January 25, 2008
Stock Losses in Perspective
From late December until the Federal Reserve's interest rate cut earlier this week, most major stock indices had dropped by 10%-20%. The Progressive Policy Institute estimates that the total worldwide loss in market capitalization was about $9 trillion, which is roughly equal to:
--the combined GDP of China, India, and Southeast Asia combined, or
--the U.S. economy minus southern states, or
--the combined GDP of Germany, Britain, France, Italy, and the Netherlands.
Posted by John at 4:59 AM | Comments (0) | TrackBack
January 20, 2008
Fleeting Benefits from a Delta Merger
Posted by John at 7:46 AM | Comments (0) | TrackBack. . . Any cost reductions, for example, could easily be eaten up by higher wages required to win labor’s support for a deal. And because one big merger could prompt a second — Continental Airlines is expected by many analysts to snap up United, Northwest or another carrier as a defensive gesture against Delta — any advantage provided by a bigger route system might be quickly neutralized.
They are unlikely to win over travelers, too. Big mergers could mean less service to some markets, as a newly combined airline might wipe out thousands of jobs by scaling back at smaller hubs. Fliers could expect a surge in delays as combining operations and computer systems would most likely create service meltdowns.
"A merger almost inevitably is going to cause some service problems,” said Philip A. Baggaley, an analyst at Standard & Poor’s who is dubious on the business benefits of combinations. . . .
December 8, 2007
Air Leaking from the Chinese IPO Bubble?
The Economist ponders whether such is the case:
Posted by John at 12:29 PM | Comments (0) | TrackBackOf the 15 largest offerings to have debuted on the mainland exchanges this year, the share prices of eight are below their first-day close. The most vivid example of the market's gloom was once the most vivid example of its elation. PetroChina, an energy producer, became the most valuable company in the world when its shares more than doubled on its November 5th debut in Shanghai. Since then, its shares have dropped in value by a third and PetroChina has become shorthand for a sucker's trade among angry Chinese punters. More recently, Sinotruk and Sinotrans Shipping also fell below their opening prices on the day of listing, shocking retail investors who had fought for shares in the certain knowledge that every offering could only go up.
November 28, 2007
A Petrodollar Investment Tsumani
As long as oil prices remain about $70 a barrel, McKinsey Global Institute calculates, roughly $2 billion of new petrodollars will enter financial markets every day. [Source: Financial Times] Even with oil prices at $50 a barrel, McKinsey projects petrodollar foreign assets will grow to $5.9 trillion by 2012. (You can find the McKinsey study here.)
Consequently, it's hardly going on a a limb to expect more deals like the Abu Dhabi Investment Authority's $7.5 billion investment in Citicorp and Dubai International Capital's investment in Sony.
Posted by John at 5:16 AM | Comments (0) | TrackBackNovember 9, 2007
How Low Can You Go, GM?
BusinessWeek's Ian Rowley points out that Toyota's expected operating profits for this year exceed the entire market capitalization of General Motors.
Posted by John at 3:30 AM | Comments (0) | TrackBackNovember 7, 2007
PetroChina's Eclipse of Exxon Should Draw Respect, Not Skepticism
The Financial Times compares PetroChina and Exxon, and concludes that the former's eclipse of the present day descendant of John D. Rockefeller's Standard Oil Company is not totally preposterous:
Posted by John at 9:45 AM | Comments (0) | TrackBack. . . A comparison of their recent records, compiled by PFC Energy, a consultancy, does Exxon few favours. While over the past five years the US giant has added 6 per cent to its oil and gas reserves, for example, PetroChina has added 19 per cent.
PetroChina’s reserves are already on a par with Exxon’s, and are set to grow further.
A recent report by Wood Mackenzie, another consultancy, noted that the large Chinese oil companies, including PetroChina, were investing more in exploration and development than many western companies, and said: “Higher domestic spending is starting to provide some payoffs.”
PetroChina’s Nanpu discovery is thought to hold up to 11bn barrels of oil which would make it the biggest oil find in China for decades. . . .
. . . it is getting harder for Exxon, like all the big oil companies, to get access to resources.
PetroChina, with the full backing of the Chinese state behind it, is able to do business in countries such as Venezuela where Exxon cannot or will not go.
It will be many years before PetroChina can match Exxon’s technology and skills, if it ever does, and that will continue to give the American company an edge.
But sceptics would do well to remember that there was a time when people laughed at the idea that Toyota would topple General Motors from its world number-one slot.
November 5, 2007
PetroChina Breathes More Air in China's Stock Market Bubble
PetroChina shares soared in the wake of a share offering on the Hong Kong market, placing a value of more than $1 trillion on the company. PetroChina's market capitalization is not only now twice than of Exxon, the world's second largest company by market cap, but greater than Exxon and General Electric, the world's third largest company, combined. PetroChina's market cap is now also greater than Google, Bank of America, Toyota, and Microsoft combined.
Here's one analyst's assessment of PetroChina's prospects:
Posted by John at 8:05 AM | Comments (0) | TrackBack"Production is static with limited upside for the next three to four years," Grace said. "As for the downstream, the price controls and overall regulatory trend limit the company's earnings." [Bloomberg]
October 23, 2007
The Google Effect
From 2004 to 2006, roughly $19 billion in wealth was monetized from Google employees exercising options and selling shares. That sum is greater than the GDP of Panama, Iceland, or Bahrain. [Source: Mercury News]
Posted by John at 6:03 AM | Comments (0) | TrackBackOctober 19, 2007
Greed, Fear, and a Little Criminal Activity Caused the 1987 Crash
Twenty years ago today, the Dow Jones Industrial Average dropped by 22% in single day, and Donald Luskin explains why it really happened:
Posted by John at 7:36 AM | Comments (0) | TrackBack. . . Before the crash, it was widely discussed among professional investors that the combination of portfolio insurance and program trading could cause a cascading market decline, as each step downward caused portfolio insurance strategies to do more program selling, which in turn would cause a steeper decline, and more selling, and so on.
