Contributor since: 2006
Good point. I don't have an Angieslist subscription but I instantly took the mediocre Yelp reviews to mean Donovan's place is a bad actor as well. He's definitely more credible/professional than the Lumber Liquidator guys. Apologies to Monster Flooring.
Great article. However, it seems that everyone in the flooring industry runs a shady, half-assed operation.
Donovan's company reviews:
"Sourcing the obvious in the Wall Street Journal is why I stopped reading his rant after the first sentence."
No Matt. The reason ONE is the most hated company on the Street right now is because the Department of Education is doing everything in it's power to shut down the company's ability to charge students a fee for using their cash distribution services.
Two articles highlight this risk from the WSJ:
These regulations, in prior drafts have looked very draconian (this comes from the DoE Website at
[Colleges] "must ensure that the student or parent does not incur any cost associated with—
(A) Opening the financial account or initially receiving the debit card, prepaid card, or access device associated with the account;
(B) Maintaining the account, such as a monthly maintenance fee, inactivity fee, or account termination fee;
(C) Using the debit card, prepaid card, or access device to conduct up to four cash withdrawals per month or statement cycle at any out-of-network ATM located in a State; and
(D) Using the debit card, prepaid card, or access device to conduct point-of-sale purchases or to receive cash back from point-of-sale purchases.
(iv) Must ensure that the debit card, prepaid card, or access device associated with the account belongs to a surcharge-free national or regional ATM network that has ATMs on or near each campus;
(v) May not market or portray the financial account, debit card, prepaid card, or access device as a credit card or credit instrument, or subsequently convert the account, card, or device to a credit card or credit instrument;
(vi) Must ensure that the student or parent is not assessed any fee or charge to cover an ATM transaction, or one-time debit card transaction, when the financial account has insufficient or unavailable funds, or when the entity declines a transaction."
If these regulations are adopted as currently written, it would basically shut down a huge part of Higher One's business model.
Now, the company and it's new CEO could figure out a way to circumvent the rules because the company does provide a valuable services. THIS could be an opportunity since the stock is cheap and hated.
However, a direct attack by the government on Higher One's business should probably have been mentioned in your article, Charles Moscoe. I know finding "hidden sources" such as the Wall Street Journal on-line are difficult, but it's worth doing the tough digging to find out what's really going on.
Nice analysis. I'm long too! Let's hope you're right.
Very nice summary of an important book
This is one of the most intelligent articles ever written about actual money management. It's easy for academics to throw stones at mutual fund managers because of the exact issues that you have outlined. Most people pay for active management because 1) they have no other choice in their 401k or retirement plans and 2) they know that they don't actually know how to manage money by themselves. Despite the claims of Motley Fool, Jim Cramer and hundreds of other internet sites, it's virtually impossible for a layman to actually beat the market without eventually blowing up completely. Ask all the individuals that started trading during the .com era. For every one individual that ended up a millionaire, I can show you 100 who ended up worse than when they started. Unless you have Wall Street experience or have time to study your investments (Jim Cramer says do one hour of homework on each of your stocks every month - oh please - how many people have time or even know how to do this!)
However, I think you can't let the mutual fund industry off the hook either. The endless drive to gather new assets is one of the main reasons that people pile into funds at the top. All the money managers I respect actually close their funds when they can't find any new ideas. That avoids the trap of money pouring in at the top. Like everything, it's a matter of greed versus doing what's right. Usually, on Wall Street, greed wins out. Also, a focus on absolute performance, rather than style boxes and relative returns would also make Mutual Funds better alternatives. The bull market since 1982 created so many unnatural and eccentric distinctions in mutual funds that it completely obscured the point of investing - to actually make money.
So the correct conclusion might also be a reform of the mutual fund industry as well as different measures of benchmarking.
Your analyis gives ITWO no credit for the $80 million payment ITWO will recieve from SAP in regards to its out of court settlement. ITWO should receive this payment in the current quarter.
If you include this amount, it seems JDAS is clearly trying to steal ITWO. The original deal was already at the low end of the valuation range and to lower it any more would not be acceptable. If JDAS wants to lower the price, ITWO should take the $20 million and move on. It can survive just fine without JDAS.
This week's most anticipated showdown was a complete mismatch. After defending themselves for months against charges by David Einhorn that the firm was undercapitalized and aggressive in
its accounting, Lehman's management announced this week the firm would lose more than $2 billion and needed to raise an additional $6 billion in capital.
Turns out Lehman's CFO, Erin Callan, was set up as a mouthpiece for Lehman's dastardly CEO Dick Fuld right from the start. David Einhorn understood Lehman's balance sheet better than CFO Callan ever did. And is it any wonder. Callan admitted in an April interview with Portfolio magazine that she had no "accounting background."
