11 December 2007
"It has long been my feeling that the lessons of economics that reside in economic history are important and that history provides an interesting and even fascinating window on economic knowledge." p.28
Galbraith wrote this book 25 years after the Great Crash, as an elder statesman, one generation removed from the event.
"The wonder, indeed, is that since 1929 we have been spared so long. One reason, without doubt, is that the experience of 1929 burned itself so deeply into the national consciousness. It is worth hoping that a history such as this will keep bright that immunizing memory for a little longer." p.29
I had to buy my copy recently from an Amazon reseller based in the UK. When my book arrived, it was postmarked from Malmo, Sweden. Looking again at Amazon, I see that a new printing of this work has appeared in the U.S. Whenever there is turmoil in the markets, I guess interest in the history of previous market disasters rises like fear and volatility.
Considering this week's over-zealous run-up in the markets, followed with today's petulant overreaction to Helicopter Ben only dropping the federal funds rate by 25 basis points, it's as good a time as any to look back nearly 80 years.
Here are some of my notes on The Great Crash 1929.
The precursor to the crash: the desire to get rich quickly with little effort via speculation and leverage. Galbraith delved into the mid-twenties Florida land boom (and bust). Apparently, the Ponzi scheme originated in this period: "As the speculation spread northward, an enterprising Bostonian, Mr Charles Ponzi, developed a subdivision 'near Jacksonville'. It was approximately sixty-five miles west of the city. (In other respects Ponzi believed in good, compact neighbourhoods; he sold twenty-three lots to the acre.)" p.33
"The Florida boom was the first indication of the mood of the twenties and the conviction that God intended the American middle class to be rich. But that this mood survived the Florida collapse is still more remarkable...Even as the Florida boom collapsed, the faith of Americans in quick, effortless enrichment in the stock market was becoming every day more evident." p.35
Galbraith is unclear as to the origins of the speculative frenzy in the stock markets. He lamely suggested that growing corporate earnings encouraged upward movement in securities pricing. More interestingly, Britain's return to the gold standard pressured investors to take leave of costly investing in Britain and the Continent, and shifted that money to the U.S. Also the Federal Reserve Bank of New York cut rates and made it cheaper for more people to obtain credit and invest in shares. And then there was the issue of rampant trading on margin and the values of the underlying stocks used as collateral for those loans.
Reassurances from Wall Street professionals, much like the quotes detailed and mocked in "Oh Yeah" that permitted many en masse to abandon fundamental analysis and join the speculative frenzy, untethered to reality.
The Federal Reserve was impotent to quash the speculative market. Raising the "rediscount rate" would not have affected the speculators who were borrowing on margin at twice the rediscount rate (or more) and until the crash, were watching their shares accelerate at an even steeper rate. Galbraith asserted that the Fed could have increased margin requirements, but it decided to keep mousily quiet. Galbraith mocked the Fed's feeble attempts at "moral suasion" via mildly-worded press releases.
The Crash decimated leveraged investment trusts, instruments created to take advantage of the demand for speculative offerings. The values of these trusts were inflated not with tangible assets, but with the perceived value of "the precious ingredient of financial genius." p.79 They seem analogous in some ways to today's hedge funds, many of which don't actually seem to engage in the act of hedging. The Crash also crushed the values of American blue chip industrials like General Electric and AT&T. Solid companies and defensive stocks couldn't avoid the destructions of wealth.
Perhaps the most important lesson in Galbraith's work is covered in Chapter 4 - In Goldman, Sachs We Trust.
What is that lesson? GS seems to find a way to survive financial debacles with their money and reputation largely intact.
According to a lovely chart in the January 2008 issue of Bloomberg Markets detailing the subprime market collapse, GS is the only bank/security firm on the chart to have no subprime-related write-downs, no layoffs, and a recent positive return on its share price.
In 1929, GS launched the Goldman Sachs Trading Corporation, an investment trust organized by GS and largely sold to the public at $104 per share. As of a 1932 Senate hearing which closes Chapter 4, the reader discovers that just three years later, the Goldman Sachs Trading Corporation was trading at 1 3/4, that after a two-for-one split.
29 November 2007
For years, I've been in possession of a 1931 book entitled "Oh Yeah?"
I recall finding it on my Dad's bookshelf. As a child of the Depression, he often expressed a mix of macabre humor and frustration about the 30's. He also would worry that any economic downturn would lead to another one. I recently pulled "Oh Yeah?" off the shelf and perused its collection of contemporary quotes by presidents, business leaders, economists, and journalists.
As this book was published in 1931, it captures only the very beginning of the crash and ensuing depression. However, near the end, on page 59 (yes, it's short and sweet), there's a calendar for 1931, with a quote for each month.
JANUARY The American business man is getting his tail feather off the ground.--Louis K. Liggett, Republican National Committee.
FEBRUARY The bottom has now been reached.--Roy A. Young, Federal Reserve Bank of Boston.
MARCH The long decline has at last been halted.--Dr. Julius Klein, Assistant Secretary of Commerce.
APRIL Business has turned the corner.--Roger W. Babson.
MAY Big attendance at race meetings is one of the best indications of improving business conditions.--Stuyvesant Peabody, Illinois Turf Ass'n.
JUNE Much of th present crepe-hanging should be historical....In July, up we go.--Dr. Julius Klein.
JULY A level of resistance is being reached.--Bradstreet's.
AUGUST Angels, looking down, probably pay little attention to our difficulties.--Arthur Brisbane.
SEPTEMBER The glow of righteous satisfaction that many have felt in their recent savings should be replaced by the knowledge that thrift under certain conditions is very wasteful.--William Trufant Foster, Economist.
OCTOBER The overliquidated prices of many securities are a sign of too short perspective and too excitable temperament.--Charles M. Schwab.
The book seethes with skepticism. So much hooey said by so many people who should know better, why should any of these predictions be believed? Yes, as a reader in 2007, we know how wrong these men were, but I think "Oh Yeah?" is still valuable beyond my sentimental reasons for keeping it on my bookshelf. The editors of "Oh Yeah?" were right. They weren't going to make the same mistake, and contribute to the folly of economic forecasting. That's a valuable take-away from "Oh Yeah?". They seemed uncertain about the future and closed the wee volume with a perfect pessimistic punch:
"The country is not in good condition.