One especially aggressive head trader on the proprietary trading desk of one particularly aggressive investment bank had followed that discussion, and it gave him an evil idea. What would happen, he wondered, if he started massively short-selling stock index futures, driving the stock market down single-handedly as long as he dared to sell enough contracts -- thus setting off the cascade. Once the cascade was set in motion, he could keep selling, knowing that the portfolio insurers would drive the market lower and lower. Eventually he'd cover his shorts at a huge profit.
It worked. And this man was in a great position to know that it would. His firm acted as broker for all the largest portfolio insurers, including Wells Fargo. So he knew exactly how much the market would have to decline to set off the portfolio insurers' sell programs. In other words, he had inside information. All he had to do to make a fortune was use that information, betray his own clients' trust in his firm, and threaten the world financial system by causing the biggest stock market crash in history. . . .
Wal-Mart on the Wane?
Contrary to what FTC bureaucrats and the anti-business crowd would have us believe, size isn't everything. If anything, in today's competitive world, it may be a liability. Wal-Mart increasingly appears to be an example, along with Microsoft and IBM, to name just two other behemoths whose "dominance" engendered angst, "non-profit" political action committees, and antitrust suits in earlier days. The Wall Street Journal reports on the seeming end of the Wal-Mart era:
. . . Wal-Mart's influence over the retail universe is slipping. In fact, the industry's titan is scrambling to keep up with swifter rivals that are redefining the business all around it. It can still disrupt prices, as it did last year by cutting some generic prescriptions in the United States to $4. But success is no longer guaranteed.
Rival retailers lured Americans away from Wal-Mart's low-price promise by offering greater convenience, more selection, higher quality or better service. Amid the country's growing affluence, Wal-Mart has struggled to overhaul its down-market, politically incorrect image while other discounters pitched themselves as more upscale and more palatable alternatives.
The Internet has changed shoppers' preferences and eroded the commanding influence Wal-Mart had over its suppliers. As a result, American shoppers are increasingly looking for qualities that Wal-Mart has trouble providing. . . .
Read the rest of this extensive article here.
Posted by John at 6:17 AM | Comments (0) | TrackBackSeptember 10, 2007
Change, Change, Change for U.S. Business
A rapidly changing job market is the result of rapid change among employers. Chris Zook, director of global strategy at consulting firm Bain & Co., gives some signposts in an interview with Universia-Knowledge@Wharton:
Bain conducted an extensive analysis of change in the Fortune 500 over the past two decades. We found that 153 of the top 500 companies in 1994 either ended up in bankruptcy or were acquired and integrated into another company. An additional 130 had made fundamental changes in their core strategy. Only one in three survived intact.
Posted by John at 4:32 AM | Comments (0) | TrackBackOverall, the facts are quite sobering:
--Only 1 in 10 companies achieve sustainable growth over a 10-year period.
--Business life spans have plummeted to an average of 14 years.
--CEOs are leaving their jobs twice as often as in previous decades, with today’s average tenure only four years.
--The average period an investor holds a share of common stock has decreased from about eight years to eight months.
--Market leaders are more quickly losing their lead positions.
--Product lifecycles in many industries have shrunk by 70% or more.
In the next decade, we expect the survival rate to approach only one-in-four, as major global forces accelerate the pace of change. . .
. . . Three decades ago, only about 20% of industries could be described as turbulent. Today we estimate it to be 62% . . .
August 9, 2007
China Poised to Become Largest IPO Market for 2007
With China Construction Bank Corp.having hired underwriters and other large IPOs like PetroChina Co. and China Shenhua Energy Co. in the works, China is poised to become the largest market for IPOs this year. Through July, Chinese companies have raised $24.2 billion from IPOs, second only to the United States, with $26.9 billion in proceeds for IPOs here. [See this Wall Street Journal story for further information.]
Posted by John at 6:29 AM | Comments (0) | TrackBackJune 13, 2007
A $150 Billion U.S. Company Built With Talent Acquired Worldwide
Google's Vice President for People Operations, Laszlo Bock, recently testified before a Congressional committee on immigration policies and the "fierce, worldwide battle for talent" which Google and other companies find themselves in. Bock, himself a Romanian immigrant, gives specific examples and a stirring explanation of the very practical and direct benefits of immigration. Take a moment and watch this video:
March 28, 2007
Entrepreneurs are the Heroes of the World
Johan Norberg, whose work I’ve pointed to previously on several occasions, has joined the Cato Institute as a Senior Fellow. In honor, the latest Cato’s Letter reprints a speech Norberg gave to the Cato Club 200 Retreat in 2006, entitled “Entrepreneurs Are the Heroes of the World”. It is a tremendously well-written treatise which you should read in its entirety, and bookmark to re-read periodically. It’s that good.
Here’s as short as excerpt as I could manage; please read the complete speech:
. . . There is a classic work by Joseph Campbell, a book on cultural history called The Hero with a Thousand Faces, about heroes in different cultures. Because Campbell traveled the world by reading books from other continents, he could see that there are heroes in all cultures, in all books, in all eras. We need heroes, because they say something about what our values are, what is good, what is great, what is bad, what we should strive for, and what we should try to avoid.
