Posts filed under ‘Uncategorized’
Bin Laden Killing Overshadows Royal Rally
Excerpt from No-Cost May Sidoxia Monthly Newsletter (Subscribe on right-side of page)
Before the announcement of the killing of the most wanted terrorist in the world, Osama bin Laden, the royal wedding of Prince William Arthur Philip Louis and Catherine Middleton (Duke and Duchess of Cambridge) grabbed the hearts, headlines, and minds of people around the world. As we exited the month, a less conspicuous royal rally in the U.S. stock market has continued into May, with the S&P 500 index climbing +2.8% last month as the economic recovery gained firmer footing from the recession of 2008 and early 2009. As always, there is no shortage of issues to worry about as traders and speculators (investors not included) have an itchy sell-trigger finger, anxiously fretting over the possibility of losing gains accumulated over the last two years.
Here are some of the attention-grabbing issues that occurred last month:
Powerful Profits: According to Thomson Reuters, first quarter profit growth as measured by S&P 500 companies is estimated at a very handsome +18% thus far. At this point, approximately 84% of companies are exceeding or meeting expectations by a margin of 7%, which is above the long-term average of a 2% surprise factor.
Debt Anchor Front & Center: Budget battles remain over record deficits and debt levels anchoring our economy, but clashes over the extension of our debt ceiling will occur first in the coming weeks. Skepticism and concern were so high on this issue of our fiscal situation that the Standard & Poor’s rating agency reduced its outlook on the sovereign debt rating of U.S. Treasury securities to “negative,” meaning there is a one-in-three chance our country’s debt rating could be reduced in the next two years. Democrats and Republicans have put forth various plans on the negotiating table that would cut the national debt by $4 – $6 trillion over the next 10-12 years, but a chasm still remains between both sides with regard to how these cuts will be best achieved.
Inflation Heating Up: The global economic recovery, fueled by loose global central bank monetary policies, has resulted in fanning of the inflation flames. Crude oil prices have jumped to $113 per barrel and gasoline has spiked to over $4 per gallon. Commodity prices have jumped up across the board, as measured by the CRB (Commodity Research Bureau) BLS Index, which measures the price movements of a basket of 22 different commodities. The CRB Index has risen over +28% from a year ago. Although the topic of inflation is dominating the airwaves, this problem is not only a domestic phenomenon. Inflation in emerging markets, like China and Brazil, has also expanded into a dangerous range of 6-7%, and many of these governments are doing their best to slow-down or reverse loose monetary policies from a few years ago.
Expansion Continues but Slows: Economic expansion continued in the first quarter, but slowed to a snail’s pace. The initial GDP (Gross Domestic Product) reading for Q1 slowed down to +1.8% growth. Brakes on government stimulus and spending subtracted from growth, and high fuel costs are pinching consumer spending.
Ben Holds the Course: One person who is not overly eager to reverse loose monetary policies is Federal Reserve Chairman, Ben Bernanke. The Chairman vowed to keep interest rates low for an “extended period,” and he committed the Federal Reserve to complete his $600 billion QE2 (Quantitative Easing) bond buying program through the end of June. If that wasn’t enough news, Bernanke held a historic, first-ever news conference. He fielded a broad range of questions and felt the first quarter GDP slowdown and inflation uptick would be transitory.
Skyrocketing Silver Prices: Silver surged ahead +28% in April, the largest monthly gain since April 1987, and reached a 30-year high in price before closing at around $49 per ounce at the end of the month. Speculators and investors have been piling into silver as evidenced by activity in the SLV (iShares Silver Trust) exchange traded fund, which on occasion has seen its daily April volume exceed that of the SPY (iShares SPDR S&P 500) exchange traded fund.
Obama-Trump Birth Certificate Faceoff: Real estate magnate and TV personality Donald Trump broached the birther issue again, questioning whether President Barack Obama was indeed born in the United States. President Obama produced his full Hawaiian birth certificate in hopes of putting the question behind him. If somehow Trump can be selected as the Republican presidential candidate for 2012, he will certainly try to get President Obama “fired!”