--From "Calvin Coolidge Says," January 20, 1931."
As much as I enjoy "Oh Yeah?", it's difficult to extract a broader understanding of the 1929 crash and aftermath from a contemporary, primary source. It was written for people who were living through the turmoil, who would recognize names like Reed Smoot, Arthur Brisbane, and Roger Babson. The only name that still resonates today is Charles M. Schwab, but we're now on more familiar terms when we Talk to Chuck.
So that led me to John Kenneth Galbraith's 1954 classic, "The Great Crash 1929".
I'll hopefully post my thoughts on that book soon.
21 February 2007
The Truth About Cars is a thoroughly interesting shit-tossing automobile-loving website that's been running a General Motors deathwatch for 110 posts and counting.
My dad cursed General Motors after buying his last American car--a '79 Seville that had gaps so large between panels that you couldn't slam your hand in the car door. And let's not discuss the shockingly crooked rear tail light. From that point, he would only look at Toyotas, Datsuns/Nissans, and Hondas.
I recall JVL's metallic brown Oldsmobile self-immolating after he lent it to a friend at Johns Hopkins. (That's not him in the picture, nor a pre-fire shot of his car.) Granted, the car may just have had too much of Baltimore and chosen the quickest path to the automotive afterlife.
As a New Yorker, I don't own my own wheels. So I drive Avis-provided GM and Ford crap-o-ramas. They remind me of my old '87 Acura Legend, except that these fine cars are often '06 and '07's. I expect a bit more automotive evolution over a twenty-year span.
Anyway, if I had listened to TTAC's anecdotes and thought about my dad when making an investment decision regarding GM over the last year or so, I'd me much poorer. Yes, yes, it's quite the shocker that GM was the best performing Dow component of 2006.
All the better then--that recent performance gives a put option investor that much more room for the stock to fall.
There was quite a bit of volume today on the March 35 puts (GM OG). That's what I'm looking at tomorrow.
The Advisory Board Company (ABCO) is the second member of the Fantastic Five from the the March issue of Smart Money.
Here are the two sentences touting ABCO. Vince Gallagher of Needham Funds made the pick:
A consulting firm that makes hospitals and doctor groups more efficient. "It's the sweet spot of health care and business services--two home runs," Gallagher says.
The first stop for the Pig was ABCO's website. This is ABCO, in its own words:
The Advisory Board is a membership of 2,500 of the country's largest and most progressive health systems and medical centers. The Advisory Board provides best practices research and analysis to the health care industry, focusing on business strategy, operations and general management issues.
Gathering data across and beyond the membership, the Advisory Board publishes daily and weekly news services, 50 major studies and 3,000 customized research briefs each year on progressive management and clinical practices in health care. In general, the research focuses on the best (and worst) demonstrated practices, helping member institutions benefit from one another's learning curves.
There are some solid fundamentals at play with ABCO. Free cash flow has climbed from $19.0MM in 2002 to $50.4MM in 2006.
And I'm not finding much recent analyst coverage, meaning ABCO is currently trading under the Wall Street radar. SmartMoney's competition page yielded no consensus analyst recommendation. Morningstar doesn't publish an analyst report on ABCO.
Hey, not every post can be a wealth of information. I'm finding it a bit funny that a company specializing in research and analysis doesn't have that much research and analysis for investors.
20 February 2007
The online version of the March 2007 Smart Money cover story beckoned an airport newsstand peruser (yours truly) with the headling "Double Your Money." My first thought, upon picking up the magazine, and buying it, was How long to double? The feature makes five sector picks with the idea of hitting a double in five years, namely biotech (FBT), water (PHO), semiconductors (XSD), small cap (IWO), and emerging markets (EEM). Some of these picks are intruiging--I would much rather spread my risk investing in biotech with an ETF, than with trying to pick an individual stock that could easily disintegrate on some unexpected bad news from the FDA. On the other hand, if I'm looking into water, I think I'd rather just pour some investible dollars into WTR instead of spraying them into the PHO ETF.
Reading further into the wood pulp version of the March '07 issue, I found a sidebar entitled "The Fantastic Five," eschewing the broad sector picks for some down-and-dirty individual stocks. Assorted money managers made some picks. I thought it might be worthwhile to look beyond the two sentences dedicated to each ticker. In this post, I'm going to look at the first of the five, Cypress Semiconductor (CY).
John Buckingham of the Al Frank Fund made this selection. Here are the two sentences from Smart Money justifying the choice:
"The company has $5 a share in cash and a $2 billion ownership stake in solar-cell maker SunPower. Given the company's $2.3 billion market valuation, Buckingham says, investors essentially get Cypress's solid microchip business for free."
Larry Cao, a Morningstar analyst, doesn't think much of CY, giving it a fair value of $6 a share. So much for the free "solid" microchip business:
Cypress' roots in commodified products have hurt its growth and profitability over the years. The low-margin and slow-growing SRAM (static random-access memory) product line remains about one third of its revenue. Invented in 1971, the technology is showing its age and has been giving way to flash memory products in handset applications. As a result, SRAM revenue dropped by about $100 million last year, to $300 million. A few other product lines such as specialty memory and USB products have better margins, but end-market demand remains a concern. These aging products will in aggregate grow at a below-industry rate, in our opinion.
Cao isn't as bullish as Buckingham regarding CY's cash hoard either:
Cypress is in decent financial shape, with about $400 million in cash and investments offsetting $600 million in long-term debt. But free cash flow--at less than 3% of sales the past two years--is somewhat meager in our eyes.
Cao believes that investors in CY could see some gains if the SunPower business were spun off. Some shareholders agree:
In December, activist investor Chapman Capital LLC urged Cypress to split off its stake in solar panel company SunPower Corp. (SPWR.O: Quote, Profile , Research) and then take its core chipmaking business private.
Trade publication Electronics Weekly posted a brief interview with Paul Bentley, CY director of sales and marketing. Here are some excerpts:
EW: On the lists of potential takeover targets of private equity funds, Cypress usually figures. Does Cypress feel these funds have anything to contribute to Cypress?
Paul Bentley: In October of 2006, we completed a review of strategic options relative to our market valuations. We concluded that we could deliver more value to our customers and to our stockholders by continuing on our current path.
