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James Cullen
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I graduated from Boston College (Carroll School of Management -- Finance and Corporate Reporting & Analysis concentrations), where I was extensively involved with the BC Investment Club (Portfolio Manager and Vice President). After graduating, I worked at a large buyside firm on the energy... More
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  • Sitting in Cash Because Markets Can Go Down Too

    I haven’t said much about what I’ve been doing personally here of late. In sum, the general theme is that I’ve been scaling out of positions the entire summer, and am now 100% cash. Had I not sold anything, I would be up more on the year than I am at present – but that’s pretty much par for the course in a rally that has been as sharp and persistent as this one.

    There’s still a strong undercurrent of disbelief at this rally, so in that sense not much has changed since March, when the world was bearish and nothing but pain existed for equity holders. The difference now (besides much higher prices) is that there’s a growing contingent with a belief that the recovery is at hand, or their more speculative counterparts who don’t believe in a recovery but are afraid of missing a higher move.

    A growing number of financial stocks that are essentially worthless have seen their option values multiply several-fold; the well-documented list includes Fannie Mae (FNM), Freddie Mac (FRE), AIG, Citigroup (NYSE:C), and Lehman (OTC:LEHMQ), and August trading volume has been heavily concentrated in those names. I’m not discounting the option value of a stock; real-world outcomes are probabilistic and stock prices should reflect that. But it does speak to speculation returning to the market, and that’s a sign of caution in a time of great uncertainty – and make no mistake, the short-term bandages are only hiding long-term problems.

    Good investing is not about having a myopic focus on maximizing returns, it’s also about managing risk. Winning is important, but so is not losing. With the feedback loop of the last six months, market conditions are such that it’s very easy to forget that losing is a distinct possibility in an era of debt deflation. Although inflation has been the headline worry of Fed watchers, I’m not convinced; the intermediate concern (2-5 years) that seems underestimated is deflation. Central banks are small in comparison to global capital flows, and although we might try to stimulate like crazy, it will be difficult to offset trillions of dollars in irresponsible lending being rationalized.

    In light of this, I’m looking at convertible securities that offer yields of 6% or more (about 500 bps over 2-year Treasuries) in industries that will have above-average profitability in the case of an economic recovery. My assumption is that the yield alone will offer an attractive return, and with most at a discount to par, the total return potential approaches double-digits over a two-year time frame. If I’m wrong about the immediacy of a market recovery, the convertible option offers a hedge on rising stock prices – in sum, a better balance of risk and reward than either a straight stock or bond allocation.

    A final closing note: I’m going to change up my policy about writing, since I often spend dozens of hours studying something only to determine it is a dead end. So, in the future, I’ll comment on those, instead of just the scarce opportunities I end up acting on.

    Disclosure: None.

    Sep 02 6:02 PM | Link | Comment!
  • Book Review: Full of Bull

    I recently finished reading Stephen McClellan’s revised and updated book Full of Bull: Unscramble Wall Street Doubletalk to Protect and Build Your Portfolio. McClellan spent over 30 years as an analyst of technology stocks, and had a front row seat to the evolution of the modern sell-side analyst.

    McClellan covers a diverse set of topics, and although there are occasions when the book doesn’t flow right – he frequently jumps back and forth between advice and sometimes tenuously-connected anecdotes – that’s a minor problem at worst. More glaring - and perhaps a consequence of when it went to press (February 2009) or his personal investment outlook - is the negative undertones and myopic focus on the current bear market. I wonder if recent market events have changed his disposition…

    The best lesson this book offers is for the individual investor who believes they can benefit by listening to headline recommendations of upgrades and downgrades – i.e. new “buy” (or equivalent) calls. Wall Street analysts, as McClellan says, aren’t judged by the accuracy of their stockpicking, but instead by client relations and related business they generate. Helping individual investors is at the bottom of their priority list.

    By now, that overwhelming urge to be optimistic (at least in public) about stocks should be well-known, even if the situation doesn’t warrant it. Most research disclosures still show that a “sell” rating is used less than 20% of the time, and that’s part of the game played by analysts with the company’s they cover – many of whom McClellan says take petty actions against analysts who aren’t favorable on their shares.

    Another important takeaway for emphasis: the short-term is overanalyzed, and individual investors don’t really have a chance of gaming those movements. Particularly in the large-cap space, dozens of analysts will be following a company, and there’s no edge to be had from ratings changes or earnings estimate revisions. Stick to the small-cap space where more inefficiencies can be found, and take a longer-term view of a company’s competitive positioning.

    One prominent part of the book that won’t directly help you as an investor, but I nonetheless found to be great reading, was the description of how the analyst’s role has evolved. Research has become entwined with other functions at an investment bank, and most research today is paid for indirectly. McClellan bemoans this, and how it compromises the ideal purpose of research, but no solution to this problem is offered. That’s one idea I’d like to see more thoroughly developed should another edition of Full of Bull ever be published.

    Disclosure: The book publisher provided me with a free copy to review. If you purchase the book using a link from this page, I earn a small commission, but that does not result in you being charged anything extra.

    Aug 20 12:54 AM | Link | Comment!
  • Book Review: Power and Persuasion

    I’ve been away for the last week and a half on vacation, and that’s provided me with a chance to catch up on plenty of overdue reading (if putting me slightly out of touch with recent news). One of the books I read during my time away was Michael Masterson’s Power and Persuasion. Previously, I reviewed another book from Masterson, entitled “Automatic Wealth for Grads,” my notes on which can be found here.

    Who stands to benefit from this? If I had to pick a market, this book is targeting an audience with a lower level of base knowledge in regards to business leadership. If you’re an experienced business leader, I don’t see this book as being helpful, because you’ve probably already established how you work best, and will not find much in the way of new information or ideas. But, there are certainly many people who haven’t picked up many of the useful skills the book discusses, and would stand to benefit from this. Consider it an introduction class on real-world professional people skills; I frequently wish my school did more to directly push these management skills.

    What is the book like? It is divided into sections dealing with a specific skill or function (e.g. public speaking, delegating, working in a team), and every chapter includes a numbered list of ways to develop and strengthen that ability. The divisibility this structure creates is helpful for those wishing to focus on specific areas, but can be overwhelming at times because of the volume of information - perhaps especially true because I was reading the entire book for purposes of review. If you do end up reading this book, I suggest looking at the contents and focusing on the small handful of chapters you think you will most immediately benefit from, and skimming other sections while you put the lessons learned into effect.

    My main problem I have with the book is that it could have used additional proofreading and editing. There are a number of typos I noticed in the first 100 pages alone, and the writing style can be choppy and thus less than clear at a number of times. I read thousands of pages weekly, and I hardly ever see minor mistakes like this, so it’s confusing how they could have slipped past in such quantity.

    What’s the ultimate value in the work? Masterson cites a number of examples from his own experience, but I always feel like they are unnecessarily vague. There could be more illustrative stories to round out the theoretical discussion, and the book is heavily coupled with references to numerous other books and academic papers. While there’s something to be said for condensing a wide range of works into more salient points, at times I felt like it might be more beneficial to simply read the work Masterson cites, if not entirely economical from a time perspective. Overall, this is a decent book for a person motivated to start learning leadership techniques, but far from a must-read.

    This book is available from Agora Book Publishing.

    Disclosure: The publisher sent me a free copy to review.

    Jun 04 12:12 AM | Link | Comment!
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