Charlie Sheen…Losing! The Charlie Sheen soap opera continues. Ever since Sheen has gotten kicked off the show Two and a Half Men, speculation has percolated as to whether someone would replace Sheen to act next to co-star John Cryer. Names traveling through the gossip circles include everyone from Woody Harrelson to Jeremy Piven to Rob Lowe. Time will tell whether the audience will laugh or cry, but regardless, Sheen will be laughing to the bank if he wins his $100 million lawsuit against Warner Brothers (TWX).
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients own certain commodity and S&P 500 exchange traded funds, but at the time of publishing SCM had no direct position in SLV, SPY, TWX, or any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC “Contact” page.
Top 10 of 2010
Last year is over, but you can relive some of the memories by enjoying a few of the more popular Investing Caffeine articles of 2010. If you have already read all of these, you can always take a vacation and return 365 days from now and read the best of 2011 then. Happy (not so) New Year!
John Mauldin: The Man Who Cries Wolf
Professional Double-Dip Guesses are “Probably” Wrong
Technical Analysis – Astrology or Lob Wedge?
Marathon Investing: Genesis of Cheap Stocks
PIMCO – The Downhill Marathon Machine
Getting off the Market Timing Treadmill
TMI: The Age of Information Overload
Lessons Learned from Financial Crisis Management 101
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients own certain exchange traded funds, but at the time of publishing SCM had no direct position in any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC “Contact” page.
Females in Finance – Coming Out of Hibernation
I’m not sure if you are like me, but the annual media ritual of myopically breaking down the sale of every shoe, belt, cell phone, television, and pair of underwear during the November/December holiday season can become very grating. What makes it a little easier for me to swallow is the stable of attractive female retail analysts who are finally unleashed from their long hibernation slumbers to review their mall traffic and parking satellite findings. I’m a happily married man, but I still cannot complain about seeing these multi-threat beauties dissect sales trends and fashion fads. However, in this day and age, I’m not so sure that females feel the same way about their under-representation in the finance field?
If there are 155.8 million females in the United States and 151.8 million males (Census Bureau: October 2009), then how come only 6% of hedge fund managers (BusinessWeek), 8% of venture capitalists, and 15% of investment bankers are female (Harvard Magazine)? Is the finance field just an ol’ boys network of chauvinist pig-headed males who only hire their own? Or do the severe time-demands of the field force females to opt-out of the industry due to family priorities?
Although I’m sure family choices and quality of life are factors that play into the decision of entering the demanding finance industry, from my experience I would argue women are notoriously underrepresented even at younger ages (well before family considerations would weigh into career decisions). Maybe cultural factors such as upbringing and education are other factors that make math-related jobs more appealing to men?
If underrepresentation in the finance field is not caused by female choice, then perhaps the male dominated industry is merely a function of more men opting into the field (i.e., men are better suited for the industry). More specifically, perhaps male brains are just wired differently? Some make the argument that all the testosterone permeating through male bodies leads them to positions involving more risk. If you look at other risk related fields like gambling, women too are dramatic minorities, making up about 1/3 of total compulsive gamblers.
Women Better than Men?
The funny part about the underrepresentation of females in finance is that one study actually shows female hedge fund managers outperforming their male counterparts. Here’s what a BusinessWeek article had to say about female hedge fund managers:
A new study by Hedge Fund Research found that, from January 2000 through May 31, 2009, hedge funds run by women delivered nearly double the investment performance of those managed by men. Female managers produced average annual returns of 9%, versus 5.82% for men and, in 2008, when financial markets were cratering, funds run by women were down 9.6%, compared with a 19% decline for men.
The article goes onto to theorize that women may not be afraid of risk, but actually are better able to manage risk. A UC Davis study found that male managers traded 45% more than female managers, thereby reducing returns by -2.65% (about 1% more than females).