EW: Is Cypress interested in the solar power market?
Paul Bentley: We are not only interested, but we are already a major player. Our SunPower subsidiary had revenues in 2006 of more than $230m, and they continue to grow rapidly. We also recently completed the acquisition of PowerLight, a leading integrator of solar-power installations. The acquisition allows us to deliver faster solar system innovation to our customers as we execute our plan to reduce the installed cost of a solar system by half over the next five years.
Zack's recently commented on CY's latest quarter:
Cypress Semiconductor (NYSE: CY) reported its financial results for the fourth quarter [Q4] of 2006. Revenue was $287.0 million, down 1.1% sequentially and below our estimate of $290 million. On a GAAP [generally accepted accounting principles] basis, earnings per share was $0.09. Including the impact of stock-based compensation, the pro forma EPS [earnings per share] was $0.08, below our estimate of $0.11. Revenue and gross margins in Q4 were adversely affected by softness in the communications market. On the other hand, SunPower revenue grew 14% sequentially and over 154% year over year. Also, entering the first quarter, revenue for that quarter was 86% booked. We rate the stock a Hold and have set a target price of $19.
What's my take?
CY does not paint an interesting fundamental story. Morningstar's Cao makes that point clearly. But I'm not sure he has the right perspective. For me, CY is not about its staid, low-growth semiconductor business. The core chipmaking business limits the dowside risks.
The investing thesis for CY is about potential:
1. Potential continued growth of SunPower;
2. Potential spin-off of SunPower;
3. Potential private equity takeover of CY.
The upside for CY is one or two of these theses coming true.
Up next...The Advisory Board (ABCO)
11 February 2007
Sam Dillon, reporting with a Phoenix dateline, eviscerated the for-profit University of Phoenix, owned and operated by the publicly-traded Apollo Group. The dateline caught my attention as Dillon's piece could be reported from any of the 39 states where there's a campus, I guess. I always thought the name attaching the mostly online institution was a bit of a ruse to root itself to a specific geographic locale. But I digress.
It's a withering piece--perfect fodder for the Pig to build a case against Apollo.
First off, the image of today's Times below shows the prominence this story's receiving. It appears on the far left column, just above-the-fold.
Here's the crux of the piece, broken down into major points by yours truly:
The complaints have built through months of turmoil. 1.The president resigned, as did the chief executive and other top officers at the Apollo Group, the university's parent corporation. 2.A federal court reinstated a lawsuit accusing the university of fraudulently obtaining hundreds of millions of dollars in financial aid. The university denies wrongdoing. 3.Apollo stock fell so far that in November, CNBC featured it on a "Biggest Losers" segment. The stock has since gained back some ground. [Quite a bit, actually.] 4.In November, the Intel Corporation excluded the university from its tuition reimbursement program, saying it lacked top-notch accreditation.
These are significant negatives. Granted, the turnover at the top should subside, and shares in APOL have rocketed up 40% from their November lows. The lawsuit and Intel spurning the University of Phoenix remain, bolstering the bearish case.
Will press like this encourage other states and the federal government to scrutinize the UoP? Will companies other than Intel question the quality of education UoP provides for its employees, and follow Intel's suit?
"Wall Street has put them under inordinate pressure to keep up the profits, and my take on it is that they succumbed to that," said David W. Breneman, dean of the Curry School of Education at the University of Virginia. "They seem to have really stumbled."
In the interview, Dr. Pepicello shrugged off the bad news. Many top corporations still pay for employees to attend the university, he said, and the exodus of top officials has resulted from a healthy search for new directions. "We are reinventing ourselves," Dr. Pepicello said.
What can Dr. Pepicello say? He's on the defensive here.
Scrutiny of for-profit universities is on the rise. Here in NYC, for-profit schools are advertised all over the subway. Of these, the Interboro Institute has been investigated for enrolling unqualified students and reaping federal student aid it didn't deserve, and the Taylor Business Institute was ordered closed by the New York State Board of Education at the end of 2006 for failing to meet minimal education standards. And there's the story of Decker College, a for-profit vocational school in Kentucky that fell into bankruptcy, ruining the thin chance William Weld had of taking on now-Governor Spitzer.
Prestige and accreditation back up the degree a student receives. What is the value of a degree that lacks either of those qualities?
"Their business degree is an M.B.A. Lite," said Henry M. Levin, a professor of higher education at Teachers College at Columbia University. "I've looked at their course materials. It's a very low level of instruction."
In November, the university's reliance on part-time faculty caused a problem with Intel, hundreds of whose employees it has educated. Alan Fisher, an Intel manager, said the company had decided to pay for employees to attend only highly accredited programs. Although Phoenix is regionally accredited, it lacks approval from the most prestigious accrediting agency for business schools, the Association to Advance Collegiate Schools of Business.
John J. Fernandes, the association's president, said the university had never applied. "They're smart enough to understand their chances of approval would be low," Mr. Fernandes said. "They have a lot of come-and-go faculty. We like institutions where the faculty is stable and can ensure that students are being educated by somebody who knows what they're doing."
Wouldn't a school like UMUC, a University of Maryland school, be a better choice for older students? UMUC offers an array of online degree programs accredited by the Middle States Association of Colleges and Schools.
The Pig understands the allure of convenience distance learning. I took classes at Hunter College while working with the help of a flexible schedule that permitted me to hop on the 6 train, sit in a classroom for an hour or two, and then return to the office. But then again, I was lucky to have that option; not many people have flexible schedules, a college 25 blocks from my office, and CUNY's uber-cheap tuition--about half that of UoP.
The big kicker in the case against APOL comes in the last paragraph:
Those questions are likely to dog the university as it defends itself in the lawsuit, which a district court had dismissed but an appellate court reinstated in September. The university could be forced to repay hundreds of millions of dollars if it loses. It asked the Supreme Court last month to review the appellate ruling, arguing that an adverse outcome in the lawsuit could expose it to "potentially bankrupting liability."
Potentially bankrupting liability makes me want to look at put LEAPS, on top of shorter-term put options.
Check out APOL's weekly chart, care of stockcharts.com:
Notice how APOL rarely trades above its 40-week moving average? And when it does, it drops soon thereafter?