He saw a common pattern. He thought that in most cultures and in most eras the same kinds of things are seen as heroic. Something big happens, and our hero is forced to go on a journey to fight hostile enemies against all odds with a lack of knowledge of what to do and when and how. But along the way he makes some friends who help him along and give him the knowledge and the inspiration to do what is right.Posted by John at 4:48 AM | Comments (0) | TrackBackThink about that heroic journey once again, and think of the persons I just talked about—people like you,
thinkers, innovators, entrepreneurs. What makes it possible for us to buy equipment and goods from the other side of the world? Entrepreneurs face ancient traditions, political obstacles, taxes, and regulations, but they also have friends—people with access to capital, to knowledge, to other businesses. If they are lucky, entrepreneurs succeed. If not, they learn something new, make it even better the next time, and bring to the community something new that changes lives forever.That is the heroic epic. The entrepreneur is the hero of our world. We do not really need the Frodos, the Luke Skywalkers, or the Buffy the Vampire Slayers. We have the Malcolm McLeans of the world. . . .
Some anti-globalists and people opposed to free trade are now well-paid consultants who sit on the boards of big companies and tell them that what they do is really a bad thing and that they must accept much more corporate social responsibility. In their terms, corporate social responsibility means that what you have done so far is not social. It is not enough to create goods, services, and technologies that increase our life expectancies and save the lives of our children. No, you need to do something more. After making your profit, you need to give something back to society.
Give something back to society? As if the entrepreneurs and capitalists had stolen something that belonged to society that they have to give back! Profit is not something that we have to apologize for. Profit is proof that the capitalist has given something to society that it cherishes more than the material wealth it has given to the businessman. I must emphasize that entrepreneurs should never be grateful for a society that gives them license to act, to dream, to innovate, and to create. I think that we, the society, should be grateful to the entrepreneur and to the businessman for what they do. Entrepreneurs are the heroes of our world—that despite the risks, the hard work, the hostility from society, the envy from neighbors, and state regulations, they keep on creating, they keep on producing and trading. Without them, nothing would be there. . . .
March 1, 2007
A Halt to Overseas IPOs for Chinese SOEs
Press reports indicate that the Chinese government has redirected state-owned companies ready for their IPOs to the Shanghai and Shenzen exchanges, in lieu of Hong Kong and overseas markets, in an attempt to increase the supply of equities and dampen speculation in mainland markets.
Posted by John at 6:04 AM | Comments (0) | TrackBackFebruary 28, 2007
China's Engineered Stock Market Tumble
The 8% percent drops in both the Shanghai and Shenzen stock markets on Tuesday were engineered by a Chinese government worried about excessive speculation ($), notes Stratfor, the Austin-based private intelligence firm. Even after Tuesday’s debacle, Shanghai stocks are up 3% over the past week, stock turnover is up 700% from a year earlier, and the number of traders on Chinese exchanges has risen 134% from just the previous month. In other words, says Stratfor, there’s more to come:
. . . the Chinese believe their exchanges are massively overvalued (hence the engineered crash). They will do this again, and are not (yet) particularly concerned with the international consequences. China planned to dampen its own stock market, not the world's markets. Along with the rest of the world, Beijing did not expect the contagion effect to be so extreme. Yet, for now at least, China's own exchanges are its primary concern, and it will act according to that belief.
Second, everyone else now is going to chew on the fact that Beijing did this intentionally. They will either agree with the Chinese that the exchanges are overvalued and that additional measures are needed, or they will be terrified that Beijing did this intentionally and not care about the reasons. Whether what is sold is a domestic Chinese firm or a foreign firm invested in China does not matter much. Neither does it matter if the stock is on an exchange in China or abroad. Either way, the reaction will be the same: Sell.
Third, trading in 800 of the 1,400 stocks on the Shanghai exchange was suspended during the sudden drops Feb. 27; they have a lot farther to fall, even without any engineered drops caused by panicky selling. . . .
Analysis like this, on a daily basis, is what you get from Stratfor; I encourage you to subscribe to their service if you have any interest at all in global affairs.
Posted by John at 5:36 AM | Comments (0) | TrackBackFebruary 19, 2007
Toyota's Long View
The New York Times Magazine has an extended profile of Toyota which is worth a close reading; the excerpt below is only one selection you could pull from the article to illustrate the difference between how Toyota and the Detroit-based auto companies have operated:
. . . the most obvious example of Toyota’s long view is the Prius hybrid. [Toyota Motor North America President Jim] Press said he believes that every automobile in the U.S. will eventually be a hybrid. I asked how soon. Not in five years, he replied, “but I think at some point in the not-too-distant future.” I asked whether Toyota developed and marketed the technology years ahead of the other major automakers because it possessed better technical skills. Press instead framed the issue as a matter of philosophy. Ten years ago, he said, at about the same time the Prius made its debut, Ford rolled out the huge S.U.V. franchise. “Both of us had the same tea leaves, the same research,” he said. “One of us bet on hybrid, one of us bet on big S.U.V.’s.” In his view, the wisdom of making big S.U.V.’s — Press left unacknowledged that Toyota eventually brought out its own line of S.U.V.’s — seemed dubious: “First of all, long term, is fuel going to get cheaper or more expensive? Is oil going to become more plentiful or less plentiful? Is the air going to become cleaner or more polluted? And so, do you do something proactive and innovative, to be in tune with where society is going? Or do you hold on to where it has been, and then don’t let go, to the bitter end?” It was never a matter of altruism, he seemed to be saying, but an example of how corporations survive in society. “What’s the right thing to do to sustain the ability to sell more cars and trucks?” he asked. The Prius was not about a fast return on investment. It was about a slow and long-lasting one.
By the way, the article also points out some of Toyota’s failures, including its effort over the years to introduce a full-size pickup which captures the fancy of America’s hardcore truck buyers.
