November 26, 2007
The 50 weirdest terms of financial jargon – and what they actually mean
Flummoxed by front-end loading? Bamboozled by bridging? Don’t know if your cap is split or your asset orphaned?
Here is Times Money’s alternative guide, for anyone who blushes at the mention of cum-dividends, or thinks churning is something that only happens to dairy products.
1. AER – Annual Equivalent Rate refers to the actual rate of interest you will receive on savings and current accounts after a year. It is different to the gross rate because the AER takes into account how frequently the interest is applied. Daily is better than monthly, because of the effects of compounding. It is useful to know, because most accounts have a bonus rate for a few months, which is later replaced by more bog-standard rewards.
2. Amortisation – It sounds like something to do with death, and in fact, it is. It is to do with the depreciation of intangible assets, or alternatively, the process by which the decrease in value of an asset is calculated, ie. The intangible bit is important. Tangible assets, like Volvos, depreciate. Intangible assets, like a patent or brand, amortise.
3. Annuity – Not something that young people need to worry about, but anyone approaching or already in retirement definitely needs to care about these, because they will have to buy one. Annuities are Government-enforced income plans that you must buy with your pension to provide you with an income. They are enforced because people over a certain age cannot be trusted not to squander their retirement pots in one go, on things like round the world cruises or expensive drumkits. The Government doesn’t want this to happen because it would then be forced to pay out more state pension money.
4. APR – like AER, only it means the amount of interest you will pay on mortgages, loans and credit cards. You want a nice a low one. Mortgage lenders will quote a headline interest rate which lasts for a set time period, then a (usually much higher) APR, which is what you would pay if you stayed on that mortgage for the full term. If you thought that only dullards did not know what an APR was, note that 71 per cent of 16-18 year olds recently questioned thought that a high APR was a good attribute on a credit card. This does not necessarily disprove the point.
5. Bear – Not the grizzly kind. A way of describing the stock market or an attitude towards the economic outlook. Describing someone as bearish does not mean they are large and hairy, it means that they have a cautious and conservative outlook, and are more inclined to be pessimistic. A bear market is characterised by falling share prices and poor returns. Bear times are bad times.
6. Beta - Inexplicably, beta, in the finance world, measures the volatility of a share relative to other markets and is nothing to do with them being second rate, as Greek etymologists might assume. Something that has a beta of more than 1 is more volatile than other shares in the index, while something with a beta less than 1 is considered relatively stable. Risk-takers like betas. Buying a beta is the stock-market equivalent of magic mushrooms - you never know whether you will end up higher or lower.
7. Bonds Bonds is a restaurant in the heart of the City of London where top bankers meet, as well as a famous Australian underwear manufacturer. The term also refers to something altogether less exciting, a type of investment where the investor lends money to a company for a period of more than one year that is then repaid at a specified time, with interest. If it helps: Bonds are good, ie James Bond, but bills are bad, ie. Bill Clinton, an economics teacher once said. Bonds are not always good, however. They are safer than buying shares, but they do not have the potential to make you higher returns. They are for people who do not like surprises.
8. Bridging – A bridge is a structure spanning and providing passage over a gap or barrier, such as a river or roadway. It is also the upper bony ridge of the human nose. In finance however, bridging is a type of loan that provides short-term funding before long-term funding is secure. This could be particularly relevant if you are building your own house or setting up a business because this is what lenders are likely to offer if they don’t trust you completely, but think you might be on to something.
9. Bull - The opposite of bear. A bull market is strong, aggressive and opportunistic. Being bullish in the City is a good thing. It basically means optimistic about the outlook.
10. CAT – Short for catastrophe bond. These are issued by insurance companies to raise finance in the event of a catastrophe. Dead cats can also be bounced, according to stock market investors (see below).
11. Churning – Anchor butter does it to milk, but in finance, this refers to a fairly mercenary practice by stockbrokers and IFAs, whereby they buy and sell stocks for clients in large volumes frequently to make more money in commission. In business, a churn rate also refers to the attrition of customers. A high churn rate therefore means lots of new business coming in and going out, while a low one means customers stay put.
12. Compound Interest – There is no better illustration of the benefits of compound interest, which basically means earning interest on interest already paid, than here
13. Cum dividend – The word is latin for “with”, hence cum-dividend, benignly, relates to a share sale made close to the time that the dividend is due to be paid out that will still be eligible for the dividend. Nice if you can get it.
