Helicopter Ben to QE3 Rescue
Faster than a speedy credit default swap, more powerful than a federal funds interest rate cut, and able to leap a tall Mario Draghi in a single bound, look…it’s Helicopter Ben! How did Federal Reserve Chairman Ben Bernanke become a monetary superhero with such a cool nickname as Helicopter Ben (a.k.a. “HB”)? Bernanke, a former Princeton University professor, has widely been known to be a diligent student of the Great Depression, and his aviation nickname stems from a 2002 speech in which he referenced dropping money from a helicopter to combat deflation. While investors may worry about HB’s ability to fight the inflation thugs, there should be no questions about his willingness to implement accommodative, deflation-fighting monetary policies.
Chairman Bernanke may not epitomize your ideal superhero, however this slightly past middle-aged bearded and balding man has helped mastermind some of the most creative and aggressive monetary rescue efforts our country and globe has seen in the history of man (and woman). This week’s money-printing QE3 announcement solidified Bernanke’s historic capital saturating ranking.
Since Helicopter Ben’s heroic appointment as Federal Reserve Chairman in 2006 by George W. Bush, Bernanke has instituted numerous monetary gadgets in hopes of meeting the Federal Reserve’s dual mandate, which is i) to achieve low inflation and ii) to strive for maximum employment. Arguably, given the anemic growth here in the U.S.; the recession in Europe; and slowing growth in the emerging markets (i.e., China, Brazil, India, etc.), slack in the economy and static labor wages have largely kept inflation in check. With the first part of the dual mandate met, Bernanke has had no problem putting his monetary superpowers to work.
As referenced earlier, Bernanke’s bazooka launch of QE3, an open ended MBS (Mortgage Back Securities) bond binging program, will add $40 billion of newly purchased assets to the Fed’s balance sheet on a monthly basis until the labor market improves “substantially” (whatever that means). What’s more, in addition to the indefinite QE3, Bernanke has promised to keep the federal funds rate near zero “at least through mid-2015,” even for a “considerable time after the economic recovery strengthens.”
HB’s Track Record
Throughout superhero history, Superman, Spider-man, and Batman have used a wide-array of superhuman powers, extraordinary gadgets, and superior intellect to conquer evil-doers and injustices across the globe. Bernanke has also forcefully put his unrivaled money-printing talents to work in an attempt to cure the financial ills of the world. Here’s a quick multi-year overview of how Bernanke has put his unique talents to print trillions of dollars and keep interest rates suppressed:
Rate Cuts (September 2007 – December 2008): Before “quantitative easing” was a part of our common vernacular, the Fed relied on more traditional monetary policies, such as federal funds rate targeting, conducted through purchases and sales of open market securities. Few investors recall, but before HB’s fed funds rate cut rampage of 10 consecutive reductions in 2007 and 2008 (the fed funds rate went from 5.25% to effectively 0%), Bernanke actually increased rates three times in 2006.
Crisis Actions (2007 – 2009): Love him or hate him, Bernanke has been a brave and busy soul in dealing with the massive proportions of the global financial crisis. If you don’t believe me, just check out the Financial Crisis Timeline listed at the St. Louis Federal Reserve. Many investors don’t remember, but Bernanke helped orchestrate some of the largest and most unprecedented corporate actions in our history, including the $30 billion loan to JPMorgan Chase (JPM) in the Bear Stearns takeover; the $182 billion bailout of AIG; the conversion of Morgan Stanley (MS) and Goldman Sachs Group Inc. (GS) into bank holding companies; and the loan/asset-purchase support to Fannie Mae (FNMA) and Freddie Mac (FMCC). These actions represented just the tip of the iceberg, if you also consider the deluge of liquidity actions taken by the Fed Chairman.
HB Creates Acronym Soup
In order to provide a flavor of the vastness in emergency programs launched since the crisis, here is an alphabet soup of program acronyms into which the Fed poured hundreds of billions of dollars:
- Term Asset-Backed Securities Loan Facility (TALF)
- Term Auction Facility (TAF)
- Money Market Investor Funding Facility (MMIFF)
- Commercial Paper Funding Facility (CPFF)
- Primary Dealer Credit Facility (PDCF)
- Asset-Backed Commercial Paper Money Market Fund Liquidity Facility (AMLF)
- Temporary Reciprocal Currency Arrangements (Swap lines)
- Term Securities Lending Facility (TSLF)
Plenty of acronyms to go around, but these juicy programs have garnered most of investors’ attention:
QE1 (November 2008 – March 2010): In hopes of lowering interest rates for borrowers and stimulating the economy, HB spearheaded the Fed’s multi-step, $1 trillion+ buying program of MBS (mortgage backed securities) and Treasuries.
QE2 (November 2010 – June 2011): Since the Fed felt QE1 didn’t pack enough monetary punch to keep the economy growing at a fast enough clip, the FOMC (Federal Open Market committee) announced its decision to expand its holdings of securities in November 2010. The Committee maintained its existing policy of reinvesting principal payments from its securities holdings and to also purchase a further $600 billion of longer-term Treasury securities by the end of the second quarter of 2011 (an equivalent pace of about $75 billion per month).
Operation Twist (September 2011 – December 2012): What started out as a $400 billion short-term debt for longer-term debt swap program in September 2011, expanded to a $667 billion program in June 2012. With short-term rates excessively low, Bernanke came up with this Operation Twist scheme previously used in the early 1960s. Designed to flatten the yield curve (bring down long-term interest rates) to stimulate economic activity, Bernanke thought this program was worth another go-around. Unlike quantitative easing, Operation Twist does not expand the Fed’s balance sheet – the program merely swaps short-term securities for long-term securities. Currently, the program is forecasted to conclude at the end of this year.
The Verdict on HB
So what’s my verdict on the continuous number of unprecedented actions that Helicopter Ben and the Fed have taken? Well for starters, I have to give Mr. Bernanke an “A-” on his overall handling of the financial crisis. Had his extreme actions not been taken, the pain and agony experienced by all would likely be significantly worse, and the financial hole a lot deeper.
