Cheap Is No Longer Good Enough
By Toby Shute
January 11, 2010 |
After a recent college reunion/homecoming, I had a chance to connect with fund manager Harry Long, the managing partner of Contrarian Industries. Long's company specializes in alternative asset management, algorithmic system research and development, and strategic consulting. Harry and I had a wide-ranging conversation about fundamental and systematic approaches to investing. Here's an edited portion of our exchange.
Toby Shute: You've described your investing approach as an attempt to marry the qualitative with the systematic. This reminds me of Warren Buffett's description of his investment strategy as 85% Benjamin Graham and 15% Philip Fisher. Let's start with Graham. What was his most important contribution to the investment field?
Harry Long: Graham's most important contribution to investing was the brilliant way he went about systematizing it. He gave very clear, mechanical rules, which outperform most discretionary human investors, even today.
If you look at services like Validea.com, the American Institute for Individual Investors, and countless other services, they have taken his dictates from The Intelligent Investor and put them into a screen, which beats the pants off just about everything else developed since.
I think Joel Greenblatt is trying to follow in that tradition. We'll see how he stacks up to Graham. It's a noble pursuit.
Shute: Phil Fisher is known for focusing on the characteristics of a great growth franchise, some of which are impossible to quantify. Importantly, though, he weeded out potential investments using a 15-point checklist that he applied pretty strictly. Are checklists an effective way of systematizing a qualitatively oriented investment process?
Long: When it comes to checklists, I've seen many, but very few good ones. It's really multiple simple rules, when applied in combination, that get you performance. For instance, if investors automatically sold, or had a rule against investing in, any company with earnings decreases of greater than 14% in any quarter, they should have sold almost all bank stocks in 2008.
In practice, you'll find that a well-designed system, using objective data, will often key in on companies that Fisher would have appreciated qualitatively. You have to do both, but I would encourage your readers to find businesses with great metrics and then ask "why?" rather than trying to find great stories which may or may not be executing.
Shute: What else can investors learn from Phil Fisher?
Long: Most investors would do best to stick to Fisher's basic tenet -- buy businesses with strong competitive positions. As Fisher pointed out, if you avoid companies with unhealthy profit margins, you save yourself a lot of money, sleep, and heartache. On the other hand, there are occasionally companies such as Wal-Mart (NYSE: WMT) that have low margins on purpose.
As for his focus on R&D, it's pretty hit-or-miss. Apple (Nasdaq: AAPL) and Google (Nasdaq: GOOG) would be examples of great success stories. However, while the Intels (Nasdaq: INTC) of the world had great runs, they are still plowing billions into R&D and hitting a growth wall.
Investors should have a diversified portfolio of quality. Cheap is no longer good enough -- investors need to search for cheap and excellent. Competition is simply too brutal, unless you are in a position to take control of ailing firms.
Shute: Can you apply this advice to a particular sector?
Long: In the financial sector, rather than owning banks, which risk capital through lending and have infinite competition, [investors] could own something like MSCI, which gets fee income from its MSCI indices. It doesn't risk capital. Simple business -- you hand me money, I hand you information -- and it has very little strong competition in the index business. MasterCard (NYSE: MA) and Visa (NYSE: V) also don't have the same balance-sheet risk as an issuer like American Express.
I could go on and on. Just because you're investing in the financial sector, you don't have to be conventional.
[Michael] Bloomberg understood that the way to be successful is to sell the miners their picks and shovels. Why does everyone spend time studying banks, rather than his example? Why aren't people obsessed with studying FactSet Research Systems (NYSE: FDS)? Maybe it's a tabloid phenomenon where success is simply too boring.
Stay tuned as Toby's conversation with Harry Long continues tomorrow. Harry Long's comments are purely his personal opinions and should not be construed as financial or investment advice.
So, Fool, how do you weigh the quantitative and qualitative aspects of a business in your own investing decisions? Share your philosophy in the comments section below.
http://www.fool.com/investing/value/2010/01/11/cheap-is-no-longer-good-enough.aspx
Tuesday, 12 January 2010
Focus on future growth of the company
When we are looking at stock prices, we are not focussing on this quarter's earnings but on the company's future growth.
Watch for Events Suggesting It Is Time for Selling
Watch for Events Suggesting It Is Time for Selling
Many events can have a negative effect on the value of your winning stock. Thus, you should carefully consider them and whenever they occur you should embark on selling. Such events may include:
◦Too much attention from the media
Too much attention on the part of the media may lead to artificially inflated prices of the stock since many investors show interest. After the hype passes the price may start to fall and result in the loss of profits.
◦Slowed growth of the stock.
If you possess a growth stock, it is good to consider its selling after it has reached the point at which its growth speed has started to decrease. This is required because the market shows negative attitude toward growth stocks that are unable to sustain their growth.
◦Better investment opportunities
It may turn out that there are other stocks that provide better returns. The latter may present a lower level of risk as well. Thus, it is recommended that you consider the selling of your stock and purchasing one of these.
◦Decreased or Eliminated Dividends
At one point or another, the company issuing the stock may start to decrease the dividends it pays to shareholders. If they are also completely eliminated, then this may indicate that the company is undergoing some change or problem. This represents a good reason for selling the stock and avoiding losing your profits.
Many financial experts advise the selling of part of the stock. The rest is left to grow further. In this way you get part of your profits and let the rest generate further returns.
Many events can have a negative effect on the value of your winning stock. Thus, you should carefully consider them and whenever they occur you should embark on selling. Such events may include:
◦Too much attention from the media
Too much attention on the part of the media may lead to artificially inflated prices of the stock since many investors show interest. After the hype passes the price may start to fall and result in the loss of profits.
◦Slowed growth of the stock.
If you possess a growth stock, it is good to consider its selling after it has reached the point at which its growth speed has started to decrease. This is required because the market shows negative attitude toward growth stocks that are unable to sustain their growth.
◦Better investment opportunities
It may turn out that there are other stocks that provide better returns. The latter may present a lower level of risk as well. Thus, it is recommended that you consider the selling of your stock and purchasing one of these.
◦Decreased or Eliminated Dividends
At one point or another, the company issuing the stock may start to decrease the dividends it pays to shareholders. If they are also completely eliminated, then this may indicate that the company is undergoing some change or problem. This represents a good reason for selling the stock and avoiding losing your profits.
Many financial experts advise the selling of part of the stock. The rest is left to grow further. In this way you get part of your profits and let the rest generate further returns.
Know When to Sell
Don't sell just because the price has gone up or down, but give it some serious thought if one of the following things has happened.
- Did you make a mistake buying it in the first place?
- Have the fundamentals deteriorated?
- Has the stock risen too far above its intrinsic value?
- Is there something better you can do with the money, that is, you can find better opportunities?
- Do you have too much money in one stock, taking up too much space in your portfolio?
Monday, 11 January 2010
Stock market: is it time to take profits?
Stock market: is it time to take profits?
The FTSE100 is at a 16-month high leaving many people wondering whether they should take some profits and redirect their money elsewhere.
Published: 10:13PM GMT 10 Jan 2010
Stock markets across the globe have carried on where they left off in 2009 and continue to climb. The FTSE 100 index, for instance, reached a 16‑month high on Tuesday when it broke through the 5,500 level.
Since Britain's blue-chip index fell to a low of 3,512 in March last year, investors have seen a 60pc return on many of their investments. In some cases they will have seen even greater gains if they had invested in overseas funds.
The question now for many people is whether they should take some profits and redirect their money elsewhere. While stock market bulls say that shares will carry on rising, there are fears that the economy could falter again once the Bank of England puts the brakes on quantitative easing and interest rates start to climb.
The Institute of Directors (IoD) said business leaders were pessimistic about prospects for the British economy and warned that "a double-dip, or even a triple-tumble scenario" was a significant risk.
Graeme Leach, the IoD's chief economist, said: "We are very doubtful of a sharp bounce back in 2010. We don't believe sustainable growth will occur. Yes, there could be an occasional spurt of activity, but the next two years look pretty glum."
