Search Results for: behemoth

Return to Behemoth Stocks

Return to Behemoth Stocks

Posted on by David Merkel

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Photo Credit:?Benh LIEU SONG

Somewhat less than three years ago, I wrote two articles on Behemoth stocks [one, two], which I define as stocks with over $100 Billion of market cap. ?Today I want to revisit those stocks, and those that have joined them. ?The last time I wrote, there were 39 of them actively trading on US Exchanges. ?Now there are 61, for a difference of 22. ?24 stocks are new, and two?have dropped out. ?Let start with those two:

  • Vodapone plc [VOD] sold off its interest in Verizon Wireless to Verizon, creating a lot of value, and returned a lot of capital to shareholders. ?For those of us who were shareholders, I can only say, great job. ?You made Verizon pay up, and you didn’t blow all of the new free capital on suboptimal projects.
  • The stock price of Vale, SA [VALE] has gone down considerably (~40%). ?China is no longer a giant vacuum cleaner for minerals The pace of China’s expansion has slowed, and that has had an impact on base metals producers like Vale.

This highlights three things:

  • In a bull market, once you are big, you tend to stay there.
  • If you want to create value for shareholders as a behemoth, you need to take radical actions that sell off parts of the company, and return capital to shareholders. ?Managements should think, “How can we reorganize the company such that each component part will be better managed, and lines that we aren’t so good at are sold off.”
  • In general, these companies are too large to be taken over; change must come from within. ?Activists will only succeed if the managements let them.

Now let’s look at the new companies, which fall into six main groups: Consumer Oriented, Banks,?Pharmaceuticals,?Information Technology,??Industrials, and??Internet.

Consumer Oriented

  • Anheuser Busch Inbev SA (ADR) [BUD]
  • British American Tobacco PLC [BTI]
  • Comcast Corporation [CMCSA]
  • Home Depot, Inc. [HD]
  • Visa Inc [V]
  • Walt Disney Company [DIS]

Banks

  • Banco Santander, S.A. (ADR) [SAN]
  • Bank of America Corp [BAC]
  • Citigroup Inc [C]
  • Royal Bank of Canada [RY]
  • Westpac Banking Corp (ADR) [WBK]

Pharmaceuticals

  • Amgen, Inc. [AMGN]
  • Bayer AG (ADR) [BAYRY]
  • Gilead Sciences, Inc. [GILD]
  • Sanofi SA (ADR) [SNY]

Information Technology

  • Cisco Systems, Inc. [CSCO]
  • QUALCOMM, Inc. [QCOM]
  • Taiwan Semiconductor Mfg. Co. [TSM]

Industrials

  • Siemens AG (ADR) [SIEGY]
  • United Technologies Corp [UTX]
  • Volkswagen AG (ADR) [VLKAY]

?Internet

  • Amazon.com, Inc. [AMZN]
  • Facebook Inc [FB]

?Energy

  • China Petroleum & Chemical Corp [SNP]

Most of these stocks have become Behemoths as a result of rising earnings and expanding P/E multiples amid the bull market. ?A few, like Facebook and Amazon don’t require much in the way of earnings to support their stock price versus something like an Apple or a Google. ?But let me show you my summary graph regarding now and three years ago for Behemoth stocks:

BEHEMOTH 8-2014_11021_image001

 

Three years ago, 2011-13 earnings were estimated, versus 2014-16 earnings today. ?If you look at 2008-10, you can see the impact of the new stocks on the median P/E of the group as a whole. ?In general, the P/Es of the new Behemoth stocks were higher than those that were already Behemoths three years ago, pulling the median at least one multiple turn higher.

And looking at 2011-13 estimated versus the actual, you can see how much valuations have increased over that period. ?It didn’t happen all at once, but the S&P 500 is ~60% higher now than when I wrote the first two pieces (not counting dividends).

In December 2011 you could consider getting 9-10% earnings yields out of the Behemoths. ?Today, you’re looking at 7%. ?Quite a difference. ?Some of it could be attributed to tighter yield spreads, but not to changes in Treasury yields, which are actually higher now than they were in December 2011.

You aren’t as well-compensated today relative?to BBB corporate yields to play in the Behemoth stocks today. ?Now, the Behemoths may be safer than many other stocks in the market, and are priced at a discount to the market averages, but your absolute margin of safety is lower.

What Can Behemoth Stocks do for You?

  • They can pay you dividends. ?They have relatively protected market niches, and they pay above average dividends — 2.9% on average, and that is with seven that have dividends of less than 1%.
  • They can go down less than other stocks whenever the next bear market?hits.

What Can’t Behemoth Stocks do for You?

  • They can’t grow as rapidly as smaller companies.
  • They can’t be taken over, so improvements from entrenched management teams must come from sweet reason convincing them, rather than barbarians at the gates.

What Could Behemoth Stocks do for You, if Management Teams were Willing to Take Some Chances?

These ideas aren’t likely, because those that manage Behemoth companies like managing these monstrosities, but if they did consider shareholders first:

  • Energy companies would split into upstream, midstream, refining?and retail companies.
  • Conglomerates would divide into more focused companies.
  • Large financial companies would split into companies focused on serving specific markets, realizing that there are few advantages from diversification, and much loss from lack of focus.
  • Companies would segment into slow-growing legacy businesses which can be reliable income vehicles, and the rapidly-growing portions that could be amazing with some focus.
  • Frito-Lay would spin off Pepsi.
  • Procter and Gamble and GE would be even more aggressive about spinning off entities.

The main problem with Behemoths is that they are undermanaged. ?There is only so much a single senior management team can do; the incentives of management teams get rather dull with respect to each division. ?Even the radical decentralization of Berkshire Hathaway can only do so much; a day will come when they will centralize, reorganize and prune, but not while Warren Buffett still leads.

As for me and my clients, we own six of the cheaper Behemoth stocks, comprising ?14% of our holdings, biding our time until I?see better opportunities.

Full Disclosure: Long BRK/B, BP, CVX, SNP, TOT, and WFC

Valuing Behemoths, Redux

Valuing Behemoths, Redux

Posted on by David Merkel

A few things I left out last night.? Here’s a country breakdown for Behemoths trading on US exchanges:

Note: if I had a Bloomberg terminal and could give you global data, this would look much less US-centric.

And, here is a sector and industry breakdown:

Going cell-by-cell, Oil & Gas – Integrated had the largest concentration. The companies were Exxon Mobil Corporation, Royal Dutch Shell plc (ADR), Chevron Corporation, Petroleo Brasileiro SA (ADR), BP plc (ADR), and TOTAL S.A. (ADR).? Oil & Gas Operations was not all that different, and that company was PetroChina.? These are simple companies, as I view them, mining all over the world to find energy for a hungry planet.

Then there is Schlumberger, in the Oil Well Services & Equipment industry.? They are the elephant in their industry, though small compared to the majors, and smaller compared to the national oil companies that control most of the world’s oil resources.

Computer services are IBM and Google, two very different companies.? Software & Programming is Microsoft and Oracle, also very different.? Apple is Computers & Hardware.? Intel is Semiconductors.? The hard question with this group is who is managing their companies to use free cash flow wisely.? This is a maturing industry, and the best companies in the future will treat their capital providers well.

In Healthcare the differences in industries is not worth considering.? The companies are: Johnson & Johnson, Merck, Pfizer, Novartis AG (ADR), Roche Holding Ltd. (ADR), GlaxoSmithKline plc (ADR).? They are all big pharmaceutical developers, though J&J has significant hardware businesses.

Communications Services boils down to China Mobile Ltd. (ADR), AT&T Inc., Vodafone Group Plc (ADR), Verizon Communications Inc.? Big companies pursuing their advantages in the US, UK and China, with wireless dominating over wireline.

As for Retail, that is WalMart.? Who else could it be?? No other company in retail is so extensive. The hard question for them is how they move the needle.? Are there no more worlds to conquer, a la Alexander?

Those that call regional banks are not so — JP Morgan and Wells Fargo are Money Center banks.? HSBC (ADR) is as well.

Rounding out the financials are two nontraditional companies — Berkshire Hathaway, and General Electric.? BRK is an insurance company funding an industrial conglomerate.? GE is an industrial company with a finance arm attached to it.

Beverages (Non-Alcoholic) are simple. Coke and Pepsi.? What could be simpler?

The other three in Consumer Non-Cyclical are Unilever N.V. (ADR), Procter & Gamble, and Philip Morris.? It would be very difficult to reverse-engineer the competitive advantages that these companies have built up.

With Metals Mining it is BHP Billiton Limited (ADR), Vale (ADR), and Rio Tinto plc (ADR).? They have become almost an oligopoly for a variety of minerals.

Finally, among auto and truck manufacturers, there is Toyota Motors, a well-run company that has had its share of problems lately.

=-=–==-=-=–=

Most of these companies are likely to be slow growers.? One exception is some of the tech and pharmaceutical companies, where they will fight for new markets versus obsolescence of old markets.? Unless one is an industry expert, hard to see how the battle comes out.

And, as I commented on last night’s piece:

Maynard, that?s a concern of mine as well. Will they dispose of noncore assets attractively? Even slack cash, after a suitable buffer, is noncore. How will management use the free cash flow?

1) Dividends?
2) Small value-creating acquisitions that can be grown organically?
3) Buybacks at discounts to the firm?s private market value?

Those create value, but it is hard to manage a complex company ? so growing via acquisition is tough without overpaying by buying scale, or creating a company that is even more complex, and unmanageable.

That?s why I think management is the key with large companies ? will they make the right capital allocation choices or not?

Tough analysis — but to me it boils down to how shareholder friendly behemoth companies will be. Try to analyze what the main strategies are, and only invest where you think they are managing for the good of shareholders, rather than management.

Full disclosure: my clients are long CVX, PBR, TOT, VOD, WMT, INTC, ORCL

Valuing Behemoths

Valuing Behemoths

Posted on by David Merkel

There have been a lot of articles recently about how cheap the Behemoth stocks are — I define Behemoth stocks as those with over $100 Billion of market capitalization.? At the close on December 2nd, there were 39 of them that trade on US Stock exchanges.

It’s no secret that Behemoth stocks have underperformed.? One example of it comes from looking at the cap-weighted S&P 500 versus the equal-weighted S&P 500 over the last decade.? The larger cap stocks underperformed, particularly the financials, as they ballooned, and popped.

Here is a graph showing how the median P/Es of the current behemoths have declined, and may decline further, if prices don’t rise, but earnings do.

So why have the P/Es of the largest companies compressed? In an environment where low global growth is expected, the biggest companies have felt it most severely.? They are so big that they cannot compensate much for changes in global demand, as opposed to smaller companies that can try to tap markets that they haven’t tapped so far.

For Behemoth companies to achieve large earnings growth, they have to find monster-sized innovations to do so.? Those don’t come along too regularly.? Even for a company as creative as Apple (or Google), it becomes progressively more difficult to create products that will raise earnings by a high percentage quarter after quarter.

As a result it should not be a surprise that Behemoth stocks trade at discounts to the market when global growth prospects are poor.? They have more assets and free cash flow to put to work than is useful in a bad environment.? Not every environment offers large opportunities.