With that said, am I happy about the announcement of QE3 and the explosion in the Fed’s money printing activities? The short answer is “NO”. It’s difficult to support a program with questionable short-run interest rate benefits, when the menacing inflationary pressures are likely to outweigh the advantages. The larger problem in my mind is the massive fiscal problem we are experiencing (over $16 trillion in debt and endless trillion dollar deficits). More importantly, this bloated fiscal position is creating an overarching, nagging crisis of confidence. A resolution to the so-called “fiscal cliff,” or the automated $600 billion in tax increases and spending cuts, is likely to have a more positive impact on confidence than a 0.05% – 0.25% reduction in mortgage rates from QE3. Once adequate and sustained growth returns, and inflation rears its ugly head, how quickly Helicopter Ben tightens policy will be his key test.
Until then, Bernanke will probably continue flying around while gloating in his QE3 cape, hoping his quantitative easing program will raise general confidence. Unfortunately, his more recent monetary policies appear to be creating diminishing returns. Even before QE3’s implementation, Helicopter Ben has witnessed his policies expand the Fed’s balance sheet from less than $900 billion at the beginning of the recession to almost $3 trillion today. Despite these gargantuan efforts, growth and confidence have been crawling forward at only a modest pace.
No matter the outcome of QE3, as long as Ben Bernanke remains Federal Reserve Chairman, and growth remains sluggish, you can stay confident this financial man of steel will continue dumping money into the system from his helicopter. If Bernanke wants to create a true legendary superhero ending to this story, the kryptonite-like effects of inflation need to be avoided. This means, less money-printing and more convincing of Congress to take action on our out-of-control debt and deficits. Now, that’s a comic book I’d pay to read.
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 positions in JPM, AIG, MS, GS, FNMA, FMCC, 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.
Decision Making on Freeways and in Parking Lots
Many drivers here in California adhere to the common freeway speed limit of 65 miles per hour, while some do not (I’ll take the 5th). In the vast majority of cases, racing to your destination at these faster speeds makes perfect sense. However, driving 65 mph through the shopping mall parking lot could get you killed, so slower driving is preferred in this instance. Ultimately, the specific environment and situation will dictate the rational and prudent driving speed. Decision making works in much the same way, and Daniel Kahneman, a Nobel Prize winner, has encapsulated his decades of research in psychology and economics in his most recent book, Thinking, Fast and Slow.
Much of Kahneman’s big ideas are analyzed through the lenses of “System 1” and “System 2” – the fast and slow decision-making processes persistently used by our brains. System 1 thinking is our intuition in the fast lane, continually making judgments in real-time. Our System 1 hunches are often correct, but because of speedy, inherent biases and periodic errors this process can cause us to miss an off-ramp or even cause a conclusion collision. System 2, on the other hand, is the slower, methodical decision-making process in our brains that keeps our hasty System 1 process in check. Although little mental energy is exerted by using System 1, a great deal of cerebral horsepower is required to use System 2.
Summarizing 512 pages of Kahneman’s book in a single article may be challenging, nevertheless I will do my best to summarize some of the interesting highlights and anecdotes. A multitude of Kahneman’s research is reviewed, but a key goal of the book is designed to help individuals identify errors in judgment and biases, in order to lower the prevalence of mental mistakes in the future.
Over Kahneman’s 50+ year academic career, he has uncovered an endless string of flaws in the human thought process. To bring those mistakes to life, he uses several mind experiments to illustrate them. Here are a few:
Buying Baseball: We’ll start off with a simple Kahneman problem. If a baseball bat and a ball cost a total of $1.10, and the bat costs $1 more than the ball, then how much does the ball cost? The answer is $0.10, right? WRONG! Intuition and the rash System 1 forces most people to answer $0.10 cents for the ball, but after going through the math it becomes clear that this gut answer is wrong. If the ball is $0.10 and the bat is $1 more, then that would mean the bat costs $1.10, making the total $1.20…WRONG! This is clearly a System 2 problem, which requires the brain to see a $0.05 ball plus $1.05 bat equals $1.10…CORRECT!
The Invisible Gorilla: As Kahneman points out, humans can be blind to the obvious and blind to our blindness. To make this point he references an experiment and book titled Invisible Gorilla, created by Chritopher Chabris and Daniel Simons. In the experiment, three players wearing white outfits pass a basketball around at the same time that a group of players wearing black outfits pass around a separate basketball. The anomaly in the experiment occurs when someone in a full-sized gorilla outfit goes prancing through the scene for nine full seconds. To the surprise of many, about half of the experiment observers do not see the gorilla. In addition, the gorilla-blind observers deny the existence of the large, furry animal when confronted with recorded evidence (see video below).
Green & Red Dice: In this thought experiment, Kahneman describes a group presented with a regular six-sided die with four green sides (G) and two red sides (R), meaning the probability of the die landing on green (G) is is much higher than the probability of landing on red (R). To make the experiment more interesting, the group is provided a cash prize for picking the highest probability scenario out of the following three sequences: 1) R-G-R-R-R; 2) G-R-G-R-R-R; and 3) G-R-R-R-R-R. Although most participants pick sequence #2 because it has the most greens (G) in it, if one looks more closely, sequence #2 is the same as #1 except for sequence #2 has an additional green (G). Therefore, the highest probability winning answer should be sequence #1 because sequence #2 adds an uncertain roll that may or may not land on green (G).
While the previous experiments described some notable human decision-making flaws, here are some more human flaws:
Anchoring Effect: Was Gandhi 114 when he died, or was Gandhi 35 when he died? Depending how the question is asked, asking the initial question first will skew the respondents answer to a higher age, because the respondents answer will be somewhat anchored to the number “114”. Similarly, the price a homebuyer would pay for a house will be influenced or anchored to the asking price. Another word used by some for anchoring is “suggestion”. If a subliminal suggestion is planted, people’s responses can become anchored to that idea.