It is no surprise then that many investment professionals are taking profits and redirecting the gains into other investments.
Oliver Burns, a private client investment manager at Jupiter, is taking profits from some of last year's winners and rotating into higher yielding, larger-cap, defensive stocks.
He said: "We remain positive on the market while interest rates stay low and there are signs of economic recovery, but we believe it has overrun in the short term. In terms of sectors, we are reducing our exposure to corporate bonds, but remain positive on the long-term prospects for emerging markets.
"In our view, stock-picking funds will add significant value over the next year and so we are considering managers such as Derek Stuart, who runs Artemis Special Situations, and Ben Whitmore of Jupiter UK Special Situations, as well as higher yielding funds such as Schroder Income and Artemis Income."
Jonathan Jackson, an equity analyst at Killik & Co, the stockbroker, said: "We would certainly look at taking profits on certain shares that have done well, such as M&S, and reinvest elsewhere in the stock market."
Gary Potter, an investment manager at Thames River, the multi-manager specialist, is in the camp that thinks economic growth is going to struggle and suggests some of the recent rises in commodity stocks are due a pause.
"We have always encouraged people to take profits where they have done well and look to areas that have good outlooks but where share prices have been left behind. For example, mid and smaller-cap stocks have underperformed in this large-cap rally and may offer investors a better home."
But Adrian Shandley, the managing director of Premier Wealth Management, is not convinced that now is the time for investors to exit the stock market altogether. He believes that shares are still undervalued, despite their rise over the past nine months.
"Britain definitely has serious problems, but that doesn't mean the stock market will do badly," he said. "And it often rises after general elections, as they get uncertainty out of the way. Before then, I'd expect markets to be fairly flat."
However, he does believe that investors might want to rejig their portfolios because the recent market rises are likely to mean that they will have greater exposure to certain areas than they need. This could make their portfolios more risky than investors would like.
Broadly, you need to sell enough from sectors that have outperformed to bring your asset allocations back to their original percentages, he said.
For example, you might have split your money at the outset as follows: 30pc UK equities, 30pc bonds, 30pc international equities and bonds, 10pc property. The strong performance of the overseas markets would have boosted their proportion of the portfolio above 30pc, so you need to sell some of your holdings to return the percentage to 30pc.
Mr Shandley added: "Even if you decide not to reduce your exposure to shares, it's a virtual certainty that you should rebalance your portfolio. If emerging markets have stormed away and you remain fully invested in them, a crash will wipe out all your gains. Rebalancing would protect some of those gains."
T Bailey, the investment manager, is in the throes of reducing its exposure to the UK and giving its portfolios a more global feel.
But it is cautious about emerging markets in the short term and is therefore looking to invest in funds in the mature overseas markets such as America (its favoured funds are Axa Framlington American Growth, Neptune US Opportunities and Vanguard US Opportunities).
Philippa Gee of T Bailey said: "We recently reduced the allocation to Japan slightly in favour of the US, using the Legal & General US Index Trust. We also moved a small allocation from the Asia Pacific ex Japan sector to the UK. This went into the iShares FTSE 100 exchange-traded fund (ETF)."
Stephen Ford, an investment manager at Brewin Dolphin, the stockbroker, also said he was becoming more cautious on emerging markets in the short term, given the run they have had. "We have noted that emerging markets are now trading at a 15pc premium to developed markets and therefore a period of consolidation is probable.
"We expect 2010 to be a year for investors to take less equity risk than they carried in 2009 and that conditions will become more volatile. That said, equities should still outperform bonds over the next 12 months."
Whether now is a good time to take profits depends on when you originally invested your money, Mr Shandley pointed out. If, for example, you invested just before the banking crisis you are unlikely to have any profits to take. If you invested last spring or five years ago, on the other hand, then you will have profits to take.
Andrew Merricks of Skerritt Consultants, the Brighton-based independent financial adviser, said investors should think twice about taking profits on investments that produce a decent income, such as corporate and high-yield bonds, because such yields continue to offer a good alternative to the returns on cash and gilts.
Several experts believe that emerging markets – though still a decent long-term play – are favourites for a correction.
Mark Harris of Henderson said: "A number of higher-risk areas such as emerging markets have done extremely well from the lows in March 2009. It is worth taking profits from emerging markets and cyclical sectors such as mining, despite their long-term attractions.
"While we do not believe that the recovery will be derailed, asset pricing conditions are likely to change. For investors who are mindful of shorter-term moves in asset markets, it is worth considering switching some money away from the leading markets and sectors into the laggards."
http://www.telegraph.co.uk/finance/personalfinance/investing/6963591/Stock-market-is-it-time-to-take-profits.html
The FTSE100 is at a 16-month high leaving many people wondering whether they should take some profits and redirect their money elsewhere.
Published: 10:13PM GMT 10 Jan 2010
Stock markets across the globe have carried on where they left off in 2009 and continue to climb. The FTSE 100 index, for instance, reached a 16‑month high on Tuesday when it broke through the 5,500 level.
Since Britain's blue-chip index fell to a low of 3,512 in March last year, investors have seen a 60pc return on many of their investments. In some cases they will have seen even greater gains if they had invested in overseas funds.
The question now for many people is whether they should take some profits and redirect their money elsewhere. While stock market bulls say that shares will carry on rising, there are fears that the economy could falter again once the Bank of England puts the brakes on quantitative easing and interest rates start to climb.
The Institute of Directors (IoD) said business leaders were pessimistic about prospects for the British economy and warned that "a double-dip, or even a triple-tumble scenario" was a significant risk.
Graeme Leach, the IoD's chief economist, said: "We are very doubtful of a sharp bounce back in 2010. We don't believe sustainable growth will occur. Yes, there could be an occasional spurt of activity, but the next two years look pretty glum."
It is no surprise then that many investment professionals are taking profits and redirecting the gains into other investments.
Oliver Burns, a private client investment manager at Jupiter, is taking profits from some of last year's winners and rotating into higher yielding, larger-cap, defensive stocks.
He said: "We remain positive on the market while interest rates stay low and there are signs of economic recovery, but we believe it has overrun in the short term. In terms of sectors, we are reducing our exposure to corporate bonds, but remain positive on the long-term prospects for emerging markets.
"In our view, stock-picking funds will add significant value over the next year and so we are considering managers such as Derek Stuart, who runs Artemis Special Situations, and Ben Whitmore of Jupiter UK Special Situations, as well as higher yielding funds such as Schroder Income and Artemis Income."
Jonathan Jackson, an equity analyst at Killik & Co, the stockbroker, said: "We would certainly look at taking profits on certain shares that have done well, such as M&S, and reinvest elsewhere in the stock market."
Gary Potter, an investment manager at Thames River, the multi-manager specialist, is in the camp that thinks economic growth is going to struggle and suggests some of the recent rises in commodity stocks are due a pause.
"We have always encouraged people to take profits where they have done well and look to areas that have good outlooks but where share prices have been left behind. For example, mid and smaller-cap stocks have underperformed in this large-cap rally and may offer investors a better home."
But Adrian Shandley, the managing director of Premier Wealth Management, is not convinced that now is the time for investors to exit the stock market altogether. He believes that shares are still undervalued, despite their rise over the past nine months.
"Britain definitely has serious problems, but that doesn't mean the stock market will do badly," he said. "And it often rises after general elections, as they get uncertainty out of the way. Before then, I'd expect markets to be fairly flat."
However, he does believe that investors might want to rejig their portfolios because the recent market rises are likely to mean that they will have greater exposure to certain areas than they need. This could make their portfolios more risky than investors would like.
Broadly, you need to sell enough from sectors that have outperformed to bring your asset allocations back to their original percentages, he said.
For example, you might have split your money at the outset as follows: 30pc UK equities, 30pc bonds, 30pc international equities and bonds, 10pc property. The strong performance of the overseas markets would have boosted their proportion of the portfolio above 30pc, so you need to sell some of your holdings to return the percentage to 30pc.