Posted by John at 8:52 PM | Comments (0) | TrackBackDecember 11, 2006
Home Depot Set to Make a China Acquisition?
After a considerable period of time and several false starts, Home Depot is set to announce a substantial acquisition in China, according to the Financial Times. The company will reportedly pay $100 million for a majority interest in Tianjin-based HomeWay, which operates 14 home improvement stores in northern China.
Posted by John at 5:38 AM | Comments (0) | TrackBackA Public Company CEO Truly in Sync with His Investors
My friend Sam ("The Bull") Haskell, who does a terrific job from his perch at Sterne Agee following banks around the Southeast, recently led a group of investors visiting banks in the Gulf South region.
The Bull reported the following comment by Rusty Cloutier, CEO of Lafayette, Louisiana-based MidSouth Bancorp: "I can’t give myself a raise, because if you take into account my share ownership, and apply our earnings multiple on the additional expense of the raise, I end up losing money."
I know Rusty, and this comment is not designed for effect; Rusty's the real deal. If all public companies were run with the philosophy underlying this statement, we wouldn't need nearly the number of employees at the Securities and Exchange Commission we have today.
Posted by John at 4:28 AM | Comments (0) | TrackBackNovember 20, 2006
Physician, Heal Thyself
Posted by John at 4:05 AM | Comments (0) | TrackBackThe Securities and Exchange Commission has its own problems over bungled books - with millions in cash slipping through the cracks, and a computer system so vulnerable that hackers can run wild inside Wall Street's watchdog agency.
A critical audit by the Government Accountability Office (GAO) said the SEC has failed to maintain controls in three key areas - security of its computer system, handling of the cash paid in disgorgement and penalties, and keeping track of equipment and assets.
The audit praised the SEC's new chief Chris Cox for fixing most of the SEC's internal control problems from a disastrous audit the prior year, but said the agency still has "significant deficiencies."
Even with Cox's crackdown, the GAO said the SEC still isn't handling its cash correctly. As an example, it said $21 million paid as a disgorgement from an unidentified firm wasn't even recorded on the books, making it difficult to know if penalties are paid or ever collected. . . .
August 5, 2006
Monopolists Don't Make Great Investments
Conventional thinking assumes that greater industry concentration creates pricing power, better margins, and higher share returns. In fact, industry concentration creates lower returns and average stock performance, according to this study:
Firms in more concentrated industries earn lower returns, even after controlling for size, book-to-market, momentum, and other return determinants. Explanations based on chance, measurement error, capital structure, and persistent in-sample cash flow shocks do not explain this finding.
The reason for these findings are probably a combination of complacency and lack of competitive pressure to innovate, say the researchers:
Drawing on work in industrial organization, we posit that either barriers to entry in highly concentrated industries insulate firms from undiversifiable distress risk, or firms in highly concentrated industries are less risky because they engage in less innovation, and thereby command lower expected returns. Additional time-series tests support these risk-based interpretations.
Competition is a good thing, even for investors.
[Thanks to Paul Kedrosky for the pointer.]
Posted by John at 9:32 PM | Comments (0) | TrackBackJuly 26, 2006
Context and Luck in Investing
James Surowiecki, whose financial column in the New Yorker is part of my regular reading routine, sees the recent misfortunes of Airbus and attendant press reports (such as this one) as just another example of our tendency to overlook the role of context and luck in our investment judgments. Read his entire column--it's worth your attention--but here's a short excerpt:
Posted by John at 7:05 AM | Comments (0) | TrackBackPeople are generally bad at accepting the importance of context and chance. We fall prey to what the social psychologist Lee Ross called "the fundamental attribution error"—the tendency to ascribe success or failure to innate characteristics, even when context is overwhelmingly important. In one classic demonstration, people shown a person shooting a basketball in a gym with poor lighting and another person shooting a basketball in a gym with excellent lighting assume that the second person hit more shots because he was a better player. This problem is compounded by the tendency to extrapolate big conclusions from small samples, something that behavioral economists call "the law of small numbers." In the decade or so that Airbus has been a serious competitor to Boeing, this is its first really bad patch, and its difficulties are due mainly to making one bad bet while Boeing made one good one. That’s a minuscule sample size on which to base any kind of conclusion. But this is exactly what we like to do: sports fans assume that a few excellent performances are proof of a player’s underlying ability, while investors assume that a mutual fund’s record over one year is a reliable indicator of the manager’s skill.
Because we underestimate how much variation can be caused simply by luck, we see patterns where none exist. It’s no wonder that management theory is dominated by fads: every few years, new companies succeed, and they are scrutinized for the underlying truths that they might reveal. But often there is no underlying truth; the companies just happened to be in the right place at the right time. In 1999, after all, it was hard to find a business book that didn’t hold up Enron as the embodiment of one important principle or other. . . .
July 25, 2006
Design-Based Investing
Daniel Pink, author of A Whole New Mind, sees design as a critically important part of investing:
To see the future of business, walk into a McDonald's in Columbus, Ohio. In that extraordinarily ordinary Midwestern city (trust me -- I grew up there), Mickey D's has begun rolling out a new look, one that owes to more Greenwich Village cafes than to exurban drive-throughs.
As Chicago Tribune architecture critic Blair Kamin explained recently, "McDonald's is ... transforming its harsh, plastic-heavy interiors into soft, earth-toned places where you might linger with your laptop in an upholstered chair beneath a stylish pendant light."
The Starbucks-ifcation of the golden arches is another indicator of how deeply a design sensibility has seeped into American business. To survive in just about any industry today, you must be literate in design. And that's true for investors, too. . . .
Read the rest of his commentary here.