Overconfidence: We encounter overconfidence in several forms, especially from what Kahneman calls the “Illusion of Pundits,” which is the confidence that comes with 20-20 hindsight experienced in our 24/7 media world. Or as Kahneman states in a different way, “The illusion that we understand the past fosters overconfidence in our ability to predict the future.” Driving is another example of overconfidence – very few people believe they are poor drivers. In fact, a well-known study shows that “90% of drivers believe they are better than average,” despite defying the laws of mathematics.
Risk Aversion: In Kahneman’s book, he also references risk aversion studies by Mathew Rabin and Richard Thaler. What the researchers discovered is that people appear to be irrational in the way they respond to certain risk scenarios. For example, people will turn down the following gambles:
A 50% chance to lose $100 and a 50% chance to win $200;
OR
A 50% chance to lose $200 and a 50% chance to win $20,000 .
Although rational math would indicate these are smart bets to take, however most people decline the game because humans on average weigh losses twice as much as gains (see also the Pleasure/Pain Principle). To get a better understanding of predictive human behavior, the real emotional costs of disappointment and regret need to be accounted for.
Truth Illusions: A reliable way to make people believe in falsehoods is through repetition. More exposure will breed more liking. In addition to normal conversations, these repetitive truth illusions can be witnessed in propaganda or advertising. Minimizing cognitive strain also reinforces points. Using bold, colored, and contrasted language is more convincing. Simpler language rather than more complex language is also more credible.
Narrative Fallacies: We humans have an innate desire to continually explain the causation of an event due to skill or stupidity – even if randomness is the best explanation.People try to make sense of the world, even though many outcomes have no straightforward explanation. Often times, a statistical phenomenon like “regression to the mean” can explain the results (i.e., outliers revert directionally toward averages). The “Sports Illustrated Jinx,” or the claim that a heralded cover story athlete will be subsequently cursed with bad performance, is used as a case in point. Actually, there is no jinx or curse, but often fickle luck disappears and athletic performance reverts to norms.
Kahneman on Stocks
Many of the principles in Kahneman’s book can be applied to the world of stocks and investing too. According to Kahneman, the investing industry has been built on an “illusion of skill,” or the belief that one person has better information than the other person. To make his point, Kahneman references research by Terry Odean, a finance professor at UC Berkely, who studied the records of 10,000 brokerage accounts of individual investors spanning a seven-year period and covering almost 163,000 trades. The net result showed dramatic underperformance by the individual traders and confirmed that stocks sold by the traders consistently did better than the stocks purchased.“Taking a shower and doing nothing” would have been better than the value destroying trading activity. In fact, the most active traders did much worse than those who traded the least. For professional managers the conclusions are not a whole lot different. “For a large majority of fund managers, the selection of stocks is more like rolling dice than like playing poker. Typically at least two out of every three mutual funds underperform the overall market in any given year,” says Kahneman. I don’t disagree, but I do believe, like .300 hitters in baseball, there are a few managers that can consistently outperform.
There are a lot of lessons to be learned from Daniel Kahneman’s book Thinking, Fast and Slow and I apply many of his conclusions to my investment practice at Sidoxia. We all race through decisions every day, but as he repeatedly points out, familiarizing ourselves with these common mental pitfalls, and also utilizing our more methodical and accurate System 2 thought process regularly, can create better decisions. Better decisions not only for our regular lives, but also for our investing lives. It’s perfectly OK to race down the mental freeway at 65 mph (or faster), but don’t forget to slow down occasionally, in order to avoid mental collisions.
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 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.
Sun Breaking through Stormy Financial Clouds?
The ominous economic storm clouds have been looming for quite some time now. And with the lingering European financial crisis, U.S. Presidential elections, and a pending “fiscal cliff” coming to a head in the next few months, investors have their umbrellas firmly in hand. While average investors have been running for shelter, the stock market has been shining. In addition to the +2% gain in August, stocks have advanced about +12% in 2012 and about +20% from a year ago, as measured by the S&P 500 index. The move in the Nasdaq Composite index has been even brighter, surging +18% higher this year and about +25% from a year ago (quite a bit different from Bill Gross’s “Cult of Equity” 4% return expectations).
Here is a look of 1-year returns provided by Mark Perry at Carpe Diem a week and a half ago:
A big driver for these positive returns are record corporate profits:
Despite the positive returns and record profits, investors remain terrified. How scared are people about potential economic thunder and lightning? According to Scott Grannis at Calafia Beach Pundit, savings deposits have increased by a staggering $2.4 trillion over the past four years, which is effectively losing 2-3% in annual value to inflation. I don’t know when negative sentiment will turn positive, but when it does, there is a lot of pent up demand for consumption and investment.
Death to Uncertainty
The markets hate uncertainty. This cliché is often referenced, but the truth is…there is always uncertainty. More aptly stated, the markets hate additional uncertainty. So whether you are a Republican or Democrat, the mere fact the elections will be over in November may be enough to lower uncertainty and lift some of the gloomy financial clouds. Republicans hope for fiscal sanity to return with a win by the Romney ticket, but the market may favor an Obama victory because it likes the devil it knows rather than the one it doesn’t. The race is very close now, and as always, the Independents will determine which party ultimately wins.
When discussion shifts to the impending “fiscal cliff” (automatic tax hikes and spending cuts), voter patience wears thinner – inaction is no longer a sustainable political strategy. If you don’t believe me, then just reference the record-low Congressional approval rating. Incumbents looking for re-election will have to set forth credible solutions to these serious fiscal problems, or suffer the consequences. Voters are serious now, and a “do-nothing” strategy will only lead to an early retirement, not a cushy paycheck in Washington D.C.
The corporate world is watching closely too. Tight-fisted executives sitting on trillions of dollars in cash are looking for some direction. No matter who wins, by knowing the direction of future policy changes, executive optimism is likely to spur incremental growth.