Mr Shandley added: "Even if you decide not to reduce your exposure to shares, it's a virtual certainty that you should rebalance your portfolio. If emerging markets have stormed away and you remain fully invested in them, a crash will wipe out all your gains. Rebalancing would protect some of those gains."
T Bailey, the investment manager, is in the throes of reducing its exposure to the UK and giving its portfolios a more global feel.
But it is cautious about emerging markets in the short term and is therefore looking to invest in funds in the mature overseas markets such as America (its favoured funds are Axa Framlington American Growth, Neptune US Opportunities and Vanguard US Opportunities).
Philippa Gee of T Bailey said: "We recently reduced the allocation to Japan slightly in favour of the US, using the Legal & General US Index Trust. We also moved a small allocation from the Asia Pacific ex Japan sector to the UK. This went into the iShares FTSE 100 exchange-traded fund (ETF)."
Stephen Ford, an investment manager at Brewin Dolphin, the stockbroker, also said he was becoming more cautious on emerging markets in the short term, given the run they have had. "We have noted that emerging markets are now trading at a 15pc premium to developed markets and therefore a period of consolidation is probable.
"We expect 2010 to be a year for investors to take less equity risk than they carried in 2009 and that conditions will become more volatile. That said, equities should still outperform bonds over the next 12 months."
Whether now is a good time to take profits depends on when you originally invested your money, Mr Shandley pointed out. If, for example, you invested just before the banking crisis you are unlikely to have any profits to take. If you invested last spring or five years ago, on the other hand, then you will have profits to take.
Andrew Merricks of Skerritt Consultants, the Brighton-based independent financial adviser, said investors should think twice about taking profits on investments that produce a decent income, such as corporate and high-yield bonds, because such yields continue to offer a good alternative to the returns on cash and gilts.
Several experts believe that emerging markets – though still a decent long-term play – are favourites for a correction.
Mark Harris of Henderson said: "A number of higher-risk areas such as emerging markets have done extremely well from the lows in March 2009. It is worth taking profits from emerging markets and cyclical sectors such as mining, despite their long-term attractions.
"While we do not believe that the recovery will be derailed, asset pricing conditions are likely to change. For investors who are mindful of shorter-term moves in asset markets, it is worth considering switching some money away from the leading markets and sectors into the laggards."
http://www.telegraph.co.uk/finance/personalfinance/investing/6963591/Stock-market-is-it-time-to-take-profits.html
Investors turn their backs on stock market
Investors turn their backs on stock market
The number of people planning to invest in the stock market has halved during the past six months, despite the recent market rally, research has shown. - they did not have enough spare cash, cited by 59pc,
- while 30pc said they were putting any money they did have into savings accounts rather than investments.
- But 18pc of those questioned said they thought the stock market was currently too volatile,
- while 9pc said it would fall back from its current level.
Glove makers surge in early trade
Glove makers surge in early trade
Written by Joseph Chin
Monday, 11 January 2010 09:33
KUALA LUMPUR: Shares of glove markers rose in early trade on Monday, Jan 11, bucking the weaker market sentiment, with Latexx, Hartalega and Rubberex, following a positive outlook for the sector and spurred by Latexx's latest venture.
At 9.26am, the FBM KLCI fell 1.45 points to 1,291.53. Turnover was 131.13 million shares valued at RM103.91 million.
Hartalega added 15 sen to RM6.87, Latexx 14 sen to RM3.61 and Rubberex-WA 12 sen to RM1.92.
Interest in Latexx was also spurred by its Amsterdam-based Budev BV to set up a joint-venture company to market and distribute protein-free gloves.
Budev owns the intellectual property rights related to a TECHNOLOGY [] to reduce proteins causing latex allergy.
http://www.theedgemalaysia.com/business-news/157168-glove-makers-surge-in-early-trade.html
Latexx up on protein-free glove venture
Tags: Budev | Latexx Partners | protein-free gloves
Written by Joseph Chin
Monday, 11 January 2010 09:23
KUALA LUMPUR: LATEXX PARTNERS BHD [] securities rallied in early trade on Monday, Jan 11 after it proposed to team up with Amsterdam-based Budev BV to set up a joint-venture company to market and distribute protein-free gloves.
At 9.11am, its warrants, Latexx-WA rose 18 sen to RM3.10 with 305,400 units done while the shares added 16 sen to RM3.63 with 997,700 shares done.
The FBM KLCI shed 0.94 point to 1,2919.04. Turnover was 80.87 million shares valued at RM57.52 million.
It is teaming up with Amsterdam-based Budev BV to set up a joint-venture company to market and distribute protein-free gloves. Budev owns the intellectual property rights related to a TECHNOLOGY [] to reduce proteins causing latex allergy.
The JV company, Total Glove Co Sdn Bhd will have a paid-up of RM9,998 or 9,998 shares of RM1 each. Latexx and Budev will subscribe for 4,999 shares each in the JV company.
Latexx said the JV would treat natural rubber latex examination and surgical gloves using its technology.
The JV company will market and distribute these gloves, which will have "non-detectable level of proteins and allergens" to prevent users from having an allergic reaction. Budev will grant an exclusive licence to the JV company for the use of the technology.
Latexx said the proposed JV would enable it to venture into a new era of technology to treat natural rubber latex examination and surgical gloves with extremely reduced levels of proteins and allergens to non-detectable level to prevent users from having an allergic reaction.
http://www.theedgemalaysia.com/business-news/157167-latexx-up-on-protein-free-glove-venture.html
Written by Joseph Chin
Monday, 11 January 2010 09:33
KUALA LUMPUR: Shares of glove markers rose in early trade on Monday, Jan 11, bucking the weaker market sentiment, with Latexx, Hartalega and Rubberex, following a positive outlook for the sector and spurred by Latexx's latest venture.
At 9.26am, the FBM KLCI fell 1.45 points to 1,291.53. Turnover was 131.13 million shares valued at RM103.91 million.
Hartalega added 15 sen to RM6.87, Latexx 14 sen to RM3.61 and Rubberex-WA 12 sen to RM1.92.
Interest in Latexx was also spurred by its Amsterdam-based Budev BV to set up a joint-venture company to market and distribute protein-free gloves.
Budev owns the intellectual property rights related to a TECHNOLOGY [] to reduce proteins causing latex allergy.
http://www.theedgemalaysia.com/business-news/157168-glove-makers-surge-in-early-trade.html
Latexx up on protein-free glove venture
Tags: Budev | Latexx Partners | protein-free gloves
Written by Joseph Chin
Monday, 11 January 2010 09:23
KUALA LUMPUR: LATEXX PARTNERS BHD [] securities rallied in early trade on Monday, Jan 11 after it proposed to team up with Amsterdam-based Budev BV to set up a joint-venture company to market and distribute protein-free gloves.
At 9.11am, its warrants, Latexx-WA rose 18 sen to RM3.10 with 305,400 units done while the shares added 16 sen to RM3.63 with 997,700 shares done.
The FBM KLCI shed 0.94 point to 1,2919.04. Turnover was 80.87 million shares valued at RM57.52 million.
It is teaming up with Amsterdam-based Budev BV to set up a joint-venture company to market and distribute protein-free gloves. Budev owns the intellectual property rights related to a TECHNOLOGY [] to reduce proteins causing latex allergy.
The JV company, Total Glove Co Sdn Bhd will have a paid-up of RM9,998 or 9,998 shares of RM1 each. Latexx and Budev will subscribe for 4,999 shares each in the JV company.
Latexx said the JV would treat natural rubber latex examination and surgical gloves using its technology.
The JV company will market and distribute these gloves, which will have "non-detectable level of proteins and allergens" to prevent users from having an allergic reaction. Budev will grant an exclusive licence to the JV company for the use of the technology.