My clients and I own 7 of the 39 Behemoths (18% of assets).? When is it reasonable to own Behemoths?

It makes sense in a period where leverage is expanding, but that’s not now.? It also makes sense to own them when the earnings yield (E/P) exceeds the return on high-yield bonds by 3% or more.? In that case, like Buffett, we look at the stock like a bond, and look for growth in the book value per share to drive the growth in the price.

There is another value driver — I have a saying: “The equity always holds the capital structure option.”? For small companies, they can decide to merge or lever up.? For Behemoth companies they can decide to pay special dividends, buy back stock, or spin off or sell subsidiaries.

I don’t know that the Behemoth companies that I own will do this, but I expect at valuation levels like we are at today, where the prospective earnings yield is 9% or better, there will be enhancements to value and plenty of them.? After all, the Behemoths for the most part don’t face liquidity issues, and most of them have cash flow in excess of investment needs.

But the big payoff may come from Behemoths splitting into smaller companies.? Management abilities peak out after a certain level of asset value… it’s hard to manage Behemoth companies, unless the company is simple — energy companies can grow larger, because it is only a question of more geography.? There is no threat that they need to sell a different product.

As a result of all of this, we should pay much greater attention to how shareholder-friendly the Behemoths are.? Analyze the management teams, and see how willing they might be to take actions that will enrich shareholders.

Personally, I think almost all companies with market caps over $100 billion would perform better if they broke themselves into more logical pieces.

 

Sorted Weekly Tweets

Posted on by David Merkel

Picture Credit: David Merkel, with an assist from the YouImagine AI image generator || Even logos need a vacation every now and then

Investing

  • Hedge funds gave Discord, Stripe, SpaceX and other startups billions. A Bloomberg News analysis shows what they may be worth https://t.co/vBOZSoqyIJ  Far better to write them down, so as to keep an air of honesty. Jan 07, 2023
  • Berkshire Hathaway Could Face a Big Tax Hit if the Bull Market Resumes https://t.co/TIZsdztH9T  This is a proposal that I support: tax the change in unrealized capital gains. In the first year, tax unrealized capital gains. For private equity, an EBITDA tax Jan 07, 2023
  • ARK’s Cathie Wood Isn’t Backing Down. She Explains Exactly Why. https://t.co/7hsvVaV8Ea  An amateur who got lucky for a while, who throws money at companies that generally can’t produce positive free cash flow to reward shareholders. Jan 07, 2023
  • How private markets became an escape from reality https://t.co/ouOZMxC7JT  ‘Investor Cliff Asness wrote recently of the “mind blowing” possibility that investors now knowingly accept lower returns “for the privilege of not being told the prices”.’ Jan 07, 2023
  • Silicon Valley staff rush to offload start-up shares as valuations plummet https://t.co/T6hxfFBzJt  Watch for more deals where a big investor buys in at the last round price, but with additional goodies atached. Jan 07, 2023
  • The Fed needs to jack rates up by 10% right now https://t.co/DbWnztkWNw  “But we’re sure that the good folk at Andreessen Horowitz, Sequoia and Founders Fund have done exhaustive due diligence and been disciplined in their capital allocation.” Jan 07, 2023
  • A tried-and-true investing strategy just turned in one of its worst years ever. But is the strategy dead? Not even close, says @jasonzweigwsj. https://t.co/jWP36ra4DM  80/20 is best for the long haul. 60/40 does about as well as 100/0 but with less volatility Jan 06, 2023
  • If you receive a windfall, should you pay down debt or save for the future? https://t.co/X82JnL6Wp8  It may be a good idea if you have a long time horizon. Valuations are *still* not cheap yet. There is more downside likely after the FOMC stops raising rates. Jan 05, 2023

Politics

  • Kevin McCarthy’s torturous bid for House speaker exemplifies the dysfunctional state of the Republican Party heading into the 2024 presidential race https://t.co/X3BIIk5cRq  Be bold. Want centrist politics? Ban political parties and primaries. Jan 07, 2023
  • South Carolina’s congressional maps will be redrawn after a federal court ruled that the House district lines intentionally split Black neighborhoods https://t.co/iePGQNglOT  District boundaries should be chosen to minimize the length of internal boundaries Jan 06, 2023
  • Why can’t Kevin McCarthy get the votes he needs, and what happens until the standoff is resolved? Here are answers https://t.co/eExsSCCvpZ  Well, who knows? Maybe nothing gets done by Congress, and the government shuts down. The Russians invade Alaska, & the Chinese take Taiwan Jan 05, 2023
  • Representatives Matt Gaetz and Andy Harris, and even a freshman GOP House member, stand to gain from their votes for Kevin McCarthy for speaker https://t.co/QXtkZIUXJD  Somewhat piggish here, problem of a small majority… perhaps the “Freedom Caucus” could do a deal with the Dems Jan 04, 2023
  • Directors who often have little financial expertise are looking after the retirement funds of US public servants. They’re proving to be no match for a system that’s exploded in size and complexity https://t.co/vXZiUcPc33  We do our best to keep investment expertise off the boards. Jan 04, 2023
  • I applied to serve on the Maryland & Howard County Pension Boards as a citizen representative. I am more than a generalist investor; I am an investment actuary. I understand it all. Of course they didn’t choose me. Politics. https://t.co/9FP9JeS9vp  Jan 04, 2023

Science

  • The phenomenon behind California’s double-whammy drought and storms has a name: “hydroclimate whiplash” https://t.co/Z8yUafaHwu  Climate change is getting stretched pretty thin to explain every unusual bit of weather. Jan 08, 2023
  • US Army’s Flow Battery Could Change Military Power https://t.co/malEss9iyc  If this actually works, it would be significant for intermittent power sources Jan 07, 2023
  • Improved Solid-State Batteries for Electric Vehicles Are On The Way https://t.co/gkKCcEKDIt  Still has to be developed to scale, but this could be promising Jan 07, 2023
  • San Francisco is in the path of one of the worst rainstorms yet in a season that has likely left behind $1 billion in damages and losses across California https://t.co/GSDxXdfpTe  At least this will good for the farmers Jan 07, 2023
  • Meet Tree Energy Solutions, a green-hydrogen startup looking to provide low-emission fuels to European companies amid the energy crisis https://t.co/8JCKHUqBe3  This does not make sense. Most projects in this vein are trying to turn NG into hydrogen. Jan 04, 2023
  • Is my study useless? Why researchers need methodological review boards https://t.co/nDKAEgFS2s  It would also help if they reviewed the data & statistical analysis in advance, so that it will be “set in stone” and not arbitrarily modified to get a “significant” result Jan 03, 2023

Companies

  • How Amazon grew an awkward side project into AWS, a behemoth that’s now 4 times bigger than its original shopping business https://t.co/eAg7FtrYkh  Long read, worth it. How an internal project to standardize $AMZN programming became a business for others needing computer services Jan 07, 2023
  • Why Banks Are Losing the War Against Fintechs https://t.co/6NUII7cwNH  This article is really about cultural differences between bankers and programmers. It would pay the banks to teach programmers about banking, then listen to their suggestions once they have learned Jan 05, 2023
  • Southwest’s Biggest Mistake Was Forgetting Its Own Culture https://t.co/6yHLAXawM6  This was coming for a while. On a $LUV flight over a year ago, the crew was openly complaining about the long hours and unpredictability of scheduling. Jan 04, 2023
  • About that $4bn BREIT deal https://t.co/KoBvPE6FCj  You have an opportunity to exit the troubled BREIT. Take the exit, and feed the losses to $BX, the University of CA, and those who are too slow to act. Jan 04, 2023
  • Bank regulators say holding cryptocurrencies is likely inconsistent with safe banking practices https://t.co/lt7wvzuZwv  “Regulators say holding cryptocurrencies is likely inconsistent with safe banking practices.” Keep the two systems separate. Same way we don’t allow FX mismatch Jan 04, 2023

Economics

  • What makes the least sense in Chinese economic policy is trying to maintain residential real estate prices at such high levels, virtually requiring huge amounts of debt to support the prices. Housing is important, but it can’t truly be 70% of the assets of the nation. #3redlines Jan 07, 2023
  • The Fed needs to stop raising rates https://t.co/eFgO1Oc1ti  I used to accuse Bill Gross of “talking his book” when he was at PIMCO, but in this case, I think he hit the nail on the head. Jan 04, 2023
  • Japan’s new benchmark 10-year note brings a fresh headache for the nation’s central bank in its battle against bond bears https://t.co/GtnWVv45eF  Japan risks a situation where something may break. Better to let the 10-yr float. Jan 06, 2023

Financing

  • Wall Street wants capital rules eased to unblock $22tn Treasury market https://t.co/VyNaOGhrr7  This could make sense. Treasuries and cash reserves hit the supplemental leverage ratios disproportionate to their actual riskiness Jan 07, 2023
  • The deal was unusual because of its timing and purpose. Most banks and borrowers were holding off on bringing new deals after a rocky year https://t.co/lYIn3LYbPU  Dividend deals are usually bad investments. Do they think the credit bear cycle is over? Jan 06, 2023
  • “There’s a durable arbitrage built into AAA CLOs. There’s a regulatory arbitrage,” said Sycamore Tree’s Okada. “You’re floating rate, you’re AAA. I’m pounding the table on that trade.” https://t.co/Bpp20OM083  And that will work until it doesn’t Jan 06, 2023

Odds & Ends

  • If you’re looking to earn some extra income, these are the most profitable side hustles https://t.co/A3VDHLIjVu  Useful article Jan 07, 2023
  • Extra pharmacy certification requirements put an unnecessary stigma on abortion medication https://t.co/hPZ4FkO6Tx  Yes, “safe” medicine that kills an unborn child Jan 06, 2023
  • Walgreens plans to seek certification to dispense pills that can induce an abortion, part of a new program through the US FDA to broaden access to the medication https://t.co/VnIunu2BfK  I will be selling my CVS shares. FD: + $CVS Jan 06, 2023
  • The Patriarch Behind Vladimir Putin by @tunkuv https://t.co/hltSakx8fR  This is believable, given the long-term fractious relationship between the Russian and Ukrainian Orthodox Churches. But both are empty ritualism. Jan 04, 2023
  • Pope Francis has been the leader of the Catholic Church for almost 10 years, but he has only been the sole pope in the Vatican since Saturday https://t.co/TxW06Raa9c  Bergoglio is a relativist, similar to a liberal protestant with few absolutes Jan 04, 2023
  • The moves partly stem from a growing consensus among many who work in education that disruptive behavior often reflects underlying mental-health issues such as anxiety, depression and trauma https://t.co/KRbLENCvxW  In-school suspension is effective. So is expulsion. Jan 04, 2023
  • Sam Bankman-Fried has said Alameda prospered until it was tripped up in a crypto crash. Its troubles were much deeper than that. https://t.co/7JrH5fxqnH  Hindsight is 20-20, even for things with a lot of red flags. Jan 04, 2023

Breaking up is hard to do

Posted on by David Merkel

Photo Credit: Chris Blakeley || Always optimistic when things are growing, and in the dumps when it falls apart

Over the years, I have suggested that two firms should break up on a number of occasions: AIG & GE. Both are now in the process of completing their breakups.

