Posts tagged ‘NBA’

Michael Jordan and Market Statistics

Basketball Match

Basketball is in the air as the NBA playoffs are once again upon us. While growing up in high school, Michael Jordan was my basketball idol, and he dominated the sport globally at the highest level. I was a huge fanatic. Besides continually admiring my MJ poster-covered walls, I even customized my own limited edition Air Jordan basketball shoes by applying high school colors to them with model paint – I would not recommend this fashion experiment to others.

Eventually the laws of age, physics, and gravity took over, as Jordan slowly deteriorated physically into retirement. On an infinitesimally smaller level, I also experienced a similar effect during my 30s when playing in an old man’s recreational basketball league. Day-by-day, month-by-month, and year-by-year, I too got older and slower (tough to believe that’s possible) as I watched all the 20-somethings run circles around me – not to mention my playing time was slashed dramatically. Needless to say, I too was forced into retirement like Michael Jordan, but nobody retired my number, and I still have not been inducted into the Hall of Fame.

“Air Wade” Before Retirement: No Photoshop in 1988, just an optical illusion created by an 8-foot rim.

“Air Wade” Before Retirement: No Photoshop in 1988, just an optical illusion created by an 8-foot rim.

Financial markets are subject to similar laws of science (economics) too. The stock market and the economy get old and tired just like athletes, as evidenced by the cyclical nature of bear markets and recessions. Statistics are a beautiful thing when it comes to sports. Over the long run, numbers don’t lie about the performance of an athlete, just like statistics over the long run don’t lie about the financial markets. When points per game, shooting percentage, rebounds, assists, minutes played, and other measurements are all consistently moving south, then it’s safe to say fundamentals are weakening.

I’ve stated it many times in the past, and I’ll state it again, these are the most important factors to consider when contemplating the level and direction of the stock market (see also Don’t Be a Fool, Follow the Stool).

  • Profits
  • Interest Rates
  • Valuations
  • Sentiment

While the absolute levels of these indicators are important, the trend or direction of each factor is also very relevant. Let’s review these factors a little more closely.

  • Profits: Profits and cash flows, generally speaking, are the lifeblood behind any investment and currently corporate profits are near record levels. When it comes to the S&P 500, the index is currently expected to generate a 2016 profit of $117.47. Considering a recent price closing of 2,092 on the index, this translates into a price-earnings ratio (P/E) of approximately 17.8x or a 5.6% earnings yield. This earnings yield can be compared to the 1.9% yield earned on the 10-Year Treasury Note, which is even lower than the 2.1% dividend yield on the S&P 500 (a rare historical occurrence). If history repeats itself, the 5.6% earnings yield on stocks should double to more than 10% over the next decade, however the yield on 10-year Treasuries stays flat at 1.9% over the next 10 years. The strong dollar and the implosion of the energy sector has put a lid on corporate profits over the last year, but emerging signs are beginning to show these trends reversing. Stabilizing profits near record levels should be a positive contributor to stocks, all else equal.
  • Interest Rates: Pundits have been pointing to central banks as the sole reason for low/negative interest rates globally (see chart below). NEWS FLASH: Central banks have been increasing and decreasing interest rates for decades, but that hasn’t stopped the nearly unabated 36-year decline in interest rates and inflation (see chart below). As I described in previous articles (see Why 0% Rates?), technology, globalization, and the rise of emerging markets is having a much larger impact on interest rates/inflation than monetary policies. If central banks are so powerful, then why after eight years of loose global monetary policies hasn’t inflation accelerated yet? Regardless, all else equal, these historically low interest rates are horrible for savers, but wonderful for equity investors and borrowers.

    Source: Calafia Beach Pundit

    Source: Calafia Beach Pundit

  • Valuations: The price you pay for an investment is one of the, if not the, most important factors to consider. I touched upon valuations earlier when discussing profits, and based on history, there is plenty of evidence to support the position that valuations are near historic averages. Shiller CAPE bears have been erroneously screaming bloody murder over the last seven years as prices have tripled (see Shiller CAPE smells like BS). A more balanced consideration of valuation takes into account the record low interest rates/inflation (see The Rule of 20).
  • Sentiment: There are an endless number of indicators measuring investor optimism vs. pessimism. Generally, most experienced investors understand these statistics operate as valuable contrarian indicators. In other words, as Warren Buffett says, it is best to “buy fear, and sell greed.” While I like to track anecdotal indicators of sentiment like magazine covers, I am a firm believer that actions speak louder than words. If you consider the post-crisis panic of dollars flowing into low yielding bonds – greater than $1 trillion more than stocks (see Chicken vs. Beef ) you will understand the fear and skepticism remaining in investors minds. The time to flee stocks is when everyone falls in love with them.