Be Prepared & Pack Your Sunglasses
Admittedly, recent economic data hasn’t been overly rosy, and there are no immediate signs of a bright and shiny economic day. Although not surprising, given the constant media attention, European economic activity has fallen into recession. In our backyard, U.S. GDP growth decelerated in second quarter to 1.5% from 2.0% from the previous quarter, and job growth has stalled. In Asia, economic figures out of China continue to generate lackluster trends. As strategist Ed Yardeni points out, “August manufacturing activity fell to a nine-month low with the new export orders index the lowest in three years.”
On the surface, the uninspiring economic data would suggest to investors to pack their bags and move into a bunker. However, what shrewd investors realize is that trading with economic trends is not an optimal strategy. Following such logic would have led investors to pile in buying at the peak of 2007 and panic sell at the bottom in early 2009. Much of the recent economic news is nothing to write home about, and the information has already been factored into current prices and expectations. The real trick is determining the state of affairs 12-18 months from now, which is not an easy task. So while current data is fragile at best, governments and central banks across the globe have been aggressively cutting rates, implementing fiscal stimulus, and positioning for further monetary policy support. What’s more, consumers and corporations have deleveraged (cut debt) significantly, and governments are currently going through this painful process.
Sell in May and Regret Away
As the weakening data started to roll out at the beginning of spring, so-called market pundits were quick to point out the seasonal trade to “Sell in May and go away.” Well, if you followed that strategy, you may have slept better, but you not only would have incurred significant transaction costs and taxes, but also given up some capital gains and dividends. September and October have traditionally been volatile months, so the financial market gods may still have something to say.
Weather forecasting and financial forecasting are difficult professions. Even though the economic weather has been cloudy recently, if you are relying too heavily on your umbrella and galoshes, the next few months should help determine whether it’s time to bust out your sunglasses and sunscreen rather than a heavy raincoat.
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 Barclays 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.
Pretzels, Bratwurst, Beer, and Markets
No, I was not lazy, sick, or kidnapped, but rather I was on vacation and hence I have been tardy on my most recent blog posting. These vacation things are relatively rare in the Slome household, therefore the family decided to take a larger than normal trip. Where did we go? Well, with all the talk about Europe’s financial woes, we decided to go to the financial nerve center of the crisis…Germany! Truth be told, the fact that my mother was born there and I have a ton of relatives there may also have something to do with the selection. Now that I have safely returned, I’m glad to report that the world has not ended yet in Europe…or at least not in the comparatively stronger region of Deutschland.
Here is a shortened collage of my trip highlights:
King Ludwig II’s Linderhof Castle in Southern Germany.
Summer home to Bavaria’s former kings in Munich (Nymphenburg Palace)
Spectacular view of the Neckar River.
Neuschwanstein Castle (a.k.a., the Disneyland castle).
Picturesque scene of Forggensee Lake as we hike up to the Neuschwanstein Castle.
Picture from the interior courtyard of Heidelberg Castle.
Town of Rudesheim perspective from the Rhine River.
Who said there was no surfing in Germany?
Munich’s famous Glockenspiel depicting the marriage between local Duke Wilhelm V with Renata of Lorraine.
“Doe a deer, a female deer, ray, a drop of golden sun.” Leopoldskron Palace as seen in The Sound of Music (Salzburg Austria).
Max-Joseph Platz right next to the famous Munich Nationaltheater (opera house).
Hofbrauhaus…enough said.
The choice of my trip timing seemed fortuitous, since volume trickled to a crawl and there was not a tremendous amount of news-flow. How do I know? Although I traveled across the pond, my electronic phone, tablet, and computer leashes did not fully untether themselves from my control. With the presidential election cycle swinging into full gear, coupled with key announcements coming out of Frankfurt and Brussels, nobody should be surprised to see some more volatility. It’s time to detoxify from all the pretzels, bratwurst, and beer and more forcefully reengage in the financial markets.
Dollars and cents are lost every day, but the memories, experiences, and relationships from this trip will never be lost.
Auf Wiedersehen Deutschland!
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 DIS 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.
The Art of the Conference Call
My heart is beating, my palms are sweaty, and I feel like I’m about to hurl. No, I don’t have the flu and I am not about to go sky diving, but rather my top holding is about to report its quarterly financial results. Fifteen minutes after the market close, the headline numbers are due. Company XYZ has just reported EPS results of $.96, a penny above Wall Street expectations. The outcome of the pending 60 minute conference call could have major ramifications, not only to my pocketbook, but also to millions of investors, including mine.
After printing out the fresh press release, hot-off-the-press, the challenge now becomes determining what to do with this mountain of newly available data at my fingertips?
Here are some important factors to consider as you scan through reams of press release data and prep for the next 60 minutes of joy:
Get the Basics: Most importantly, once your figure out what reported revenue and EPS results are relative to consensus, investors must determine whether the numbers are GAAP (Generally Accepted Accounting Principles) or Non-GAAP. Surprisingly to some, Non-GAAP results are preferred because these numbers are generally closer to “cash reality”.
What’s Guidance? The majority of companies reporting their quarterly results will provide investors an outlook of their financial expectations for the following quarter – and sometimes for the full year. This commentary is often more important to the immediate stock price compared to the just-reported actual results.
Bust Out the Red Bull: Now that we have the basics and the conference call is beginning, it’s time to break out the 6-pack of Red Bull. If company XYZ is like any of the other 98% of companies, investors will have the pleasure of listening to 30 minutes of monotonous press release reading. This is a smoke and mirrors approach for management to avoid the upcoming firing line of tough questions.
Numerical Basics: Now is the time to put your multi-tasking skills to the test. First, as management reads the press release in a monotone voice (usually verbatim or to a script), you can gather some of the important financial basics. Cash is king, so the first place I migrate to find the cash generating power of a company (or lack thereof) is the Cash Flow Statement. The crucial aspect is determining how much discretionary cash is available to the company after accounting for maintenance capital expenditures – this cash power can be used for dividends, share buybacks, and acquisitions. Next on the priority totem pole is the income statement, where we can check out the trends in sales growth, profit margins, and company specific metrics, such as same store sails in the retail industry or BOE in the energy industry (Barrels of Oil Equivalent). Strong profitability is great, but if the sales, margins, cash flows, and/or company metrics are moving in the wrong direction, then look out below – the stock may be on the verge of cratering. For reference, just take a peek at Zynga [ZNGA], Netflix [NFLX], Facebook [FB], and Research in Motion [RIMM] for proof.