Posted by John at 8:26 AM | Comments (0) | TrackBackJuly 11, 2006
Invest in Countries That Allow Competition
Don Luskin suggests the following criteria for investing your money around the world:
. . . if you want to bet on long-term growth, bet on countries that are slugging it out in the competitive arena of globalization. Bet on countries that aren't afraid to let Toyota open factories there, or Wal-Mart to open superstores.
Such as, he suggests, the United States. Read his excellent commentary in full to understand the power of productivity in creating investment wealth.
Posted by John at 7:41 PM | Comments (0) | TrackBackMay 15, 2006
Looking at the Headlines to Find Out What Not to Buy
Bill Miller, portfolio manager of the Legg Mason Value Trust, has beaten the market for 15 straight years. He's done so by being consistently contrarian, seeing value where others see disaster and shunning the expensively popular.
Miller's latest commentary should be mandatory reading for anyone who owns any stocks or mutual funds--in other words, just about everybody:
When I saw the front page headline in the Financial Times on April 10, I was momentarily disoriented. "Commodity prices set to soar," it read. My first thought was I read the date wrong, that it was April 1, and this was an April Fool's story. But it was April 10, not April the first.
Then I thought perhaps they had delivered me a copy of the FT from the spring of 1999, when commodities prices were all in the tank and oil sold for $10 a barrel. Reminding the reader that you had predicted the great commodity bull market in 1999 when prices were down and everyone was bearish would be good marketing. But the date was unmistakably 2006. And then I recalled that the FT's sister publication, The Economist, had on its cover in the spring of 1999 the headline "Drowning in oil," saying that despite the price of crude having fallen in half in two years, "$10 might actually be too optimistic. We may be heading for $5." What it did not say, as oil was making its lows, was that the price was set to soar, and that you could make six times your money in the next seven years.
Is it any surprise now that oil is a six-bagger, that copper has quadrupled in the past four years, that silver has tripled in three years, as has sugar, that orange juice has doubled in the past two years, and that after the biggest commodity rally in 50 years, it is NOW that prices are "set to soar" and that pension funds are falling all over themselves to allocate a portion of their assets to commodities? . . .
Posted by John at 4:23 AM | Comments (0) | TrackBackThe excitement and enthusiasm surrounding commodities, and the belief that they will continue to rise, is not surprising. People want to buy today what they should have bought 5 or 6 years ago; call it the 5-year psychological cycle.
Today people want commodities, emerging market, non-US assets, and small and mid-cap stocks. Those were all cheap 5 years ago and had you bought them then you would be sitting on enormous gains. But 5 or 6 years ago, everyone wanted tech and Internet and telecom stocks, and venture capital and US mega caps. The time to buy them was in 1994 or 1995, when they were cheap. But in 1994 or 1995, people wanted banks and small and mid caps, which should have been bought in 1990, and well, you get the picture.
In general, you can get a good sense of what to buy now by looking to see what the worst performing assets or groups were over the past five or six years. That is long-term for most people, and long enough to convince them that the malaise is permanent and to have migrated their money elsewhere, such as to whatever has done best in the past 5 or 6 years.
Given the choice of buying Commodities with a capital C, or buying capital C -- Citigroup -- at current prices, I'll take the latter. Check back in 5 years.
April 29, 2006
Rushing Into Emerging Markets
Inflows to emerging market funds surpassed the record £20bn total [roughly $36.5 billion] for the whole of 2005 in the first 13 weeks of 2006. [Source: Financial Times]
Posted by John at 5:15 AM | Comments (0) | TrackBackMarch 13, 2006
"The Big Lie" About Alignment of Shareholder and CEO Interests
Mark Cuban, in his always entertaining and enlightening blog, has some thoughts worth your attention on what he calls "the Big Lie": the notion that CEO and shareholder interests are aligned:
. . . the concept of CEO and shareholders interest being in alignment because they both own stock is a big lie. The CEO wants to hit the homerun of their career when they take the job, the shareholder just doesn’t want to strike out with their life savings.
His complete post on the subject is worth your attention; it may save some of your life savings.
Posted by John at 9:54 PM | Comments (0) | TrackBackMarch 8, 2006
Spaghetti, General Motors Style
The Wall Street Journal featured a terrific story on today’s front page about how General Motors' bureaucracy has inhibited the company's performance. Reading the entire article, if you have any management responsibilities at all, is so painful your teeth ache by the time you finish. Here’s just a tidbit to save yourself the throbbing:
GM employs 325,000 people, almost as many as the population of Miami itself. At various times there have been as many as six layers of management between top executives in Detroit and those in the field. GM's general manager for the Southeast has 38 teams reporting to him, overseeing relations with the region's 1,400 dealers, among other things.
In addition to these geographic units, the company is divided along functional lines, with global groups overseeing areas such as marketing, product development and human resources. GM calls this "the Matrix." To explain how the two chains of command interact, GM has produced a chart that shows them overlapping in a pattern that resembles a basket weave. . . .
 |
|
The article continues:
It's a system that's confusing even to insiders, especially midlevel employees who often feel as if they have two bosses. Marketing ideas often get lost as they bounce between departments.
The design of GM's corporate headquarters, located in Detroit's Renaissance Center, reflects this bureaucratic inertia. Its four towers resemble massive, steel grain silos. To find colleagues in different departments, employees must sometimes take elevators to the ground floor and walk around an illuminated walkway to get to the other towers. New employees and contract workers get lost frequently.
"We are a large company and we are all working independently to make things happen," says Sonia Green, a GM marketing executive charged with helping revive the company's business in Miami. "Unfortunately, we all work in little silos."
Size is not necessarily the issue; silos and layers are. Home Depot, according to their website, actually has more associates than GM.