Readers of Michael Lewis’s book Moneyball understand the importance statistics can play in winning sports. Michael Jordan may not have been a statistician like Billy Beane, because he spent his professional career setting statistical records, not analyzing them. Unfortunately, my basketball career never led me to the NBA or Hall of Fame, but I still hope to continue winning in the financial markets by objectively following the all-important factors of profits, interest rates, valuations, and sentiment.

investment-questions-border

www.Sidoxia.com

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 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.

April 23, 2016 at 5:39 pm 2 comments

LeBron James’s Stock: Buy, Sell, or Hold? (Ticker: LBJ)

The world is watching. With the National Basketball Association (NBA) free agency period officially kicking off on July 1st, frothing-mouthed NBA owners have been released to attack LeBron “King” James in hopes of dragging him back to their home teams. Don’t be surprised to see extensive media footage of paparazzi chasing around a Cadillac Escalade with tinted windows or LeBron’s custom logo’d Ferrari – at least until James officially announces his new team of choice (or reasserts his loyalty to his hometown Cleveland Cavaliers). Stalking one of the greatest professional basketball players of all-time may be fascinating to many, but in the high stakes business of professional sports, LeBron is nothing more than a financial asset being shopped around everywhere from Los Angeles and New Jersey to Miami and New York. So, if LeBron James was a stock, would he be a buy, sell, or hold? And if so, at what price? By the way, his bud, and fellow biased posse member, Warren Buffett, is not eligible to answer these important questions.

Hot IPO Season

Although LeBron is the talk of the town these days, there is a flood of other new contract issuances coming to market. Unlike the stock market, the IPO (Initial Public Offering) and Secondary Offering markets for NBA players is flaming hot this year, with some fresher faces mixing it up with some steely veterans. Beyond LeBron James, you have an incredibly talented cast of characters chasing big bucks, including Dwyane Wade, Chris Bosh, Amar’e Stoudemire, Joe Johnson, Paul Pierce, Ray Allen, Dirk Nowitzki, Yao Ming, Carlos Boozer, Manu Ginobili, Richard Jefferson, and Michael Redd.

Valuation

James is not an unknown commodity like a private start-up company with a limited track record, so valuing LeBron is much easier than sizing up a rookie. What is a 25 year old, two-time MVP phenom, who averages 27.8 points per game, 7.0 rebounds, and 7.0 assists worth?  

Well, what kind of coin are other illustrious players making…for example Kobe Bryant of the Los Angeles Lakers? Even with Bryant’s slightly less dazzling stats (25.3 points per game, 5.3 rebounds, and 4.7 assists), in April he signed a three-year contract extension worth almost $90 million that will keep him in Los Angeles through the 2013-14 season. The comparison isn’t exactly fair, since Bryant, a 12-time All-Star, has been in the league twice as long as James (14 years vs. 7 years) and Bryant also just secured his fifth golden championship ring (versus zero for James).

To get an even better feel on LBJ stock’s comparable analysis, let’s look at the green that other premier players in the league pulled in last season:

1. Tracy McGrady (Houston Rockets): $23.4 million

2. Kobe Bryant (LA Lakers): $23.2 million

3. Jermaine O’Neal (Miami Heat): $22.8 million

4. Tim Duncan (San Antonio Spurs): $22.2 million

5. Shaquille O’Neal (Cleveland Cavaliers): $20 million

6. Dirk Nowitzki (Dallas Mavericks) $19.8 million

    Paul Pierce (Boston Celtics): $19.8 million

8. Ray Allen (Boston Celtics): $19.75 million

9. Rashard Lewis (Orlando Magic): $18.9 million

10. Michael Redd (Milwaukee Bucks): $17 million

Big bucks all these players make, but so sad what they do with it (read Hidden Pro Athlete Train Wreck)

M & A Perspective

Another way of looking at the LBJ free agency circus is from a mergers and acquisition standpoint. Unfortunately, the vast majority of mergers fail (see CNET article). One major reason is the culture dynamics that need to align between the coach, LeBron, and the other supporting cast on the team. Golden state Warrior Latrell Sprewell’s choking of Coach P.J. Carlesimo in 1997 is proof positive of what can go wrong when cultures collide. Another aspect of deal-busters is the tendency for suitors to overpay for acquisition deals, and bake in too optimistic assumptions regarding the target’s capabilities to perform.