14. Dead cat bounce – Don't call the RSPCA, the bounce refers to a stock market phenomenon, where a temporary recovery in the market follows a long and pronounced period of decline. What this has to do with dead cats is unclear.
15. Endowment – If your mortgage broker says you are well-endowed, don’t slap him across the face straight away – he could be commenting on the performance of your mortgage investment vehicle. Endowments are investments that were originally sold alongside mortgages that are designed to grow in value by enough over the period to pay off the loan. They also provide some life insurance cover to the holder. However, endowments have a black mark against them, after a big misselling scandal left many homeowners without enough to pay off their mortgage.
16. Equity – another way of saying value, for instance, of a home or share. With homes, it relates to only that part which represents debt-free value. It also means impartial and fair, although these attributes do not necessarily apply.
17. Ex-dividend – Not a perk of divorce, a share sold ex-dividend means that the buyer is not entitled to any recent dividend payments on the share and has to wait until next time around. Thus, shares sold ex-dividend are often a bit cheaper than their cum-dividend cousins.
18. Front-end loading – In a lad’s mag, this could mean all sorts of things that have no place in a financial glossary. What it actually refers to, however, is the fee that advisers lump onto a mutual fund or insurance policy at the time they sell it to you, meaning you end up with a smaller investment at the beginning. Advisers argue it is the cost of their expertise, but the jury is very much out about whether loading is a good thing.
19. Future – Buying a future means entering into a contract to buy an asset at a certain time at its future selling price. It’s a bit of a gamble, since no one knows what that future price will be. Future traders would find one of these useful.
20. Gearing – It sounds like something Jeremy Clarkson might talk about, but it is actually just another word to describe borrowing. However with gearing, the borrowing is done expressly for the purpose of investing more. Investment trusts gear, for example.
21. Gilt – Gold-edging is not just an interior design feature. A gilt is also another word for a Government bond, also known as a risk-free bond, because when you are the Government and you owe people cash when their bonds mature, you can just print more.
22. Gross – Can describe slugs, eels and ugly people kissing. It also means amount received before tax is paid. For instance, your gross income will always be startlingly higher than your net income – by around 30 per cent in the UK according to one study. Much better to live in Dubai, where net income is only 5 per cent lower than gross, on average. Same applies to gross interest.
23. Hedging – Nothing to do with green leafy boundaries and everything to do with funds and betting. Hedging means taking two positions that will offset each other if prices change and so limiting financial risk. In Roulette, the ultimate hedge bet is putting your money on both red and black, however this is pointless and bound to lose half your money. Hedge fund managers are far more clever than that.
24. Illiquid – On the liquidity scale, think of cash as water and things like houses as rocks. Liquid assets are those which can be accessed easily to buy other things, Illiquid assets are harder to turn into ready money than things like cash and cheques.
25. Intestacy – A mistake Paul McCartney would definitely not have made. This means dying without a will, and is a big no-no for anyone with rich with a big family who do not get on. If you die intestate, then everything automatically goes to the next of kin, which can obviously cause major family rifts if the next of kin is a loathed step-mother or sibling.
26. Junk bond – These offer high interest but are high risk. The lyrics to this song should help you remember.
27. Leverage – A word that will provoke a wince from investment bankers right now, leveraging is the main reason that banks across the world are in so much trouble. It means borrowing to complete a transaction. Private equity houses do a lot of it when they buy out a company. The problem now is that since the credit crunch, no one trusts anyone to pay back the money they borrow. The general view is that too much leveraging has been going on and that banks are now at risk.
28. Liabilities – People running around with scissors, Britney Spears, and also debts. A liability is anything you owe to someone else. If you are in debt, the phrase “I have a few liabilities” sounds less controversial, if a bit silly.
29. LTV – If mortgage lenders owned their own Sky channel, this is what they would call it. It means loan-to-value, and is the maximum proportion of a property’s value that a lender is willing to lend on. High LTVs are for people who have not saved up much, and come with higher interest rates. Low LTVs come with much lower rates, but require big deposits of 30 per cent of the property’s value. A real headache for first-time buyers. It looks like mortgage TV is only one step away.
30. Margin – This is the difference between costs and revenue and basically means the amount of profit. Obviously, you want a nice big one, like him.