Regardless of the theories or studies used to explain gender risk appetite, the relative underrepresentation of females in finance is a fact. I’ll let everyone else weigh in why that is the case, but in the meantime I will enjoy watching the female analysts explain the minute by minute account of UGG and iPad sales through the holiday shopping season.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
Related Articles:
BusinessWeek article on female fund managers
Bashful Path to Female Bankruptcies
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients own certain exchange traded funds and AAPL, but at the time of publishing SCM had no direct position in DECK or any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC “Contact” page.
Paper Cut to Death with 12b-1 Fees
Paying all these 12b-1 fees and other expenses found in the small-print can be a lot like getting paper-cut to death. The Securities and Exchange Commission (SEC) is looking to put a Band-Aid on the problem by capping these nonsensical fees and proposing more disclosure, albeit three decades after these fees initially got introduced. According to InvestmentNews, the SEC has proposed a .25 percent cap on 12b-1 fees, which may save investors upwards of $857 million per year if the proposal is enacted. That’s all good and great, but aren’t investors already getting pillaged and plundered with load expenses and other investment management fees?
The Original Rationale
The original thought process behind the 12b-1 fee movement was designed to allow the little guys (small fund management companies) to compete on an even playing field against the big guys (think of Fidelity, Vanguard, and the American Funds) when it came to product distribution. The SEC says about 2/3 of the 8,000 mutual funds in the industry charge 12b-1 fees, which reached over $13 billion in 2008. These 12b-1 fees generally account for 18% of the total annual fund expenses (ICI – Investment Company Institute).
Source: ICI. The general trend in 12b-1 fees was upwards until the financial crisis hit.
So are small fund management companies truly benefitting from the customer kickbacks after 12b1-fees were unveiled in 1980? It appears the small fry fund companies have indeed scraped up some extra fees as ammo to market products against the big guys, but the big guys are receiving the same 12b-1 fees. It’s like giving both me and Alex Rodriguez (New York Yankees) an aluminum bat in the game of baseball. There’s a good chance I may be able to clear the infield now, but A-Rod will instantly have the power to hit one out of the stadium – I have effectively gained no advantage with my new metal bat.
The Investor Perspective
If I’m an investor, what do I care if my mutual fund company has one investor or one million investors? I just want the best products at the lowest price. Yeah, there are these special items used in other industries that help pay for marketing and distribution expenses…they’re called sales and profits. What a novel idea.
Deciphering all the mutual fund class flavors is tough enough. Like trading in a used car when buying a new car, the juggling of prices, fees, and taxes can become a head-spinning exercise in discovering the true component costs. The cards become even more stacked against investors, if you consider alternative products like the shady world of annuities (see Annuity Trap article). If translating 12b-1 and load fees is not challenging enough for you, try digesting a slice of legalese heaven by examining this 259 page annuity prospectus gem.
The Flawed Structure
Unfortunately, the financial industry is rife with conflicts and opacity, with the investor getting the short end of the stick. The industry’s main incentive is all about generating commissions for the broker (salesman) and financial institution – not about generating the best return for the client. Here is how I see a typical conversation playing out between a broker and prospect:
Broker A: “This is a slam dunk investment with guaranteed returns.”
Prospect XYZ: “Wow, that sounds great – guaranteed returns in a world that everyone is talking double-dip. How do I learn more?”
Broker A: “You can sign here on the dotted line, or borrow this forklift and take two months to review this gargantuan 259 page prospectus that I don’t even understand.”
Prospect XYZ: “If I have questions about 12b-1 fees, administrative fees, up-front commissions, management fees, mortality charges, trail expenses, or other costs, can I give you call?”
Broker A: “Oh sure, but I’ll probably be in the Bahamas drinking umbrella-coconut drinks with all the commission dollars I’ve earned, so if I don’t answer, just leave a message.”
Why do 12b-1 Fees Exist at All?
OK, now that I’ve returned from my annuity rant, let’s get back to the pointless value of 12b-1 fees. I mean honestly, what privileged status does the financial industry have in charging customers for a business’s operating expenses? Why stop at charging customers for marketing and distribution costs…maybe customers can start paying for new fund development expenses or for employee health benefits? What’s more, if the financial industry is going to nickel and dime clients with all kinds of fees, then why not have customers subsidize the marketing and advertising campaigns in other industries, like in the pharmaceutical, tobacco, beer, and junk food industries?
