Archive for March, 2013
March Madness Brings Productivity Sadness
You feel that scratchy throat coming on? Taking a long lunch to discuss business? Has there been a death in the family? Don’t feel bad about calling in sick or being unproductive during March Madness, the multi-week annual NCAA college basketball tournament, because you are not alone. According to Challenger, Gray and Christmas, 3.0 million people plan to watch up to three hours of basketball games during work hours, costing companies and the economy at least $134 million in lost wages during the first two days of the tournament. What’s more, March Madness tends to attract other unproductive habits in the form of illegal gambling to the tune of $2.5 billion each year (source: FBI).
While I don’t have the time to spend hours filling out a 64-team bracket, I can’t do all the finger-pointing – I too participate in my fair share of unproductive lollygagging. I’ve been known to throw away hours of my time scrolling through my Twitter news feed (twitter.com/WadeSlome) or paging through my Flipboard timelines. Heck, if you really want to talk about unproductive, the President of the United States even filled out a bracket (click here) – so far, so good, but his Wisconsin pick didn’t help his cause.
If you need more proof of our country’s collective lack of productivity, then consider the following:
- Fantasy Fun: In 2008, there were 35 million people (mostly men) participating in fantasy football at a cost of $6.5 billion over a 17-week NFL season (source: Challenger, Gray and Christmas).
- The Juice: The 1995 O.J. Simpson verdict cost the country $480 million in lost output and the New York Stock Exchange trading volume plummeted by 41% during the half hour surrounding the reading of the verdict (source: Alan Dershowitz’s America on Trial).
- Shop until You Drop: “Cyber Monday” is one of the largest online shopping days of the year, which occurs shortly after Thanksgiving’s “Black Friday”. Workers wasted $488 million of their time in 2007, and that number has undoubtedly increased significantly since then (source: Challenger, Gray and Christmas).
- Summer Sport: In 2012, Captivate Network found out that workers watching the Summer Olympics at the office resulted in a productivity loss of $650 million.
- Hangover Hammer: Super Bowl Sunday is one of the largest alcohol consumption evenings of the year. The U.S. Center for Disease Control estimates that hangovers cost our nation about $160.5 billion annually.
- Social Media Profit Black Hole: Are you addicted to Facebook (FB), Twitter, LinkedIn (LNKD) or other social media network of choice? A report by LearnStuff shows that Americans spend as much time collectively on social media in one day as they do watching online movies in a year. The cost? A whopping 4.4% of GDP or $650 billion.
Investor Madness
One of the biggest black hole productivity drains for investors is the endless deluge of foreboding news items – each story potentially becoming the next domino to collapse the global economy. The most productive use of time is an offensive strategy focused on identifying the best investment opportunities that meet lasting financial objectives. Reading prospectuses, annual reports, and quarterly financial results may not be as sexy as scanning the latest Twitter-worthy headline, but detailed research and questioning goes a long way towards producing superior long-term returns.
On the other hand, news-driven fears that cause investment paralysis can cause irreparable damage. A counter greed-driven performance chasing strategy will lead to tears as well. It’s OK to read the newspaper in order to be informed about long term trends and economic shifts, but as Mark Twain says, “If you don’t read the newspaper, you are uninformed. If you do read the newspaper, you are misinformed.”
While March Madness may not be the most productive time of the year, when your sore throat clears or you get back from that late lunch, it behooves you to become more productive with your investment strategies. Picking the wrong investment players on your portfolio team may turn March Madness into investor sadness.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in certain exchange traded funds (ETFs), but at the time of publishing SCM had no direct position in FB, LNKD, Twitter, 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.
Damned if You Do, and More Damned if You Don’t
Source: Photobucket
In the stock market you are damned if you do, and more damned if you don’t.
There are a million reasons why the market should or can go down, and the press, media, and bears come out with creative explanations every day. The “Flash Crash,” debt ceiling debate, credit downgrades, elections, and fiscal cliff were all credible events supposed to permanently crater the market. Now we have higher taxes (capital gains, income, and payroll), sequester spending cuts, and a nagging recession in Europe. What’s more, the pessimists point to the unsustainable nature of elevated corporate profit margins, and use the ludicrous Robert Shiller 10-year Price-Earnings ratio as evidence of an expensive market (see also Foggy Rearview Mirror). If an apple sold for $10 ten days ago and $0.50 today, would you say, I am not buying an apple today because the 10-day average price is too high? If you followed Robert Shiller’s thinking, this logic would make sense.