31. Mutual – Is a lovely word that conjures up all sorts of feelings of warmth and reciprocity, which is arguably why building societies, which are mutual, are apparently so well liked. A mutual company does not have shareholders. Instead, it shares out profits between its customers, or “members”. If you couldn't care less about mutual values, what you want is a demutualisation. This gives you a taste of what it must feel like to win the lottery, because you could get a nice big cash windfall.
32. NAV – Nothing to do with Satellite Navigation systems or these boys, a NAV is the Net Asset Value of a mutual fund share. This is calculated by subtracting a mutual fund’s liabilities from its assets.
33. Negative equity – Lots of people who took out mortgages for 100 per cent or more of the value of their properties are in danger of this, which translates as losing money on your house. During times when house prices are falling, more homeowners are at risk of this. So expect to hear lots about negative equity in coming months then, if this forecast comes true.
34. Net – simply means amount of money left after tax is paid. Usually looks pitiful when compared with your gross salary.
35. Nominal – means a value not adjusted to take account of inflation. Inflation is pretty high at the moment, and looks set to carry on rising, so nominal values should basically be ignored, as they might lead you to think that something is worth more than it actually is.
36. OEIC - pronounced OIK, like the word that tweedy men use to describe teenagers who play music on their iPods loudly in public. OEIC stands for an Open-ended investment company, which invests in other companies. It is open-ended because it can increase or decrease the amount of shares in issue at will.
37. Option – Unimaginatively titled, an option is a contract that gives a share buyer the right to buy or sell a stock at a given price until a specific date. Yet another way of making the stock market more interesting and lucrative. Do you ever get the feeling that city boys just make stuff up as they go along?
38. Orphan - The rather tragically-named orphan assets are so-called because they are the unclaimed pots of cash built up by with-profits funds, to which no-one is really entitled. What to do with these assets has become the subject of controversy. Can companies hold on to them to boost balance sheets or should they divide the spoils between policyholders and shareholders?
39. PEP – This stands for Personal Equity Plan. They are the O-levels of the tax efficient investment world - you can’t get them anymore – they were replaced by Isas in 1999, but some people still have them. Like Isas, they were designed as a tax-efficient way of investing in the stock market.
40. Preference – We all have them, but in finance, a preference is naturally more complicated than, say, favouring tea over coffee. A preference share is one which pays a fixed rate of interest. So, like insurance, it is only actually preferential in the bad times. They are lower risk than normal shares because if a company goes bust, then preference shareholders will be at the front of the queue for payouts. Good news, if you have preferential shares in Northern Rock, perhaps. But this rarely happens. On the downside, if a company does well, preference shareholders will not benefit as much as normal ones, who will receive bigger returns.
41. Price-earnings ratio – a company’s current share price compared to its earnings per share. That obviously still means nothing. So just remember that a high one means investors are expecting higher earnings growth in the future, whereas a low one is more pessimistic. Only compare the PE ratios of companies in the same industry.
42. Redemption – Hedonists and erring Christians seek it, and so do investors who want the money they put in bonds or shares back, thank you very much.
43. Scrip – It sounds cooler than it is. A way of paying something via a means other than money. Scrips are things like gift tokens, points and tickets that act as a subsititute for cash.
44. Sipp – SIPP stands for Self-Invested Personal Pension. In the pensions world, these are sexy. They are the Agent Provocateur lingerie of pensions, compared with other more Spanx-like products, such as stakeholders. This is because they are more flexible, as well as more expensive. They look prettier, because you can put things like your art collection in them. Pension advisers get very excited about these because they can make lots of money from selling them to you, but this doesn’t mean you should. Only those who think Agent Provacateur lingerie is a bargain need apply.
45. Split-cap – Can lead to pregnancy in another context, but investors are more likely to assume you are talking about a type of investment trust that splits capital growth from income. A full definition would take a while, but there is one here. A horrible misselling scandal in 2004 meant that they became as unpopular for a while, but there are reports that they are beginning to regain popularity.
46. Stagging – Where two male deer lock antlers? No. It describes the act of buying a share at its initial public offering price and selling it on immediately for a profit. It is also called flipping. Honestly, who invents these words?
47. Stagflation – The English language just keeps on giving. Stagflation describes an economic period of high inflation, low growth, rising unemployment and recession. The word comes from the marriage of stagnation and inflation, apparently. Expect to hear this word more often from taxi drivers and economists when debating whether the Bank of England should cut interest rates.
