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Darren McCammon
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Darren owns ProActive Financial LLC where he provides Financial Planning and Analysis consulting services. In addition to these consulting services, he also manages family investment accounts. Darren's education includes a Bachelors in Economics, an MBA, and a Certificate in Personal Financial... More
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  • The CFO Of DDD Left Today...

    The CFO of 3D Systems (NYSE:DDD), Mr. Ted Hull, left the company today. It was portrayed as mutual as these things usually are, but it likely was not. I come to this conclusion because Mr. Hull has only been with DDD since November 2014, the departure was sudden "as of end of day today", and he was replaced by his controller instead of their being another CFO from the outside lined up. When there is a mutually agreed upon change in leadership there is usually a transition period.

    It is unlikely that Mr. Ted Hull "wasn't up to the level of competency necessary to effect currency hedging" as one comment opined. He spent over 5 years as functional CFO for Global sales at Cisco. With over $40 billion in annual sales across the globe under his control, I'm guessing he was very competent at currency hedging.

    As you can see in the link above, Mr. Hull has a solid resume. However, Mr. Hull's options with DDD would have been deeply in the hole so there was little incentive to stay in what had to be a tumultuous situation. I have no knowledge of this particular instance; however, if for instance a CFO at some other company were being pressured to "work with the CEO" regarding financials, that CFO's best choice in such a situation might be to leave. A CFO caught cooking the books risks his reputation, career and potential jail time if he signs financials that he knows to be incorrect. Say for instance not writing down goodwill and assets from purchases which have clearly become impaired. This is of course just a potential example that may have nothing to do with the current situation at DDD.

    Some additional information from the SEC filing which may or may not be pertainent:

    "The separation agreement provides that Mr. Hull will be paid an amount of up to $400,000 equal to one year of his current salary ("Separation Pay")........For a period of three years after separation, the Company will indemnify Mr. Hull for any claim arising from his performance as an officer, director or employee of the Company or any of its subsidiaries or other affiliates or in any other capacity in which he served at the Company's request, in each case to the maximum extent permitted by law and under the Company's Articles of Incorporation and By-Laws.

    As part of the separation agreement, and subject to certain conditions, Mr. Hull agreed to a release of claims against the Company and to certain non-compete, non-solicitation and non-disparagement provisions."

    I do not imply that there is, was, or will be any improper accounting at 3D Systems. For all I know Mr. Ted Hull left because he decided he wanted to sail around the world or spend more time with his family. I have no specific knowledge of the situation. Each investor must draw their own conclusion.

    Tags: DDD, short
    May 15 2:18 PM | Link | 6 Comments
  • Retiree Investment Risk

    The Sharpe and Sortino ratios are common measures of risk vs. return. A graph of the performance of $10k invested is required for funds. Risk equals price volatility. What these all have in common is a focus on total return vs. price volatility.

    While I agree the focus on total return is key for all investors and should be the primary focus for those in the accumulation stage, I do not think the same can be said for those in the distribution phase of their lives. For those in the distribution phase, the retiree, an exclusive focus on total return vs. price volatility does not tell the whole story and can be counterproductive. The main risk for all but the most well heeled retiree is not price volatility but rather the risk of running out of purchasing power before they run out of life. Existing measures which focus on price do not recognize this risk and can lead retired investors to improper conclusions.

    For instance the common conclusion that Treasuries are riskless. Treasuries are riskless from a price point of view, 20 years from now you are going to get back the dollars, in nominal terms, you invested. However, this does you little good if in those 20 years the price of a Big Mac has doubled (a 3.6% annual inflation rate halves your purchasing power over 20 years). It also doesn't do you much good if you starved to death in the meantime because the yield from such investments couldn't provide the steady stream of Big Mac's you needed to survive. For the middle class retiree the purchasing power and "enough sustainable income for retirement" risk of a Treasury is huge. For the middle class retiree a Treasury is anything but riskless. In fact the only guarantee may be that an exclusive focus on riskless investments will ensure the middle class retiree runs out of purchasing power before they run out of life. We do a real disservice to this group when our measurement tools cause them to focus on price volatility as if it is the only risk.