Despite the barrage of daily concerns and excuses, the market continues to set new record highs and the S&P 500 is up by more than +130% since the 2009 lows – just a tad higher than the returns earned on cash, gold, and bonds (please note sarcasm). Cash has trickled into equities for the first few months of 2013 after years of outflows, but average investors have only moved from fear to skepticism (see also Investing with the Sentiment Pendulum ). With cash and bonds earning next to nothing; gold underperforming for years; and inflationary pressures eroding long-term purchasing power, the vice is only squeezing tighter on the worrywarts.
Are there legitimate reasons to worry? Certainly, and the opportunities are not what they used to be a few years ago (see also Missing the Pre-Party). Although an endangered species, long-term investors understand backwards looking economic news is useless. Or as Peter Lynch wisely stated, “If you spend 13 minutes a year on economics, you’ve wasted 10 minutes.” The fact remains that the market is up 70% of the time, on an annual basis, and has been a great place to beat inflation over time. It’s a tempting endeavor to avoid the down markets that occur 30% of the time, but those who try to time the market fail miserably over the long-run (see also Market Timing Treadmill).
Equity investors would be better served by looking at their investment portfolios like real estate. Homeowners implicitly know the value of their home changes on a daily basis, but there are no accurate, real-time quotes to reference your home value on a minute by minute basis, as you can with stocks. Most property owners know that real estate is a cyclical asset class that is not impacted by daily headlines, and if purchased at a reasonable price, will generally go up in value over many years. Unfortunately, for many average investors, equity portfolios are treated more like gambling bets in Vegas, and get continually traded based on gut instincts.
Volatility is at six-year lows, and investors are getting less uncomfortable with owning stocks. Although everybody and their mother has been waiting for a pullback (myself included), don’t get too myopically focused. For the vast majority of investors, who should have more than a ten year time horizon, you should understand that volatility is normal and recessions will cause stocks to gown significantly, twice every ten years on average. If you are a long-term investor, like you should be, and you understand these dynamics, then you will also understand that you will be more damned if you don’t invest in equities as part of a diversified portfolio.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in certain exchange traded funds (ETFs), 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.
Fine Tuning Your Stock Fishing Skills
If you are one of those fishing hobbyists crowded among a large group while hunting for a big fish, mathematics dictates your odds of reeling in a grand prize are significantly diminished. Expert fishermen are generally the first to arrive because they understand once the masses appear the opportunities will disappear. Like big fish, colossal stocks are rarely discovered by a large herd of investors. Financial bubbles occur in this manner, however these periods are usually short-lived and the investor pack often ends up losing more money on the way down relative to the profits earned on the way up. Successful investors are usually the ones following a disciplined systematic approach that is often contrarian in nature. In other words, not chasing performance requires patience, an elusive quality in these fast-paced, frenetic financial markets.
More prevalent in these markets are impulsive day-traders, unruly high frequency traders, and tempestuous hedge funds. Why own stocks, if you can rent them? Like a fisherman who constantly casts his/her bait in and out of the water, a short-sighted investor cannot realize outsized gains, unless the bait is given sufficient time to lure (find) the next winning idea.
Like many professions, experts often optimally mix the quantitative science and behavioral art of their craft. Whether it’s a teacher, doctor, accountant, attorney, or bus driver, the people who excel in their profession are the ones who move beyond the statistical and procedural basics of their trade. Practicing and understanding the nuts and bolts of your job is important, but developing those intangible, artistic skills only comes with experience. Unfortunately, many investing hobbyists don’t appreciate these artistic nuances and as a result go on destroying their portfolios, even though they act as if they were experts.
On the flip-side, decisions purely based on gut instincts will also lead to sub-par outcomes. The fisherman who does not account for the wind, temperature, geography, light, and seasonal differences will be at a distinct disadvantage to those who have studied these scientific factors.