Digesting Q&A: The questions and answers portion of the conference call is the meat and potatoes of the earnings release meal. This is the portion of the call in which management’s feet are held up to the fire with some critical questions. There are plenty of relevant and reasonable questions, but there is always at least one analyst who asks a 10-part question with endless follow-ups, going into the most obscure facets of the company, which will have no bearing on the stock price. On manzy occasions, the analysts ask the questions are more concerned about listening to the tones of their voice than they are interested in finding critical answers to strategic and operational corporate issues. Nonetheless, in most cases, this segment can be the most valuable part of the conference call.
Hodge Podge & Intangibles: After following the previous steps, the scattered puzzle will begin to take shape. But there are still are some pieces to put in place, in order to create a clearer picture. For example, market share is an important feature – triangulating share gains and losses via revenue trends and industry data can help determine who is winning and losing in the marketplace. The institution of price increases or cuts is another data point that can provide insights into the level of cut-throat competition. And let´s not forget aquisitions, these corporate marriages can either be a sign of dominant strength or a sign of weak desperation.
Putting the previously discussed elegant tools to use will help you become a better stock artist, but to truly master the art of the conference call one has to repeatedly practice these steps and add your personal list of analytical intangibles. Then, you will have a profitable piece of art.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients own certain exchange traded funds and NFLX, 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.
Equity Quicksand or Bond Cliff?
The markets are rigged, the Knight Capital Group (KCG) robots are going wild, and the cheating bankers are manipulating Libor. I guess you might as well pack it in…right? Well, maybe not. While mayhem continues, equity markets stubbornly grind higher. As we stand here today, the S&P 500 is up approximately +12% in 2012 and the NASDAQ market index has gained about +16%? Not bad when you consider 15 countries are offering negative yields on their bonds…that’s right, investors are paying to lose money by holding pieces of paper until maturity. As crazy as buying technology companies in the late 1990s for 100x’s or 200x’s earnings sounds today, just think how absurd negative yields will sound a decade from now? For heaven’s sake, buying a gun and stuffing money under the mattress is a cheaper savings proposition.
Priced In, Or Not Priced In, That is the Question?
So how can stocks be up in double digit percentage terms when we face an uncertain U.S. presidential election, a fiscal cliff, unsustainable borrowing costs in Spain, and S&P 500 earnings forecasts that are sinking like a buried hiker in quicksand (see chart below)?
I guess the answer to this question really depends on whether you believe all the negative news announced thus far is already priced into the stock market’s below average price-earnings (P/E) ratio of about 12x’s 2013 earnings. Or as investor Bill Miller so aptly puts it, “The question is not whether there are problems. There are always problems. The question is whether those problems are already fully discounted or not.”
Source: Crossing Wall Street
While investors skeptically debate how much bad news is already priced into stock prices, as evidenced by Bill Gross’s provocative “The Cult of Equity is Dying” article, you hear a lot less about the nosebleed prices of bonds. It’s fairly evident, at least to me, that we are quickly approaching the bond cliff. Is it possible that we can be entering a multi-decade, near-zero, Japan-like scenario? Sure, it’s possible, and I can’t refute the possibility of this extreme bear argument. However with global printing presses and monetary stimulus programs moving full steam ahead, I find it hard to believe that inflation will not eventually rear its ugly head.
Again, if playing the odds is the name of the game, then I think equities will be a better inflation hedge than most bonds. Certainly, not all retirees and 1%-ers should go hog-wild on equities, but the bond binging over the last four years has been incredible (see bond fund flows).
While we may sink a little lower into the equity quicksand while the European financial saga continues, and trader sentiment gains complacency (Volatility Index around 15), I’ll choose this fate over the inevitable bond cliff.
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 KCG 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.
Financial Olympics: Chasing Gold, Siver & Bronze
Article is an excerpt from previously released Sidoxia Capital Management’s complementary August 1, 2012 newsletter. Subscribe on right side of page.
As a record number of 204 nations compete at the XXX Olympic Games in London, and millions of couch-watchers root on their favorite athletes, a different simultaneous competition is occurring…the 2012 Financial Olympics. So far, both Olympics have provided memorable moments for all. While the 2012 London Olympic viewers watched James Bond and Queen Elizabeth II parachute into a stadium filled with 80,000 cheering fans, investors cheered the Dow Jones Industrial Average above the 13,000 level on the same day of the opening ceremony. We have already witnessed a wide range of emotions displayed by thousands of athletes chasing gold, silver, and bronze, and the same array of sentiments associated with glory and defeat have been observed in the 2012 Financial Olympics. There is still a way to go, but despite all the volatility, the stock market is still up a surprising +10% in 2012.
Here were some of the key Financial Olympic events last month:
Draghi Promises Gold for Euro: Some confident people promise gold medals while others promise the preservation of a currency – European Central Bank President (ECB) Mario Draghi personifies the latter. Draghi triggered the controversy with comments he made at the recent Global Investment Conference in London. In the hopes of restoring investor confidence Draghi emphatically proclaimed, “The ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough.” To view this excerpt, click video link here.
U.S. Economy Wins Bronze: Whereas Europe has been disqualified from the Financial Olympics due to recessionary economic conditions (Markit predicts a -0.6% contraction in Q3 eurozone GDP), the U.S. posted respectable Q2 GDP results of +1.5%. This surely is an effort worthy of a bronze medal given the overall sluggish, global demand. Fears over a European financial crisis contagion; undecided U.S. Presidential election; and uncertain “fiscal cliff” (automatic tax hikes and spending cuts) are factors contributing to the modest growth. Nevertheless, the US of A has posted 12 consecutive quarters of economic growth (see chart below) and if some clarity creeps back into the picture, growth could reaccelerate.