Not all 12b-1 fees are created equally. Many funds do not even carry 12b-1 fees, or many that do carry a much more modest punch. While I respect Mary Shapiro’s courage in addressing the useless 30-year 12b-1 fee structure institutionalized by industry lobbyists, putting a Band-Aid on this paper-cut is only hiding the wound, not healing it.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients own certain exchange traded funds and mutual funds, including Vanguard and Fidelity, but at the time of publishing SCM had no direct position in any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC “Contact” page.
The New Abnormal – Now and Then
Mohamed El-Erian, bond manager and CEO of PIMCO (Pacific Investment Management Company, LLC) is known for patenting the terms “New Normal,” a period of slower growth, and subdued stock and bond market returns. Devin Leonard, a reporter from BusinessWeek, is probably closer to the truth when he describes our current financial situation as the “New Abnormal.” Accepting El-Erian description is tougher for me to accept than Leonard’s. Calling this economic environment the New Normal is like calling Fat Albert, “fat.” When roughly 15 million people are out of work, not receiving a steady paycheck, am I suppose to be surprised that consumer spending and confidence is sluggish?
Rather than a New Normal, I believe we are in the midst of an “Old Normal.” Unemployment reached 10.8% in 1982, and we recovered quite nicely, thank you, (the Dow Jones Industrial has climbed from a level about 800 in early 1982 to over 11,000 earlier in 2010). Sure, our economy carries its own distinct problems, but so did the economy of the early 1980s. For example:
- Inflation in the U.S. reached 14% in 1982 (core inflation today is < 1%) ;
- The Prime Rate exceeded 20%;
- Mexico experienced a major debt default;
- Wars broke out between the U.K./Falklands & Iran/Iraq;
- Chrysler got bailed out;
- Egyptian President Anwar Sadat was assassinated;
- Hyperinflation spread throughout South America (e.g., Bolivia, Argentina, Brazil)
As I’ve mentioned before, in recent decades we’ve survived wars, assassinations, currency crises, banking crises, Mad Cow disease, SARS, Bird Flu, and yes, even recessions – about two every decade on average. “We’ve had 11 recessions since World War II and we’ve had a perfect score — 11 recoveries,” famed investor Peter Lynch highlighted last year. Media squawkers and industry pundits constantly want you to believe “this time is different.” Economic cycles have an odd way of recurring, or as Mark Twain astutely noted, “History never repeats itself, but it often rhymes.” I agree.
Certainly, each recession and bear market is going to have its own unique contributing factors, and right now we’re saddled with excessive debt (government and consumers), real estate is still in a lot of pain, and unemployment remains stubbornly high (9.5% in June). Offsetting these challenges is a global economy powered by 6 billion hungry consumers with an appetite of achieving a standard of living rivaling ours. Underpinning the surge in developing market growth is the expansion of democratic rule and an ever-sprawling extension of the technology revolution. In 1900, there were about 10 countries practicing democracy versus about 120 today. These political advancements, coupled with the internet, are flattening the world in a way that is creating both new competition and opportunities. The rising tide of emerging market demand for our leading edge technologies not only has the potential of elevating foreigners’ standard of living, but pushing our living standards higher as well.
With the United States population representing roughly 25% of the globe’s total Gross Domestic Product (~5% of the global population), simple mathematics virtually assures emerging markets will continue to eat more of the global economic pie. In fact, many economists believe China will pass the U.S. over the next 15 years. As long as the pie grows, and the absolute size (not percentage) of our economy grows, we should be happy as a clam as our developing country brethren soak up more of our value-added goods and services.