Morningstar rates APOL five-stars, giving the company's shares a fair value of $65 per. On the surface, APOL fits Morningstar's criteria in that it's the leader in online education, has a wide economic moat, and produces lots of free cash flow. Enrollment is up 8.6% based on Apollo's focus on growing its associate's degree programs.
Problem is, Morningstar's generally positive view of APOL contradicts the Times piece. From the current APOL Morningstar report:
Apollo's regional accreditation, recognizable brands, and solid reputation contribute to its wide moat...
Apollo's ability to attract working adults and its students' employers' willingness to support tuition reimbursement for an Apollo education are indication of its solid reputation.
The Times' harsh spotlight on Apollo's University of Phoenix shows the flaws in Apollo's reputation, and Morningstar's arguments.
APOL, along with SNE, are christening the new WershovenistPig Negative Stock Watch List, joining the numerous other sections over to the left.
Priya Ganapati, the thestreet.com reporter and author of said piece graciously replied to my ornery post. I'm flattered by the response, and felt it proper to present her clarifications:
1. Regarding Sony protecting its PS3 franchise. Sure, parents are going to be concerned with violence on video games available for the PS3 and sure they may opt for the Wii. But try looking at this from the Sony perspective. Sony doesn’t want to turn off potential buyers (and a large number of consoles do tend to be gifts), which is why it is publicly saying that it won’t support adult content on Blu-ray, while the Sony supported Blu-ray association will work with adult content producers. I think it clearly shows that Sony wants to have it both ways and lets not forget the PS3 is the primary delivery channel for the Blu-ray player right now.
2. I do agree there are adult video rentals available through the Internet but I do suspect a lot of viewers watch adult content on the Internet now. And that’s a huge huge shift from the 1980 when Everybody went to the store to rent adult movies. So there is a change in user behavior there.
I don't find her arguments wholly convincing, though I'm sure she's accurate on point two regarding the internet being one big porn delivery system.
In any case, Blog Hog Jonathan Last recently bolstered the case against Sony by digging up a report that the Wii and the PS2 are outselling the PS3 in Japan.
However, I am not ready to commit to picking up SNE puts as Bloomberg reported today that the Yen may decline further, which in turn could put upward pressure on the price of SNE shares:
The yen may decline after the Group of Seven industrial nations stopped short of saying that the currency's weakness is a threat to the global economy.
The Japanese currency is trading near a record low against the euro and the weakest in four years versus the dollar as the Bank of Japan holds interest rates at 0.25 percent, the least among major economies. At a meeting in Essen, Germany, G-7 officials sought to reconcile Europeans who want the yen to strengthen with the U.S. and Japan, which say the market should set exchange rates.
25 January 2007
Up for reading something appallingly stupid? Check out the following piece from thestreet.com:
Sony's Adult-Video Decision Stands Up
By Priya Ganapati
TheStreet.com Staff Reporter
1/25/2007 1:46 PM EST
Here are some brilliant excerpts in this case favoring Sony's prudently prudish decision to cockblock the adult film industry:
Sony has received much recent flak for its decision to not work with adult-content producers. While it hasn't said it won't allow adult-entertainment content on the Blu-ray format, it has damned content producers by not cooperating.
But even if many of those producers move to HD DVD, here's why it won't really matter:
In the 1980s, tapes and the neighborhood video rental store were probably the only way to get to adult content. Now much of it is viewed online. The Internet has made it easy and anonymous to get access to movies that are too embarrassing to request in person.
While Blu-ray or HD DVD may offer greater clarity, the big question is, how much does the average viewer want to sacrifice Internet anonymity for the pleasure of walking into a seedy video store in person to rent a hi-def disc?
This argument right here is when the reader has indisputable confirmation that the author has no idea what she's writing about. The "seedy video store" jaunt is a lame straw-man. I'm not speaking from any recent experience, but back in the late 20th century, circa 1998 and very single, the Pig bought his first DVD player. Soon thereafter, after buying classics like The Philadelphia Story and The Great Escape, I purchased my first adult DVD over the internet.
The advent of Blu-Ray and HD DVD has not altered the consumer landscape--adult discs will mostly be bought over the internet. I'm not a Netflix subscriber, but I believe they do not rent out adult DVD's. No matter--a simple Google search will pop up adult rental providers like dvdempire.com.
Betamax tapes could record content for about 60 minutes, while VHS tapes were three hours long. While bulkier, VHS tapes were perfect for recording movies, and the industry took to them.
Um. Betamax tapes were originally 60 minutes long. Common VHS tapes were not three hours long. Someone's researching with Wikipedia, and not much else. T-120 VHS tapes were the standard, with SP recording times of two hours. VHS recording times eventually grew with the introduction of VCR's that recorded on slower speeds (LP and EP/SLP) as well as manufacturers devising thinner magnetic tape for T-160 and T-180 cassettes. I digress, but it's another example of the quality of this article.
"Sony is trying to demonstrate they care about the home environment and what type of content can be played on a PlayStation 3," says Jon Peddie, president of Jon Peddie Research. "Its kind of patronizing that they would do such a thing, but it will appeal to parents who worry about their kids playing video games and what kind of content is available to them."
The Jon Peddie quote is ridiculous. Will over-concerned parents favor buying a PS3 because it may not be able to show some sexy action in HD? I would bet these same parents will be just as concerned about intensely violent HD games PS3 first-person shooters. Won't these parents just buy the Wii, with its cute, kid-friendlier repertoire?
Another bit of stupid:
This way, Sony gets to have its cake and eat it too. Sony can continue to publicly not support Blu-ray but hope that the Blu-ray lobbying group can work out a better relationship with adult-content producers.
It's also worth remembering that what really won the day for VHS were cost, recording time and licensing issues with Sony.
This piece is supposed to be favorable to Sony. I'm just reading argument after argument bolstering the Case Against:
1. Lobbyists have to repair the relationship with the adult industry--while Blu-ray is in its infancy, in the middle of a format war, where the other format is as welcoming as Seka is to John Holmes.
2. If VHS won the day with cost, recording time and licensing issues with Sony, what is the constant in the VHS/Beta and Blu-ray/HD DVD format wars? Licensing issues with Sony.