On the flip side, some obvious complementary skill-set synergies could mesh nicely if a multi-player deal could be constructed between Chris Bosh (Toronto Raptors), Dwyane Wade…cool name (Miami Heat), and resurrected Coach Pat Riley, also of the Heat.

The Buck Stops in ???

When all is said and done, LeBron’s choice is simple – join the team that offers the best hope of winning a championship. The dollars and cents component of the deal are pretty formulaic due to salary caps and league maximums mandated through the Collective Bargaining Agreement (CBA) between owners and players. As the Associated Press points out, the difference between staying in Cleveland and going elsewhere is around a measly $30 million (easy for me to say):

“James can get perhaps $125 million over six years by staying in Cleveland; $96 million over five years if he goes.”

 

My bottom line is that LBJ’s stock is pricey right now, but well worth the BUY if he ends up in Miami with Wade and Bosh. Unfortunately, a restructuring or 1-time charge in Cleveland will not get the job done (Shaq proved that point), so in the Cavs’ hands James is a sell. On the speculative BUY side, let us please forget I am a biased California native, and not fully dismiss the possibility of the Los Angeles Clippers landing LeBron. Billy Crystal is no iconic Laker fan like Jack Nicholson, but nonetheless with LBJ dressed up in red, white, and blue, Billy would have no trouble recruiting some of his celeb pals to hang courtside with him.

Given all the suitors and scenarios, determining a precise Buy, Sell, or Hold rating can be quite challenging. Information in this epic story is changing by the hour, but based on the current data, I am selling LeBron short in Cleveland, and buying him long in Los Angeles. Kobe, don’t confirm your 6th celebration parade next June just quite yet.

Wade W. Slome, CFA, CFP®  

Plan. Invest. Prosper.  

www.Sidoxia.com 

*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 positions in MSG, 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.

July 2, 2010 at 1:34 am 1 comment

The Hidden Train Wreck – Professional Athlete Portfolios

train-wreck

Need capital for a floating furniture venture? How about an oxygen absorbing skin procedure? Well, if you are having any difficulty, just call an NFL, NBA, or MLB rookie. Even wealthy professional athletes have been impacted by the financial crisis, not to mention the aggressive sales tactics of the investment industry and the players’ poor money management skills. Many players are too busy concentrating on winning games, while their portfolios are suffering losses. The statistics are staggering. Here are the findings, according to an article published in Sports Illustrated earlier this year:

  • “By the time they have been retired for two years, 78% of former NFL players have gone bankrupt or are under financial stress because of joblessness or divorce.”
  • “Within five years of retirement, an estimated 60% of former NBA players are broke.”
  • The divorce rate for pro athletes ranges from 60% to 80%, based on estimates from athletes and agents.
  • “According to the NFL Players Association, at least 78 players lost a total of more than $42 million between 1999 and 2002 because they trusted money to financial advisers with questionable backgrounds.”

These are not old, dementia-suffering widows living in Florida we are talking about, but rather professional athletes, many of which made multi-million fortunes during their playing careers. The article goes out of its way to demonstrate this is not a fringe issue affecting a minority of professional athletes. Numerous examples were provided, including the following:

  • Ten current and former Major League Baseball players, including outfielder Jonny Damon of the New York Yankees, had some of their money tied up in the alleged $8 billion fraud perpetrated by Robert Allen Stanford.
  • Raghib (Rocket) Ismail lost a fortune by investing in excessively risky ventures, including a movie about music label COZ Records; a cosmetics procedure company; a nationwide phone-card dispensing venture; and a framed calligraphy company opened in New Orleans two months before Hurricane Katrina hit.
  • Drew Bledsoe, Rick Mirer and five other NFL retirees each invested a minimum of $100,000 in a failed start-up, which touted “biometric authentication” technology that potentially could replace credit cards with fingerprints. The players eventually sued UBS (the financial-services firm) for allegedly withholding information about the company founder’s criminal history and drug use.
  • Torii Hunter, outfielder for the Los Angeles, invested almost $70,000 in living-room furniture that included inflatable rafts – perfect for those consumers living in flood zones. Suffice it to say, the results did not meet initial expectations.
  • In addition to his legal problems, NFL quarterback Michael Vick filed for Chapter 11 bankruptcy last year partly because he could not repay about $6 million in bank loans that he directed toward a car-rental franchise in Indiana, wine shop in Georgia  and real estate in Canada.
  • Retired NBA forward Vin Baker’s seafood restaurant in Old Saybrook, Connecticut, was foreclosed on in February 2008 due to nearly $900,000 in unpaid loans.
  • “NBA guard Kenny Anderson filed for bankruptcy in October 2005. He detailed how the estimated $60 million he earned in the league had dwindled to nothing. He bought eight cars and rang up monthly expenses of $41,000, including outlays for child support, his mother’s mortgage and his own five-bedroom house in Beverly Hills, Calif.—not to mention $10,000 in what he dubbed “hanging-out money.” He also regularly handed out $3,000 to $5,000 to friends and relatives.”
  • “Former NBA forward Shawn Kemp (who has at least seven children by six women) and, more recently, Travis Henry (nine by nine) have seen their fortunes sapped by monthly child-support payments in the tens of thousands of dollars.”

Besides irresponsible spending, and greedy advisors, contributing factors to all the losses are the “boring” and “unintelligible” nature of securities investments. Professional athletes like to flaunt investments like night clubs and car dealerships – there is a “thrill of tangibility,” according to SI writer Pablo Torre.

Professional athletes are not the only ones suffering losses. Ordinary investors have lost also and are learning it’s not what you make – rather it’s what you preserve and grow. The majority of the athletes do not realize their peak earnings years cover a very brief period, and therefore need to be more prudent with their money management since the windfall moneys must be spread over many years.

Trust is an important but difficult trait to find for many of these athletes since many opportunistic friends, acquaintances, and family members in many cases put their self interests ahead of the professional athlete’s needs. There is no simple formula for intelligent money management, however there are ways for athletes to protect their financial blind spots:

1)      Educate Themselves. Learn the basics of what you are investing in. You may not learn the ins and outs but you can get a basic understanding of the expected return and volatility of your investments. Athletes often forget about diversification as well, “Chronic over-allocation into real estate and bad private equity is the number one problem [for athletes] in terms of a financial meltdown,” Ed Butowsky of Chapwood Investments says.

2)      Trust But Verify. Ronald Reagan famously made those statements decades ago and the principle applies to money too. Many athletes pay tens of thousands of dollars for investment advice, so asking questions is advisable. Specifically, ask how performance is trending versus comparable benchmarks and get a view over multiple time periods.

3)      Avoid Friends and Family. If possible, separating business from friends and family is a wise idea. When emotions mix with money, harmful decisions can damage the athlete’s financial future.

4)      Determine Fees & Commissions. When investing hundreds of thousands, if not millions of dollars, fees and commissions can be substantial; therefore it is imperative for the athletes to know what they are paying their advisors.

5)      Experience Matters. Check out the background of your advisor and determine the licenses and credentials they hold. If you were flying a plane in a heavy storm, you would want an experienced pilot flying the plane, not a flight attendant.

6)      Budget. Establish an investment plan with a sustainable lifestyle that accounts for inflation. As veteran agent Bill Duffy says, whose clients include Suns guard Steve Nash and Nuggets forward Carmelo Anthony, “A pro athlete’s money is supposed to outlive his career. Most players never get that.”

Athletes spend their whole lives trying to make the professional ranks in order to earn the big bucks. Due to their high profile status, financial advisors and trusted individuals prey on the sports figures’ wealth. Unfortunately a majority of the athletes lack the money management skills and discipline to preserve and grow their earned wealth. Perhaps repeatedly shining a light on the dirty under-belly of this tragic problem will prevent future financial train wrecks from occurring. Until then, I guess we’ll just have to sift though the bankrupt remains of inflatable sofa raft companies and liquidation proceeds from failed night clubs.

Read the Complete Sports Illustrated Article Here

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper.

September 23, 2009 at 3:45 am 4 comments


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