The Longer View, Part 1

Here are some posts that have caught my attention over the last month, but I never commented on because of the increase in volatility placed more of a premium on covering current events.

  1. Will we ditch GAAP accounting for IFRS?  Personally, I don’t want to learn a new set of rules, but if it improves our ability to invest in a more global era, then maybe it will be a good thing.
  2. Do we care if we have auditors or not?  BDO Seidman recently got hit for damages of $521 million.  If this damage amount stands, it will bankrupt them, and possibly eliminate the #5 auditor in the US.  My argument here is not over guilt, but merely the size of the award.  That said, if the damage amount stands my solution would be to award 30% of the ownership of BDO Seidman to the plaintiffs.  Let them earn it through shared profits.
  3. Peter Bernstein takes my side in the understating inflation debate.  As I have said before, if you want to smooth inflation, use the median or the trimmed mean, which is more statistically robust than excluding food and energy.
  4. Jeff Matthews comments on how many companies that paid large special dividends, or bought back too much stock are regretting it in this environment.  What should they say to shareholders, but won’t?  I’ve said that for years at RealMoney, but during a boom phase, who listens?
  5. I found it fascinating that private issuances of equity via 144A are exceeding IPOs at present.  Only the big institutions get to invest, and they can only trade it to each other.  I experienced that as a bond manager, but for equities, this is new, and a growing thing.  Question: most trading will then be negotiated block trades as in the bond market.  If a mutual or hedge fund buys one of these 144A issues, how do they price it?  With bonds, it doesn’t usually matter as much, because things usually move slowly, but with equities?
  6. Can we time the value premium?  (I.e., when do we invest in growth versus value?)  The answer seems to be no.  Value strategies work about two-thirds of the time, which makes them dominant, but not so much so as to overcome the more sexy growth investing.  This allows the anomaly to continue.  The end of the article concludes: The bottom line for investors is that the prudent strategy is to ignore the calls to action you hear from Wall Street and the media and adhere to your investment plan. The only actions you should be taking are to rebalance your portfolio and to harvest losses when that can be done in a tax-efficient manner.  I like it.
  7. I’ll say it again.  Be careful with ETNs.  They may have tax advantages versus ETFs, but the hidden risk is that the sponsor of the ETN goes bankrupt, in which case you are a general creditor.  With an ETF, bankruptcy of the sponsor should pose little risk.
  8. Hit me again, please.  If financials didn’t hurt me recently, then it was cyclicals.  Ouch.  Both are at risk, but for different reasons.  Financials, because of a fear of systemic risk.  Cyclicals, because of a fear of a slowdown stemming from an impaired financial system being unwilling/unable to lend.

I’ll try to post on the other half of this on Monday.  Have a great Sunday.