The news on GE dropped today, and I was surprised that the media did not pick up on one significant question on the GE breakup. Who gets the insurance liabilities that have been a real pain to GE even after selling off Genworth. As I tweeted:

How could they miss this?

I think I first suggested that GE should break up in a comment in RealMoney’s Columnist Conversation sometime back in 2005, but that is lost in the pre-2008 RealMoney file system, and exists no more. In terms of what I can show I will quote from this old post from 2008:

5) File this under Sick Sigma, or Six Stigma GE is finally getting closer to breaking up the enterprise.? It has always been my opinion that conglomerates dont work because of diseconomies of scale.? As I wrote at RealMoney:

David Merkel
GE Geriatric Elephant
4/27/2007 1:16 PM EDT

First, my personal bias. Almost every firm with a market cap greater than $100 billion should be broken up. I dont care how clever the management team is, the diseconomies of scale become crushing in the megacaps.

Regarding GE in specific, it is likely a better buy here than it was in early 1999, when the stock first breached this price level. That said, it doesnt own Genworth, the insurance company that it had to jettison in order to keep its undeserved AAA rating. Which company did better since the IPO of Genworth? Genworth did so much better that it is not funny. 87% total return (w/divs reinvested) for GNW vs. 28% for GE. A pity that GE IPOed it rather than spinning it off to shareholders

But heres a problem with breaking GE up. GE Capital, which still provides a lot of the profits could not be AAA as a standalone entity and have an acceptable ROE. It would be single-A rated, which would push up funding costs enough to cut into profit margins. (Note: GE capital could not be A-/A3 rated, or their commercial paper would no longer be A1/P1 which is a necessary condition for investment grade finance companies to be profitable.)

Would GE do as well without a captive finance arm (GE Capital)? It would take some adjustment, but I would think so. So, would I break up GE by selling off GE Capital? Yes, and I would give GE Capital enough excess capital to allow it to stay AAA, even if it means losing the AAA at the industrial company, and then let the new GE Capital management figure out what to do with all of the excess capital, and at what rating to operate.

Splitting up that way would force the industrial arm to become more efficient with its proportionately larger debt load, and would highlight the next round of breakups, which would have the industrial divisions go their own separate ways.

Position:none, and I have never understood the attraction to GE as a stock

Over the years, I continued to write about GE and Genworth (I grew bearish over LTC after analyzing Penn Treaty. I was always bearish on mortgage insurance). I never thought either would do well, but I never expected them to do as badly as they did. Optimistic accounting ploys from the Welch years bit into profits of Immelt, as he was forced to reset accruals higher again and again. Overly aggressive financial and insurance underwriting similarly had to be reversed, and losses realized.

After today, all but the successor firm for GE (Aviation) has a chance to do something significant, freed from the distractions of being in a conglomerate. They can focus, and maybe win. As for GE Aviation, because of the insurance liabilities they will probably receive a valuation discount. Maybe they will sacrifice and pay up, selling the liabilities to Buffett with significant overcollateralization.

American International Group

I first suggested that AIG break up back in 2008. Only M. R. Greenberg had the capability of managing the behemoth, and once he was gone, lower level managers began making decisions that Greenberg would have quashed, which led to short-term gains, and larger long-term losses. After AIG was taken over by the Fed, bit-by-bit they began selling off the pieces — Hartford Steam Boiler, ILFC, AIA, Alico (to MetLife), and more. They were left with a portion of the international P&C business, and the domestic life and P&C businesses.

They are now planning on spinning off the domestic life companies, which will leave AIG as a P&C insurer with relatively clean liabilities (They reinsured Asbestos and Environmental with Berkshire Hathaway).

Where do we go from here?

Is there a lesson here? Avoid complexity. Avoid mixing mixing industrial and financial. Avoid mixing life and P&C. (Allstate is finally splitting that.)

That said, there may be another lesson for the future. What of the extremely large companies that are monopolies? Some of them aren’t complex; they just dominate a large area of the economy as monopolies. Governments want to do one of two things with monopolies. They either want to break them up, or turn them into regulated utilities. Why?

The government doesn’t like entities that get almost as powerful as them, so they limit their size, scope, and subject them to regulation. So be aware if you hold some of the largest companies in the US or the world, because governments have their eyes on them, and want them to be subject to the government(s).

Full disclosure: long MET

Index Investing is not Inherently Socialistic

Index Investing is not Inherently Socialistic

Posted on by David Merkel

Photo Credit: Simon Cunningham
Photo Credit: Simon Cunningham

How does capital get allocated to the public stock markets? ?Through the following means:

  • Initial Public Offerings [IPOs]
  • Follow-on offerings of stock (including PIPEs, etc.)
  • Employees who give up wage income?in exchange for stock, or contingent stock (options)
  • Through rights offerings
  • Company-issued warrants and convertible preferred stock, bonds, and bank debt (rare)
  • Receiving equity in exchange for other claims in bankruptcy
  • Issuing stock to pay for the purchase of a private company
  • And other less common ways, such as promoted stocks giving cheap shares to vendors to pay for goods or services rendered. ?(spit, spit)

How does capital get allocated away from?the public stock markets? ?Through the following means:

  • Companies getting acquired with payment fully or partially in?cash. ?(including going private)
  • Buybacks, including tender offers
  • Dividends
  • Buying for cash?company-issued warrants and convertible preferred stock, bonds, and bank debt
  • Going dark transactions are arguable — the company is still public, but no longer has to publish data publicly.

I’m sure there are more for each of the above categories, but I think I got the big ones. ?But note what largely does not matter:

  • The stock price going up or down, and
  • who owns the stock

Now, I have previously commented on how the stock price does have an effect on the actual business of the company, even if the effects are of the second order:

My initial main point is this: capital allocation to?public companies does not in any large way depend on what happens in secondary market stock trading, but on what happens in the primary market, where shares are traded for cash or something else in place of cash. ?When that happens, businessmen make decisions as to whether the cash is worth giving up in exchange for the new shares, or shares getting retired in exchange for cash.

In the secondary market, companies do not directly get any additional capital from?all the trading that goes on. ?Also, in the long run, stocks don’t care who owns them. ?The prices of the stocks will eventually reflect the value of the underlying claims on the business, with a lot of noise in the process.

My second main point is this: as a result, indexing, or any other secondary market investment management strategy does not affect capital allocation much at all. ?Companies going into an?index for the first time typically have been public for some time, and do not issue new shares as a direct consequence of going into the index. ?The price may jump, but that does not affect capital allocation unless the company does decide to issue new shares to take advantage of captive index buyers who can’t sell, which doesn’t happen often.

The same is true in reverse for companies that get kicked out of an index: they?do not buy back?and retire shares as a direct consequence of going into the index. ?They may buy back shares when the price falls, but not because there aren’t indexers in the stock anymore.

So why did I write about this this evening? ?I get an email each week from Evergreen Gavekal, and generally, I recommend it. ?Generally it is pretty erudite, so if you want to get it, email them and ask for it.

In their most recent email, Charles Gave (a genuinely bright guy that I usually agree with) argues that indexing is inherently socialist because you lose discipline in capital allocation, and allocate to companies in proportion to their market capitalization, which is inherently pro-momentum, and favors large companies that have few good opportunities to deploy capital.

I agree that indexing is slightly pro-momentum as a strategy, and maybe, that you can do better if you remove the biggest companies out of your portfolio. ?Where I don’t agree is that indexing changes capital allocation to companies all that much, because no cash gets allocated to or from companies as a result of being in an index. ?As a result, indexing is not an inherently socialistic strategy, as Gave states.

Rather, it is a free-market strategy, because no one is constrained to do it, and it shrinks the economic take of the fund management industry, which is good for outside passive minority investors. ?Let clever active managers earn their relatively high fees, but for most people who can’t identify those managers, let them index.

If indexing did lead to misallocation of capital, we would expect to see non-indexed assets?outperform indexed over the long haul. ?In general, we don’t see that, and so I would argue the indexing is beneficial to the investing public.

I write this as one who makes all of his money off of active value investing, so I have no interest in promoting indexing for its own sake. ?I just agree with Buffett that most people should index?unless they know a clever active manager.

A Different Look at Neglect

A Different Look at Neglect

Posted on by David Merkel

It’s good to look at stocks that not everyone else is looking at. ?A little neglect can be a good thing.

  • Companies that are a little illiquid.
  • Companies with a dedicated shareholder base; they don’t sell at the drop of a hat.
  • Companies with control investors that don’t give outside passive minority investors the short end of the stick.
  • Companies that have odd business models that have most investors ignore them
  • Companies in boring businesses.

Let’s look at this top down, looking at neglect by market sector. ?Days to turn over indicates how rapidly stocks are traded. ?A high number means they trade more slowly.

Sector Market Cap ($M) Dollar Volume ($K) Days to turn over
05 – Consumer Non-Cyclical 1,536,807 7,274,592 211
07 – Financial 3,511,041 16,767,713 209
12 – Utilities 1,051,811 5,348,267 197
06 – Energy 2,425,787 14,781,550 164
02 – Capital Goods 1,253,361 7,882,012 159
08 – Health Care 2,428,969 16,080,916 151
Grand Total 23,817,027 161,861,109 147
01 – Basic Materials 947,830 6,770,631 140
11 – Transportation 594,989 4,279,380 139
03 – Conglomerates 15,805 116,462 136
09 – Services 4,936,835 37,308,869 132
10 – Technology 4,368,575 38,382,921 114
04 – Consumer Cyclical 745,217 6,867,798 109

In general, colder sectors attract more long-term holders. ?Sectors where competitive conditions change more rapidly turn over faster.

An aside before we go on — I excluded from this analysis:

  • Foreign stocks trading on US exchanges
  • Over the counter stocks
  • Stocks with less than $10 million in market cap
  • Exchange traded products

That left me with around 3900 stocks. ?As an aside, stock turnover seems have to increased, and I wonder if high frequency?trading and ETP creation/liquidation might be driving that. ?147 days for an average holding period means stocks trade their entire market capitalization ?around 2.5x per year. ?Cue up the commentary from Buffett and Munger about how most trading in the stock market is wasted effort.