Latexx said the proposed JV would enable it to venture into a new era of technology to treat natural rubber latex examination and surgical gloves with extremely reduced levels of proteins and allergens to non-detectable level to prevent users from having an allergic reaction.
http://www.theedgemalaysia.com/business-news/157167-latexx-up-on-protein-free-glove-venture.html
Half of listed companies experience fraud, says KPMG
Half of listed companies experience fraud, says KPMG
Written by Melody Song
Monday, 11 January 2010 11:12
KUALA LUMPUR: Nearly half of all the listed companies in Malaysia or 49% and also the country's top 1,000 corporations have experienced at least one instance of fraud, according to the KPMG Fraud Survey Report 2009.
The results of the survey, released on Monday, Jan 11, showed that 47% of respondents who experienced fraud within their organisations disclosed that total losses suffered during the survey period amounted to RM63.95 million while the remaining number were unsure of the amount.
Some 42% of those surveyed who reported fraud were from companies that dealt with
Motivations for fraud included
The most common types of fraud were
http://www.theedgemalaysia.com/business-news/157186-half-of-listed-companies-experience-fraud-says-kpmg.html
Written by Melody Song
Monday, 11 January 2010 11:12
- manufacturing,
- CONSTRUCTION [] and
- engineering or consumer products.
- greed/lifestyle (62%) and
- personal financial pressure (39%).
The most common types of fraud were
- theft of cash (39%),
- theft of inventory (31%),
- fraudulent expense claims (26%) and
- kickbacks (25%).
Money leaves the country on an unprecedented scale
Malaysia's Disastrous Capital Flight
SPECIAL REPORTS
Monday, 11 January 2010
Money leaves the country on an unprecedented scale
Often with the exodus of money goes an exodus of talent as highly skilled persons disadvantaged by race or, as in the case of some Malays, disgusted by local corruption or primitive religious authorities, take themselves and their capital to Australia, Canada, India, China, etc.
Asia Sentinel
Churches are not the only thing to have been going up in flames in Malaysia. Take a look at the nation's foreign exchange reserves. They fell by close to 25 percent during 2009 according to investment bank UBS even though the country continued to run a huge surplus on the current account of its balance of payments. Says UBS: "Question: which Asian country had the biggest FX losses in 2009?" The answer is Malaysia and by a very large margin; we estimate that official reserves fell by well more than one quarter on a valuation-adjusted basis". It describes the situation as "bizarre" and contrasts Malaysia with other countries with large current account surpluses – Thailand, China, Taiwan, Singapore, and Hong Kong – which have seen their reserves increase – as should be expected.
In short there has been an exodus of money from Malaysia on a scale which surpasses that which occurred during the Asian crisis. Nor is this just a mirage. The decline is also reflected in a sudden decline in base money supply – even while, thanks to Bank Negara, broader M2 has continued to grow modestly.
Who is responsible for this massive outflow? And where has it gone? The questions cannot be answered from the data and probably will not be by a government that knows its own state-controlled enterprises, headed by Petronas, may probably be responsible for part of it. The more certain reason however is the outflow of local private capital has been taking place on an unprecedented scale in response to political instability, massive official corruption and discrimination against non-Malays.
This capital bloodletting has as yet attracted little attention because Malaysia's foreign debt levels had declined dramatically since the Asian crisis and its reserves reached very healthy levels. So the outflow has not disturbed the financial markets, and Bank Negara has easily been able to keep interest rates low and the currency strong.
But unlike 1998, when the exodus of hot foreign money was a major contributor to the crisis, foreigners cannot be blamed. There is little speculative interest in the ringgit and the Malaysian bourse has rather fallen off the map as far as foreign institutional money is concerned. The BRICs, India, China, Russia, Brazil have taken the merging market lead once dominated by Southeast Asia.
Nor is there much evidence that the Middle East money which was supposed to be flowing into Muslim Malaysia, into holiday apartments or Johor's massive Iskandar development zone, has been much in evidence. Malaysia's one recent success, the development of its sukuk (Islamic bond) market may have caused more capital outflow than inflow. At any rate any overall net inflow of foreign capital whether into bonds, equities, factories or real estate has been dwarfed by the exodus of Malaysian money.
The latter is reflected in the weakness of private sector investment, which now trails public investment. Indeed it explains why the economy remains weak despite very healthy prices for most of Malaysia's commodity exports. The nation has been running a current account surplus of more than 10 percent of gross domestic product for the past decade and hit about 17 percent of GDP in the year just ended. Initially this surplus was needed to pay down debt accumulated during the mid-1990s Mahathir boom years and to rebuild foreign exchange reserves to healthy levels.
But subsequently it became simply a consequence of the weakness of private investment. Domestic investors were discouraged by the corrupt and warped system and foreigners moved to China and elsewhere. GDP growth has become ever reliant on government stimulus – again racially biased in its allocation -- financed by a persistently large budget deficit.
Meanwhile, publicly controlled capital has been rushing overseas. Petronas has been spending its billions in profits around the world as it attempts to become a major global player – at the expense of Malaysian citizenry in general and the oil and gas producing states in particular. Other government-controlled entities such as Malayan Banking Bhd have been bidding top dollar for foreign assets – such as Bank Internasional Indonesia.
Often with the exodus of money goes an exodus of talent as highly skilled persons disadvantaged by race or, as in the case of some Malays, disgusted by local corruption or primitive religious authorities, take themselves and their capital to Australia, Canada, India, China, etc.
The 2009 reserves loss may have had some specific cause which will not be repeated. But it has merely served to underline a dismal trend which has been in evidence for the best part of a decade. Malaysia has so far been saved from itself by the commodity price gains of the past five years – with even the late 2008 collapse now largely reversed. Oil and palm oil may be off their peaks but both are now double their prices of five years ago.
It is better not to imagine what will happen to Malaysia if prices collapse to 2004 levels and stay there. Better now to address the real reasons behind capital outflow and lack of private investment.
http://www.malaysia-today.net/index.php?option=com_content&view=article&id=29559:malaysias-disastrous-capital-flight&catid=21:special-reports&Itemid=100135
SPECIAL REPORTS
Monday, 11 January 2010
Money leaves the country on an unprecedented scale
Often with the exodus of money goes an exodus of talent as highly skilled persons disadvantaged by race or, as in the case of some Malays, disgusted by local corruption or primitive religious authorities, take themselves and their capital to Australia, Canada, India, China, etc.
Asia Sentinel
Churches are not the only thing to have been going up in flames in Malaysia. Take a look at the nation's foreign exchange reserves. They fell by close to 25 percent during 2009 according to investment bank UBS even though the country continued to run a huge surplus on the current account of its balance of payments. Says UBS: "Question: which Asian country had the biggest FX losses in 2009?" The answer is Malaysia and by a very large margin; we estimate that official reserves fell by well more than one quarter on a valuation-adjusted basis". It describes the situation as "bizarre" and contrasts Malaysia with other countries with large current account surpluses – Thailand, China, Taiwan, Singapore, and Hong Kong – which have seen their reserves increase – as should be expected.
In short there has been an exodus of money from Malaysia on a scale which surpasses that which occurred during the Asian crisis. Nor is this just a mirage. The decline is also reflected in a sudden decline in base money supply – even while, thanks to Bank Negara, broader M2 has continued to grow modestly.
Who is responsible for this massive outflow? And where has it gone? The questions cannot be answered from the data and probably will not be by a government that knows its own state-controlled enterprises, headed by Petronas, may probably be responsible for part of it. The more certain reason however is the outflow of local private capital has been taking place on an unprecedented scale in response to political instability, massive official corruption and discrimination against non-Malays.
This capital bloodletting has as yet attracted little attention because Malaysia's foreign debt levels had declined dramatically since the Asian crisis and its reserves reached very healthy levels. So the outflow has not disturbed the financial markets, and Bank Negara has easily been able to keep interest rates low and the currency strong.
But unlike 1998, when the exodus of hot foreign money was a major contributor to the crisis, foreigners cannot be blamed. There is little speculative interest in the ringgit and the Malaysian bourse has rather fallen off the map as far as foreign institutional money is concerned. The BRICs, India, China, Russia, Brazil have taken the merging market lead once dominated by Southeast Asia.