Source (Calafia Beach Pundit)
No Podium for Spain: Spain’s recent economic achievements closely mirror those of the athletic team, which thus far has failed to secure a sporting medal of any color. Why no Spanish glory? Recently, the Bank of Spain announced the country’s economy was declining at a -1.6% annual rate. Shortly thereafter, Spain estimated its economy would contract by -0.5% in 2013 instead of expanding +0.2%, as previously expected. Adding insult to injury, Valencia (Spain’s most indebted region) said central government support would be needed to repay its debts. These factors, and others, have forced the Spanish government to adopt severe austerity measures to cut its budget deficit by $80 billion through 2015. Spanish banks have negotiated a multi-billion-euro bailout, but they will have to hand control over to European institutions as a concession. Considering these facts, combined with an unemployment rate near 25%, one can appreciate the dominant and pervading losing spirit.
Global Central Banks Inject Financial Steroids: The challenging and competitive global growth environment is not new news to central bankers around the world. As a result, finance leaders around the world are injecting financial steroids into their countries via monetary stimulus (mostly rate cuts and bond buying). Like steroids, these actions may have short-term invigorating effects, but these measures can also have longer-term negative consequences (i.e., inflation). Here are some of the latest country-specific examples (also see chart below):
- U.S. Federal Reserve Chairman Ben Bernanke has already shot a couple “Operation Twist” and “QE” (Quantitative Easing) bullets, but as global growth continues to slow, he has openly acknowledged his willingness to dig into his toolbox for additional measures under the right circumstances, including QE3.
- The PBOC (People’s Bank of China) surprised many observers by employing its second rate cut in less than a month. The PBOC lowered its one-year lending rate by 0.31% to 6%.
- The ECB (European Central Bank) lowered its key lending rate by 0.25% to an all-time low of 0.75% and also cut its overnight deposit rate (the equivalent of our Federal Funds rate) by 0.25% to 0%.
- Brazil’s central bank recently cut its benchmark Selic rate for the 8th time in a year to an all-time low of 8% from 12.5%.
- South Korea’s central bank lowered its key interest rates by 0.25% to 3%, its first such action in three years.
- The BOE (Bank of England) raised its quantitative easing goal by 50 billion pounds (~$78 billion).
Source (Calafia Beach Pundit)
Banks Disqualified from Libor Games: As a result of the Libor (London Interbank Offered Rate) rigging scandal, Barclays CEO Robert Diamond resigned from the bank and agreed to forfeit $31 million in bonus money. Libor is a measure of what banks pay to borrow from each other and, perhaps more importantly, it acts as a measuring stick for determining rates on mortgages and other financial contracts. In an attempt to boost the perceived financial strength of their financial condition, multiple banks artificially manipulated the calculation of the Libor rate. Ironically, this scandal likely helped consumers with lower mortgage and credit card rates.
Rates Running Backwards: Sports betting on teams and events is measured by point spreads and numerical odds. In the global debt markets, betting is measured by interest rates. So while losing, debt-laden countries like Greece and Spain have seen their interest rates explode upwards, winning, fiscally responsible countries (including Switzerland, Austria, Denmark, Netherlands, Germany, and Finland) have seen their bond yields turn NEGATIVE. That’s right, investors are earning a negative return. Rather than making a bet on higher yielding bonds, many investors are flocking to the perceived safety of these interest-losing bonds (see chart below). This game cannot last forever, especially for individual and institutional investors who require income to meet liquidity and return requirements.
Source (The Financial Times)
China Wins GDP Gold Medal but No World Record: China currently leads in both the Olympic Games gold medal count (China 13 vs. U.S. 9 through July 31st) and GDP competition. Given the fiscal and monetary stimulus measures the government has implemented, it appears their economy is bottoming. Despite the tremendous anxiety over China’s growth, China’s National Bureau of Statistics just announced a +7.6% Q2 GDP growth rate (see chart below), down from +8.1% in Q1. Although this is the slowest growth since the global financial crisis, Even though this was the slowest GDP growth rate in over three years, most countries would die for this level of growth. Adding evidence to the bottoming storyline, HSBC recently reported the preliminary Chinese PMI manufacturing index rose to 49.5 in July, up from 48.2 in June – the highest reading since early this year (February).
Source (Calafia Beach Pundit)
Higgs Wins God Particle Gold: Michael Phelps and Missy Franklin are not the only people to win gold medals in their fields. Peter Higgs and fellow scientists had 50-years of their physics research validated when the Large Hadron Collider discovered the long-sought Higgs boson (a.k.a., the “god particle”). The collider, located on the Franco-Swiss border, measured approximately 17 miles in length, took years to build, and cost about $8 billion to finish. Pundits are declaring the unearthing of Higgs boson as the greatest scientific discovery since the sequencing of the human genome. Higgs’s gold medal may just come in the form of a Nobel Prize in Physics.
Source (The Financial Times)
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 Barclays 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.
Sifting Through the Earnings Rubble
An earthquake of second quarter earnings results have rocked the markets (better than expected earnings but sluggish revenues), and now investors are left to sift through the rubble. With thousands of these earnings reports rolling in (and many more in the coming weeks), identifying the key investment trends across sectors, industries, and geographies can be a challenging responsibility. If this was an easy duty, I wouldn’t have a job! Fortunately, having a disciplined process to sort through the avalanche of quarterly results can assist you in discovering both potential threats and opportunities.
But first things first: You will need some type of reliable screening tool in order to filter find exceptional stocks. According to Reuters, there are currently more than 46,000 stocks in existence globally. Manually going through this universe one stock at a time is not physically or mentally feasible for any human to accomplish, over any reasonable amount of time. I use several paid-service screening tools, but there are plenty of adequate free services available online as well.
