
KUALA LUMPUR: LION DIVERSIFIED HOLDINGS BHD []'s (LDHB) subsidiary Excel Step Investments Ltd disposed of a total 36.74 million shares representing a 3.62% stake in PARKSON HOLDINGS BHD [] between June 29, 2009, and Oct 19, 2009, for RM185.8 million cash, to partly settle its deferred cash payments.
In a statement today, LDHB said 16.74 million shares were sold in the open market, with the remaining 20 million disposed off via a placement through JPMorgan Securities (Malaysia) Sdn Bhd.
It said its deferred cash payments payable were from its RM100 million acquisition of a 11.1% stake in Megasteel Sdn Bhd in February this year and its purchase of RM450 million Lion Corp Bhd Class B(b) bonds from Amsteel Corp Bhd, also in February.
It also said the balance of the proceeds from its share disposal would be used to repay borrowings and for working capital.
LDHB said following the disposal, its stake in Parkson was now reduced to 1.45%, adding that Excel Step held RM228.8 million redeemable convertible secured loan stocks 2007/2010 convertible into 57.2 million new Parkson shares.
"The LDHB group's original costs of investment in the 36.74 million Parkson shares was approximately RM147 million and the investment was made in Sept 2007," it added.
It said as of today, it had disposed of a total of 55.24 million Parkson shares, or a 5.44% stake, for a total cash consideration of RM272.3 million.
Between Apr 24 and June 26, it had disposed of a 1.82% interest in Parkson via the open market for RM86.5 million cash.
Hai-O riding high on China connection
Hai-O riding high on China connection
Tags: Changyu Pioneer Wine Co Ltd | China | Chinese herbs | Chinese medicated wines | Extensive network in China | Hai-O Enterprise Bhd | Tan Kee Hock
Written by Tony C H Goh
Monday, 19 October 2009 11:23
KUALA LUMPUR: HAI-O ENTERPRISE BHD [], widely known as a wholesaler and retailer of Chinese herbs and medicine, is now looking at expanding its reach in the wine, liquor and liqueur business by leveraging on its strong network in China.
“Currently, wines and liquor are considered as the second-liner products carried by the retail division. But with the current market trend towards drinking of red wine in the country, we foresee huge potential,” Hai-O’s general manager Tan Kee Hock said at the third Yantai International Wine Festival in Yantai, China, recently.
Hai-O has an extensive network in China, with business dealings dating back to 1975, particularly with Changyu Pioneer Wine Co Ltd, China’s oldest vineyard, which was established in 1892 and its biggest wine producer based in the wine-producing region of Yantai, Shandong province.
“As the sole distributor of Changyu’s wines in Malaysia, we are allocating a big portion of our promotion and advertising budget to raise awareness,” said Tan, who is in charge of the Chinese medicated wines, cooking wines, healthcare food and beverages division of the company.
Among Changyu products under the sole agency rights of Hai-O are Ling Zhi Medicated Liquor, Tze Pao San Pian Chiew, Te Zhi San Pian Chiew, Changyu Cabernet Dry Red Wine, Changyu Cabernet, Gernischt Dry Red Wine and Changyu Ice Wine.
While seeking to grow its wine and liquor business, multi-level marketing (MLM), wholesale and retailing are still the main contributors to Hai-O’s growth and revenue. It is exposed to all mainstream segments of Malaysia’s population, with the retail segment basically aimed at the Chinese, while MLM is mainly Malay-based.
For the fiscal year ended April 30, 2009 (FY09), Hai-O’s revenue increased 16% to RM435.2 million from RM373.8 million in the previous year. Net income rose 7% to RM52 million. The higher revenue reflects strengthening of the ringgit against the US dollar and the promotion of house-based products from the retail division.
The wholesale and retail division contributed RM16.8 million to the group revenue of RM148.6 million in the first quarter ended July 31, 2009 (1QFY10), down 11.2% from RM18.9 million in the previous quarter and 16.9% or RM20.2 million in the same period last year.
But given the promising potential of the wine industry in China, Hai-O believes its strategy of leveraging on the biggest wine company in the fast-developing Asian giant is likely to pay off. Hai-O has seen its share price jumping nearly 30% over the past three weeks to RM7.02 last Friday when it added another 12 sen, with 38,600 shares done.
Yantai is the largest wine-producing region in China, accounting for around 35% or one in every three bottles of wine produced there. The wine industry in China is the world’s 10th largest grape wine producer, and the only Asian country that produces grape wine on a commercial scale.
Other major grape wine players in China include Sino-French joint venture, Dynasty Winery Ltd and China Great Wall Wine Co, Ltd. Collectively, these top three wine producers control 40% of China’s wine market. Besides Shandong, some other famous wine-producing regions are found in Fujian and Guangdong provinces.
While growth in the traditional wine consumer countries has remained flat in the last 10 years, experts estimate that China would be the world’s most active wine market with a 36% growth through 2010. Over the same period, total global wine consumption is expected to grow at only 9.15%.
Research data from British research institute ISWR/DGR showed that based on current trends, total global wine consumption will reach 100 million litres by 2010, with China accounting for 5.58 million litres.
In a recent report on the company, RHB Research remained upbeat on Hai-O’s prospects going forward, even when there was a visible slowdown of the company’s retail and wholesale business.
This was largely due to the strong performance of its main business segment of MLM, for which the number of members has ballooned to more than 110,000 from 70,000 a year ago.