24 January 2007
I couldn't resist doing some more data mining of Super Bowl advertisers' stock performance in the week after the game. I know these data make for riveting posts, but I felt a little naked after offering up a thin gruel of a dataset.
Here's the 2005 advertiser list:
(ticker of advertiser - 2/4/05 close - high price between 2/7 - 2/11 - peak % change)
F - $13.22 - $13.54 - 2.42%
FDX - $96.36 - $98.57 - 2.29%
BUD - $48.46 - $48.65 - 0.78%
PEP - $55.31 - $55.71 - 0.72%
KRB/BAC - $46.89 - $47.07 - 0.38%
MCD - $32.57 - $32.85 - 0.86%
MSFT - $26.32 - $26.34 - 0.07%
LLY - $55.03 - $56.69 - 1.56% (midweek dividend of $.38)
VZ - $36.85 - $36.98 - 0.38%
MGM - $78.00 - $79.60 - 2.05%
NWS - $17.70 - $17.76 - 0.34%
Average difference between 2/4/05 close and following week peak: +1.08%
And the benchmarks:
^GSPC (S&P 500) - 1203.03 - 1208.38 - 0.44%
^DJI (DJIA) - 10716.13 - 10865.69 - 1.40%
^IXIC (NASDAQ Composite) - 2086.66 - 2095.64 - 0.43%
2005 gains matched Phil Davis' assertion that advertisers gain about 1%. The Super Bowl picks beat the NASDAQ and S&P, but lagged the Dow's performance for the week ending 2/11/05.
Here's the 2004 advertiser list:
(ticker of advertiser - 2/4/05 close - high price between 2/7 - 2/11 - peak % change)
BUD - $50.59 - $52.43 - 3.64%
PEP - $47.26 - $50.58 - 7.02%
SPLS - $26.61 - $27.00 - 1.47%
HRB - $57.93 - $59.52 - 2.74%
TWX - $17.57 - $17.72 - 0.85%
GM - $49.68 - $49.85 - 0.34%
GE - $33.63 - $33.99 - 1.07%
FDX - $67.28 - $67.85 - 0.85%
IBM - $99.23 - 100.43 - 1.21%
CSG - $29.95 - $31.98 - 6.78%
DCX - $47.53 - $47.88 - 0.74%
MNST - $24.48 - $25.82 - 5.47%
PG - $101.08 - $103.67 - 2.56%
BAY - $30.49 - $30.70 - 0.69%
GSK - $44.00 - $45.22 - 2.78%
MO - $55.59 - $55.65 - 0.11%
DIS - $24.00 - $24.03 - 0.12%
IACI (EXPE) - $32.25 - $32.45 - 0.62%
Average difference between 1/30/04 close and following week peak: +2.17%
And the benchmarks:
^GSPC (S&P 500) - 1131.13 - 1142.79 - 1.03%
^DJI (DJIA) - 10488.07 - 10634.81 - 1.40%
^IXIC (NASDAQ Composite) - 2066.15 - 2085.49 - 0.94%
2004 gains surpassed each of the major indices.
Still interested in this trading scenario? I have 2001-2003 advertiser lists ready to go. Perhaps tomorrow. I need a nice sueño soon.
23 January 2007
Phil Davis asserts that Super Bowl advertisers get a 1% boost in their share prices during the week following the Super Bowl:
Congrats to the Bears and Colts for making it to the Superbowl -- now let's make some money on it!
No, not betting (Colts by 10), but one thing I always notice is that companies that advertise in the Superbowl tend to get about a 1% move in the week following the game. While I wouldn't just invest willy-nilly, we do have some prime prospects to consider:
- Apple Computer Inc. (AAPL)!
I find this potential short-term money making opportunity too intriguing to pass up.
But wait. I need more evidence than a fudgy statement using a soft convictionless expression "tend to get about", referring to the 1% move.
I reviewed this collection of advertisements and advertisers from Super Bowl XL, played on February 5, 2006.
The stock tickers of the companies that traded publicly at that time last year were (in the order of the AdLand piece):
BAY, TM, GM, S, F, NFS, BUD, DMND, HMC, MOT, DIS, FDX, PG, PEP, UN, T, YUM, VIA
I did a wee bit of data mining on Yahoo! Finance's historical price quotes page. I recorded the closing price of each ticker on February 3, 2006, the Friday preceding the Bowl. I then wrote the highest price each stock traded during the following week, between February 6 and February 10, 2006.
What eternal statistical truths did I unearth from this tiny data sample?
These stocks averaged a peak change of +2.45% from the Friday, February 3 close. However, no pattern emerged as to when each ticker hit its highest price. Although every stock traded higher during the following week, only 13 out of 18 stocks ended up priced higher as of market close on Friday, February 10.
Here are the peak percentage gains for each ticker:
BAY +2.64%, TM +3.46%, GM +3.11%, S +2.14%, F +2.06%, NFS +0.37%, DMND +0.33%, HMC +1.46%, MOT +3.68%, DIS +2.03%, FDX +2.58%, PG +0.37%, PEP +1.41%, UN +1.52%, T +3.10%, YUM +3.21%, VIA +2.45%.
Who had the most spots last year? BUD, YUM and PEP. Only YUM exceeded the average 2.45% gain for the group, so having the most spots doesn't necessarily predict success.
If I'm remembering correctly, FDX and UN had the most critically-acclaimed ads, if I can go so far as to use such a description. FDX beat the average; UN didn't.
That 2.45% average gain is lacking context with the larger market. So, of course, I looked up the February 3 closing numbers for the Dow Jones Industrial Average, NASDAQ Composite, and S&P 500 indices, and compared them to the highest points these indices rose to during the subsequent week.
Each index attained its highest levels on 2/9/06. The DJIA rose 1.94%, the NASDAQ rose 0.13% on 2/9/06, and the S&P rose 0.83%. Clearly, the Super Bowl advertisers outperformed the markets by a significant margin over such a limited period. If anyone out in the Blog ether reading this would care to compile advertisers in Super Bowls XXXIX and prior, and perform the same stock price comparison, please take the ball and run with it.
Switching sports for cliche purposes, who's on deck this year?
The list of rumored advertisers during the Super Bowl XLI broadcast is eerily familiar:
BAY, F, FDX, PEP, GRMN, NFS, DMND, HMC, BUD, GM, TM, AAPL, MSFT, S, TWX, T
The newbies here are GRMN, AAPL, and MSFT.