48. Serps – Not a sexually transmitted disease, SERPs was the State Earnings Related Pension Scheme set up provide a second pension income, on top of the basic state pension, for people who did not have occupational schemes. The system has now been replaced by the State Second Pension, or S2P, which is the Government’s way of making pension savings sound cool. Unfortunately however, it sounds too much like Y2K – the millennium computer bug that sparked fears of Armageddon, to ever go down well.
49. Underwriter – A company that stumps up the money behind insurance policies. These people have extraordinary power in society, because they can work out things like when you are likely to die.
50. Wind-up – It means something else to humourists, and Jeremy Beadle. In the world of money, it means when a company ceases activity with a view to shutting down altogether. It can also refer to a way of ending a pension scheme, or a relationship, if you want to dump someone: "I'd like to wind things up with you", should do the trick, or alternatively, do what this guy did. It's time to do that here too.
Compiled by Rebecca O'Connor
Posted by Rebecca O'Connor on November 26, 2007
http://timesbusiness.typepad.com/money_weblog/2007/11/the-top-50-mo-1.html
Wednesday 21 October 2009
How to detect some early financial warnings in companies
Wednesday October 21, 2009
How to detect some early financial warnings in companies
Personal Investing - By Ooi Kok Hwa
Or how to smell a rat
TRADING volume on the stock market has recently been getting higher again. Some retail investors, who were absent from the recent rally, have started to get excited.
Over the past few months, investors were mainly focusing on good quality stocks, selling at a cheap level. However, attention has started to switch to poor quality stocks lately. Even though sometimes investors may be able to make money by betting on those stocks, we still need to be careful about the fundamentals of the companies. In this article, we will look at how to detect some early financial warnings.
A lot of companies like to make corporate announcements during the bull market. We agree that some of the announcements were genuine, but many corporate proposals were simply too good to be true.
If we analyse further, we will notice that the proposals might be way beyond the capabilities of the companies. Sometimes, the management’s projections of sales and profits were far beyond the past history. The capital expenditure requirements were well above the companies’ borrowing capacities.
Besides, the time required to turn the projects into profits might be too long. Nevertheless, as a result of the announcements, the stock prices would surge and normally, the main sellers behind might be the key owners.
We have also seen some proposals that turned out to be profitable. The companies did make profits in the first few years. However, the high growth in expansion stretched the capabilities of the top management, who might not have the experience and ability to run big businesses. They might have the experience to manage RM100mil turnover businesses. However, when the turnover surged beyond RM1bil per year, they might have problems. In fact, the main concerns to the companies were the top management team which lacked skills and experience to run big businesses.
We need to be careful if there are any changes to the key managers of the companies, auditors or accounting firms. The key managers are referred to the positions like chief executive officers and financial controllers. Besides, frequent changes in auditors provide serious financial warnings, especially the change from a reputable audit firm to an unknown one.
How to smell a rat or how to detect some early financial warnings in companies
Companies will soon start to report their financial results for the period ended Sept 30. In Malaysia, often good companies will try to announce their results before the deadline of Nov 30. However, if they are having difficulties in providing their financial statements, normally, we will expect some bad news to be announced. One of the possible explanations behind the delay is that the companies need more time to rectify certain financial problems.
Another potential sign of financial warning is when the companies venture into unrelated businesses. Previously, we saw many Bursa Malaysia second board companies going into financial distress in 1997/98 when they departed from their core businesses in manufacturing and ventured into property development activities.
We need to understand that when the company owners enter into areas that are not their core competencies, they might not be able to apply the knowledge and experiences accumulated previously. Instead, they would have to go through the entire learning curve again, which would result in the management taking a lot of time in managing those unrelated businesses.
In such situations, investors will need to pay attention and analyse whether those new ventures will be able to add value to the shareholders’ wealth. Some companies like to change their names after venturing into new businesses. Too frequent name changes may also imply that the companies have been shifting their core business focus and directions, which may not be good news to the shareholders.
Litigation is also another warning sign. We need to pay attention to companies that are involved in litigations, which may be either attributed to the companies being sued or they are suing someone else. These litigations may divert the management’s attention from day-to-day business operations. As a result, they may affect the companies’ performance as well.