Which makes you wonder why she was chosen for the difficult job just six months ago? Unless, of course, CEO Dick needed someone naïve and inexperienced to help hide the ugly truth of LEH's balance sheet as long as possible. On Thursday, CEO Dick "demoted" Callan from CFO back to the rank-and-file, essentially throwing "Wall Street's Most Powerful Woman" under the bus. So Einhorn wins this round, with an assist from Fuld.
Thanks for all the insightful comments. Let me address a couple of good points you brought up.
I started looking at the Shanghai market after reading Robert Hsu's excellent newsletter, China Strategy. He's a well connected and intelligent analyst that actually has experience living and trading in Asia. His analysis is coherent and well researched. He wrote in the May 3rd issue ...
“I've also heard stories of Buddhist monks becoming avid day-traders who visit local brokerage houses on a daily basis, wearing baseball caps to disguise their shaved scalps. The most interesting story to me involved hundreds of Shanghai nannies who quit their jobs last month to become full-time stock speculators. Everyone, it seems, wants a piece of the China Miracle.
The Chinese nanny story struck a personal chord with me because my childhood nanny in Taiwan, Miss Wu, recklessly plunged all of her personal savings into the Taiwanese stock market during the late '80s. She managed to turn $60,000 into $300,000 by purchasing highflying bank stocks on margin. But when the market eventually crashed, Miss Wu lost everything. She had no retirement funds left, and my family has been helping her ever since."
We've seen this thing over and over in the past decade. Unsophisticated investors drive up asset prices to unsustainable levels creating the risk for serious declines. Whether it be the NASDAQ, real estate, or whatever, it all ends the same way - when investors who don't understand risk use margin and cheap money to chase exorbitant returns, it ends in a major collapse.
So if it looks like a duck, quacks like a duck and waddles like a duck, it's probably a bubble.
I think the most compelling argument AGAINST a massive decline occurring is that 1) valuations aren't absurd and 2) we are still in the early innings of the Shanghai market run-up.
Like Mathew said in his comment, the Shanghai market was in a serious slump just 18 months ago. So if we go back to my NASDAQ comparison, we might well be in 1997 or 1998, not 2000. From 1995 to 2000, the NASDAQ advanced 567%. The Nikkei in the 1980s, which was probably one of the top ten bubbles of all time, increased about 470% in the entire decade.
Part of the Shanghai advance is "catch-up" because of significant reforms taken on by the Chinese government. Prior to 2005, the best Chinese companies weren't listed in Shanghai, they were listed in Hong Kong or on the NYSE. The Shanghai market was a dumping ground for virtually bankrupt State Owned Enterprises (SOEs). But recently, quality China companies like China Life, China Aluminum and Sinopec began listing their shares on the Shanghai Index. In addition, the Chinese securities regulators made all classes of shares tradable. That eliminated much of dual or triple ownership structure that made analysis of these SOEs virtually impossible. And the increased transparency lead to higher valuations.
But what worries me about the Shanghai market, is the speed of the advanced. The from 1995 to 1998, the NASDAQ advanced about 164% until it hit a 33% correction in 1998. In comparison, the Shanghai market has increased 330% in two years. That type of advance is unattainable and will result in serious downside volatility. It might not spell the end of the bull market, but it will result in some breathtaking declines.
A second argument against a massive decline is that valuations of China stocks are not absurd. This is actually somewhat difficult to quantify because, as huangthomas points out in his comment, there are four different markets in China. In addition, many of the leading Chinese stocks are listed on markets outside of Shanghai. While some shares trade at absurd valuations, some share trade at low valuations. China Life (LFC) at 73x earnings looks like a bubble valuation to me. But China Mobile (CHL) at 21x earnings looks reasonable. Cnooc (CEO) at 10x earnings looks cheap but CTRIP.COM (CTRP) at 76x earnings looks expensive. So as you see, you can't paint the China market all with one brush, which makes it difficult to say that the valuations are too high.
Just one more note. The "strong fundamentals" argument is usually irrelevant in understanding bubbles. The fundamentals are always strong as bubbles form. It's the strong fundamentals that creates excitment and increased stock speculation. Saying that internet companies were all money losing ventures is revisionist history. EBAY, AMZN, AOL, CSCO and YHOO were the fastest growing companies in the history of the world. Many are now the most profitable as well. Investors create the bubble by projecting these strong fundmetals to ininity and price shares off of those linear projections. That leads to massive overvaluation which creates the final phase of the bubble. When the speculation reaches an excessive levels, it bursts not because of poor fundamentals but because something changes investor behavior. An external shock, less liquidity or simple exhastion can all spell the end of the advance.
Therefore, I would expect a lot more serious declines on the order of 15% - 30% to shake out a lot of the new, retail investors. But I can't say for certain that its the end of the run. Hence, my call for a "correction," not a collapse in the Chinese market.