But now let’s look at industries:

Industry Market Cap ($M) Dollar Volume ($K) Days to turn over
0715 – Insurance (Property & Casualty) 632,449 1,730,968 365
0112 – Fabricated Plastic & Rubber 3,298 10,484 315
1206 – Natural Gas Utilities 435,106 1,407,846 309
0506 – Beverages (Non-Alcoholic) 354,710 1,217,841 291
1103 – Air Courier 139,858 505,601 277
0521 – Personal & Household Products 434,008 1,574,389 276
1209 – Water Utilities 17,103 64,198 266
0724 – Money Center Banks 223,336 877,033 255
0524 – Tobacco 272,385 1,170,334 233
0606 – Oil & Gas – Integrated 438,181 1,900,557 231
0957 – Retail (Grocery) 398,981 1,740,963 229
0712 – Insurance (Miscellaneous) 51,749 227,575 227
0218 – Misc. Capital Goods 417,891 1,859,649 225
0975 – Waste Management Services 59,927 283,562 211
0730 – S&Ls/Savings Banks 1,887 9,013 209
1112 – Railroads 186,397 902,219 207
0809 – Major Drugs 227,419 1,135,147 200
0915 – Communications Services 692,373 3,519,894 197
0503 – Beverages (Alcoholic) 52,692 273,645 193
0727 – Regional Banks 1,227,813 6,422,106 191
1030 – Scientific & Technical Instruments 265,595 1,393,898 191
0706 – Insurance (Accident & Health) 247,622 1,310,785 189
0718 – Investment Services 554,225 2,934,362 189
0418 – Footwear 80,706 428,470 188
0512 – Fish/Livestock 1,917 10,383 185
0703 – Consumer Financial Services 405,697 2,203,610 184
0203 – Aerospace and Defense 402,223 2,254,100 178
0960 – Retail (Home Improvement) 169,283 956,876 177
0127 – Misc. Fabricated Products 77,222 439,594 176
0221 – Mobile Homes & RVs 5,297 31,414 169
0612 – Oil Well Services & Equipment 574,292 3,407,144 169
0106 – Chemicals – Plastics and Rubbers 173,053 1,038,370 167
0954 – Retail (Drugs) 230,495 1,417,370 163
1109 – Misc. Transportation 73,963 456,181 162
0103 – Chemical Manufacturing 353,360 2,227,847 159
0709 – Insurance (Life) 166,263 1,052,261 158
0803 – Biotechnology & Drugs 1,613,675 10,424,895 155
1203 – Electric Utilities 599,603 3,876,223 155
0415 – Auto & Truck Parts 203,596 1,324,773 154
0509 – Crops 4,889 31,874 153
0918 – Hotels & Motels 94,044 616,953 152
0609 – Oil & Gas Operations 1,386,175 9,141,482 152
0209 – Construction – Supplies and Fixtures 140,270 934,529 150
1006 – Computer Hardware 72,374 487,123 149
1036 – Software & Programming 1,152,944 7,816,781 147
Grand Total 23,817,027 161,861,109 147
0921 – Motion Pictures 159,568 1,105,864 144
1024 – Electronic Instruments & Controls 182,569 1,279,912 143
0515 – Food Processing 403,598 2,854,143 141
0909 – Business Services 446,084 3,157,933 141
0812 – Medical Equipment & Supplies 436,733 3,130,033 140
0930 – Printing Services 7,170 51,557 139
0109 – Containters & Packaging 81,869 590,633 139
0933 – Real Estate Operations 594,286 4,295,888 138
0206 – Construction & Agricultural Machinery 137,131 991,809 138
0303 – Conglomerates 15,805 116,462 136
0969 – Schools 21,108 160,274 132
1115 – Trucking 44,104 336,398 131
0939 – Rental & Leasing 238,564 1,828,936 130
0130 – Non-Metallic Mining 4,789 37,031 129
0942 – Restaurants 219,661 1,709,208 129
1118 – Water Transportation 32,241 255,920 126
0406 – Appliances & Tools 55,182 456,389 121
0927 – Printing & Publishing 91,943 760,613 121
0133 – Paper & Paper Products 30,855 256,597 120
0936 – Recreational Activities 75,698 643,463 118
0124 – Metal Mining 98,839 864,894 114
0430 – Recreational Products 54,015 474,019 114
0421 – Furniture & Fixtures 31,741 279,508 114
0948 – Retail (Catalog & Mail Order) 266,904 2,421,091 110
0806 – Healthcare Facilities 151,142 1,390,841 109
0121 – Iron & Steel 76,186 704,432 108
0924 – Personal Services 41,546 386,447 108
0403 – Apparel/Accessories 89,378 848,477 105
1018 – Computer Services 1,023,238 9,989,880 102
1003 – Communications Equipment 837,801 8,227,385 102
0972 – Security Systems & Services 8,892 88,979 100
1021 – Computer Storage Devices 124,136 1,290,696 96
0963 – Retail (Specialty Non-Apparel) 216,223 2,271,386 95
0945 – Retail (Apparel) 160,390 1,696,879 95
0906 – Broadcasting & Cable TV 471,387 5,029,758 94
0433 – Textiles – Non-Apparel 11,455 123,789 93
1033 – Semiconductors 670,980 7,309,563 92
0951 – Retail (Department & Discount) 102,849 1,133,640 91
1012 – Computer Networks 14,378 159,288 90
0903 – Advertising 39,473 442,180 89
0409 – Audio & Video Equipment 11,660 130,676 89
0518 – Office Supplies 12,608 141,981 89
0215 – Construction Services 119,782 1,361,922 88
0912 – Casinos & Gaming 109,703 1,259,520 87
0424 – Jewelry & Silverware 6,527 78,568 83
0603 – Coal 27,139 332,366 82
0118 – Gold & Silver 20,871 256,842 81
0115 – Forestry & Wood Products 27,489 343,907 80
1027 – Office Equipment 4,010 51,064 79
0412 – Auto & Truck Manufacturers 189,092 2,548,454 74
0436 – Tires 8,943 126,838 71
0212 – Construction – Raw Materials 30,768 448,589 69
1106 – Airline 118,426 1,823,061 65
0966 – Retail (Technology) 20,283 329,637 62
0427 – Photography 2,923 47,837 61
1015 – Computer Peripherals 20,549 377,330 54

Again, the pattern is more volatile and controversial industries trade more frequently than the more stable industries. ?One one sense, this is obvious, because the stock market can be used for two purposes — investing and gambling. ?Gambling is much more attractive when prices are volatile, and the prospects for making a big win are significant. (Even if the possibility of big losses is high as well. ?Oh well, profits tend to flow to those ?who eliminate the downside.)

Finally, let’s look at individual stocks, segmented by market capitalization.

Behemoth Stocks

Company Ticker Sector Industry Days
Berkshire Hathaway Inc. BRK.A 07 – Financial 0715 – Insurance (Property & Casualty) 6,579
Wal-Mart Stores, Inc. WMT 09 – Services 0957 – Retail (Grocery) 542
Exxon Mobil Corporation XOM 06 – Energy 0609 – Oil & Gas Operations 453
Johnson & Johnson JNJ 08 – Health Care 0803 – Biotechnology & Drugs 427
PepsiCo, Inc. PEP 05 – Consumer Non-Cyclical 0506 – Beverages (Non-Alcoholic) 365
Procter & Gamble Company, The PG 05 – Consumer Non-Cyclical 0521 – Personal & Household Products 362
General Electric Company GE 02 – Capital Goods 0218 – Misc. Capital Goods 353
Wells Fargo & Co WFC 07 – Financial 0727 – Regional Banks 345
Coca-Cola Company, The KO 05 – Consumer Non-Cyclical 0506 – Beverages (Non-Alcoholic) 341
Chevron Corporation CVX 06 – Energy 0606 – Oil & Gas – Integrated 339
         
Comcast Corporation CMCSA 09 – Services 0915 – Communications Services 196
QUALCOMM, Inc. QCOM 10 – Technology 1033 – Semiconductors 193
Citigroup Inc C 07 – Financial 0727 – Regional Banks 175
Cisco Systems, Inc. CSCO 10 – Technology 1003 – Communications Equipment 161
Intel Corporation INTC 10 – Technology 1033 – Semiconductors 146
Bank of America Corp BAC 07 – Financial 0727 – Regional Banks 138
Gilead Sciences, Inc. GILD 08 – Health Care 0803 – Biotechnology & Drugs 123
Amazon.com, Inc. AMZN 09 – Services 0948 – Retail (Catalog & Mail Order) 105
Apple Inc. AAPL 10 – Technology 1003 – Communications Equipment 93
Facebook Inc FB 10 – Technology 1018 – Computer Services 50

The table above lists the biggest stocks — the top ten that are less traded, and the top ten that are most traded. ?No surprises, those that are most traded are more controversial than those that are traded less. ?Also, some companies have investors with control positions, which further slows down trading as most control investors rarely trade.

Large Cap Stocks

Company Ticker Sector Industry Days
Cheniere Energy Partners LP Ho CQH 12 – Utilities 1206 – Natural Gas Utilities 1,709
CNA Financial Corp CNA 07 – Financial 0715 – Insurance (Property & Casualty) 1,647
Icahn Enterprises LP IEP 09 – Services 0963 – Retail (Specialty Non-Apparel) 1,355
Spectra Energy Partners, LP SEP 12 – Utilities 1206 – Natural Gas Utilities 1,190
Enable Midstream Partners LP ENBL 06 – Energy 0606 – Oil & Gas – Integrated 1,166
Cheniere Energy Partners LP CQP 12 – Utilities 1206 – Natural Gas Utilities 1,041
Thomson Reuters Corporation (U TRI 09 – Services 0927 – Printing & Publishing 1,012
Western Gas Equity Partners LP WGP 06 – Energy 0609 – Oil & Gas Operations 969
Enterprise Products Partners L EPD 12 – Utilities 1206 – Natural Gas Utilities 956
Plains GP Holdings LP PAGP 06 – Energy 0612 – Oil Well Services & Equipment 953
         
Citrix Systems, Inc. CTXS 10 – Technology 1036 – Software & Programming 54
United Continental Holdings In UAL 11 – Transportation 1106 – Airline 53
LinkedIn Corp LNKD 10 – Technology 1018 – Computer Services 47
Yahoo! Inc. YHOO 10 – Technology 1018 – Computer Services 47
Whole Foods Market, Inc. WFM 09 – Services 0957 – Retail (Grocery) 45
Micron Technology, Inc. MU 10 – Technology 1033 – Semiconductors 39
CBS Corporation CBS 09 – Services 0906 – Broadcasting & Cable TV 37
Tesla Motors Inc TSLA 04 – Consumer Cyclical 0412 – Auto & Truck Manufacturers 21
Netflix, Inc. NFLX 09 – Services 0906 – Broadcasting & Cable TV 19
Twitter Inc TWTR 10 – Technology 1018 – Computer Services 19

What fascinates me here about the low turnover stocks is the dominance of energy limited partnerships. ?Since they are income vehicles, they don’t trade as much stocks used for speculative gains.