    The focus on price not only ignores the main risk of the retiree, which is more about maintaining a sustainable and growing income stream, it also tends to foster emotion laden decisions. By emphasizing price volatility with our graphs and risk measurements we tend to promote fear and greed. We see prices crash in 2008, get scared and sell. We only buy back into the market once prices have risen for a few years and feel we are missing out or "need more return and have no choice". Thus the emphasis is on price trend, not "what am I getting for my monetary investment". Were we buying the donut shop down the street, we would see a fall in the price asked, provided the expected income stream hadn't also fallen, as a positive. It is dysfunctional that we see a fall in the price of stocks which has already occurred as a negative, particularly if their expected income streams haven't correspondingly fallen. A system of measurement or risk focus which caused us to react with the emotion of, "Cool, I can buy this income stream for less" would be preferable. In other words the retiree is probably better served by focusing less on price volatility and more on the income stream and it's volatility.

    Again existing measures of risk and required charts for funds, do not even take the income stream risk into account. For this reason I find them inadequate. Wouldn't this chart designed by Trust and Fiduciary Management (no affiliation) be more useful than the standard price only chart?

    (click to enlarge)Pass Through Security based Portfolio performance

    Note the yellow line in the above graph is the same as the standard total return based line required for mutual fund portfolio's and widely used elsewhere. However, because this graph was used in a white paper academic study, it doesn't have to follow the standard reporting format of just showing the yellow line. Instead the author can also include a blue line showing the income stream, it's accumulation and volatility over time. Doesn't the addition of this second blue line tell a much different and fuller story for the retiree? One more helpful in making one's investment decisions? If I were a retiree only looking at the yellow line, I might be scared away from this portfolio by the sharp drop in price which occurred during 2008. The inclusion of the blue line however reassures me that the income stream was much steadier and the yield much higher than I could get from for instance a bond.

    The next graph even further emphasizes the income stream

    (click to enlarge)Pass Through Security Portfolio Yield Graph

    Here we see the yield from the portfolio went up considerably during the 2008 crash. All of a sudden the price having already fallen might be a good thing. What I like about this graph is it could have led the viewer in late 2008 to a more useful conclusion of, "Wow, I can get a lot of bang for my buck!" We are encouraged to buy in late 2008 and early 2009, not to sell. Isn't this more productive and predictive? Wouldn't the resulting choice likely have been more beneficial? By focusing on the income stream instead of price we have reduced the fear and greed imparted on the viewer. We have encouraged better investment decision making by telling a more useful and descriptive story.

    The above analysis indicates the retiree is better served by a focus on the potential income stream and it's volatility, rather than just looking at total return and price volatility. For the retiree risk is at least as much about creating a sustainable and growing income stream as it is about price. But can we go one step further towards reducing risk and ensuring not only a stable income stream buy also a growing one?

    A Money Management Strategy Can Reduce Risk

    The implementation of a simple money management strategy when combined with a high yield portfolio can go a long way towards further developing a stable and increasing income stream for the retiree. Let's take the pass-through security portfolio from above but instead of re-investing the dividends lets assume the client uses part of it to fund their retirement and keeps the rest in cash.

    In this money management strategy we will specifically assume the client takes an initial withdrawal equal to 4% of the portfolio (a commonly suggested Safe Withdrawal Rate or SWR), increases that withdrawal amount by 3% each year, and leaves any additional distributions in cash earning 0%. Our retiree continues to do this each year, letting the leftover cash build, until the portfolio experiences a negative calendar year return of 20% or greater. At that point our retiree per plan reinvests the entire amount back into the portfolio. This is a simple enough strategy, spend 4% and leave the rest in cash until the market crashes, then reinvest.

    Here's what our chart now looks like:

    (click to enlarge)A simple money management strategy helpsLooking further into the detail we see the following:

    (click to enlarge)Pass Through Securities + Money Management

    * Starting with $10,000 at the beginning of 2002, the portfolio balance fluctuates and we experience volatility especially price volatility similar to the market (S&P 500). The portfolio yield and income however is much less volatile. It remains in the 7-8% range until suddenly spiking during the crash (lower prices but for the most part not lower dividends). On January 1st 2009, right in the middle of the crash our money management strategy said to re-invest all cash back into securities. (I can tell you from experience, this is not an easy thing to do.) However, in doing so the money management strategy bought securities when they were on sale, yielding 12-13%. The result is the overall portfolio yield effectively stepped up to 9%+, a rate it continues to enjoy. To summarize by using a money management strategy the retiree turned volatility into an advantage, using it to effectively produce a steady AND INCREASING income stream.