On a shorter term basis, Leonard profiles several abnormal characteristics practiced by consumers. Here’s what he has to say about the “New Abnormal”:
“The new abnormal has given rise to a nation of schizophrenic consumers. They splurge on high-end discretionary items and cut back on brand-name toothpaste and shampoo. Companies like Apple, whose net income jumped 94 percent in its last quarter, and Starbucks, which is enjoying a 61 percent increase in operating income over the same time frame, are thriving. Mercedes-Benz is having a record sales year; deliveries of new vehicles in the U.S. rose 25 percent in the first six months of 2010. Lexus and BMW were also up. Though luxury-goods manufacturers like Hermýs [sic] and Burberry are looking primarily to Asia for growth, their recent earnings reports suggest stabilization and even modest improvement in the U.S.”
Beyond the fray of high-end products, the masses have found reasons to also splurge at the nation’s largest mall (The Mall of America), home to a massive amusement park and a 1.2 million gallon aquarium. So far this year, the mall has experienced a +9% increase in sales.
So while El-Erian calls for a “New Normal” to continue in the years to come, what might actually be happening is a return to an “Old Normal” with ordinary cyclical peaks and valleys. If this isn’t true, perhaps we will all revert to a “New Abnormal” mindset described by Devin Leonard. If so, I will see you at the Mercedes dealership in my Burberry suit, with $3 latte in hand.
Read Devin Leonard’s Complete New Abnormal Article
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
*DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients own certain exchange traded funds and AAPL, but at the time of publishing SCM had no direct position in Mercedes, BMW, Burberry, Hermy’s, SBUX, or any security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC “Contact” page.
Riding Out the Financial White Waters
De Ja Vu All Over Again
As Hall of Famer baseball player Yogi Berra said, “This is like deja vu all over again.” Crises are nothing new, but the emotion of the moment can feel worse than reality. Getting continually bombarded with data in this globally interconnected world with 24-hour non-stop news cycles contributes to this lost perspective. The fact is our country has survived multiple wars, assassinations, banking crises, SARS, mad cow, swine flu, widening deficits, recessions, currency crises, and yes, even breakdowns in exchange mechanisms – witness the October 1987crash (Black Monday) drop of -22% caused by an overused and flawed portfolio insurance strategy. Today, the rise of the high frequency trading machines and fragmented exchanges are being blamed as causes for last week’s dislocations.
Rather than put current events in proper context, misrepresented facts and irresponsible, knee-jerk conclusions are often spread like a virus. Extremism has pervaded all aspects of our culture, especially in throughout our media and politics. In this sour environment, nothing can seemingly carry shades of gray…it must be either black or white. The events of the last few days, weeks, months, and years are nothing new. We have seen this financial crisis movie before, even if it is a different title, with different actors, and shuffled characters. These messes start with a great, profitable idea, thereby attracting other participants, which breeds speculation and greed, and eventually stimulates a bubble to burst. This negative cycle in turn manifests itself into a manmade fear machine, which leads to panic and recession. At that point, inefficient capital eventually becomes weeded out, people go to jail, and rules get created to prevent similar bubbles from forming again.
These cycles can be slowed or delayed, but not stopped. Greedy capitalists are creative and they have a proven track record of planting new seeds of growth in the soil of our democracy. Our system may not be the best, but as Winston Churchill stated, “Democracy is the worst form of government except for all the others forms that have been tried from time to time.”
The European Crisis: Where from Here?
A lot has been going on in the markets, so much so that investors shrugged off the news that +290,000 jobs were added in April (and numbers were revised higher the previous month). Market participants instead chose to focus on the escalating Greek headlines. Currently the consensus thinking believes there is a significant probability of Greece defaulting with the financial downdraft spreading to neighboring countries as evidenced by widening interest rate spreads (see chart below).
Chart from The Financial Times
Much attention has been directed towards the PIIGS countries (Portugal, Italy, Ireland, Greece, and Spain) due to their poor fiscal criteria, but not all PIIGS are created equally. Although, I am less worried about Portugal and Ireland due to their minimal contribution to European GDP (Gross Domestic Product), I am concerned about the potential deterioration in Italy and Spain’s ability to pay back there borrowers or refinance their debt. Time will tell.
If you want to compare Europe’s debt and deficit problems with the United States, I encourage you to read my past article on D-E-B-T: The Four-Letter Word.