Look whose recent performance has been impressive enough to merit a BusinessWeek cover story.
Posted by John at 10:44 PM | Comments (0) | TrackBackMarch 7, 2006
You Can't Go Home Again
 |
February 27, 2006
One Bank’s Crocodile Tears over Sarbanes-Oxley
Footnoted.org is a blog all investors in publicly-traded equities should pay attention to; Michelle Leder does a terrific job at proving the devil is indeed in the details. The details, in this case, are the footnotes and generally ignored SEC filings of public companies.
I was particularly amused by her highlighting of the case of Sound Financial, which recently announced it was being acquired by Hudson City Bancorp. In one press account, the cost of Sarbanes-Oxley compliance was cited as the "biggest enemy" of small banks like Sound Financial. In Sound Financial’s case, the amount cited was $500,000.
Seemingly while the bank was being shopped, executives of Sound Financial found the time and money to be able to overhaul employment agreements, benefit plans, and retirement plans and agreements for top officers and directors. The 8-K filing revealing these changes, dated December 8, 2005, contained the term "change of control" 95 times, Leder notes.
Sound Financial announced its sale just two months later. We’ll never know the answer to the question, but I wonder how much shareholder wealth got deducted from Hudson City’s purchase price because of the economics behind that December 8-K filing?
Posted by John at 6:18 AM | Comments (1) | TrackBackFebruary 15, 2006
The Real Cost of Being Public: It Has Nothing to Do with Compliance
A few days ago I was with a senior executive of a privately-held financial services firm which has several different lines of business. The firm, whose shareholders are all employees, just received the findings of a valuation and market analysis they had commissioned.
In the opinion of their outside consultants, this firm would sell at about 12 times earnings if it were publicly traded, based on factors such as comparable company valuations.
Taking each of the firm’s businesses individually and conducting a “sum of the parts” analysis, however, yielded a valuation of 24 times combined earnings.
This private firm’s intrinsic value is double what their outside experts estimate the company would be selling for if they went public.
One of the more interesting findings this firm’s consultants also came back with was the tremendous stability of their earnings in just about any business environment. They’ve been smart enough to assemble a collection of business lines which complement each other quite well in their cyclicality and volatility characteristics.
”It sounds to me like the higher valuation is justified if the earnings stream is really that stable,” I noted.
”Yes,” my friend replied, “but the market won’t pay us for it.”
Needless to say, you won’t be seeing this company in the pubic markets anytime soon.
Much of corporate America loves to yap about how much Sarbanes-Oxley is costing them. The cost of going public is often not fully captured by the cost of Sarbanes-Oxley compliance, public filings, or dealing with outside investors.
The true cost to them is not getting the valuation a reasoned, objective analysis says is justified. That cost, for this particular firm, is tens of millions of dollars to its shareholders as a whole. Such an amount dwarfs the out of pocket compliance costs.
It’s worth thinking about—quite seriously—if you’re a private company considering the IPO leap.
Posted by John at 10:11 PM | Comments (0) | TrackBackFebruary 12, 2006
Home Depot in Talks to Buy in China
Home Depot appears poised to make its first acquisition in China, according to the Financial Times ($):
Posted by John at 11:56 PM | Comments (0) | TrackBackHome Depot, the world's biggest do-it-yourself group, is in talks to acquire a large stake in Orient Home, one of China's largest DIY chains. An agreement would mark the US group's entry into the $50bn (£29bn) Chinese home improvement market.
People close to the situation said the US group was in talks to acquire up to 49 per cent in Orient Home from its parent, the Chinese conglomerate Orient Group, for more than $200m.
The acquisition of the holding in the Chinese group, which plans to increase its chain of warehouse-like stores from 27 to more than 100 by 2010, would represent Home Depot's first foray into Asia. . . .
February 9, 2006
A Possible Sale of Univision: It All Makes Sense
Is it any wonder Univision is "exploring strategic alternatives?" Not when you add up the following:
--What better time to reap the rewards of a business with an 85% share of the U.S. Hispanic television market and 69 radio stations in 16 of the top 25 Hispanic markets? Exceedingly few businesses (even fewer in media) maintain such market shares indefinitely.
--The Hispanic segment is one of the few in traditional media which could be described as "dynamic."
--Private equity money abounds.
--The caterpillars are munching.
Posted by John at 5:55 PM | Comments (0) | TrackBackFebruary 4, 2006
Large Public Companies Give Human Capital Lip Service, if That
Mercer Human Resource Consulting did an analysis over two years of the 100 largest publicly traded companies. What they found regarding those companies attitudes toward their human capital is telling.
Only 20% of the companies studied discuss human capital and its role in the company’s success in their annual reports. Only one-quarter of companies give limited references to their people, while the remainder do not even metion their people.
Other findings from the study:
--Of those companies that do report on human capital, the information typically focuses on simple payroll or wage statistics.
--About a quarter of the companies offer platitudes ("our people are our greatest asset") or a few lines about the caring nature of the organization.
--Even when employees are discussed, the annual reports usually fail to provide hard facts about how the companies’ practices for managing human capital drive business results.
The results from the Mercer study are not only indicative of management’s view of their people. Management’s attitudes, reflected in their communication with investors, are also indicative of what they perceive their shareholders think is important. Annual reports, after all, are annual reports to shareholders.
If Wall Street demanded it, companies would report on their human assets. Wall Street doesn't give a damn.
(Thanks to Fast Company and Consultant-news.com for the pointer.)
Posted by John at 3:26 PM
| Comments (0)
| TrackBack
January 29, 2006
Wall Street's Bonuses Equal the GDP of Afghanistan
Wall Street’s 2005 bonuses equaled $21.5 billion, spread among 172,000 people. This amount equals the GDP of Afghanistan in 2004, a country with a population of 30 million.