Investing with the 2-Sided Coin
As Warren Buffett says, “Value and growth are two sides of the same coin.” Having a disciplined screening process in place is the first step in finding those companies that reflect the optimal mix between growth and value. I am willing to pay an elevated price (i.e., higher P/E ratio) for a company with a superior growth profile, but I want a more attractive value (i.e., cheaper price) for slower growth companies. I am fairly agnostic between the mix of the growth/value weighting dynamics, as long as the risk-reward ratio is in my favor.
Since I firmly believe that stock prices follow the long-term trajectory of earnings and cash flows, I fully understand the outsized appreciation opportunities that can arise from the “earnings elite” – the cream of the crop companies that are able to sustain abnormally high earnings growth. Or put in baseball terms, you can realize plenty of singles and doubles by finding attractively priced growth companies, but as Hall of Fame manager Earl Weaver says, “You win many more games by hitting a three-run homer than you do with sacrifice bunts.” The same principles apply in stock picking. Legendary growth investor Peter Lynch (see also Inside the Brain of an Investing Genius) is famous for saying, “You don’t need a lot of good hits every day. All you need is two to three goods stocks a decade.”
Some past successful Sidoxia Capital Management examples that highlight the tradeoff between growth and value include Wal-Mart stores (WMT) and Amazon.com (AMZN). Significant returns can be achieved from slower, mature growth companies like Wal-Mart if purchased at the right prices, but multi-bagger home-run returns (i.e., more than doubling) require high octane growth from the likes of global internet platform companies. Multi-bagger returns from companies like Amazon, Apple Inc. (AAPL), and others are difficult to find and hold in a portfolio for years, but if you can find a few, these winners can cure a lot of your underperforming sins.
Defining Growth
Fancy software may allow you to isolate those companies registering superior growth in sales, earnings, and cash flows, but finding the fastest growing companies can be the most straightforward part. The analytical heavy-lifting goes into effect once an investor is forced to determine how sustainable that growth actually is, while simultaneously determining which valuation metrics are most appropriate in determining fair value. Some companies will experience short-term bursts of growth from a single large contract; from acquisitions; and/or from one-time asset sale gains. Generally speaking, this type of growth is less valuable than growth achieved by innovative products, service, and marketing.
The sustainability of growth will also be shaped by the type of industry a company operates in along with the level of financial leverage carried. For instance, in certain volatile, cyclical industries, sequential growth (e.g. the change in results over the last three months) is the more relevant metric. However for most companies that I screen, I am looking to spot the unique companies that are growing at the healthiest clip on a year-over-year basis. These recent three month results are weighed against the comparable numbers a year ago. This approach to analyzing growth removes seasonality from the equation and helps identify those unique companies capable of growing irrespective of economic cycles.
Given that we are a little more than half way through Q2 earnings results, there is still plenty of time to find those companies reporting upside fundamental earnings surprises, while also locating those quality companies unfairly punished for transitory events. Now’s the time to sift through the earnings rubble to find the remaining buried stock gems.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients own certain exchange traded funds and WMT, AMZN, AAPL, 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.
Private Equity: Parasite or Pollinator?
In the wild, there exist both parasitic and symbiotic relationships. In the case of blood thirsty ticks that feed off deer, this parasitic relationship differs from the symbiotic association of nectar-sucking bees and pollen-hungry flowers. These are merely a few examples, but suffice it to say, these same intricate interactions occur in the business world as well.
Our economy is a complex jungle of relationships, spanning governments, businesses, consumers, investors, and many intermediaries, including private equity (PE) firms. With the November election rapidly approaching, more attention is being placed on how private equity firms fit into the economic food chain. Figuring out whether PE firms are more like profit-sucking parasites or constructive job creating mechanisms has moved to the forefront, especially given presidential candidate Mitt Romney’s past ties to Bain Capital, a successful private equity firm he founded in 1984.
Currently it is politically advantageous to portray PE professionals as greedy, job-cutting outsourcers – I’m still waiting for the political ad showing a PE worker clubbing a baby seal or plucking the legs off of a Daddy Long Legs spider. While I’d freely admit a PE pro can be just as gluttonous as an investment banker, hedge fund manager, or venture capitalist, simplistic characterizations like these miss the beneficial effects these firms provide to the overall economy. Capitalism is the spine that holds our economy together and has allowed us to grow into the greatest superpower on the planet. Private equity is but a small part of our capitalistic ecosystem, but plays a valuable role nonetheless.
While there are many perspectives on the role of private equity in our economy, here are my views on a few of the hot button issues:
Job Creation: Although I believe PE firms are valuable to our economy, I think it is a little disingenuous of Romney and his supporters to say Bain was a net “job creator” to the tune of 100,000+ jobs during his tenure. The fact of the matter is PE firms’ priority is to create profitable returns for its investors, and if that requires axing heads, then so be it – most PE firms have no qualms doing precisely that. Romney et al point to successes like Staples Inc. (SPLS), Dominos Pizza Inc. (DPZ) and Sports Authority, Inc., where profitability and success ultimately led to job expansion. From my viewpoint, I believe these examples are more the exception than the rule. Not surprisingly, any job losses executed in the early years of a PE deal will eventually require job additions if the company survives and thrives. Let’s face it, no company can cut its way to prosperity in perpetuity.
Competitveness: Weak, deteriorating, or bankrupt companies cannot and will not hire. Frail or mismanaged companies will sooner or later be forced to cut jobs on their own –the same protocol applied by opportunistic PE vultures swarming around. While PE firms typically focus on bloated or ineffective companies, I think the media outlets overemphasize the cost-cutting aspects of these deals. Sure, PE companies cut jobs, outsource functions, and cut benefits in the name of profits, but that alone is not a sustainable strategy. Trimming fat, by replacing complacent management teams, investing in modern software/equipment, expanding markets, and implementing accountability are all paramount factors in making these target companies more efficient and competitive in the long-run.
Financial Markets-Arbiter: At the end of the day, I think the IPO/financial markets are the final arbiters of how much value PE firms create, not only for investors, but also for the economy overall. If greedy PE firms’ sole functions were to saddle companies with massive debts, cut heads off, and then pay themselves enormous dividends, then there would never be a credible exit strategy for investors to cash out. If PE firms are correctly performing their jobs, then they will profitably create leaner more efficient durable companies that will be able to grow earnings and create jobs over the long-term. If they are unsuccessful in this broad goal, then the PE firm will never be able to profitably exit their investment via a corporate sale or public offering.