Source: Barclays Capital; OECD via The Financial Times
Surviving the Choppy White Waters
Although the Federal Reserve and the government came to the country’s rescue by implementing massive monetary and fiscal stimulus, the “great bounce” of 2009 has recently lost some steam. A recent -10% correction should not be surprising considering we have just undergone a +100% & +83% explosion in the Nasdaq and S&P 500 indexes, respectively, last year from the March lows. In fact, the correction should be viewed as healthy. After gorging on a large, heavy meal, one needs some time to digest the provisions (just as time is necessary to absorb large financial gains).
Presently, there’s a tug-of-war going on between an improving economy and legacy structural issues (e.g., debt, deficits, entitlements, taxes, healthcare, regulatory reform, etc.) If I had to guess, with all the major national issues we face, I expect trading to be choppy for the next six months until we make it through the mid-term elections (relieving some uncertainty). Until then, take a deep breath, put current events in historical perspective, so you will be able to profit from the rough waters (volatility), rather than react late and become hostage to it. If you correctly follow these guidelines, you too can survive the rough financial waters.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
*DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients own certain exchange traded funds and an AIG subsidary structured security, but at the time of publishing SCM had no direct positions in JPM, Lehman Brothers, AIG, or any security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC “Contact” page.
SEC Awake at the Switch…Sort Of
The SEC is accusing Goldman Sachs (GS) of screwing its own clients through lack of disclosure (see also Goldman Cheat? article), but the SEC apparently enjoys passively watching a little action itself. Throughout the financial crisis, as investors watched the collapse of major financial institutions like Bear Stearns (JPM), Lehman Brothers, and AIG, the SEC was accused of falling asleep at the switch. As it turns out, the SEC was not asleep, but rather they were quite awake switching on the porn.
Efficiency may not be the core strength of all governmental agencies (several of my horrific trips to the department of motor vehicles (DMV) can attest to that fact), but little did I know that my tax dollars were supporting six-figure salaries (some over $200,000), so SEC employees could watch skin flick classics like Pulp Friction, Spankenstein, or Buttman and Throbbin’.
I guess from a certain standpoint, one might appreciate SEC employee ingenuity and determination. For example the Associated Press reported the following:
“An accountant was blocked more than 16,000 times in a month from visiting websites classified as “Sex” or “Pornography.” Yet he still managed to amass a collection of “very graphic” material on his hard drive by using Google images to bypass the SEC’s internal filter, according to an earlier report from the inspector general.”
“A senior attorney at the SEC’s Washington headquarters spent up to eight hours a day looking at and downloading pornography. When he ran out of hard drive space, he burned the files to CDs or DVDs, which he kept in boxes around his office.”
Perhaps the SEC is just like Goldman Sachs? They both just happened to get caught, even though many others have participated in the sinful behavior. How widespread is pornography viewing in the workplace? A study conducted by Websense in 2006 reported that 16% of men with internet access admitted to watching porn during office hours.
Watching nudey movies is less damaging than allegedly misrepresenting and hiding information from investors, but Dick Fuld, Bernie Madoff, and Allen Stanford are certainly thankful to the distracted SEC staffers for the extra time the crooked Wall Streeters were given to run their schemes. Wall Street has become a lightning rod, and given the fact that 2010 is an election year, there is extreme pressure on politicians to limit the power, size, and activities of the major banks. Maybe the new regulatory reform legislation being crafted in Congress will even include a ban on workplace pornography viewing. With additional free time, the SEC may successfully find more law-breakers. Who knows, possibly Goldman could even help the government recover some lost tax revenue by auctioning off excess dirty movies left over at the SEC?
Read the Rest of the AP Article
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
*DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients own certain exchange traded funds and in a security derived from an AIG subsidiary, but at the time of publishing SCM had no direct positions in GS, Bear Stearns (JPM), and Lehman Brothers, or any security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC “Contact” page.