Wall Street’s bonus pool for last year also exceeds the GDP of two-thirds of the world’s countries.
[From the Baltimore Sun; thanks to Under the Counter for the pointer.]
Posted by John at 1:57 PM | Comments (0) | TrackBackJanuary 28, 2006
Please Don't Confuse Me with Facts--My Emotion Circuits are Fully Illuminated
Just in case you need proof that much of what passes for political debate in the U.S. is more heat than light, researchers at Emory University have it for you. LiveScience.com reports:
Democrats and Republicans alike are adept at making decisions without letting the facts get in the way, a new study shows.
And they get quite a rush from ignoring information that's contrary to their point of view.
Researchers asked staunch party members from both sides to evaluate information that threatened their preferred candidate prior to the 2004 Presidential election. The subjects' brains were monitored while they pondered. . . .
"We did not see any increased activation of the parts of the brain normally engaged during reasoning," said Drew Westen, director of clinical psychology at Emory University. "What we saw instead was a network of emotion circuits lighting up, including circuits hypothesized to be involved in regulating emotion, and circuits known to be involved in resolving conflicts." [Emphasis mine]
The test subjects on both sides of the political aisle reached totally biased conclusions by ignoring information that could not rationally be discounted, Westen and his colleagues say.
Then, with their minds made up, brain activity ceased in the areas that deal with negative emotions such as disgust. But activity spiked in the circuits involved in reward, a response similar to what addicts experience when they get a fix, Westen explained.
The study points to a total lack of reason in political decision-making.
"None of the circuits involved in conscious reasoning were particularly engaged," Westen said. "Essentially, it appears as if partisans twirl the cognitive kaleidoscope until they get the conclusions they want, and then they get massively reinforced for it, with the elimination of negative emotional states and activation of positive ones."
Notably absent were any increases in activation of the dorsolateral prefrontal cortex, the part of the brain most associated with reasoning. . . .
This research is a warning to all decision-makers, not the least of which are investors. It's important to know whether you're interpreting facts, or whether your network of emotion circuits are lit. The latter can cost you a lot of money.
Posted by John at 10:22 AM | Comments (0) | TrackBackJanuary 24, 2006
In Investing, Past is Not Prologue, Size is Not Strength
Michael Moe over at ThinkBlog points out, in a highly effective way, that past is not prologue in investing, particularly in the stock market. The accompanying chart is just one illustration of his point.
 Number of Companies Among the 100 Largest in Market Capitalization, 1925 & 2005 |
You think financial services might be as well represented in the top market cap companies a decade from now? What about healthcare and pharmaceuticals?
It’s worth actively considering, particularly if you seriously believe that Bank of America’s market capitalization, for example, is a sign of strength. (Just to pick on one beached whale of banking who offered quite an anemic earnings report on Monday.)
Posted by John at 5:15 AM | Comments (0) | TrackBackJanuary 17, 2006
Jimmy Appleseed
One more nugget from my recent conversation with Jimmy Tallent: "If I’m not plowing back a few percentage points of current year growth into the business something’s wrong. The long-term best interest of the shareholder is that I grow at 13% instead of 15% or 16%. If I’m growing at 16% I may not be doing my job."
These few sentences help explain a premium multiple in banking. It could be any industry.
What Jimmy was referred to is the need, in his mind, to reinvest earnings back into the business in the form of people. As we noted in another post, the business will follow good bankers.
Hiring a banker or group of bankers with a good book of business can bring a very healthy return on investment. It’s generally much better than buying a bank and paying a hefty control premium.
The problem is that capturing this return involved taking a short term loss. The compensation, office, and other expense associated with hiring a loan officer comes in advance of the business that person brings in. If the banker’s good, the business will come, but it can take some time.
Banks whose strategic revolves around organic growth have to plant people seeds. They have to plant the right seeds, or they’ll get chrysanthemums instead of oak trees. Those seeds have to germinate and grow.
Skilled bankers like Jimmy Tallent (or Tom Hawker, Tim Vaill, or Ronnie Austin, for that matter) understand how to execute a seed planting strategy. They’re willing to exercise patience because they understand that the market pays for organic growth—-for managers who know how to grow a business without acquisitions gimmicks or accounting tricks.
It’s one principle reason why United Community Banks sells at a premium multiple relative to its peers. The market intuitively understands that the company’s true underlying growth rate is understated. Seeds are being planted. The market sees future earnings in incubation.
Call him Jimmy Appleseed.
Posted by John at 7:49 PM | Comments (0) | TrackBackJanuary 6, 2006
Guest Predictions for 2006 from Tom Hawker, Capital Corp. of the West
 |
|
I was delighted that Tom provided a contribution to Tidbits guest predictions for 2006:
Posted by John at 2:26 PM | Comments (0) | TrackBackIn the banking world we can expect further regulatory burdens from the various regulatory bodies aided and abetted by a Congress and SEC that think they can legislate good behavior. Areas of special focus will continue to be Bank Secrecy and Patriot Act along with Elder Abuse (i.e. making banks responsible for reporting any behavior that they deem to be potential abuse—--with no definition!). After Riggs National ignited a fire with Congress and the Regulators in 2004 they addressed BSA with a "take no prisoners" approach. This resulted in the unintended consequence of banks asking small Mom and Pop groceries, gas stations and the like to leave in order to avoid the risk of being offensive to over-zealous regulators. Heat on Congress and Regulators caused a step back in 2005, but expect them to be excited about things like stored value cards being a tool of terrorists. (Imagine buying a pocketful of cards at $50 each when a diamond is much easier to transport and avoid detection!)