Nor is there much evidence that the Middle East money which was supposed to be flowing into Muslim Malaysia, into holiday apartments or Johor's massive Iskandar development zone, has been much in evidence. Malaysia's one recent success, the development of its sukuk (Islamic bond) market may have caused more capital outflow than inflow. At any rate any overall net inflow of foreign capital whether into bonds, equities, factories or real estate has been dwarfed by the exodus of Malaysian money.
The latter is reflected in the weakness of private sector investment, which now trails public investment. Indeed it explains why the economy remains weak despite very healthy prices for most of Malaysia's commodity exports. The nation has been running a current account surplus of more than 10 percent of gross domestic product for the past decade and hit about 17 percent of GDP in the year just ended. Initially this surplus was needed to pay down debt accumulated during the mid-1990s Mahathir boom years and to rebuild foreign exchange reserves to healthy levels.
But subsequently it became simply a consequence of the weakness of private investment. Domestic investors were discouraged by the corrupt and warped system and foreigners moved to China and elsewhere. GDP growth has become ever reliant on government stimulus – again racially biased in its allocation -- financed by a persistently large budget deficit.
Meanwhile, publicly controlled capital has been rushing overseas. Petronas has been spending its billions in profits around the world as it attempts to become a major global player – at the expense of Malaysian citizenry in general and the oil and gas producing states in particular. Other government-controlled entities such as Malayan Banking Bhd have been bidding top dollar for foreign assets – such as Bank Internasional Indonesia.
Often with the exodus of money goes an exodus of talent as highly skilled persons disadvantaged by race or, as in the case of some Malays, disgusted by local corruption or primitive religious authorities, take themselves and their capital to Australia, Canada, India, China, etc.
The 2009 reserves loss may have had some specific cause which will not be repeated. But it has merely served to underline a dismal trend which has been in evidence for the best part of a decade. Malaysia has so far been saved from itself by the commodity price gains of the past five years – with even the late 2008 collapse now largely reversed. Oil and palm oil may be off their peaks but both are now double their prices of five years ago.
It is better not to imagine what will happen to Malaysia if prices collapse to 2004 levels and stay there. Better now to address the real reasons behind capital outflow and lack of private investment.
http://www.malaysia-today.net/index.php?option=com_content&view=article&id=29559:malaysias-disastrous-capital-flight&catid=21:special-reports&Itemid=100135
What's next in Malaysia's Allah row?
What's next in Malaysia's Allah row?
Tue Jan 5, 2010
ARE RELIGIOUS TENSIONS IN MALAYSIA AN INVESTMENT RISK?
Not directly. Religious disputes are a risk mostly in their potential to increase ethnic tensions, with the biggest fear being a repeat of ethnic clashes that took place in 1969.
Some investors are concerned over the increasing Islamisation of Malaysia as a potential market risk.
During a meeting with investors in New York last year Najib, was asked about the government's stand over the caning sentence meted out to a Muslim woman for drinking beer under rarely-enforced Islamic criminal laws.
An escalation of religious tensions in Malaysia could weaken Najib's ability to push through economic reforms aimed at boosting foreign investment.
IS THERE A RISK OF ETHNIC CLASHES?
The risk is very small. The bloody 1969 clashes left a deep scar on the national psyche.
Any signs of trouble would see the government use the Internal Security Act that allows detention without trial.
While there are likely to be protests organised by fringe groups, there is no real risk of attacks on churches or other places of worship.
(Editing by Alex Richardson)
http://in.reuters.com/article/worldNews/idINIndia-45153020100105?pageNumber=4&virtualBrandChannel=0
Sadly, despite the journalist's prediction, some attacks on churches occurred a week after.
Tue Jan 5, 2010
ARE RELIGIOUS TENSIONS IN MALAYSIA AN INVESTMENT RISK?
Not directly. Religious disputes are a risk mostly in their potential to increase ethnic tensions, with the biggest fear being a repeat of ethnic clashes that took place in 1969.
Some investors are concerned over the increasing Islamisation of Malaysia as a potential market risk.
During a meeting with investors in New York last year Najib, was asked about the government's stand over the caning sentence meted out to a Muslim woman for drinking beer under rarely-enforced Islamic criminal laws.
An escalation of religious tensions in Malaysia could weaken Najib's ability to push through economic reforms aimed at boosting foreign investment.
IS THERE A RISK OF ETHNIC CLASHES?
The risk is very small. The bloody 1969 clashes left a deep scar on the national psyche.
Any signs of trouble would see the government use the Internal Security Act that allows detention without trial.
While there are likely to be protests organised by fringe groups, there is no real risk of attacks on churches or other places of worship.
(Editing by Alex Richardson)
http://in.reuters.com/article/worldNews/idINIndia-45153020100105?pageNumber=4&virtualBrandChannel=0
Sadly, despite the journalist's prediction, some attacks on churches occurred a week after.
Beijing is trying to prevent the property bubble from bursting.
China vows to keep ‘hot money’ out of property market
Beijing is trying to prevent the property bubble from bursting. — Reuters pic
BEIJING, Jan 10 — China vowed today not to let foreign speculative investment affect the property market, the latest expression of official concern that real-estate prices are racing ahead too fast.
The directive from the State Council, China’s cabinet, will serve as a guideline for local authorities and ministries, including the People’s Bank of China and the China Banking Regulatory Commission, to work out detailed policies.
“Relevant departments must enhance monitoring of loans and cross-border investment to prevent illegal inflows of capital into the property market and to avoid the impact of overseas hot money on China’s real-estate market,” the cabinet said.
It said the central bank and banking regulator should step up oversight and “window guidance” of mortgage lending.
About one-sixth of China’s nearly 10 trillion yuan (RM5 trillion) in new loans last year flowed into the property sector.
Concerned that a property bubble could stir social and economic instability, Beijing has vowed to combat overly fast price increases, although its moves to date, such as restricting sales tax exemptions, have been relatively mild.
The cabinet urged local authorities, especially in cities where housing prices are rising sharply, to increase the supply of affordable housing.
It reiterated that it would curb house buying for “investment and speculation purposes” and keep the minimum down payment for purchases of second homes at 40 per cent.
China’s central bank said this week that it would pay particularly close attention to the property market in 2010 while managing inflationary expectations. — Reuters
Beijing is trying to prevent the property bubble from bursting. — Reuters pic
BEIJING, Jan 10 — China vowed today not to let foreign speculative investment affect the property market, the latest expression of official concern that real-estate prices are racing ahead too fast.
The directive from the State Council, China’s cabinet, will serve as a guideline for local authorities and ministries, including the People’s Bank of China and the China Banking Regulatory Commission, to work out detailed policies.
“Relevant departments must enhance monitoring of loans and cross-border investment to prevent illegal inflows of capital into the property market and to avoid the impact of overseas hot money on China’s real-estate market,” the cabinet said.
It said the central bank and banking regulator should step up oversight and “window guidance” of mortgage lending.
About one-sixth of China’s nearly 10 trillion yuan (RM5 trillion) in new loans last year flowed into the property sector.
Concerned that a property bubble could stir social and economic instability, Beijing has vowed to combat overly fast price increases, although its moves to date, such as restricting sales tax exemptions, have been relatively mild.
The cabinet urged local authorities, especially in cities where housing prices are rising sharply, to increase the supply of affordable housing.
It reiterated that it would curb house buying for “investment and speculation purposes” and keep the minimum down payment for purchases of second homes at 40 per cent.
China’s central bank said this week that it would pay particularly close attention to the property market in 2010 while managing inflationary expectations. — Reuters
China tightening could undo risk markets
COLUMN - China tightening could undo risk markets: James Saft
Wed Dec 30, 2009 11:20am
By James Saft
HUNTSVILLE, Alabama (Reuters) - The key decision for global markets in 2010 will very likely not be made in Washington but Beijing, where emerging inflation and a property bubble may push China to begin reining in expansionary policies earlier than will suit the developed world.
After returning to a breakneck pace of growth with amazing speed, there are already signs that China is weighing steps to curtail the bank lending that has been a huge source of stimulus, helping to drive property and other asset prices sharply higher.