The company is well on track to surpass its internal target of 10% earnings growth in FY10. “Taking into account the robust 1QFY10 results and better-than-expected MLM sales, we raised our FY10-12 earnings forecasts by 22% to 28%,” said RHB.
“Hai-O’s attractiveness lies in its strong dividend payout policy of at least 50% of net earnings. Traditionally, the company has paid out above and beyond that amount, averaging 65% over the past five financial years.
“We project gross dividend per share for FY10 and FY11 to be at 54.5 sen and 57 sen, or a yield of 9.6% and 10%, respectively,” the research house added.
Some of the key risks include an unexpected reduction in dividend payout ratio to below 50% and the MLM division’s revenue coming in below expectations.
This article appeared in The Edge Financial Daily, October 19, 2009.
Tags: Changyu Pioneer Wine Co Ltd | China | Chinese herbs | Chinese medicated wines | Extensive network in China | Hai-O Enterprise Bhd | Tan Kee Hock
Written by Tony C H Goh
Monday, 19 October 2009 11:23
KUALA LUMPUR: HAI-O ENTERPRISE BHD [], widely known as a wholesaler and retailer of Chinese herbs and medicine, is now looking at expanding its reach in the wine, liquor and liqueur business by leveraging on its strong network in China.
“Currently, wines and liquor are considered as the second-liner products carried by the retail division. But with the current market trend towards drinking of red wine in the country, we foresee huge potential,” Hai-O’s general manager Tan Kee Hock said at the third Yantai International Wine Festival in Yantai, China, recently.
Hai-O has an extensive network in China, with business dealings dating back to 1975, particularly with Changyu Pioneer Wine Co Ltd, China’s oldest vineyard, which was established in 1892 and its biggest wine producer based in the wine-producing region of Yantai, Shandong province.
“As the sole distributor of Changyu’s wines in Malaysia, we are allocating a big portion of our promotion and advertising budget to raise awareness,” said Tan, who is in charge of the Chinese medicated wines, cooking wines, healthcare food and beverages division of the company.
Among Changyu products under the sole agency rights of Hai-O are Ling Zhi Medicated Liquor, Tze Pao San Pian Chiew, Te Zhi San Pian Chiew, Changyu Cabernet Dry Red Wine, Changyu Cabernet, Gernischt Dry Red Wine and Changyu Ice Wine.
While seeking to grow its wine and liquor business, multi-level marketing (MLM), wholesale and retailing are still the main contributors to Hai-O’s growth and revenue. It is exposed to all mainstream segments of Malaysia’s population, with the retail segment basically aimed at the Chinese, while MLM is mainly Malay-based.
For the fiscal year ended April 30, 2009 (FY09), Hai-O’s revenue increased 16% to RM435.2 million from RM373.8 million in the previous year. Net income rose 7% to RM52 million. The higher revenue reflects strengthening of the ringgit against the US dollar and the promotion of house-based products from the retail division.
The wholesale and retail division contributed RM16.8 million to the group revenue of RM148.6 million in the first quarter ended July 31, 2009 (1QFY10), down 11.2% from RM18.9 million in the previous quarter and 16.9% or RM20.2 million in the same period last year.
But given the promising potential of the wine industry in China, Hai-O believes its strategy of leveraging on the biggest wine company in the fast-developing Asian giant is likely to pay off. Hai-O has seen its share price jumping nearly 30% over the past three weeks to RM7.02 last Friday when it added another 12 sen, with 38,600 shares done.
Yantai is the largest wine-producing region in China, accounting for around 35% or one in every three bottles of wine produced there. The wine industry in China is the world’s 10th largest grape wine producer, and the only Asian country that produces grape wine on a commercial scale.
Other major grape wine players in China include Sino-French joint venture, Dynasty Winery Ltd and China Great Wall Wine Co, Ltd. Collectively, these top three wine producers control 40% of China’s wine market. Besides Shandong, some other famous wine-producing regions are found in Fujian and Guangdong provinces.
While growth in the traditional wine consumer countries has remained flat in the last 10 years, experts estimate that China would be the world’s most active wine market with a 36% growth through 2010. Over the same period, total global wine consumption is expected to grow at only 9.15%.
Research data from British research institute ISWR/DGR showed that based on current trends, total global wine consumption will reach 100 million litres by 2010, with China accounting for 5.58 million litres.
In a recent report on the company, RHB Research remained upbeat on Hai-O’s prospects going forward, even when there was a visible slowdown of the company’s retail and wholesale business.
This was largely due to the strong performance of its main business segment of MLM, for which the number of members has ballooned to more than 110,000 from 70,000 a year ago.
The company is well on track to surpass its internal target of 10% earnings growth in FY10. “Taking into account the robust 1QFY10 results and better-than-expected MLM sales, we raised our FY10-12 earnings forecasts by 22% to 28%,” said RHB.
“Hai-O’s attractiveness lies in its strong dividend payout policy of at least 50% of net earnings. Traditionally, the company has paid out above and beyond that amount, averaging 65% over the past five financial years.
“We project gross dividend per share for FY10 and FY11 to be at 54.5 sen and 57 sen, or a yield of 9.6% and 10%, respectively,” the research house added.
Some of the key risks include an unexpected reduction in dividend payout ratio to below 50% and the MLM division’s revenue coming in below expectations.
This article appeared in The Edge Financial Daily, October 19, 2009.
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