In the fishing world, there is no miracle GPS device that will guide fish onto your hook, and the same is true for stocks. No software package or technical pattern will be a panacea for profits, however having some type of scientific tool to assist in the identification of investment opportunities should be exploited to its fullest. For us at Sidoxia Capital Management (www.Sidoxia.com), our tool is called SHGR (pronounced “SUGAR”), or Sidoxia Holy Grail Ranking. The name was created tongue-in-cheek; however its purpose is crucial. Following a quantitative system like SHGR ensures that a healthy dosage of discipline and objectivity is factored into our investment decisions, so inherent biases do not creep into our process and detract from performance. Specifically, our proprietary SHGR model incorporates multiple factors, including valuation, growth, sentiment indicators, profitability, and other qualitative measurements.
Although we use a “Holy Grail” ranking system, the fact of the matter is there are none in existence – for fishermen or investors. Experience teaches us the best opportunities are found where few are looking, and if proper quantitative tools are integrated into a multi-pronged process, then you will be uniquely positioned to catch a big fish.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in certain exchange traded funds (ETFs) and CMCSA, but at the time of publishing SCM had no direct position in BRKB, HNZ, HRL, UL, T, VZ, CAR, ZIP, AMR, LCC, ORCL, APKT, DELL, MSFT, RDSA, Repsol, ODP, OMX, HLF, BUD, STZ, GE, 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.
“Se-Frustration” Medicine Tough to Swallow
Article is an excerpt from previously released Sidoxia Capital Management’s complementary March 1, 2013 newsletter. Subscribe on right side of page.
Over the last few years, the Washington D.C. fear du jour has migrated from debt ceiling to elections and now from fiscal cliff to sequestration. A better term for the $85 billion triggering of automatic spending cuts (sequestration) may be “se-frustration” due to Congress’s annoying inability to agree on a responsible approach to reducing our country’s burdensome debt and deficits. The forced cuts getting crammed down our government’s throat taste like bitter medicine, especially when the economy is limping its way back to a slow recovery (revised 4th quarter GDP growth of a meager +0.1%). Although the $1.2 trillion in cuts over 10 years may gag growth to an intensified slowdown, the good news is that the cuts will assist with the long-term health of the economy – even though most reasonable people agree there are more appropriate medicinal regimens to be offered.
The Se-Frustration / Sequestration Breakdown
Source: Peter G. Peterson Foundation
As you can see from the pie chart above, the $85 billion in spending cuts (small slivers) associated with the sequester represent a relatively small fraction of our country’s total $3.6 trillion federal budget. More specifically, the expenditure reductions equate to a meager 2.4% of 2013’s total spending tab.How is the $85 billion in painful spending medicine being administered? If Congress continues with this flawed solution, more than half of the cuts (~$43 billion) will come from defense spending (see also Impoverished Global Babysitter). For the balance of the cutbacks, discretionary spending is bearing the largest brunt of the austerity moves (~$29 billion). The main discretionary programs hit include scientific and medical research, national parks, education, food inspections, federal employee pay, law enforcement, grants to state and local governments, and the Head Start pre-school program. Notable exceptions to the reductions include military personnel, and Social Security beneficiaries. To a lesser extent, Medicare dollars will decline by about $10 billion, and a final miscellaneous mandatory program category will drop by approximately $4 billion.
Before you fall to your knees in tears of despair, let’s put this se-frustration into better perspective. While $85 billion sounds like a lot of dough, the fact of the matter is our government is still running a $1 trillion deficit (i.e. spending > tax receipts). Even if we chose to have 10 sequestrations today, our country would still be running a deficit (see chart below):
Source: Calafia Beach Pundit (Scott Grannis)
While the $85 billion in se-frustration pills taste bitter now, this far from ideal medicine will improve our fiscal health nonetheless. The elephant in the room remains our graying Baby Boomer population and associated explosion of Medicare costs, but a little bad medicine is still better than none.