"We emphasize the role of the reserve-requirement ratio, although the ratio was internationally seen as useless for years and it was thought central banks could abandon the tool," Chinese central bank Governor Zhou Xiaochuan said at a Beijing conference on Tuesday.
"Besides benchmark interest rates, we also put emphasis on managing the gap between deposit and lending rates", Zhou said.
Put simply, that implies that China may take steps to limit the amount of money banks are allowed to lend and to drive the margins between what they pay in interest and what they charge higher, both steps which will cool growth and speculation.
China's central bank on Wednesday followed up by promising to exercise tighter control over bank lending next year while reaffirming a long-standing pledge to maintain "appropriately loose" monetary policy.
Even if you don't own a million dollar apartment investment in Shanghai -- kept empty of course because cash flows are for the little people - this could spell trouble.
Zhou "today signaled the end of the global market bounce that has been in progress since the end of last winter," Lombard Street Research economist Charles Dumas wrote in a note to clients.
"The only major addition of liquidity in the world economy over the past year has been in China. That is about to be withdrawn. Risk assets look like an unwise place to be in early 2010, especially commodity futures and the government bonds of countries with large deficits and/or debts. For risky investments worldwide, this could mark a turning point from 2009's massive rally."
China's banks will lend about $1.4 trillion in 2009, roughly double 2008's allocation. Official estimates put inflation at a tepid 0.6 percent for the year to November, but this is in contrast to media reports about bulk-buying by Chinese consumers concerned about a rapid rise in the price of staple foods.
THE POWER OF NARRATIVE
Reflationary efforts in China have almost certainly had a positive impact on global economic conditions, possibly affecting market prices for securities more than fundamental demand. On the broadest measure, money supply in China is growing at an astonishing 30 percent annual clip, more or less double its usual rate of growth this decade.
By Lombard Research's reckoning, China has been doing the heavy lifting. Even with a range of extraordinary policies such as quantitative easing, combined money growth in the United States, euro zone, Japan and Britain is barely positive. But adding in China's efforts, this rises to a more normal 6 percent range.
But China could be cutting back -- through loan controls, interest rates and ultimately by allowing the yuan to rise in value -- just as other sources of liquidity such as the U.S. quantitative easing program are withdrawn. Perhaps this is all part of the grand plan, and perhaps the rise in asset prices over the past nine months will be confirmed by a self-sustaining recovery even without further growth in stimulus.
There are at least three other possibilities. First, it may be that tighter policy in China retards a recovery and hurts asset prices. But there is also a chance that China genuinely needs tighter policy but the United States, Europe and Britain do not.
If so, further signs that China is serious about addressing its nascent property bubble and inflation should be quite nasty news for equities and other risky assets. Finally, there is the possibility that China is the bellwether for inflationary issues that will crop up elsewhere soon, though this seems a long shot.
Risk assets could get hit if it looks like the Fed's hand is being forced regardless of what the U.S. central bank does about interest rates and its exit plan. Withdrawing monetary stimulus will hurt, but what might hurt even worse is if the Fed were forced to extend measures to the point at which it starts looking desperate rather than masterful.
We are operating under a common narrative in markets: that the authorities are both willing and able to do what it takes. This may or may not be true, but it gains tremendous force simply because people subscribe to it.
China may make this simple narrative quite a bit more complicated.
(At the time of publication James Saft did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund.)
http://in.reuters.com/article/economicNews/idINIndia-45053620091230?sp=tru
Wed Dec 30, 2009 11:20am
By James Saft
HUNTSVILLE, Alabama (Reuters) - The key decision for global markets in 2010 will very likely not be made in Washington but Beijing, where emerging inflation and a property bubble may push China to begin reining in expansionary policies earlier than will suit the developed world.
After returning to a breakneck pace of growth with amazing speed, there are already signs that China is weighing steps to curtail the bank lending that has been a huge source of stimulus, helping to drive property and other asset prices sharply higher.
"We emphasize the role of the reserve-requirement ratio, although the ratio was internationally seen as useless for years and it was thought central banks could abandon the tool," Chinese central bank Governor Zhou Xiaochuan said at a Beijing conference on Tuesday.
"Besides benchmark interest rates, we also put emphasis on managing the gap between deposit and lending rates", Zhou said.
Put simply, that implies that China may take steps to limit the amount of money banks are allowed to lend and to drive the margins between what they pay in interest and what they charge higher, both steps which will cool growth and speculation.
China's central bank on Wednesday followed up by promising to exercise tighter control over bank lending next year while reaffirming a long-standing pledge to maintain "appropriately loose" monetary policy.
Even if you don't own a million dollar apartment investment in Shanghai -- kept empty of course because cash flows are for the little people - this could spell trouble.
Zhou "today signaled the end of the global market bounce that has been in progress since the end of last winter," Lombard Street Research economist Charles Dumas wrote in a note to clients.
"The only major addition of liquidity in the world economy over the past year has been in China. That is about to be withdrawn. Risk assets look like an unwise place to be in early 2010, especially commodity futures and the government bonds of countries with large deficits and/or debts. For risky investments worldwide, this could mark a turning point from 2009's massive rally."
China's banks will lend about $1.4 trillion in 2009, roughly double 2008's allocation. Official estimates put inflation at a tepid 0.6 percent for the year to November, but this is in contrast to media reports about bulk-buying by Chinese consumers concerned about a rapid rise in the price of staple foods.
THE POWER OF NARRATIVE
Reflationary efforts in China have almost certainly had a positive impact on global economic conditions, possibly affecting market prices for securities more than fundamental demand. On the broadest measure, money supply in China is growing at an astonishing 30 percent annual clip, more or less double its usual rate of growth this decade.
By Lombard Research's reckoning, China has been doing the heavy lifting. Even with a range of extraordinary policies such as quantitative easing, combined money growth in the United States, euro zone, Japan and Britain is barely positive. But adding in China's efforts, this rises to a more normal 6 percent range.
But China could be cutting back -- through loan controls, interest rates and ultimately by allowing the yuan to rise in value -- just as other sources of liquidity such as the U.S. quantitative easing program are withdrawn. Perhaps this is all part of the grand plan, and perhaps the rise in asset prices over the past nine months will be confirmed by a self-sustaining recovery even without further growth in stimulus.
There are at least three other possibilities. First, it may be that tighter policy in China retards a recovery and hurts asset prices. But there is also a chance that China genuinely needs tighter policy but the United States, Europe and Britain do not.
If so, further signs that China is serious about addressing its nascent property bubble and inflation should be quite nasty news for equities and other risky assets. Finally, there is the possibility that China is the bellwether for inflationary issues that will crop up elsewhere soon, though this seems a long shot.
Risk assets could get hit if it looks like the Fed's hand is being forced regardless of what the U.S. central bank does about interest rates and its exit plan. Withdrawing monetary stimulus will hurt, but what might hurt even worse is if the Fed were forced to extend measures to the point at which it starts looking desperate rather than masterful.
We are operating under a common narrative in markets: that the authorities are both willing and able to do what it takes. This may or may not be true, but it gains tremendous force simply because people subscribe to it.
China may make this simple narrative quite a bit more complicated.
(At the time of publication James Saft did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund.)
http://in.reuters.com/article/economicNews/idINIndia-45053620091230?sp=tru
Sunday, 10 January 2010
Why All Earnings Are Not Equal
Why All Earnings Are Not Equal
By GRETCHEN MORGENSON
Published: January 9, 2010
AFTER a rip-roaring performance in 2009, the stock market has continued its upward climb. A reason to celebrate? Sure. But also a good time to check whether a company in which you have a stake keeps its books in a way that reflects reality.
When the market is roaring and the economy isn’t, executives come under increased pressure to make sure that their companies’ results justify higher valuations. That’s why smart investors keep an eye on them, by scrutinizing how their profits are figured.