Equity Life Cycle: The Moneyball Approach
Building a portfolio of stocks is a little like assembling a baseball team. However, unlike a team of real baseball players, constructing a portfolio of stocks can mix low-priced single-A farm players with blue chip Hall of Fame players from the Majors. Billy Beane, the General Manager for the Oakland Athletics, was chronicled in Michael Lewis’ book, Moneyball. Beane creates an amazing proprietary system of building teams more cost-efficiently than his deep-pocketed counterparts by statistically identifying undervalued players with higher on-base and slugging percentages. According to Beane, traditional baseball scouts were overpaying for less relevant factors, such as speed (stolen bases) and hitting (batting percentage).
In the stock world, before you can scout your team, you must first determine where in the life cycle the company lies. If Beane were to name this quality, perhaps he would call it Time-to-Maturity (TTM). Some companies operate in small, mature bitterly competitive industries (e.g. shoe laces), while others may operate in large growing markets (e.g. Google [GOOG] in online advertising and algorithmic search). Some companies because of negative regulation or heightened competition have a very short life cycle from early growth to maturity. Other companies with competitive advantages and untapped growth markets can have very long life spans before reaching maturity (think of a younger Coca Cola [KO] or Starbucks [SBUX]). Like Beane talks about in his book, many young, promising, immature baseball players flame out with short TTMs, nonetheless many scouts overpay for the cache´ such players offer.
Unfortunately, many investors do not even contemplate the TTM of their stock. Buying juvenile stocks (i.e., private companies like Twitter & Facebook – see article) or elderly stocks in and of itself is not a bad thing, but before you price a security it’s advantageous to know what type of discount or premium is deserved. Obviously, I’m looking for undervalued stocks across all age spectrums, however finding an undervalued, undiscovered late-teen just beginning on its long runway of growth combines the best of all worlds. Finding what Peter Lynch calls the “multi-baggers” is easier said than done, like searching for a needle in a haystack, but the rewards can be handsome.
What creates long runways of growth – the equivalent of winning dynasties in baseball? Well, there are several contributors leading to longer TTMs, including economies of scale, large industries, barriers to entry, competitive advantages, growing industries, superior and experienced management teams, to name a few factors. But like anything, even the great growth companies, including Microsoft (MSFT), turn from teenagers to mature adults. As famed businessman Thomas Brittingham said, “A good horse can’t go on winning races forever, and a good stock eventually passes its peak, too.”
There are many aspects to creating a winning team. If Billy Beane were to draw up factors for a baseball team, I’m confident TTM would be near the top of his list. What you pay for the length of the growth cycle is obviously imperative, but since I’m a strong believer in the tenet that “price follows earnings,” it only makes sense that above average sustainable earnings growth should eventually lead to superior price appreciation. As Bob Smith, successful manager from T. Rowe Price states, “The important thing is not what you pay for the stock, so much as being right on the company.” So if you want to recruit a portfolio of winning stocks, like Billy Beane picks successful baseball players, then include the equity life cycle maturity statistic as a factor in your selection process.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
DISCLOSURE: Sidoxia Capital Management nor its client accounts have no direct position in MSFT, SBUX, KO, Facebook, or Twitter shares at the time this article was originally posted. Some Sidoxia Capital Management accounts do have a long position in GOOG shares. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC “Contact” page.
Green Loses to Greenback
We are currently in a political environment that sees no gray, but rather only sharp contrasts in black and white. As it turns out, these three colors are not the winners or losers – the winner is the almighty “greenback” and the loser is the “green” movement. The so-called environmentally friendly Obama administration recently approved the Alberta Clipper project – a 1,000 mile pipeline being built by Endbridge Energy that is designed to carry 800,000 barrels of fuel from Canada to the U.S.
As our reliance on what New York Times journalist Tom Friedman calls the “petro dictators” has not gone away, the recent decision seems very rational in securing supplies from friendlier neighbors. However, environmental constituents like the Sierra Club feel differently:
“At a time when concern is growing about the national security threat posted by global warming, it doesn’t make sense to open our gates to one of the dirtiest fuels on earth.”