Mid-cap Stocks

Company Ticker Sector Industry Days
CIM Commercial Trust Corp CMCT 09 – Services 0939 – Rental & Leasing 9,382
Crown Media Holdings, Inc CRWN 09 – Services 0906 – Broadcasting & Cable TV 4,333
Clear Channel Outdoor Holdings CCO 09 – Services 0903 – Advertising 2,258
American National Insurance Co ANAT 07 – Financial 0715 – Insurance (Property & Casualty) 1,756
Gamco Investors Inc GBL 07 – Financial 0718 – Investment Services 1,627
Valhi, Inc. VHI 01 – Basic Materials 0103 – Chemical Manufacturing 1,385
OCI Partners LP OCIP 01 – Basic Materials 0103 – Chemical Manufacturing 1,205
Summit Midstream Partners LP SMLP 12 – Utilities 1206 – Natural Gas Utilities 1,199
TFS Financial Corporation TFSL 07 – Financial 0727 – Regional Banks 1,193
Global Partners LP GLP 06 – Energy 0609 – Oil & Gas Operations 1,131
         
FireEye Inc FEYE 10 – Technology 1036 – Software & Programming 21
AK Steel Holding Corporation AKS 01 – Basic Materials 0121 – Iron & Steel 21
Ariad Pharmaceuticals, Inc. ARIA 08 – Health Care 0803 – Biotechnology & Drugs 21
Zillow Inc Z 09 – Services 0933 – Real Estate Operations 20
Trulia Inc TRLA 09 – Services 0909 – Business Services 20
Sunedison Inc SUNE 10 – Technology 1033 – Semiconductors 19
J C Penney Company Inc JCP 09 – Services 0951 – Retail (Department & Discount) 17
SolarCity Corp SCTY 10 – Technology 1033 – Semiconductors 17
GT Advanced Technologies Inc GTAT 10 – Technology 1033 – Semiconductors 15
Yelp Inc YELP 09 – Services 0927 – Printing & Publishing 12

Again. hot stocks with uncertain returns at the bottom, and stocks with more certain prospects at the top. ? Note the income vehicles in the less traded stocks.

Small Cap Stocks

Company Ticker Sector Industry Days
PHI Inc. PHII 06 – Energy 0612 – Oil Well Services & Equipment 13,434
First Mid-Illinois Bancshares, FMBH 07 – Financial 0727 – Regional Banks 10,674
QAD Inc. QADB 10 – Technology 1036 – Software & Programming 8,529
Intermountain Community Bancor IMCB 07 – Financial 0727 – Regional Banks 8,374
Greene County Bancorp GCBC 07 – Financial 0727 – Regional Banks 7,021
Oconee Federal Financial OFED 07 – Financial 0727 – Regional Banks 6,143
Bel Fuse, Inc. BELFA 10 – Technology 1024 – Electronic Instruments & Controls 5,131
PrimeEnergy Corporation PNRG 06 – Energy 0609 – Oil & Gas Operations 4,303
Community Financial Corp TCFC 07 – Financial 0727 – Regional Banks 3,608
Transcontinental Realty Invest TCI 09 – Services 0933 – Real Estate Operations 3,168
         
PowerSecure International, Inc POWR 12 – Utilities 1203 – Electric Utilities 20
Penn Virginia Corporation PVA 06 – Energy 0609 – Oil & Gas Operations 20
Pixelworks, Inc. PXLW 10 – Technology 1033 – Semiconductors 20
IsoRay, Inc. ISR 08 – Health Care 0812 – Medical Equipment & Supplies 18
Quantum Fuel Systems Tech Worl QTWW 04 – Consumer Cyclical 0415 – Auto & Truck Parts 17
Pacific Ethanol Inc PEIX 01 – Basic Materials 0103 – Chemical Manufacturing 17
Glu Mobile Inc. GLUU 10 – Technology 1036 – Software & Programming 15
Achillion Pharmaceuticals, Inc ACHN 08 – Health Care 0809 – Major Drugs 14
Walter Energy, Inc. WLT 06 – Energy 0603 – Coal 14
Plug Power Inc PLUG 10 – Technology 1024 – Electronic Instruments & Controls 8

Look at all of the regional banks amid those that turn over less. ?Look at all of the controversial stocks amid ?those that trade frequently.

Microcap Stocks

Company Ticker Sector Industry Days
Bridgford Foods Corporation BRID 05 – Consumer Non-Cyclical 0515 – Food Processing 20,286
Magyar Bancorp, Inc. MGYR 07 – Financial 0727 – Regional Banks 8,948
Bowl America Incorporated BWL.A 09 – Services 0936 – Recreational Activities 8,599
MSB Financial Corp. MSBF 07 – Financial 0727 – Regional Banks 5,562
Siebert Financial Corp. SIEB 07 – Financial 0718 – Investment Services 5,136
Pathfinder Bancorp, Inc. PBHC 07 – Financial 0727 – Regional Banks 4,764
Jacksonville Bancorp Inc JXSB 07 – Financial 0727 – Regional Banks 4,567
Oak Valley Bancorp(NDA) OVLY 07 – Financial 0727 – Regional Banks 4,363
Howard Bancorp Inc HBMD 07 – Financial 0727 – Regional Banks 4,308
Bay Bancorp Inc BYBK 07 – Financial 0727 – Regional Banks 4,240
         
Hyperdynamics Corporation HDY 06 – Energy 0609 – Oil & Gas Operations 16
InterCloud Systems Inc ICLD 09 – Services 0909 – Business Services 14
BioFuel Energy Corp. BIOF 01 – Basic Materials 0103 – Chemical Manufacturing 10
India Globalization Capital, I IGC 02 – Capital Goods 0215 – Construction Services 8
LiveDeal Inc LIVE 10 – Technology 1018 – Computer Services 8
Giga-tronics, Incorporated GIGA 10 – Technology 1024 – Electronic Instruments & Controls 7
Digital Ally, Inc. DGLY 04 – Consumer Cyclical 0409 – Audio & Video Equipment 5
DARA Biosciences Inc DARA 08 – Health Care 0803 – Biotechnology & Drugs 4
Spherix Inc SPEX 09 – Services 0909 – Business Services 4
USEC Inc. USU 12 – Utilities 1203 – Electric Utilities 3

Look at all of the bitty banks that don’t get traded. ?Perfect for some of my friends who buy and hold such banks, if they can get the trade on. ?And then, look at all of the controversial companies whose stocks trade trade like a spinning top.

I encourage all of my readers to analyze situations where there are fewer eyeballs looking. ?Analyze situations where control investors limit the trading relative to the size of the firm. ?Go where others don’t go, because it is dull. ?Look for advantage where few others do. ?And after that, be willing to hold for a while — years, not months. ?Pay attention as to whether the company has a defensible business model — strong balance sheet, moat versus competition, etc. ?Then look for a reasonable to low price. ?There is the making of a good investment.

Full disclosure: long CVX & BRK/B

A Letter from a Young Investor

A Letter from a Young Investor

Posted on by David Merkel

Before I get to the letter, I recommend reading,?You’re Ready for Retirement, but Your Savings Aren’t by Jonathan Clement, if you have access to the Wall Street Journal. ?Main point: if you can work until age 70, do that, and then retire.

Here’s the letter:

Hi David,

A little background about myself. ?I am a 24-year male, and have been working for a little over a year. ?The only knowledge I have on investing is passive index fund investing through the book Bogleheads.? I don’t really look at my holdings other than to re-balance every year.

I am currently investing for retirement by maxing out a RothIRA, maxing out a 401k? (that allows a Brokerage account) and some in a taxable Vanguard index fund.? My holdings consist of the total stock and total bond market index funds (90/10). From my current positions my portfolio return has been 20.6%. I calculated the return by return = (market_change + dividends) / total_money. I don’t know if this is a correct formula. The time frame of my holdings is from Jan2012 – June2014.?

I went to a finance workshop that my church was hosting and there was a panel of finance experts (CPA, lawyer, financial advisor) that were indirectly encouraging active investing over passive investing through personal anecdotes.?

Looking at my current portfolio performance, I have a hard time seeing the value in spending time in learning how to actively invest and about finance in general. Currently, I do not follow up on business and market news nor am I reading any economic/investing blogs or magazines. Again, my only investing knowledge is from the Bogleheads book, and so I feel that active investing would be a daunting task.?

Do you have a comparison of an active investment portfolio’s returns (that uses your 8 portfolio rules) against an index fund (such as the Vanguard total stock market) during a bull and bear market? ?Also, do you have any advice on where to begin learning about active investing in general? How should one invest for different goals, say investing for retirement in 40 years vs. investing for a home purchase in the Bay Area in 5-10 years? I’m having a hard time seeing how I would balance time in regards to learning about investing, advancing my career through outside studying, serving in my local church, spending time to witness to family, friends and co-workers, and communion with God.? It seems like passive investing is a simpler solution with a decent average long-term return of 7%. I know I am young, have a lot to learn about life and sometimes stubborn in my thinking, so any thoughts and/or advice would be greatly appreciated.

These are the questions I will try to answer:

  1. Should you move to active investing, and are there some alternatives that would allow you gain some of the benefits of active investing, without costing you a lot of time?
  2. Do I have a track record that is publicly available?
  3. Where to learn about active investing?
  4. How should I invest if I want to buy a house in the Bay Area in 5-10 years, and how does that differ from investing for retirement?
  5. Is the time put into learning about investing really worth it when I have so many other social and spiritual commitments?

But ?I will answer them in a different order.

Is the time put into learning about investing really worth it when I have so many other social and spiritual commitments?

You can’t be good at active investing without putting time in at least at the level of a hobby, say, one?hour per day, six days a week. ?When I launched into studying investments at age 27, I already had two advantages — A mother who was self-taught in investing (and beat most mutual fund managers handily), and an academic background in economics and finance (which had its pluses and minuses).

But my commitment to learning about investing was one hour per day, six days a week. ?After 5 years, I was an investment actuary, which was pretty rare at that time. ?After 11 years, I was hired into the investment department of a medium-sized life insurer. ?17 years later, I worked for a notable hedge fund. ?23 years later, I started my own firm.

Now, there were some spillover benefits for serving the church. ?I have served on various boards of my denomination, chairing some of them, but my knowledge of finance has been a benefit to many of them, and I have been able to prevent a wide variety of errors. ?Even this week, a Christian group in western Pennsylvania reached out to me regarding a “too good to be true investment,” and I told them it was likely a fraud. ?There are ways that we can serve the church with such knowledge. ?Brothers and sisters that I know come asking for advice, and I do not turn them down.

Now, all that said — no, it is probably not worth your time to learn about active investing. ?I wrote two articles a while ago taking both sides of the argument:

Decide what you want to emphasize in your life and service to God. ?The church benefits from a few “numbers guys” (as some refer to me in my denomination), but it doesn’t need a lot of them, if the group trusts them, and they are wise and upright.

Should you move to active investing, and are there some alternatives that would allow you gain some of the benefits of active investing, without costing you a lot of time?

I don’t think you have to move to?active management — you might move to some sort of tilt on you passive management, though. ?Over the long run, tilting to value stocks and smaller stocks has been a smart idea. ?Cap-weighted indexes have most of their assets invested in behemoths that like Alexander the Great, have “no more worlds left to conquer.” ?Investing a disproportionate amount passively in mid- and small-cap stocks can be a wise idea, as can passive investing with a value bias. ?Two sides of the issue:

But,?maybe wait a while before you add some mid- and small-cap value index funds… valuations are relatively high for small and mid-cap stocks at present. ?I have a hard time finding truly cheap stocks at present.

Where to learn about active investing?

As for books, you could look through my book reviews, and scan for the word “value.” ?You could visit the website Valuewalk.com; I have to admit I am impressed with what Jacob Wolinsky has done — it is the “go to” site for value investing.