One of the common questions asked by shareholders during any AGM is the directors’ fees. We need to analyse whether the fees paid are in proportion to the companies’ profitability. Sometimes, certain companies make excessive perks for owners as well as their employees or the lifestyle of the key owners is simply not consistent with the companies’ profitability.
The above are a few of the more common financial warnings that potential or existing shareholders must pay attention to when analysing the companies for investment. More importantly, we need to remain vigilant at all times and pay attention to the latest development of the companies.
● Ooi Kok Hwa is an investment adviser and managing partner of MRR Consulting.
http://biz.thestar.com.my/news/story.asp?file=/2009/10/21/business/4940519&sec=business
How to detect some early financial warnings in companies
Personal Investing - By Ooi Kok Hwa
Or how to smell a rat
TRADING volume on the stock market has recently been getting higher again. Some retail investors, who were absent from the recent rally, have started to get excited.
Over the past few months, investors were mainly focusing on good quality stocks, selling at a cheap level. However, attention has started to switch to poor quality stocks lately. Even though sometimes investors may be able to make money by betting on those stocks, we still need to be careful about the fundamentals of the companies. In this article, we will look at how to detect some early financial warnings.
A lot of companies like to make corporate announcements during the bull market. We agree that some of the announcements were genuine, but many corporate proposals were simply too good to be true.
If we analyse further, we will notice that the proposals might be way beyond the capabilities of the companies. Sometimes, the management’s projections of sales and profits were far beyond the past history. The capital expenditure requirements were well above the companies’ borrowing capacities.
Besides, the time required to turn the projects into profits might be too long. Nevertheless, as a result of the announcements, the stock prices would surge and normally, the main sellers behind might be the key owners.
We have also seen some proposals that turned out to be profitable. The companies did make profits in the first few years. However, the high growth in expansion stretched the capabilities of the top management, who might not have the experience and ability to run big businesses. They might have the experience to manage RM100mil turnover businesses. However, when the turnover surged beyond RM1bil per year, they might have problems. In fact, the main concerns to the companies were the top management team which lacked skills and experience to run big businesses.
We need to be careful if there are any changes to the key managers of the companies, auditors or accounting firms. The key managers are referred to the positions like chief executive officers and financial controllers. Besides, frequent changes in auditors provide serious financial warnings, especially the change from a reputable audit firm to an unknown one.
How to smell a rat or how to detect some early financial warnings in companies
Companies will soon start to report their financial results for the period ended Sept 30. In Malaysia, often good companies will try to announce their results before the deadline of Nov 30. However, if they are having difficulties in providing their financial statements, normally, we will expect some bad news to be announced. One of the possible explanations behind the delay is that the companies need more time to rectify certain financial problems.
Another potential sign of financial warning is when the companies venture into unrelated businesses. Previously, we saw many Bursa Malaysia second board companies going into financial distress in 1997/98 when they departed from their core businesses in manufacturing and ventured into property development activities.
We need to understand that when the company owners enter into areas that are not their core competencies, they might not be able to apply the knowledge and experiences accumulated previously. Instead, they would have to go through the entire learning curve again, which would result in the management taking a lot of time in managing those unrelated businesses.
In such situations, investors will need to pay attention and analyse whether those new ventures will be able to add value to the shareholders’ wealth. Some companies like to change their names after venturing into new businesses. Too frequent name changes may also imply that the companies have been shifting their core business focus and directions, which may not be good news to the shareholders.
Litigation is also another warning sign. We need to pay attention to companies that are involved in litigations, which may be either attributed to the companies being sued or they are suing someone else. These litigations may divert the management’s attention from day-to-day business operations. As a result, they may affect the companies’ performance as well.
One of the common questions asked by shareholders during any AGM is the directors’ fees. We need to analyse whether the fees paid are in proportion to the companies’ profitability. Sometimes, certain companies make excessive perks for owners as well as their employees or the lifestyle of the key owners is simply not consistent with the companies’ profitability.
The above are a few of the more common financial warnings that potential or existing shareholders must pay attention to when analysing the companies for investment. More importantly, we need to remain vigilant at all times and pay attention to the latest development of the companies.
● Ooi Kok Hwa is an investment adviser and managing partner of MRR Consulting.
http://biz.thestar.com.my/news/story.asp?file=/2009/10/21/business/4940519&sec=business
Get two things right: Make the money and Keep its real value
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
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
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.
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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.
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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
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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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
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