There will continue to be consolidation in the banking world with the bigs holding more and more of the percentage of the nation's insured deposits, BofA has in excess of 10% all by themselves. This will spur a continuing effort to do start ups in the hotter markets of the US to deliver personalized service. However, this will not stem the concentration of assets. Wal-Mart will continue to look for a way to own a Non-bank Bank (ILC) to achieve their goal to provide financial services without being regulated by the Federal Reserve. This will continue the debate for separation of banking and commerce with no clear victory in sight for either side.
Interest rates are close to equilibrium, approximately 25-50bp to the top, and a point where there is now room for the Fed to drop if they perceive a decline in the economy which I don't see in 2006. Housing, while slowing, has not shown a dramatic decline from rising rates and remains at historically high levels. After all, we are still 200+ bp below the averages over the last 20-30 years. In California, for all the hype of a "bubble" in pricing, it is more likely a small blister that will slow, but not reverse gains.
We are in the mid-second term of the President and prospective candidates for 2008 will be gearing up for their runs. Hang on to your wallets.
January 4, 2006
Guest Predictions for 2006 from Tim Vaill, Boston Private Financial Holdings
 |
|
Tim and I have something in common: on weekends we follow our wives around helping tend to their horses. I believe that the man who gets horse poop on his boots when his tie is off is a guy you can trust and count on. Tim’s a walking example of this principle.
I’m always interested in what Tim’s got to say, so I was delighted to receive his contribution to this week’s Tidbits' guest predictions:
--Due to strong corporate profits, a slowing of the rise in interest rates, and the dark cloud on Iraq beginning to lift, the stock market will be up in 2006—approximately 10% on the Dow and S&P. (This is all in the absence of another major domestic terrorist attack.)
--The New England Patriots will beat the Seattle Seahawks 27-13 to win their third straight Super Bowl on February 5th, 2006.
--The yield curve will return to normal proportions by August of 2006. Bank margins will improve in Q3.
--The Boston Red Sox will not even make the playoffs in 2006.
--Between November 7th (election day) and December 31st, 2006, both Mitt Romney and Hilary Clinton will announce their candidacies for President.
--By year-end 2006, China will be within spitting distance of Canada as the #1 exporter to the USA.
--Bush will replace Donald Rumsfield as Secretary of Defense with John McCain by June 30, 2006. McCain’s first move will be to announce a sustained troop reduction in Iraq.
--Mellon Bank will be acquired by AXA Financial, with Kip Condron continuing as the combined CEO of US operations.
--General Motors will come perilously close to filing for bankruptcy but be bailed out by some sort of Congressional action.
--King Kong will win the "Best Picture" in the 2006 Academy Awards.
If you know Tim, you know that the Red Sox prediction was a hard one to have to make.
Posted by John at 5:00 PM | Comments (0) | TrackBackJanuary 2, 2006
In Saudi Arabia, Investors are Partying Like it’s 1999
Courtesy of the San Jose Mercury News:
Posted by John at 5:08 AM | Comments (0) | TrackBackSo many people crush the banks to get on board an initial public offering that the police have to be called out. Some Saudis disappear from work during trading hours, and teachers bring their laptops to class to trade stocks.
Saudis have stock-market mania, and the obsession is as close to gambling as one can get in a kingdom that bans it.
Five years ago, about 50,000 Saudis had dealings with the stock market. Today, there are more than 2 million active investors in a country of 26 million people.
"For some people, it's an addiction that's almost akin to the addiction to the casinos of Las Vegas," said Prince Mohammed Al-Faisal, a businessman.
The index went up by 85 percent in 2004, closing at 8,200 at year's end. This year, it has grown by more than 100 percent. . . .
IPOs generate major excitement. On the first day of the initial public offering for stocks of Yansab, a petrochemicals company, the crowds of potential subscribers were so huge that some banks sought police help to maintain order and break up scuffles.
Economists say inexperienced investors are basing their trading not on the performances of companies but on rumors of what big traders -- known as "hamour," a fish found in the Gulf -- are buying that day. Most traders manage their own portfolios.
Adnan Jaber, economic editor at Al-Watan newspaper, said some people are using the Internet to manipulate investors. A few months ago, an unidentified man began posting messages urging traders to sell or buy stocks based on dreams he'd had about them, he said. . . .
December 29, 2005
Arab Equity Indices the World's Best Performing in 2005
From Bloomberg:
Posted by John at 11:18 PM | Comments (0) | TrackBackEight out of the 10 best-performing stock indexes tracked by Bloomberg News are Arab benchmarks this year, led by Egypt's CASE 30 Index. Most reached records this year. . . .
"Oil and government economic reform in the Middle East is triggering the boom," said Haissam Arabi, head of asset management at Shuaa Capital, which oversees $2.2 billion in United Arab Emirates, Dubai.
The CASE Index has surged 152 percent this year in dollar terms, while the Dubai Financial Market Index has climbed 130 percent. Benchmarks in Saudi Arabia and Jordan have roughly doubled.
The total market value of stocks in Tunisia, the United Arab Emirates, Jordan, Lebanon, Qatar, Kuwait, Oman, the Palestinian Authority, Egypt, Saudi Arabia, Bahrain and Morocco has more than doubled this year to $1.3 trillion, according to data compiled by Bloomberg and statistics from the Palestinian stock exchange.
December 28, 2005
M&A Activity Reaches a Five Year High
Global M&A activity in 2005 has reached $2.9 trillion, up 38% from 2004. Deal volume hasn't been as robust since 2000.
Posted by John at 10:54 PM | Comments (0) | TrackBack