You can also read the letters of notable value investors — Buffett, Klarman, Marks, and more…

How should I invest if I want to buy a house in the Bay Area in 5-10 years, and how does that differ from investing for retirement?

Let me tell you a story. ?My congregation is near DC. ?My congregation asked me to manage the building fund, and for years, I beat the market, but DC area real estate still appreciated faster.

At the same time, many congregations in the denomination, had received buildings for low prices, or virtually free, but those were mostly in rural areas. ?So at prayer meeting in January 2009, after losing a large amount of the building fund, I asked God to drop a building in our lap, as I could not see any way that I would ever do it through my investing, good as it was.

Two months later, we bid on a short sale for a house with a church use permit. ?We had the assets free and clear for it, and closed in May 2009.

Here is my point to you: geographically constrained markets like the Bay Area — there is no good way for the liquid stocks and bonds to keep up with real estate price increases.?Buying a house in the Bay Area is a tough matter, and it might make sense to match assets and liabilities.

You might want to try to buy real estate related assets in the Bay Area — not sure how you could do that, but it would be the investment closest to funding what you want to own.

As for investing for retirement 40+ years from now, maintain a posture of 70-80% risk assets, and 30-20% safe assets. ?I have been 70/30 most of my life. ?Optimal is 80/20, but I take more idiosyncratic risk, and 70/30 just feels better to me. ?My investments are more concentrated, and the cash levels out the jolts.

Do I have a track record that is publicly available?

Yes and no. ?I send it to those who inquire after my services, but I will send you a copy after I publish this. ?I’ve done well, but I know that it might be due to chance. ?That said, my clients get the same investments that I have, so my interests are aligned with them, aside from the fee they pay me. ?I have no other compensation from my investment management.

On Finding Neglected Companies

On Finding Neglected Companies

Posted on by David Merkel

While at RealMoney, I wrote a short series on data-mining. ?Copies of the articles are here: (one, two). I enjoyed writing them, and the most pleasant surprise was the favorable email from readers and fellow columnists. As a follow up, on April 13th, 2005, I wrote an article on analyst coverage — and neglect. Today, I am writing the same article but as of today, with even more detail, and comparisons to prior analyses.

As it was, in my Finacorp years, I wrote a similar piece to this but it has been lost; I can?t find a copy of it, and Finacorp is in the ash-heap of financial firms. (Big heap, that.)

For a variety of reasons, sell-side analysts do not cover companies and sectors evenly. For one, they have biases that are related to how the sell-side analyst’s employer makes money. It is my contention that companies with less analyst coverage than would be expected offer an opportunity to profit for investors who are willing to sit down and analyze these lesser-analyzed companies and sectors.

I am a quantitative analyst, but I try to be intellectually honest about my models and not demand more from them than they can deliver. That’s why I have relatively few useful models, maybe a dozen or so, when there are hundreds of models used by quantitative analysts in the aggregate.

 

Why do I use so few? Many quantitative analysts re-analyze (torture) their data too many times, until they find a relationship that fits well. These same analysts then get surprised when the model doesn’t work when applied to the real markets, because of the calculated relationship being a statistical accident, or because of other forms of implementation shortfall — bid-ask spreads, market impact, commissions, etc.

This is one of the main reasons I tend not to trust most of the “advanced” quantitative research coming out of the sell side. Aside from torturing the data until it will confess to anything (re-analyzing), many sell-side quantitative analysts don’t appreciate the statistical limitations of the models they use. For instance, ordinary least squares regression is used properly less than 20% of the time in sell-side research, in my opinion.

 

Sell-side firms make money two ways.They can make via executing trades, so volume is a proxy for profitability.They can make money by helping companies raise capital, and they won?t hire firms that don?t cover them.Thus another proxy for profitability is market capitalization.

 

Thus trading volume and market capitalization are major factors influencing analyst coverage. Aside from that, I found that the sector a company belongs to has an effect on the number of analysts covering it.

 

I limited my inquiry to include companies that had a market capitalization of over $10 million, US companies only, and no ETFs.

 

I used ordinary least squares regression covering a data set of 4,604 companies. The regression explained 82% of the variation in analyst coverage. Each of the Volume and market cap variables used were significantly different from zero at probabilities of less than one in one million. As for the sector variables, they were statistically significant as a group, but not individually.Here’s a list of the variables:

 

Variable

?Coefficients

?Standard Error

?t-Statistic

?Logarithm of 3-month average volume

?0.57

0.04

?15.12
?Logarithm of Market Capitalization

?(2.22)

0.15

(14.69)
?Logarithm of Market Capitalization, squared

?0.36

0.01

?31.42
?Basic Materials

?(0.53)

0.53

?(1.01)
?Capital Goods

?0.39

0.54

?0.74
?Conglomerates

?(0.70)

1.95

?(0.36)
?Consumer Cyclical

?0.08

0.55

?0.14
?Consumer Non-Cyclical

?(1.40)

0.55

?(2.52)
?Energy

?2.56

0.53

?4.87
?Financial

?0.37

0.48

?0.78
?Health Care

?0.05

0.50

?0.11
?Services

?(0.30)

0.49

?(0.61)
?Technology

?0.82

0.49

?1.67
?Transportation

?2.92

0.66

?4.40
?Utilities

?(1.10)

0.60

?(1.82)

 

In short, the variables that I used contained data on market capitalization, volume and market sector.

An increasing market capitalization tends to attract more analysts. At a market cap of $522 million, market capitalization as a factor adds no net analysts. At the highest market cap in my study, Apple [AAPL] at $469 billion, the model indicates that 11 fewer analysts should cover the company. The smallest companies in my study would have 3.3 fewer analysts as compared with a company with a market cap of $522 million.

 

Market Cap

?Analyst additions

?10.00

?2.30
?30.00

?3.40
100.00

?4.61
300.00

?5.70
522.20

?6.26
?1,000.00

?6.91
?3,000.00

?8.01
10,000.00

?9.21
30,000.00

?10.31
100,000.00

?11.51
300,000.00

?12.61
469,400.30

?13.06

 

The intuitive reasoning behind this is that larger companies do more capital markets transactions. Capital markets transactions are highly profitable for investment banks, so they have analysts cover large companies in the hope that when a company floats more stock or debt, or engages in a merger or acquisition, the company will use that investment bank for the transaction.

 

Investment banks also make some money from trading. Access to sell-side research is sometimes limited to those who do enough commission volume with the investment bank. It’s not surprising that companies with high amounts of turnover in their shares have more analysts covering them. The following table gives a feel for how many additional analysts cover a company relative to its daily trading volume. A simple rule of thumb is that (on average) as trading volume quintuples, a firm gains an additional analyst, and when trading volume falls by 80%, it loses an analyst.

 

Daily Trading Volume (3 mo avg)

Analyst Additions
3 0.6
10 1.3
30 1.9
100 2.6
300 3.2
1,000 3.9
3,000 4.5
10,000 5.2
30,000 5.8
100,000 6.5
300,000 7.1
1,000,000 7.8
3,000,000 8.4
4,660,440 8.7

 

An additional bit of the intuition for why increased trading volume attracts more analysts is that volume is in one sense a measure of disagreement. Investors disagree about the value of a stock, so one buys what another sells. Sell-side analysts note this as well; stocks with high trading volumes relative to their market capitalizations are controversial stocks, and analysts often want to make their reputation by getting the analysis of a controversial stock right. Or they just might feel forced to cover the stock because it would look funny to omit a controversial company.

Analyst Neglect

The first two variables that I considered, market capitalization and volume, have intuitive stories behind them as to why the level of analysts ordinarily varies. But analyst coverage also varies by industry sector, and the reasons are less intuitive to me there.

 

Please note that my regression had no constant term, so the constant got embedded in the industry factors. Using the Transportation sector as a benchmark makes the analysis easier to explain. Here’s an example: On average, a Utilities company that has the same market cap and trading volume as a Transportation company would attract four fewer analysts.

 

Sector ?Addl Analysts ?Fewer than Transports
?Transportation ?2.92
?Energy ?2.56 ?(0.37)
?Technology ?0.82 ?(2.10)
?Capital Goods ?0.39 ?(2.53)
?Financial ?0.37 ?(2.55)
?Consumer Cyclical ?0.08 ?(2.84)
?Health Care ?0.05 ?(2.87)
?Services ?(0.30) ?(3.22)
?Basic Materials ?(0.53) ?(3.46)
?Conglomerates ?(0.70) ?(3.63)
?Utilities ?(1.10) ?(4.02)
?Consumer Non-Cyclical ?(1.40) ?(4.32)

 

Why is that? I can think of two reasons. First, the companies in the sectors at the top of my table are perceived to have better growth prospects than those at the bottom. Second, the sectors at the top of the table are more volatile than those toward the bottom (though basic materials would argue against that). As an aside, companies in the conglomerates sector get less coverage because they are hard for a specialist analyst to understand.

 

My summary reason is that “cooler” sectors attract more analysts than duller sectors. To the extent that this is the common factor behind the variation of analyst coverage across sectors, I would argue that sectors toward the bottom of the list are unfairly neglected by analysts and may offer better opportunities for individual investors to profit through analysis of undercovered companies in those sectors.

Malign Neglect

Now, my model did not explain 100% of the variation in analyst coverage. It explained 82%, which leaves 18% unexplained. Some of the unexplained variation is due to the fact that no model can be perfect. But the unexplained variation can be used to reveal the companies that my model predicted most poorly. Why is that useful? If my model approximates “the way the world should be,” then the degree of under- and over-coverage by analysts will reveal where too many or few analysts are looking. The following tables lists the largest company variations between reality and my model, split by market cap group.

 

Behemoth Stocks

?

Ticker Company Sector Excess analysts
BRK.A Berkshire Hathaway Inc. 07 – Financial (25.75)
GE General Electric Company 02 – Capital Goods (20.47)
XOM Exxon Mobil Corporation 06 – Energy (19.32)
CVX Chevron Corporation 06 – Energy (14.64)
PFE Pfizer Inc. 08 – Health Care (14.57)
MRK Merck & Co., Inc. 08 – Health Care (12.76)
GOOG Google Inc 10 – Technology (11.44)
JNJ Johnson & Johnson 08 – Health Care (11.39)
MSFT Microsoft Corporation 10 – Technology (10.39)
PM Philip Morris International In 05 – Consumer Non-Cyclical (10.21)

?

Too many

?

Ticker Company Sector Excess analysts
V Visa Inc 09 – Services ?2.58
DIS Walt Disney Company, The 09 – Services ?2.95
SLB Schlumberger Limited. 06 – Energy ?4.15
CSCO Cisco Systems, Inc. 10 – Technology ?5.22
QCOM QUALCOMM, Inc. 10 – Technology ?5.34
ORCL Oracle Corporation 10 – Technology ?5.98
FB Facebook Inc 10 – Technology ?8.28
AMZN Amazon.com, Inc. 09 – Services ?9.34
AAPL Apple Inc. 10 – Technology ?10.57
INTC Intel Corporation 10 – Technology ?11.85

?