    ** Notice the riskless cash balance, both nominally and as % of total, increases over time peaking at almost 40% of the total balance in 2008. It then drops when the market crash causes reinvestment. This is an automatic form of selling high and buying low. Because the cash builds as long as the portfolio is doing well, the strategy also significantly reduces risk as the market climbs.

    *** One's retirement income in this scenario both increases and was never effected by the gyrations of the market. The yield in every period is greater than the amount withdrawn and spent, with a little cash left over to restart the virtuous cycle.

    So why if this simple strategy works do you never hear about it from most advisors and financial media? In my opinion the answer is also pretty simple, know one makes money advising you to leave a chunk of your money in cash. Your not going to buy ongoing subscriptions or tune your TV to a channel which just keeps repeating let cash build over time. It's just not that interesting. Can you see Cramer pushing his noise buttons about cash...not. Investment advisors aren't going to say hold cash either because they typically don't get to charge a commission or % of AUM for overseeing cash. They also aren't going to buy advertising in a financial magazine or on TV when that media encourages people to not use their services but instead hold cash. It's like expecting the car salesman at your local lot to suggest you don't buy a car and instead ride a bike. Just ain't gonna happen.

    Conclusion

    By utilizing pass-through securities to formulate a high yield portfolio, then combining this portfolio with a simple money management strategy, the retiree can create a relatively stable and growing income stream. It is this stable and growing income stream which allows the retiree to overcome their true greatest risk, running out of purchasing power before they run out of life.

    May 08 2:29 PM | Link | 5 Comments
  • Why I Am Short LendingTree.com (TREE)

    There's been various full length articles explaining why the LendingTree.com (NASDAQ:TREE) business process does not put the borrower first, creates annoying feeding frenzy calls from lenders, and must continue to spend a lot on advertising. Here's two:

    "LendingTree Won't Bear Long Term Fruit"

    "LendingTree, Inc.: Unrealistic Expectations"

    I won't reiterate the arguments in detail here, you can read the links above.

    What I will do is give you the basic reason why I'm short TREE, ridiculously high valuation. I listened to the latest conference call from LendingTree.com. The CEO seemed to continuously imply that they should be thought of as the Google (NASDAQ:GOOG) of debt. While I agree that their business models are similar, delivering interested eyeballs to their customers, one must realize that Google dominates search whereas TREE does not dominate credit search. TREE faces major competition not just from offline historical ways of getting a loan (banks, loan centers, direct mail, etc.) but also from the likes of Zillow.com (NASDAQ:Z), CreditKarma.com, Bankrate.com (NYSE:RATE), and even social media sites and general search sites like Google.com itself. This is why TREE brings 5.6% of revenue to the bottom line whereas 22.4% of GOOG's revenue becomes bottom line profit. Tree.com in no way dominates the way Google.com does. However, let's for a moment suspend belief and say TREE deserves the multiples of GOOG:

    GOOG P/E = 26
    TREE P/E = 66
    Implied Valuation = -60%

    GOOG EV/EBITDA = 20
    TREE EV/EBITDA = 53
    Implied Valuation = -62%

    GOOG P/B = 3.5
    TREE P/B = 6.5
    Implied valuation = -46%

    So assuming TREE does deserve a valuation comparable to GOOG (not true), TREE should still decline in price somewhere between 46 and 62%. This is the basic reason I am short TREE.

    May 01 10:11 AM | Link | 1 Comment
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  • Retiree Investment Risk - I added to my instablog post and asked it be considered as a potential artilce: http://seekingalpha.com/p/2dd1w
    May 8, 2015
  • $eri I submitted an article on ERI last night after earnings came out. It is available for premium members now. Disclosure -long ERI
    Mar 17, 2015
  • $FULL, $CANN Interesting stuff at CANN. Maybe that investment by FULL won't be worthless?
    Mar 12, 2015
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