I'm not going to analyse any of these picks--the Phil Davis excerpt above is good enough for starters.
How would I play this strategy? I'm going to look up each of these stocks on Groundhog Day and price out the at-the-money and just-in-the-money February call options. I will favor stocks with low time value premia, as the decay of time value over the course of the following week could very well negate an average gain of 2.45%. And as my limited data set showed me, there is no need to rush like Westbrook on Monday morning and load up on calls.
17 January 2007
Sony Ericsson reported on Wednesday that fourth-quarter profit more than tripled, blowing past analysts' forecasts, as record sales of high-end and Walkman-branded phones helped it gain market share from Korean rival Samsung.
"Sony Ericsson is pretty much in a sweet spot right now. They have cool, attractive models supported by cool, attractive brands," said Neil Mawston, associate director in the wireless practice of consultancy Strategy Analytics.
"They have become a phenomenally well-run company over the last year," Mawston said.
I was too flippant in my disregard of Morningstar analyst Bare's report regarding Sony's cell phones.
Let's just say, mistakes were made.
Big-time porn studio Vivid has announced its first Blu-ray porn movie, so there’s obviously a leak somewhere in the Blu-ray condom. Even the Blu-ray disc Association has reacted quickly by saying there is no ban against adult movie content.
So is one key argument in the case against Sony gone limp? Not entirely:
It’s true that Sony doesn’t care for porn on its devices. It was unhappy when porn started arriving on the UMD disc format for the PSP and from certain quotes by porn makers, Sony is not actually being that helpful with Blu-ray. It’s not blocking them but, at the same time, it’s not exactly pointing them in the direction of Blu-ray disc manufacturers that can help them out. Many are having to find their own production sources.
So Sony's neither cock-blocking the adult entertainment industry, nor is it lubricating the way for them either.
This report demonstrates the need to keep up on the news stories relating to investment positions, current as well as potential.
16 January 2007
When I did my usual digging around Google Images for a visual accompanyment for this post, I found the above photo of Michele Wie struggling at the recent Sony Open.
I know, I know. Wrong Wii.
This is the only Wie struggling with Sony.
Enough with the homonyms. Here's how I'm structuring this lengthy post: First, present a link to each recent news story, magazine article, or research piece I'm using to justify my conclusions on how to trade Sony; and second, outline the major points with my sparklingly irreverent commentary. At the bottom of the post, I'll leave you with my current strategic plan on how I'm going to invest in SNE.
Wired Magazine offers up a broad hit piece.
- Sony introduced the PS3 at E3, the Electronic Entertainment Expo in 2005...and again in 2006. The revolutionary new bit of information released in '06 was the staggeringly outsized price of $600.
- Rootkit software embedded on CDs that prompted recalls and plaintiffs attorneys to crap out some class action lawsuits.
- Sony is making attempt number 42 at a proprietary format: "[Sony's]become oddly fixated on imposing its own standards – Betamax for VCRs, the Mini-Disc for digital music players, the Universal Media Disc for PlayStation Portable, the Memory Stick for anything you can think of – despite the world's unwavering rejection of those standards."
- Is Sony too far ahead the consumer taste and demands with its expensive, yet technologically advanced microchip and Blu-ray combo? "[T]he Cell [processor at the heart of the PS3] has caused a lot of headaches for developers. Tim Sweeney, cofounder of the North Carolina-based developer Epic Games, figures it will take at least twice the effort to fully exploit the PS3's potential as to take the Xbox 360 to the max. Until that happens, it's unlikely there'll be much discernable difference between games on the two platforms. "The Cell has more theoretical computing power," says Sweeney, "but it might be years before we see that reflected in actual performance. So it's a fundamental question whether the long-term direction in computing is with architectures like the Cell.""
- "Blu-ray is equally fraught. For starters, the whole business of high-definition disc drives seems designed to invite cynicism. With DVD players now in 85 percent of US homes, sales fell in 2005 for the first time – so some manufacturers may need a next-gen disc player, but it's not clear consumers do."
- Wii, with its flailable wiimote, is fun. Xbox has Xbox Live's online gaming community. What is PS3's winning angle?
- An argument in Sony's favor: the corporate suits are sweating the (up until very recently) crap performance of SNE shares: "A couple of months ago, Howard Stringer and Ryoji Chubashi, Sony's president, reported to a luxury hotel in Tokyo's Shinagawa district to face 7,200 shareholders at Sony's annual meeting. It was not an enviable assignment. With the company in the red yet again in its most recent quarter, Japanese investors were in an unhappy mood. "I bought shares in mighty Sony," cried a woman whose holdings had lost nearly two-thirds of their value. "What are you going to do about this?""
Zacks Investment Research issued a recent negative report on Sony.
- Zacks named SNE Bear of the Day for 1/12/07. Investors apparently didn't notice this as SNE jumped $2.03 (4.45%) to $47.68.
- Zacks has a Sell rating and a $35 price target on the stock.
- Sony's LCD business is facing competitive pressures and lowering prices.
- Sony's brand image hurt by the global recall of notebook computer batteries.
- PS3's hefty price tag and launch delays, especially the failure to launch in Europe during the '06 holiday season.
- Rich valuation: "In spite of its difficulties, Sony is currently trading at a rich 68.3x extimated fiscal 2007 ending March 31, 2007 EPADR, a significant premium to its peer group." Even the six-month price target of $35 represents a robust P/E multiple of 52.2x of estimated 2007 EPADR of $0.67.
Fark.com linked to this, which used this post as its source:
"The MD of US development studio Valve Corporation has labelled Sony's PlayStation 3 "a total disaster" and predicted that Nintendo's Wii will win the next-gen console battle."
Why is this guy pissed? I think this issue is developing games for PS3:
Just say, 'This was a horrible disaster and we're sorry and we're going to stop selling this and stop trying to convince people to develop for it.'
Sony gets a 3-star rating from Morningstar, and a fair value estimate of $50 per share.