Large Cap Stocks

?

Ticker Company Sector Excess analysts
SPG Simon Property Group Inc 09 – Services (16.15)
BF.B Brown-Forman Corporation 05 – Consumer Non-Cyclical (16.03)
LUK Leucadia National Corp. 07 – Financial (15.93)
L Loews Corporation 07 – Financial (15.90)
EQR Equity Residential 09 – Services (15.87)
ARCP American Realty Capital Proper 09 – Services (15.75)
IEP Icahn Enterprises LP 09 – Services (15.50)
LVNTA Liberty Interactive (Ventures 09 – Services (15.36)
ABBV AbbVie Inc 08 – Health Care (15.01)
GOM CL Ally Financial Inc 07 – Financial (14.87)

?

Too Many

?

Ticker Company Sector Excess analysts
UA Under Armour Inc 04 – Consumer Cyclical ?16.68
BRCM Broadcom Corporation 10 – Technology ?17.29
RRC Range Resources Corp. 06 – Energy ?17.33
SWN Southwestern Energy Company 06 – Energy ?17.70
RHT Red Hat Inc 10 – Technology ?18.08
NTAP NetApp Inc. 10 – Technology ?19.82
CTXS Citrix Systems, Inc. 10 – Technology ?19.84
COH Coach, Inc. 09 – Services ?20.87
VMW VMware, Inc. 10 – Technology ?21.60
CRM salesforce.com, inc. 10 – Technology ?22.64

?

Mid cap stocks

?

Ticker Company Sector Excess analysts
FNMA Federal National Mortgage Assc 07 – Financial (13.84)
UHAL AMERCO 11 – Transportation (12.23)
O Realty Income Corp 09 – Services (12.06)
CIM Chimera Investment Corporation 07 – Financial (11.49)
SLG SL Green Realty Corp 09 – Services (11.46)
NRF Northstar Realty Finance Corp. 09 – Services (11.34)
FMCC Federal Home Loan Mortgage Cor 07 – Financial (11.14)
EXR Extra Space Storage, Inc. 11 – Transportation (10.97)
KMR Kinder Morgan Management, LLC 06 – Energy (10.94)
CWH CommonWealth REIT 09 – Services (10.51)

?

Too Many

?

Ticker Company Sector Excess analysts
AEO American Eagle Outfitters 09 – Services ?17.00
DRI Darden Restaurants, Inc. 09 – Services ?17.40
RVBD Riverbed Technology, Inc. 10 – Technology ?17.50
CMA Comerica Incorporated 07 – Financial ?17.74
GPN Global Payments Inc 07 – Financial ?18.30
WLL Whiting Petroleum Corp 06 – Energy ?19.67
DO Diamond Offshore Drilling Inc 06 – Energy ?21.57
URBN Urban Outfitters, Inc. 09 – Services ?24.06
RDC Rowan Companies PLC 06 – Energy ?24.48
ANF Abercrombie & Fitch Co. 09 – Services ?26.02

?

 

Small cap stocks

 

Ticker Company Sector Excess analysts
BALT Baltic Trading Ltd 11 – Transportation ?(7.96)
ERA Era Group Inc 11 – Transportation ?(7.45)
PBT Permian Basin Royalty Trust 06 – Energy ?(7.42)
SDR SandRidge Mississippian Trust 06 – Energy ?(7.18)
PHOT Growlife Inc 02 – Capital Goods ?(6.79)
SBR Sabine Royalty Trust 06 – Energy ?(6.74)
CAK CAMAC Energy Inc 06 – Energy ?(6.64)
FITX Creative Edge Nutrition Inc 09 – Services ?(6.57)
BLTA Baltia Air Lines Inc 11 – Transportation ?(6.53)
VHC VirnetX Holding Corporation 10 – Technology ?(6.49)

 

Too many

 

Ticker Company Sector Excess analysts
WLT Walter Energy, Inc. 06 – Energy ?12.19
ANGI Angie’s List Inc 10 – Technology ?12.31
FRAN Francesca’s Holdings Corp 09 – Services ?12.58
ZUMZ Zumiez Inc. 09 – Services ?13.49
GDP Goodrich Petroleum Corp 06 – Energy ?15.02
DNDN Dendreon Corporation 08 – Health Care ?15.89
ACI Arch Coal Inc 06 – Energy ?16.04
HERO Hercules Offshore, Inc. 06 – Energy ?16.19
AREX Approach Resources Inc. 06 – Energy ?17.64
ARO Aeropostale Inc 09 – Services ?20.80

 

Microcap Stocks

 

Ticker Company Sector Excess analysts
SGLB Sigma Labs Inc 06 – Energy ?(6.18)
AEGY Alternative Energy Partners In 10 – Technology ?(5.97)
WPWR Well Power Inc 06 – Energy ?(5.83)
TTDZ Triton Distribution Systems In 10 – Technology ?(5.53)
SFRX Seafarer Exploration Corp 11 – Transportation ?(5.15)
PTRC Petro River Oil Corp 06 – Energy ?(4.99)
UTRM United Treatment CentersInc 08 – Health Care ?(4.82)
BIEL Bioelectronics Corp 08 – Health Care ?(4.80)
DEWM Dewmar International BMC Inc 01 – Basic Materials ?(4.74)
FEEC Far East Energy Corp 06 – Energy ?(4.61)

 

Too many

 

Ticker Company Sector Excess analysts
PRSS CafePress Inc 09 – Services ?3.99
SANW S&W Seed Company 05 – Consumer Non-Cyclical ?4.03
KIOR KiOR Inc 01 – Basic Materials ?4.06
PRXG Pernix Group Inc 02 – Capital Goods ?4.08
EYNON Entergy New Orleans, Inc. 12 – Utilities ?4.17
PARF Paradise, Inc. 05 – Consumer Non-Cyclical ?4.40
SUMR Summer Infant, Inc. 05 – Consumer Non-Cyclical ?4.52
LAND Gladstone Land Corp 05 – Consumer Non-Cyclical ?4.57
JRCC James River Coal Company 06 – Energy ?6.38
GNK Genco Shipping & Trading Limit 11 – Transportation ?7.11

My advice to readers is to consider buying companies that have fewer analysts studying them than the model would indicate.? This method is certainly not perfect but it does point out spots where Wall Street is not focusing its efforts, and might provide some opportunities.

 

 

Full disclosure: long BRK/B & CVX

Sorted Weekly Tweets

Sorted Weekly Tweets

Posted on by David Merkel

Emerging Markets Submerge

 

  • Argentina to Ease Currency Controls After Devaluation http://t.co/pnDs7kHHDb Argentina finally does something smart that will stabilize $$ Jan 25, 2014
  • Contagion Spreads in Emerging Markets as Crises Grow http://t.co/8tQg0o3wEA The Volatility Machine amplifies the tightening of the Fed $$ Jan 25, 2014
  • Traders watching for signs to see if this sell off is the big one http://t.co/EujnhyTV3z Feels like Shanghai Feb2007, market up&then died $$ Jan 25, 2014
  • Stocks Slide Toward Biggest Weekly Drop Since May http://t.co/AJ8JGDmZNl Volatility Machine kicks in, as emerging markets get hammered $$ Jan 25, 2014
  • China Moves to Avert Shadow Lender’s Default http://t.co/X6UnupKats China wants 2 avoid defaults, but what will they do when too big? $$ Jan 25, 2014
  • China Trust Products Gone Awry Evoke Soros Crisis Echoes http://t.co/sMEaYwiS61 Really sounds like China has a lot of Ponzi schemes going $$ Jan 25, 2014
  • China-Dumps-Dollars Hoax Not So Funny http://t.co/nvNpEgGK42 Remember the mercantilists lost. The neomercantilistic Chinese will lose big $$ Jan 25, 2014
  • Argentine Default Chaos Relived as Blackouts Follow Looting http://t.co/EW7kZrzbOa & Argentine Peso Drops http://t.co/nD9qMSJxla A mess $$ Jan 24, 2014
  • Fool’s Gold: Behind Nu Skin’s Chinese Subculture http://t.co/FiwozVHn6y What does the party think about a business that sounds cult-like? $$ Jan 24, 2014
  • Rousseff Debuts at Davos to Assure Investors She Had Spurned http://t.co/YTr84l0eTg Shortly after Dilma elected, I sold Brazilian stocks $$ Jan 22, 2014

 

Energy

 

  • You can?t be sure of Shell ? or shale http://t.co/5n1PLW2msn Behemoth oil companies are like utilities &pay good dividends, meh cap gains $$ Jan 25, 2014
  • Steady oil market at risk from sabotage, instability http://t.co/zHMkSoGlsD This is normal 4 the oil market; no reason to worry $$ Jan 25, 2014
  • Dunno: Polar Pig Deserves Little Blame for Propane Shortage? http://t.co/ehK6qV9cRl I think corporations & individuals should stockpile $$ Jan 24, 2014
  • Quoting Bible, using Joseph stockpiling grain in Egypt, neglects an interpretation rule: u can’t get doctrine from a historical passage $$ Jan 24, 2014
  • Energy is gradually decoupling from economic growth http://t.co/gn09N1yIJH What is really meant is that we continue to get more efficient $$ Jan 24, 2014
  • Valero forecasts 4Q results above expectations http://t.co/NIOthsoMsl Well run company has a surprise beat FD: + $VLO $$ Jan 24, 2014
  • European businesses rushing to find Iran bonanza http://t.co/2258VWxDG9 Greed of businesses overcoming ideology of political allies $$ Jan 24, 2014
  • Megaprojects a megaheadache for oil bosses http://t.co/X3IXqYAVDa Big projects almost always tend to lose $$ Jan 23, 2014
  • How America?s Fracking Boom Helps 2Boost Treasuries Demand http://t.co/lyAXsrmTUo Funny, but when we ran deficits, foreigners bot r bonds $$ Jan 22, 2014

 