Bain Banter: Whether you agree with PE business practices or not, it is difficult to argue with the financial success of Bain Capital. According to a Wall Street Journal article, Bain Capital deals between 1984 – 1999 produced the following results:
“Bain produced about $2.5 billion in gains for its investors in the 77 deals, on about $1.1 billion invested. Overall, Bain recorded roughly 50% to 80% annual gains in this period, which experts said was among the best track records for buyout firms in that era.”
Critics are quick to point out the profits sucked up by PE firms, but they neglect to acknowledge the financial benefits that accrue to the large number of pension fund, charity, and university investors. Millions of middle-class American workers, retirees, community members, teachers, and students are participating in those same blood sucking profits that PE executives are slurping down.
Even though I believe private equity is a net-positive contributor to competiveness and economic growth in recent decades, there is no question in my mind that these firms participated in a massive bubble in the 2005-2007 timeframe. Capital was so cheap and abundant, prices on these deals escalated through the roof. What’s more, the excessive amounts of leverage used in those transactions set these deals up for imminent failure. PE firms and their investors have lost their shirts on many of those deals, and the typical 20%+ historical returns earned by this asset class have become long lost memories. Attractive returns do not come without risk.
With the presidential election rhetoric heating up, the media will continue to politicize, demonize and oversimplify the challenges surrounding this asset class. Despite its shortcomings, private equity will continue to have a positive symbiotic relationship with the economy…rather than a parasitic one.
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 SPLS, DPZ, Sports authority, 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.
Investing Holy Grail: Brain or Machine?
Source: Photobucket
Paul Meehl was a versatile academic who held numerous faculty positions, covering the diverse disciplines of psychology, law, psychiatry, neurology, and yes, even philosophy. The crux of his research was focused on how well clinical analysis fared versus statistical analysis. Or in other words, he looked to answer the controversial question, “What is a better predictor of outcomes, a brain or an equation?” His conclusion was straightforward – mechanical methods using quantitative measures are much more efficient than the professional judgments of humans in coming to more accurate predictions.
Those who have read my book, How I Managed $20,000,000,000.00 by Age 32 know where I stand on this topic – I firmly believe successful investing requires a healthy balance between both art and science (i.e., “brain and equation”). A trader who only relies on intuition and his gut to make all of his/her decisions is likely to fall on their face. On the other hand, a quantitative engineer’s sole dependence on a robotic multi-factor model to make trades is likely to fail too. My skepticism is adequately outlined in my Butter in Bangladesh article, which describes how irrational statistical games can be misleading and overused.
As much as I would like to attribute all of my investment success to my brain, the emotion-controlling power of numbers has played an important role in my investment accomplishments as well. The power of numbers simply cannot be ignored. More than 50 years after Paul Meehl’s seminal research was published, about two hundred studies comparing brain power versus statistical power have shown that machines beat brains in predictive accuracy in the majority of cases. Even when expert judgments have won over formulas, human consistency and reliability have muddied the accuracy of predictions.
Daniel Kahneman, a Nobel Prize winner in Economics, highlights another important decision making researcher, Robyn Dawes. What Dawes discovers in her research is that the fancy and complex multiple regression methods used in conventional software adds little to no value in the predictive decision-making process. Kahneman describes Dawes’s findings more specifically here:
“A formula that combines these predictors with equal weights is likely to be just as accurate in predicting new cases as the multiple-regression formula…Formulas that assign equal weights to all the predictors are often superior, because they are not affected by accidents of sampling…It is possible to develop useful algorithms without any prior statistical research. Simple equally weighted formulas based on existing statistics or on common sense are often very good predictors of significant outcomes.”
The results of Dawes’s classic research have significant application to the field of stock picking. As a matter of fact, this type of research has had a significant impact on Sidoxia’s stock selection process.
How Sweet It Is!
In the emotional roller-coaster equity markets we’ve experienced over the last decade or two, overreliance on gut-driven sentiments in the investment process has left masses of casualties in the wake of losses. If you doubt the destructive after-effects on investors’ psyches, then I urge you to check out my Fund Flow Paradox article that shows the debilitating effects of volatility on investors’ behavior.
In order to more objectively exploit investment opportunities, the Sidoxia Capital Management investment team has successfully formed and utilized our own proprietary quantitative tool. The results were so sweet, we decided to call it SHGR (pronounced “S-U-G-A-R”), or Sidoxia Holy Grail Ranking.
My close to two decades of experience at William O’Neil & Co., Nicholas Applegate, American Century Investments, and now Sidoxia Capital Management has allowed me to build a firm foundation of growth investing competency – however understanding growth alone is not sufficient to succeed. In fact, growth investing can be hazardous to your investment health if not kept properly in check with other key factors.
Here are some of the key factors in our Sidoxia SHGR ranking system:
Valuation:
- Free cash flow yield
- Price/earnings ratio
- PEG ratio
- Dividend yield
Quality:
- Financials: Profit margin trends; balance sheet leverage
- Management Team: Track record; capital stewardship
- Market Share: Industry position; runway for growth
Contrarian Sentiment Indicators:
- Analyst ratings
- Short interest
Growth:
- Earnings growth
- Sales growth
Our proprietary SHGR ranking system not only allows us to prioritize our asset allocation on existing stock holdings, but it also serves as an efficient tool to screen new ideas for client portfolio additions. Most importantly, having a quantitative model like Sidoxia’s Holy Grail Ranking system allows investors to objectively implement a disciplined investment process, whether there is a presidential election, Fiscal Cliff, international fiscal crisis, slowing growth in China, and/or uncertain tax legislation. At Sidoxia we have managed to create a Holy Grail machine, but like other quantitative tools it cannot replace the artistic powers of the brain.
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.
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