Such is the view of Robert A. Olstein, a veteran money manager who dissects financial statements to uncover stocks he thinks other investors are valuing improperly. Since 1995 he has overseen the Olstein All-Cap Value fund, and although he had a horrific 2008 (down 43 percent), his 14-year results exceed the Standard & Poor’s 500-stock index by an average of 3.25 percent annualized, net of fees.
Mr. Olstein’s 2008 troubles have made him more determined than ever to scrub companies’ results. “As the market goes higher, it becomes more important to measure the quality of corporate earnings,” he said. “You have to look behind the numbers.”
Adjustments that investors need to make now, in Mr. Olstein’s view, are a result of disparities between a company’s reported earnings and its excess cash flow. Earnings are what investors focus on, but because these figures include noncash items, based on management estimates, the bottom line may not tell the whole story.
Cash flow, on the other hand, is actual money that a company generates and that its managers can use to invest in the business or pay out to shareholders.
SOME of the widest gulfs between earnings and cash flows, Mr. Olstein said, are showing up the ways companies account for capital expenditures.
To ensure growth, companies invest in things like new facilities or additional equipment. As time goes on, plants and equipment lose value — the way a car does the moment you drive it away from the dealer — and companies are allowed to write off a portion of these values each year based on management estimates of how long they will generate revenue.
The write-offs are known as depreciation, and the more a company chooses to write off, the greater its earnings are reduced. So managers interested in plumping their profits may depreciate less than they otherwise would or should. Conversely, heavy depreciation amounts can make earnings appear more depressed than the company’s cash flows indicate.
“It’s an investor’s job to determine the economic realism of management’s assumptions,” Mr. Olstein said. “There is nothing illegal here, but maybe their depreciation assumptions are unrealistic.”
One way to assess the accuracy of management’s estimates is to compare, over time, how much a company spends on new plant and equipment and how much it deducts in depreciation each year. Some of the discrepancies that emerge can be temporary, caused by the lag time between an initial investment and subsequent write-downs for depreciation.
Companies in a growth phase, for instance, will show greater capital expenditures than depreciation as they increase investments in plant and equipment.
But that should be only temporary. If such discrepancies appear on a company’s books year in and out, then investors might well question the depreciation assumptions. Investors confronted by large disparities should discount those companies’ earnings by the amount of excess capital expenditures. Such an exercise reveals how much free cash flow is available to stockholders.
Conversely, if depreciation exceeds capital expenditures, Mr. Olstein says that the earnings at these companies are actually better than they appear — and that this shows up in the cash flows.
Mr. Olstein has spotted several companies whose depreciation and capital expenditures have shown significant discrepancies in recent years. For some, heavy depreciation schedules are punishing earnings temporarily. At other companies, modest depreciation means earnings look better than cash flows.
Two retailing companies provide examples of how depreciation can hurt earnings but mask solid cash flows. They are Macy’s and Home Depot, and both are coming off recent expansion programs that are still being felt in the financials, Mr. Olstein said. He owns both in his fund.
Macy’s earned just a penny a share in the first nine months of 2009 but generated per-share cash flow of $1.41. Home Depot posted per-share profits of $1.40 for the period, while its cash flow reached $1.87 a share.
The flipside is represented by companies like railroads where depreciation is not keeping up with spending. Railroad operations are capital intensive, to be sure, but for the last four years, some companies’ expenditures have exceeded their write-downs by significant margins.
For instance, Union Pacific put $3.64 a share into capital expenditures in the first nine months of 2009. But its depreciation during that period totaled just $2.12 a share. In 2008, the company spent $5.40 a per share in capital expenditures compared with $2.69 in depreciation. Since 2005, Union Pacific has recorded $17.81 a share in capital spending but has depreciated about half that much — just $9.54 a share.
“The railroads are not bad businesses, but their stocks are overpriced when you look at what their cash flows are,” Mr. Olstein said. For the first nine months of last year, Union Pacific’s free cash flow was 99 cents a share; earnings were $2.51.
Another company with a sizable gap between depreciation and capital expenditures is the Carnival Corporation, the cruise ship company. Over the last four years, it has spent $16.48 a share on assets but it has written down just $6.01 a share.
Donna Kush, a Union Pacific spokeswoman, said it’s common for capital spending to exceed depreciation in her industry. “When you have long-life assets, you will have a mismatch,” she said, “because we need to constantly upgrade for safety and to serve our customers.”
And David Bernstein, chief financial officer of Carnival, said that at some point his company’s growth would wind down and its capital expenditures and depreciation would be more aligned. But in the meantime, he said, it is “simplistic” to expect the two figures to match up.
Still, Mr. Olstein said consistent gulfs between capital spending and depreciation should concern investors. “If it keeps on deviating then you have to look at why,” he said. “You have to reconcile the differences or the market will do it for you.”
http://www.nytimes.com/2010/01/10/business/economy/10gret.html?ref=business
By GRETCHEN MORGENSON
Published: January 9, 2010
AFTER a rip-roaring performance in 2009, the stock market has continued its upward climb. A reason to celebrate? Sure. But also a good time to check whether a company in which you have a stake keeps its books in a way that reflects reality.
When the market is roaring and the economy isn’t, executives come under increased pressure to make sure that their companies’ results justify higher valuations. That’s why smart investors keep an eye on them, by scrutinizing how their profits are figured.
Such is the view of Robert A. Olstein, a veteran money manager who dissects financial statements to uncover stocks he thinks other investors are valuing improperly. Since 1995 he has overseen the Olstein All-Cap Value fund, and although he had a horrific 2008 (down 43 percent), his 14-year results exceed the Standard & Poor’s 500-stock index by an average of 3.25 percent annualized, net of fees.
Mr. Olstein’s 2008 troubles have made him more determined than ever to scrub companies’ results. “As the market goes higher, it becomes more important to measure the quality of corporate earnings,” he said. “You have to look behind the numbers.”
Adjustments that investors need to make now, in Mr. Olstein’s view, are a result of disparities between a company’s reported earnings and its excess cash flow. Earnings are what investors focus on, but because these figures include noncash items, based on management estimates, the bottom line may not tell the whole story.
Cash flow, on the other hand, is actual money that a company generates and that its managers can use to invest in the business or pay out to shareholders.
SOME of the widest gulfs between earnings and cash flows, Mr. Olstein said, are showing up the ways companies account for capital expenditures.
To ensure growth, companies invest in things like new facilities or additional equipment. As time goes on, plants and equipment lose value — the way a car does the moment you drive it away from the dealer — and companies are allowed to write off a portion of these values each year based on management estimates of how long they will generate revenue.
The write-offs are known as depreciation, and the more a company chooses to write off, the greater its earnings are reduced. So managers interested in plumping their profits may depreciate less than they otherwise would or should. Conversely, heavy depreciation amounts can make earnings appear more depressed than the company’s cash flows indicate.
“It’s an investor’s job to determine the economic realism of management’s assumptions,” Mr. Olstein said. “There is nothing illegal here, but maybe their depreciation assumptions are unrealistic.”
One way to assess the accuracy of management’s estimates is to compare, over time, how much a company spends on new plant and equipment and how much it deducts in depreciation each year. Some of the discrepancies that emerge can be temporary, caused by the lag time between an initial investment and subsequent write-downs for depreciation.
Companies in a growth phase, for instance, will show greater capital expenditures than depreciation as they increase investments in plant and equipment.
But that should be only temporary. If such discrepancies appear on a company’s books year in and out, then investors might well question the depreciation assumptions. Investors confronted by large disparities should discount those companies’ earnings by the amount of excess capital expenditures. Such an exercise reveals how much free cash flow is available to stockholders.
Conversely, if depreciation exceeds capital expenditures, Mr. Olstein says that the earnings at these companies are actually better than they appear — and that this shows up in the cash flows.
Mr. Olstein has spotted several companies whose depreciation and capital expenditures have shown significant discrepancies in recent years. For some, heavy depreciation schedules are punishing earnings temporarily. At other companies, modest depreciation means earnings look better than cash flows.