Morningstar analyst Rod Bare's report dated 12/7/06 is oddly dissonant in its use of positive adjectives like "leading" "robust" and "intriguing" to describe Sony's fortunes:
Sony's Bravia line of flat-panel televisions is a growing success. Sony Ericsson phones have leading market share among profitable high-end customer segments, and Walkman phones are showing real promise. Sales of the PlayStation Portable video game player are robust, and the PlayStation 3 is selling well, when it's available. More importantly, these investments have partners with skin in the game. They represent an intriguing consortium of tech-savvy allies with a very Sony-friendly set of incentives.
Newer reports say the PS3 isn't selling well and has plenty of availability. Dunno about you, but all I've read and heard on the phone front is the promise of the Apple I-Phone and Motorola's Razr/Krazr glut. I have read nothing about Walkman phones or Sony Ericsson phones. Either Bare's analyst report is stale (after only a month and change) or it's off-the-mark.
Jim Cramer, on the 1/11 edition of Mad Money, pushed Sony as a value play, hated by Wall Street. How did he equate SNE with value? By comparing it to the current beauty queen of the market, Apple. Apple commands a market premium because investors love the Apple story and its innovative products. Unlike Sony, Apple has had tremendous success with foisting its proprietary music format on consumers via I-Tunes.
Cramer then bizarrely talked about the value of Sony broken up into its indvidual businesses and valued the entire package in a wide range between $61 and $72.
If Howard Stringer announces that he's going to spin off valuable parts of the Sony conglomerate, then yes, Cramer's value thesis would take purchase on the Pig, but until that happens, I think the Sony-as-an-investing-alternative-to-Apple thesis is a stretch.
I am in complete agreement with Jonathan Last, and his argument against Sony at Galley Slaves.
JVL says to short Sony for two huge reasons: PS3 sales are severly lagging expectations, and Blu-ray purchasers will be unable to go on Rome adventures with Barbara Dare.
Here is the first site cited by JVL, plus a related post at The Guardian.
Sony doesn't want porn produced on Blu-Ray discs. Apparently Sony made this same mistake with Betamax. Porn helped VHS win the videotape format war. Didn't Blockbuster's policy of no porn/no NC-17 videos save the mom-and-pop video store from oblivion by leaving a tremendous revenue source in the marketplace? Is Sony doing the same thing here? Or is Sony worried that it currently cannot manufacture enough Blu-Ray discs and doesn't want the market dominated by Digital Playground and Vivid titles? This is negative for Sony's bottom line, either way.
Here is the second site mentioned by JVL.
Sony has sold only 687,000 PS3 units, whereas Nintendo sold 1.1 million Wiis and Microsoft sold 4.5 million Xbox 360's. 'Nuff said.
Finally, a brilliant commentator kicked Sony around in November 2005 over its penchant for awful DRM software. He also didn't care for the stock's fundamentals either. Of course, SNE stock shot up from $32 to $50 soon after this post.
Which makes a perfect segue for some second-guessing:
- A hot must-have game for PS3 could generate considerable interest and demand, much like what Halo did for Xbox.
- What is the forecast for the yen versus the dollar? Last week's weaker yen drove up Japanese stocks, including Sony.
I'm not going to make this post any longer by recapping the cons (and pros) for Sony. The case against Sony is wholly convincing.
What am I looking at investment-wise? Puts that are barely out-of-the-money. As I write this, SNE is trading at around $46.90. The April $45 puts are $1.45/1.55 bid/ask. The July $45 puts are $2.15/2.25. The January '08 $45 puts are $3.10/3.20. If Sony rises a bit, then I'll also consider the $50 puts.
Before I pull the trigger on any of these, I'm going to do three things: 1. Look up the yen/dollar exchange rate and yen forecasts; 2. Check for any new Sony news reports, especially on PS3; and 3. Make sure it's a bullish day for Sony and Wall Street.
09 January 2007
Blog Hog John C. recently said hello and suggested the Pig sniff out a truffle-y morsel called Western Union (WU).
I haven't had my value-investing cap on recently, so no wonder WU failed to get noticed by yours truly. So I went to Morningstar, Seeking Alpha, and Google News to dig up some reports and insight into this well-known, and recently spun-off stock.
Western Union is a $17B company that specializes in worldwide money transfer services. Morningstar's Mark Weber has has a fair value of WU of $32 a share. WU closed today at $21.96, putting it in deep 5-star territory. Weber likes WU's industry-dominant position over competitors like MoneyGram (MGI), and its high profits and billion-plus-and-growing free cash flow. Western Union is a long-standing, trustworthy brand in a business that thrives on convenience and reputation.
If you don't have a Morningstar subscription, here is a no-subscription-required interview with Mark Weber, discussing why he would buy WU if his employer permitted. Weber makes a key point regarding the competitive advantage of the Western Union brand:
Western Union is one of he world's most-recognized brands. More importantly, it's a trust brand. Most of the firm's customers are immigrants to wealthier countries from poorer ones...They need to know that the cash they send home will be available to their families. After years of reliable service, Western Union has established a solid reputation among migrant communities. Immigrants know that their hard-earned cash will get from point A to point B if they use Western Union. Given how important the transaction is to the customer, it's hard to get him or her to switch to a competing service when Western Union has never let them down.
Fat Pitch Financials on Seeking Alpha distilled Weber's arguments (and on the surface, his $32-a-share valuation model) making the long case for WU. Fat Pitch likes WU's wide business moat and vast network that grows with minimal incremental costs.
BusinessWeek just published a piece on a remittance transfer upstart called Microfinance International (MFIC) that is supposedly going to stir up the industry. The MFIC business model/article thesis is a lovely bit of Nobel-inspired optimistic hooey.
We'll just ignore those parts.
Here's a good bit from the article:
In the U.S. alone, 12.6 million Latin American immigrants will send home $45 billion in remittances in 2006. Over the last two years, the percentage of Latin American immigrants regularly sending money home to their relatives has increased from 61% to 73%, and the average amount of each remittance increased from $240 to $300.
These figures are great news for WU. 12% more immigrants sending 25% more money home should equate to increased revenues and cash flow for WU, and higher share prices for WU shareholders.
Here's an even better bit from the article, including use of the "some say" journalistic crutch, but with an actual, live, named source:
Traditionally, the remittance industry has been dominated by Western Union (WU), which made almost $1 billion on sales of almost $4 billion last year, and Moneygram (MGI), companies some say haven't had the customer's best interests at heart.