Market Impact

  • Gundlach Counting Rotting Homes Makes Subprime Bear http://t.co/SXM2uwxd0Z Gundlach moves on anticipating a bearish housing situation $$ Jan 25, 2014
  • One in Three Audits Fail, PCAOB Chief Auditor Says http://t.co/FCZMp7tGfF No surprise. Some accounting requires intelligence of actuaries $$ Jan 25, 2014
  • How to invest in the hottest stock sectors http://t.co/ZIaKwXmdma I’ve written about this b4. It works, but it flames out occasionally $$ Jan 25, 2014
  • 6 reasons your investments stink http://t.co/4NfbdyIMsm Good asset allocation considers time horizon, & asset class relative valuations $$ Jan 25, 2014
  • 6 flawed rules of personal finance http://t.co/nO5kOsmVsb Generally right, except you shouldn’t spend >4% of your lump sum per year $$ Jan 25, 2014
  • Hard-to-Sell Junk Debt Lures Oaktree to JPMorgan http://t.co/MyJdNpw4Fo I respect Marks; there r no absolute values 2b had in junk debt $$ Jan 24, 2014
  • The mountain without Mohamed http://t.co/joadD6Wp2D Pimco is a “quant shop” which grew too large for the markets that it exploits $$ $TLT Jan 24, 2014
  • Goldman Stocks Strategist Fends Off ?Barrage? After Valuation Call http://t.co/nNCz1syP8m No one ever gets popular opposing a boom. $$ $SPY Jan 24, 2014
  • Bubbles as a deflationary escape chute http://t.co/hiDhyar3aD There are simpler & safer ways to run economic policy. Regulate banks hard $$ Jan 23, 2014
  • Pressure mounts for corporates? cash piles to be put to work http://t.co/WBdUF52rz2 1 corporation’s cash is another corps short-term debt $$ Jan 23, 2014
  • Floating Notes Debut in US as Cash Chases Fewer Securities http://t.co/9On051rHUu This will be good 4 money market funds in the short-run $$ Jan 23, 2014
  • Why IBM Should Stop Buying Its Stock http://t.co/1gsVe7tLpS If you have highest price in the Dow Jones Industrial Avg u get more scrutiny $$ Jan 23, 2014
  • Buffett Makes Millions Selling 500:1 Monkey-Linked Derivs http://t.co/6juOLsh2m3 @matt_levine Wrote about this 2 http://t.co/D3sirU5yWN $$ Jan 22, 2014
  • Buffett Backs $1B NCAA Hoops Tournament Prize http://t.co/MLvgHtx7NX Almost no way that Buffett can lose here; perfect bracket impossible $$ Jan 22, 2014
  • US Bank Risk Guidelines Would ?Accelerate? Enforcement http://t.co/DaeYf9zoje I’m not sure this will work, but it will bulk up compliance $$ Jan 22, 2014
  • CFOs Use Face Time, Plant Tours to Court Shareholders http://t.co/7CHts6TqdO This isn’t new, but it is wise to build goodwill w/investors $$ Jan 22, 2014
  • Why earnings could grow http://t.co/Zmwatc3v87 h/t: @ritholtz rising profitability, overseas biz, wise cap allocation, reasonable val’ns $$ Jan 22, 2014
  • Why ‘Peak-Earnings Models’ Are Nonsense http://t.co/Sa3uAci0pj Let’s see where actual unadjusted earnings are, & see if they are growing $$ Jan 22, 2014
  • Pimco CEO El-Erian Resigns http://t.co/Bl05w8h5Tn U have 2 remember that Pimco is a “quant shop.” They follow their models, not people $$ Jan 22, 2014
  • Gold-Price Banks Meet Amid Regulatory Pressure http://t.co/2W5hTdfKpm Post-LIBOR probe it’s in their interest to solve it quietly if poss $$ Jan 22, 2014

?

Rest of the World

 

  • Iceland Traps Hedge Funds in Refusal to Discuss Bank Claims http://t.co/kVUcp2fXvf Iceland delays claims from the crisis, cares 4 people $$ Jan 24, 2014
  • Merger Bonanza Hits Finland as Economic Pain Becomes Asset http://t.co/FXCOFmQABx Finnish assets r cheap, & other firms buy them up $$ Jan 24, 2014
  • Sochi Security Slalom Shows Terror Risk With Putin on Guard http://t.co/ij243mnvCN Russia will try hard, but will they prevent terrorism? $$ Jan 24, 2014
  • Investors Seek Yields in Europe, but Analysts Warn of Risk http://t.co/a3eXCJjgqc Seek a margin of safety & don’t reach 4 yield anywhere $$ Jan 24, 2014
  • Europe, Facing Economic Pain, May Ease Climate Rules http://t.co/2aK9oLpKg6 What a hoot! The Eurocrats turn their back on global warming $$ Jan 24, 2014
  • West Explores Plan B for Forces in Afghanistan http://t.co/9cKJcmzbyt If Afghans don’t want the US, we should leave; fractious place $$ $TLT Jan 24, 2014
  • Can Rising Property Values Spur Wary Japanese to Spend? http://t.co/fsrr5ArGtP Dangerous game, at the end 2much debt & 2 little cash flow $$ Jan 24, 2014
  • Israeli Ultra-Orthodox Do the Math in Bid to Enter Workforce http://t.co/afrV0U0fd4 Think of Dark Ages where 25% were supported by others $$ Jan 23, 2014
  • Olympics host Sochi remains a volatile region http://t.co/B8gwlvHrOR A great test 4 Russia; how well can u protect a perfect target $$ $SPY Jan 22, 2014
  • Abe Eyes Land-Price Reflation to Spur Construction Boom http://t.co/1QMMntydBq But Abe thinks he will succeed in creating property bubble $$ Jan 22, 2014
  • Pimco Dropping Linkers Calls Time on Abenomics Inflation Target http://t.co/r37SBu12G5 Pimco doesn’t believe Abenomics will inflate much $$ Jan 22, 2014

 

Companies & Industries


?? Fed May Protect Warren Buffett as a National Treasure http://t.co/zTdv5t6tTz Unlike most, Buffett has more than enough cash 2 survive $$ Jan 25, 2014

  • T-Mobile Answers Call of Underbanked as Banks Fail to Pick Up http://t.co/sAl7vhJJlP New cheap way 2do payments w/o a bank account $$ $TMUS Jan 24, 2014
  • eBay CEO Says Icahn PayPal Spinoff Makes No Sense http://t.co/4bKyeBMODa Then rename the company Paypal,& spin off $EBAY . $$ Jan 24, 2014
  • What Bankers Need to Know About the Target Breach http://t.co/L6XXJaFmVY Detailed; explains how credit data captured, stored & sent $$ $TGT Jan 24, 2014
  • Pinterest CEO Ben Silbermann on Being a Dad &Running a Company http://t.co/exLTi0CLyi The “Glass Ceiiing” Means u care about your family $$ Jan 23, 2014
  • Madoff Haunts Yeshiva as University Slides to Junk http://t.co/ZbNeoudT1k Wise 2 avoid board conflicts where board member invests 4 board $$ Jan 23, 2014
  • Diamond Foods CFO on Recovering From a Crisis http://t.co/aVFn9zioB9 America offers unlimited second chances, but clean things up or else $$ Jan 23, 2014
  • Dan Loeb’s Third Point Discloses Stake in Dow Chemical http://t.co/2RuMuNEKjK Separate petrochemicals from specialty chemicals $$ $DOW #easy Jan 22, 2014
  • Buffett Leans on 29-Year-Old Cool to Oversee Problems http://t.co/NfABsLkBzD The start of a gradual centralization of $BRK-B businesses $$ Jan 21, 2014

?

US Politics & Policy

 

  • Thrill of Obama Home Visits Fades for Americans Cited at Events http://t.co/x0aWw6ddia Change seems like spare change or loose change now $$ Jan 25, 2014
  • Why Uncle Sam Can’t Guarantee College Grads a Job http://t.co/oM0htsJcLk College is debauchery, not job preparation; end the subsidies $$ Jan 25, 2014
  • Tor Anonymity Software vs. the National Security Agency http://t.co/mhBGgZPZyS Very cool, let TOR hide private communications from Gov’t $$ Jan 25, 2014
  • The Sleepiness of a Hollow Legend http://t.co/d2NRpymDBP Peggy Noonan on State of the Union Address. I never listen to them; not worth it $$ Jan 25, 2014
  • Davos pusillanimity watch, LGBT rights edition http://t.co/5BkuxGdANL vs Romans 1:28-32 http://t.co/jFOUPLWLgF Jan 24, 2014
  • Resolved: Obamacare Is Now Beyond Rescue http://t.co/SXiG685Z2r Idea is most of the improvements won’t survive the necessary cost cuts $$ Jan 24, 2014
  • NSA?s Spying on Phone Calls Illegal: US Privacy Board http://t.co/ZStT1WAiwT Should not be written off; this aids a healthy debate $$ $SPY Jan 24, 2014

 

US Healthcare

 

  • More Women Seeking Medical Help to Get Pregnant http://t.co/8ICRmFNKx3 Natural result of delaying marriage, or not marrying at all $$ Jan 24, 2014
  • Where Have All the Uninsured Gone? http://t.co/0jlpsHORUj They don’t want insurance. They will take their risks & pay as they need to $$ Jan 23, 2014
  • How Qualified Is Your Doctor? http://t.co/XkAxYmjsA6 Hard 2 tell, is certification busy work or real testing? $$ Jan 23, 2014
  • Circumcision Coverage Comes Into Focus http://t.co/rZ24KWxvGb One of those issues where if someone has a view, it tends 2b polarized $$ Jan 22, 2014

 

Other

 

  • How Real is Spike Jonze’s ‘Her’? Stephen Wolfram and Peter Norvig Weigh In http://t.co/IgJG3bdrYr AI will not get self referential ideas $$ Jan 25, 2014
  • New York Officials Arrest Man in Lufthansa Heist http://t.co/toMAGIz5ck It took 35 years, but finally an arrest 4 the ’78 heist & others $$ Jan 24, 2014
  • Card-Theft Software Grew in Internet’s Dark Alleys http://t.co/cvTgCMC0lA The losses occurred from Target missing hacks of credit cards $$ Jan 23, 2014
  • Give the guy a second chance. Yes he blew it once b4, but he is smart and now knows what the limitations r http://t.co/6Fbp1jc6EJ $$ Jan 23, 2014
  • Can a Disgraced Trader Get a Job in Academia? http://t.co/qjoP4duPQL He deserves a second chance; that is what makes America great $$ Jan 23, 2014
  • Vital Signs: More Households Don?t Own a Car http://t.co/HBlc8L9z1V More options available 4 getting around & owning a car is costly $$ Jan 22, 2014
  • Top employers for flexible and work-at-home jobs http://t.co/UGz6F2XMae Home work getting more common, challenges managing the dispersed $$ Jan 21, 2014

Wrong

  • Wrong: This 100-year-old idea could end San Francisco?s class war http://t.co/Wtxk7wwsvH Sorry, land tax would get passed to renters $$ Jan 24, 2014
  • Dunno: Don’t Care About Deficits? Vote Republican http://t.co/1BKNS2m80j The t-party cares about deficits & they r growing in the GOP $$ Jan 24, 2014
  • Wrong: Huge cash pile puts recovery in hands of the few http://t.co/8rRHHFpZJN Most of the cash collateralizes derivatives, etc. Not free $$ Jan 24, 2014

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Comments, Replies, Retweets

  • Roddy Boyd finds alleged Ponzi schemer http://t.co/GRBY0dqLqv What a guy, Roddy Boyd. $$ Jan 24, 2014
  • @footnoted @theofrancis @BoydRoddy His skills r considerable, as r his ethics. $$ Jan 24, 2014
  • @pmarca I’ve said that, but less colorfully; the market reflects all information acted upon, including errors. $$ Jan 23, 2014
  • @maoxian Good point, will have to consider that. But board should not have members investing for them $$ Jan 23, 2014
  • Wrong: UBS Tells Davos Leverage Ratio Over-Reliance Threatens Stability http://t.co/DZ5gfHmXXK After a crisis from overleveraged banks? $$ Jan 22, 2014

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