Two retailing companies provide examples of how depreciation can hurt earnings but mask solid cash flows. They are Macy’s and Home Depot, and both are coming off recent expansion programs that are still being felt in the financials, Mr. Olstein said. He owns both in his fund.
Macy’s earned just a penny a share in the first nine months of 2009 but generated per-share cash flow of $1.41. Home Depot posted per-share profits of $1.40 for the period, while its cash flow reached $1.87 a share.
The flipside is represented by companies like railroads where depreciation is not keeping up with spending. Railroad operations are capital intensive, to be sure, but for the last four years, some companies’ expenditures have exceeded their write-downs by significant margins.
For instance, Union Pacific put $3.64 a share into capital expenditures in the first nine months of 2009. But its depreciation during that period totaled just $2.12 a share. In 2008, the company spent $5.40 a per share in capital expenditures compared with $2.69 in depreciation. Since 2005, Union Pacific has recorded $17.81 a share in capital spending but has depreciated about half that much — just $9.54 a share.
“The railroads are not bad businesses, but their stocks are overpriced when you look at what their cash flows are,” Mr. Olstein said. For the first nine months of last year, Union Pacific’s free cash flow was 99 cents a share; earnings were $2.51.
Another company with a sizable gap between depreciation and capital expenditures is the Carnival Corporation, the cruise ship company. Over the last four years, it has spent $16.48 a share on assets but it has written down just $6.01 a share.
Donna Kush, a Union Pacific spokeswoman, said it’s common for capital spending to exceed depreciation in her industry. “When you have long-life assets, you will have a mismatch,” she said, “because we need to constantly upgrade for safety and to serve our customers.”
And David Bernstein, chief financial officer of Carnival, said that at some point his company’s growth would wind down and its capital expenditures and depreciation would be more aligned. But in the meantime, he said, it is “simplistic” to expect the two figures to match up.
Still, Mr. Olstein said consistent gulfs between capital spending and depreciation should concern investors. “If it keeps on deviating then you have to look at why,” he said. “You have to reconcile the differences or the market will do it for you.”
http://www.nytimes.com/2010/01/10/business/economy/10gret.html?ref=business
So you cashed out when the economy crashed, what next?
Dear Guru,
"When the global economy crashed last year, I cashed out my investments and stuffed all the money into my mattress. But now my mattress is getting lumpy and difficult to sleep on, so I think I might invest in something. Can you suggest anything?"
$$$$
via email
The reply by Malaysian guru Kam Raslan: But I get worried when the stock markets go up like this, because it's probably more wishful thinking than reality. Whenever stock prices crash, the markets will instantly shut down, because people don't want to lose all their money. Why not shut down the markets when prices suddenly go up as well? It might save us all a lot of trouble.
The above was a email and partial reply published by the Edge magazine on January 11, 2010.
There are some lessons to learn from this investor's behaviour.
"When the global economy crashed last year, I cashed out my investments and stuffed all the money into my mattress. But now my mattress is getting lumpy and difficult to sleep on, so I think I might invest in something. Can you suggest anything?"
$$$$
via email
The reply by Malaysian guru Kam Raslan: But I get worried when the stock markets go up like this, because it's probably more wishful thinking than reality. Whenever stock prices crash, the markets will instantly shut down, because people don't want to lose all their money. Why not shut down the markets when prices suddenly go up as well? It might save us all a lot of trouble.
The above was a email and partial reply published by the Edge magazine on January 11, 2010.
There are some lessons to learn from this investor's behaviour.
Jobstreet wins Singapore deal
By Karamjit Singh
Last November, JobStreet.com announced that it had won a tender to supply the Singapore government with an online recruitment service worth S$134,000 (RM325,000) over a period of two years.
For JobStreet, it was a significant win. The deal enhances JobStreet's credibility in the Singapore market. "It was a very competitive bid and to win it against global players just shows the government's trust in us," says CFO Gregory Poarch.
There could also be potential upside in the deal as it will give the company the opportunity to work with about 100 government bodies in Singapore, each of which will have different recruitment needs.
While Singapore looks good, JobStreet is still behind the market leader, JobsDB.com.
It is also trying harder in China, where it has indirect exposure through its 17% stake in 104 Corp, the leading Taiwanese online recruitment company. "It is the dominant player in the Taiwanese market and have been in operations since around the time we started in Malaysia," says CEO Mark Chang.
With so many Taiwanese companies operating in China, 104 Corp has a firm foothold in mainland China, JobStreet has already established itself as a "strong No 1" in the Philippines. The booming business process outsourcing and contact centre industry there is estimated to create one million new jobs over the next five years. "That's good for our business," says Poarch.
Indeed, with JobStreet only collecting money from companies which post job listings on its website, it is easy to see why it likes its Philippines business. JobStreet set up in the Philippines about four years after Malaysia and has almost two million users there (meaning resumes posted on its Philippine site) and has about 70% market share, says Poarch.
JobStreet's definition of users is when someone registers on the site, posts his or her resumes and creates a profile of what jobs they would be interested in, and they must leave an email ID where JobStreet can reach them should it find a job match. But if the email bounces or is full, JobStreet does not consider them a registered user, explains Poarch. Typically it has 10% of its user base actively seeking jobs, but Poarch notes that in December, this goes down to almost zero as people are waiting for their bonuses.
How has the recession impacted this business?
The company was fortunate to have a near-record cash position and this allowed it to expand while others were scaling down or going into defensive mode.
It began to see a recovery in companies hiring since last March. In total, JobStreet had about 5.7 million users at the beginning of 2009 and ended the year with almost 6.8 million users.
This large number is akin to the circulation of a newspaper which keeps attracting companies to post their listings with JobStreet, notes Poarch.
"It is not a very sexy model but it works for us." Mark Chang couldn't have put it better.
The Edge Malaysia
January 11, 2010
Last November, JobStreet.com announced that it had won a tender to supply the Singapore government with an online recruitment service worth S$134,000 (RM325,000) over a period of two years.
For JobStreet, it was a significant win. The deal enhances JobStreet's credibility in the Singapore market. "It was a very competitive bid and to win it against global players just shows the government's trust in us," says CFO Gregory Poarch.
There could also be potential upside in the deal as it will give the company the opportunity to work with about 100 government bodies in Singapore, each of which will have different recruitment needs.
While Singapore looks good, JobStreet is still behind the market leader, JobsDB.com.
It is also trying harder in China, where it has indirect exposure through its 17% stake in 104 Corp, the leading Taiwanese online recruitment company. "It is the dominant player in the Taiwanese market and have been in operations since around the time we started in Malaysia," says CEO Mark Chang.
With so many Taiwanese companies operating in China, 104 Corp has a firm foothold in mainland China, JobStreet has already established itself as a "strong No 1" in the Philippines. The booming business process outsourcing and contact centre industry there is estimated to create one million new jobs over the next five years. "That's good for our business," says Poarch.
Indeed, with JobStreet only collecting money from companies which post job listings on its website, it is easy to see why it likes its Philippines business. JobStreet set up in the Philippines about four years after Malaysia and has almost two million users there (meaning resumes posted on its Philippine site) and has about 70% market share, says Poarch.
JobStreet's definition of users is when someone registers on the site, posts his or her resumes and creates a profile of what jobs they would be interested in, and they must leave an email ID where JobStreet can reach them should it find a job match. But if the email bounces or is full, JobStreet does not consider them a registered user, explains Poarch. Typically it has 10% of its user base actively seeking jobs, but Poarch notes that in December, this goes down to almost zero as people are waiting for their bonuses.
How has the recession impacted this business?
The company was fortunate to have a near-record cash position and this allowed it to expand while others were scaling down or going into defensive mode.
It began to see a recovery in companies hiring since last March. In total, JobStreet had about 5.7 million users at the beginning of 2009 and ended the year with almost 6.8 million users.
This large number is akin to the circulation of a newspaper which keeps attracting companies to post their listings with JobStreet, notes Poarch.
"It is not a very sexy model but it works for us." Mark Chang couldn't have put it better.
The Edge Malaysia
January 11, 2010
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