"They're gouging. Their profit margins are 30%, so if you can serve the poor efficiently charging an appropriate rate, then that's great. It's a great opportunity," says Geoff Davis, president and CEO of Unitus...
Blah blah blah.
Okay, I'm not so heartless as to not want to profit off of the gouging of the poor.
C'mon, don't cry.
Price gouging and ridiculous profit margins are good for investors. And Western Union should feel secure in their ability to generate those margins. Congress isn't going to go after Western Union. Immigrants don't vote much. The poor--not so much either. We can start to worry if AARP-card-carrying seniors start using Western Union's services, and then complain to their Representative. And anyway, another W stock, Wal-Mart (WMT), already has the starring role of corporate whipping boy.
One of Western Union's hometown papers ran a supportive piece last Saturday:
One of Brian Barish's hot stock picks: Western Union, the money-transfer business spun off by First Data.
The Douglas County-based company is a good example of a "misvalued" stock he likes.
Barish, lead manager of the Cambiar Opportunity Fund, cites uncertainty surrounding Western Union and notes investors have worried about a drop in business along the "U.S.-Mexico corridor" amid the immigration reform debate.
"It's had a chilling effect," he said.
I think this creepy photo has a chilling effect, Brian.
Perhaps this short-term uncertainty argument is why the stock is a relative bargain.
The Watch List grows...
04 January 2007
Okay, so the CNE logo is not as eye-catching a graphic as Salma, but until Playboy runs a spread on the women of the oil patch, this'll have to do.
Canetic is one of many income trusts that Canadians, especially retirees, invest in for the large monthly dividends. Nice thing is, this one trades on the NYSE as well, unlike COS.UN, the income trust I examined back in 2005.
Canetic, along with all other Canadian trusts plummeted in October after the Tory finance minister, Jim Flaherty, shocked Canuck investors by sunsetting existing trusts' tax benefits in 2011.
Cramer noticed. The Canadian Press noticed:
After roiling financial markets and riling investors, the federal government's decision to tax income trusts has been named 2006 business story of the year by CP and Broadcast News.
Cramer took a look at CNE (as well as another interesting trust, Enterra) back on November 15:
In response to all the email he gets regarding Canadian energy trusts, Cramer told viewers these stocks are worth owning now.
In fact, he said he would rent a U-Haul and back up the truck. Cramer believes two Canadian energy trusts, Canetic Resources Trust ( CNE - news - Cramer's Take) and Enterra Energy Trust (ENT - news - Cramer's Take - Rating), are done going down and ready to bounce.
Even if these stocks don't move one bit, they are worth owning because they are "dividend-ilicious," he said, adding that Canetic offers a dividend of 19%, while Enterra has a 20% yield.
There is also a chance the government might change its mind and retract the law, an event that could cause both Canetic and Enterra shares to jump, Cramer said.
I agree that the monthly dividend is the real draw of Canetic. Cramer was a bit premature with his assertion that these trusts were "done going down." They both popped in the days following this Mad Money broadcast (CNE went from just over $13 to $15 a share; ENT went from $7.48 to $10.) and have since recovered from the Cramer effect.
Actually, today was a pretty rough day for oil stocks as CNE closed today at $13.25, down 4.6%.
Before I leave Cramer alone, he is also wrong (wha? Cramer wrong?) about the Canadian government changing the law. First, the Conservatives are in charge, and they pulled this unfriendly-to-investors manoeuver. The Liberals certainly won't turn away higher government revenues. Second, the Tories rightfully feared that huge traditional corporations like telecommunications giant BCE and natural gas producer EnCana would become income trusts to lessen their tax burden.
I've picked on Cramer enough. Now let's look at Kish Patel from Morningstar's reasoning behind giving CNE one miserable star:
We are reducing our fair value estimate for Canetic to $10 per unit from $11. We have reduced our production estimate for 2007 to approximately 78,000 boe/d. Since we had originally factored in some uncertainty around the Starpoint merger by utilizing an elevated cost of equity, we think it's appropriate at this time to lower Canetic's cost of equity now that some of that uncertainty has been reduced.
Our fair value estimate is based on benchmark oil price forecasts of $66 per barrel in 2006, $54 in 2007, $46 in 2008, $44 in 2009, and $46 in 2010, and natural-gas price forecasts of $6.70 per thousand cubic feet in 2006, $6.10 in 2007, $6.10 in 2008, $6.20 in 2009, and $6.50 in 2010. A 10% increase in these forecasts would result in a fair value estimate of $14 per share, and a 10% decrease in these forecasts would result in a fair value estimate of $5.50.
My beef with Morningstar's low fair value estimate comes from their 2007 oil price forecast. The Energy Information Administration of the Department of Energy recently projected crude oil to average $65 per barrel in 2007.
Morningstar used $54 in their valuation model.
But they were nice enough to show how a 10% change in the price of oil either way would change the estimate.
We're not talking about a 10% change. $65 per barrel is a bit more than 20% higher than $54 per barrel. So if a 10% increase raises the fair value of CNE from $10 a share to $14, shouldn't a 20% increase bump up CNE's fair value to around $18?
Patel is also worried about the power of the Loonie:
The trust could also be hurt by continued strength in the Canadian dollar, as it would receive less for each U.S. dollar-denominated barrel of oil it sells.
The Canadian dollar has softened to $0.85 from almost $0.91 earlier this year, alleviating some of Patel's concern.
So there are some significant risks that come with these attractive yields. Dividend-yielding stocks are usually dull, low-volatility affairs.
I should consider my options.
Theoretically, if I were to purchase say 1000 shares of CNE tomorrow, I would consider picking up ten August 07 put options with a $12.50 strike as a hedge. Each option last sold for $1.05 today. These puts would give me ample insurance against a collapse of CNE shares.
CNE is headed for the Watch List. In order to keep tabs on the stock and information that can affect its price, here are several links of note:
Here is where you can get the Canetic Trust investor fact sheet.
Here is a site to keep up on oil price forecasts.
Here are current oil prices.
Google Finance will help keep tabs on CNE's price and its competition.
Here is AccuWeather's 15-day forecast for a particular Northeast locale that can help you keep up with whether the winter weather is abnormally warm or cool, thus affecting the price of oil (and CNE)