Checkbooks Open as Merger Mania Materialize
Corporations have been flush with trillions in cash over the last five years, but due to the uncertainty surrounding our economic recovery, CEOs (Chief Executive Officers) chose to keep their short arms out of their deep pockets. As we entered 2013 that mindset has begun to change. The inherent drive for companies to grow sales, earnings, and cash flows has finally surpassed the fears of contraction, uncertainty, and recession. How do we know the mindset has changed? One need look no further than the roughly $300 billion in deals announced in the first 60 days of 2013. Here is a partial sample of the higher profile transactions:
-Warren Buffett’s Berkshire Hathaway (BRKB) and private-equity partner 3G Capital agreed to buy ketchup maker H.J. Heinz Company (HNZ) for around $23 billion.
–Dell Inc. (DELL) has offered a private buyout out of the company for $24.4 billion, thanks to a private equity partner and a $2 billion stake from PC partner Microsoft Corp. (MSFT).
–Office Depot Inc. (ODP) offered to buy OfficeMax Inc. (OMX) for $1.3 billion in stock.
–Comcast Corp. (CMCSA) is buying the 49% share of NBCUniversal it doesn’t already own for $16.7 billion from General Electric Co. (GE).
–American Airlines parent AMR Corp. AMR and US Airways Group Inc. (LCC) approved their $11 billion merger.
–Anheuser-Busch InBev (BUD) is in multi-billion dollar discussions to buy Mexican beer brands from Constellation Brands (STZ).
–Oracle Corp. (ORCL) agreed to buy Acme Packet Inc. (APKT) for $2.1 billion.
–Hormel Foods Co. (HRL) closes $700 million Skippy peanut butter acquisition from Unilever PLC (UL).
–AT&T (T) has agreed to acquire 700 MHz B band spectrum from Verizon Communications (VZ) for $1.9 billion.
–Avis Budget Group (CAR) announced acquisition of Zipcar (ZIP) for $500 million.
–Shell-Royal Dutch (RDSA) agreed to buy LNG Assets from Repsol for $6.7 billion, including the assumption of debt.
As you can see, the multi-hundred billion M&A boom of 2013 (mergers and acquisitions) has been on a tear. The fear surrounding executive board rooms has subsided, so the hunger for growth should be strong enough to keep the checkbook out and available for future company purchases.
Cornucopia Corner
Here is a short list from an abundant set of stories over the last month
- Pope Retires: Pope Benedict XVI is resigning his Popemobile and red shoes to focus on reading and prayer. After eight years as an elected pope, the 85-year-old pontiff will be the first pope to resign since Pope Gregory XII, who stepped down in 1415.
- Italian Election Like Messy Meatballs: Inconclusive election results have created a hung parliament with no signals of an imminent resolution. What’s more, former Prime Minister Silvio Berlusconi is currently being investigated over bribery charges, and an Italian blogger/comedian has splintered election results further. One thing is clear, after two years of recession, voters are unhappy and want to reverse the government’s austerity actions.
- When Bernanke Talks, People Listen (Sort Of…): Federal Reserve Chairman Ben Bernanke updated Congress with his semi-annual testimony followed by answers provided to the House Financial Services Committee. I’m not sure what some Fed followers are smoking, but those worried about potential Fed policy changes have not been listening carefully to the Fed chief’s consistent message of accommodative actions. Bernanke explicitly stated monetary stimulus will remain in place until unemployment reaches 6.5% and inflation exceeds 2.5% (neither target has yet been achieved).
- Hedge Fund Managers Duke It Out Over Diet Shakes: Carl Icahn, Chairman of Icahn Enterprises, and junior Bill Ackman, CEO of Pershing Square Capital Management have recently fiercely debated the merits of Herbalife Ltd (HLF). Ackman is short some 20 million shares and Icahn recently reported a 13% stake in Herbalife shares. (see also Herbalife Strife)
- Russian Meteor: About 1,000 people were hurt when a meteor blasted over Russia (See Video).
- North Korea Flexing Nuke Muscles: North Korea conducted its 3rd nuclear test and warned of more to come.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in certain exchange traded funds (ETFs) and CMCSA, but at the time of publishing SCM had no direct position in BRKB, HNZ, HRL, UL, T, VZ, CAR, ZIP, AMR, LCC, ORCL, APKT, DELL, MSFT, RDSA, Repsol, ODP, OMX, HLF, BUD, STZ, GE, 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.
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