-Carl Pope (Executive Director of the Sierra Club)
As far as I’m concerned, we still import about 2/3 of our oil and until alternative energies become more cost effective, we have little choice but to explore a multitude of strategic supply agreements. Canada is a neighbor and ally, therefore the U.S. should not walk away from any similar future agreement that will bring a stable and reliable source of supply. The scarcity of the critical resource and other commodities is evident by strategic deals and acquisitions being made by China and its government (See previous Investing Caffeine article, “The China Vacuum, Sucking Up Assets”).
As economic hungry emerging markets seek expansionary policies, I expect to see even more of these international types of deals.
The oil-sands region in the Athabasca region (about the size of Florida) of Alberta holds great promise. If you believe famous oil investor/speculator T. Boone Pickens and other pundits, the oil-sands region holds the equivalent amount of reserves as world supply leader Saudi Arabia – about 250 billion barrels.
I concur with recent comments Financial Times article that says the Endbridge Energy deal meets a number of U.S. strategic interests, including:
“Increasing the diversity of oil supplies for the U.S., amid political tension in many major oil-producing regions; shortening the transportation path for crude oil supplies; and increasing crude oil supplies from a major non-Organization of Petroleum Exporting Countries producer.”
I am not a believer in damaging our environment for the pure sake of profits, however in this competitive global economy I think we need to seek an aggressive dual-source supply of energy (alternative energy AND traditional petroleum/coal products). The fact of the matter is that we have been pursuing solar, wind, nuclear, and other alternative energy resources for decades with very limited success. More financial resources and subsidies must be thrown at these alternative resource possibilities, while we simultaneously seek strategic supplies like this Canadian oil-sands deal.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
DISCLOSURE: Sidoxia Capital Management and its clients have direct investment exposure in companies investing in Canadian oil-sand projects (SU) at the time the article was published. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC “Contact” page.
UFC 100 Lesnar-Mir: Pro Fighting or Cockfighting?
Brock Lesnar vs. Frank Mir
“Mayhem” may be the best word to describe UFC 100 – the mixed martial arts (MMA) event held in Las Vegas on July 11th was attended by 11,000 wound up fans. Regardless of the controversy related to the brutality of the sport – John McCain at one point called it “human cockfighting” – people are opening their wallets up in droves to watch these roided beasts bludgeon each other for $44.95 on Pay-Per-View.
In the Heavyweight class Brock “The Next Big Thing” Lesnar, a 6’3” – 265 pound monster destroyed his lesser foe Frank Mir in two rounds. For his winning demolition, Lesnar is estimated to rake in more than $2 million for his two round mauling. Despite Mir’s earlier victory over Lesnar, he earned a shockingly low $45,000 for the main event. With over $5 million collected from the gates in Las Vegas, an estimated 1.5 million Pay-Per-View watchers, and key advertisers like Bud Light and Harley Davidson, UFC executives had a little loose change to pay the stable of barbarian fighters.
After walloping Mir and flipping two prominently displayed birds (i.e., middle fingers) to the Las Vegas fans, Lesnar also KO’d UFC sponsor Bud Light by saying he was thirsty for a Coors. Lesnar held a grudge because he was not compensated for his victory by Bud Light. As the old saying goes, “There is no such thing as bad publicity.” Well, we’ll have to wait and see what impact Lesnar’s shenanigans will have on future UFC sponsorships.
Debate still lingers on whether MMA will go mainstream, and based on the force of this juggernaut, I would have to say the Magic 8-ball says the “Possibilities are strong.” Not only has 60 Minutes done a story on UFC here in the states, but the popularity of the sport is spreading rapidly globally. Evidence includes the beaming of the live fights to 75 countries and the large 20-member Japanese media group that travelled to Nevada to follow UFC star Yoshihiro Akiyama.
Whether you agree with the raw violence of the sport or not, there is no denying the momentum of this express train. UFC has come a long way in a relatively short period of time. UFC President Dana White and business partners purchased UFC in 2001 for $2 million – CNBC estimates the value of the company at $1 billion today. The IPO markets have been pretty stingy of late, but with a few more successful events like UFC 100, don’t be surprised to see Dana White offering shares via a road show through your local financial center. If Lesnar gets a cut of the shares, he might even celebrate the IPO with a swig of Bud Light.
