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Yale Bock is the President of Y H & C Investments, a Registered Investment Adviser based in Las Vegas, NV. My educational background is a B.A. in Economics from UC-Irvine, a MBA from UC-Irvine, and have earned the right to use the Chartered Financial Analyst designation. I have been managing... More
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  • Earnings Season, Energy, And Startups- 0 comments
    Jan 19, 2013 4:47 PM | about stocks: HPQ

    It has been a while, so please indulge me as I bring to the table a nice assortment of topics. First, let's consider what is happening in the capital markets, specifically the stock market. Earnings season is upon us, and the large money center and investment banks generally have reported results which are reflective of their specific situations. The same cast of characters give us the same roles in the same movies. Should we be surprised? No, of course not.

    The one area which was interesting was in the investment banking world where Morgan Stanley indicated they are looking forward to concentrating on growth. With the improvement in the housing industry, one would think the large banks focused on consumer credit, mortgage underwriting, and commercial lending would stand to prosper. Shareholders in these companies would certainly welcome better performance as the stocks have been so bad for so long any kind of return to normalized earnings power would boost the entire sector. In fact, they were so beaten down that in 2012 financials were the best performing industry in the stock market.

    I just had to bring up the fact that Berkshire Hathaway is rebounding strongly and has had a big move recently. Just to show you how well Mr. Buffett has positioned Berkshire, their ownership of the Burlington Northern railroad was a great investment. Burlington now carries approximately 35% of all the oil in North America which is not moved by pipeline. With a 5- year backlog on railroad cars, profitability for Burlington is guaranteed for as far as the eye can see. Equity markets reward profits, and about 6 months or a year ago Berkshire's stock was languishing and the critics of Buffett were out in full force. If the energy boom is even remotely as strong as many suggest, it will be a long time before Berkshire Hathaway's stock performs poorly.

    I found it interesting that Dell is now discussing a transaction which might take the company private. In the same domain, Hewlett-Packard decided to pay Meg Whitman 14 million dollars for her work last year. My own opinion is the boards of both companies are making big mistakes with these decisions. Dell faces challenges but to go private with a small premium in the hopes of coming back to the public markets in a few years is stupid. As for the board of the largest computer company in the world, maybe they think Meg has stabilized the situation. Still, if you take into consideration the mood of the public for entities like banks which pay executives big compensation packages for poor performance, it is hard to see how this is any different. With the stock at decade lows and questions about how HPQ will compete in tablets and smartphones, as well as being a second tier competitor in enterprise consulting, it would be smart of Mrs. Whitman to reconsider accepting the pay package.

    The events in Algeria again point out the importance of energy in the global marketplace. It even further underscores the increased demand of large multi national corporations for security information and services. During this week I read a report on energy trends by a large oil company. The report mentioned the increase in fuel standards (by yes, the Obama Administration) as helping improve efficiency. A few key points were straightforward:

    First, there is a massive shift occurring because of the improved capability of producing oil and gas in North America. In 2012, North America produced more energy related resources than ever before, up by about 15% over 2011. Second, emerging countries in Asia are where the vast majority of demand growth in energy will take place. Countries like China and India are going to be dependent on the rest of the world for energy supplies. As much as I hate to admit it, Russia is in a very strong position with respect to energy. The issue there is how effective their companies can be in getting the resources out of ground and to the market. Just as pertinent, the sources of energy production are going to be pretty stable for a long time. Even though the current administration loves to talk about alternative energy investment, the facts indicate materials like oil, natural gas, and coal will remain dominant for a long time. A great deal of the growth in supply will come from alternative energy areas like solar, wind, and nuclear, but they only make up about 7% of total inputs. With energy, the time frames to be considered are decades, not months or years.

    Recently, I have been looking into the investment merit of startup companies. My rationale for doing so is the current investment climate is one where income is being taxed at a slightly higher rate than in 2012. In any taxable account, investors will keep less of their dividend income. You might reinvest the dividends, but you will pay a higher tax on that income. One way to counteract the higher tax rate is to own companies which don't pay dividends, but use their income to buy back their own stock more aggressively. Certainly, we own plenty of companies which already do that. However, if you are faced with higher tax rates on your investment capital, why not invest in startups? A startup might be a situation which takes a long time to become a good business, but if it flourishes you stand to eventually reap the rewards. In the meantime, your capital has to go somewhere and you can choose what areas look promising and leaders you want to take a chance on. So how has it gone so far?

    Having contacted a few interesting startups, I must say I think a lot of the founders have a much in common. First, they are enthusiastic about their opportunity. Many are very highly educated with impressive resumes and backgrounds. In most cases, the markets they are targeting are massive. Where the wheels come off the track is the ability to provide or communicate a business plan which shows how the company will grow and attain profitability. Many startups are looking for investors with high profile networks who can help them reach their goals. Of course they should be discerning about who they get involved with. However, many of these individuals are not realistic about how much their companies are worth. I find venture capitalists and startup founders are completely delusional about the valuations they afford their prospects. At a time where you can find all kinds of situations in the public markets which are very interesting with respect to valuation, to go invest a ton of money on a startup would be giving up potentially great situations in seasoned companies. Perhaps in time the situation may change.

    Finally, the debt ceiling negotiations will probably heat up after the inauguration and State of the Union address. It appears as if Republicans will extend the ceiling for 3 months in return for a discussion about how to reform entitlement spending. You wonder if some sense of rationality will ever prevail in Washington?

    Maybe the politicans could use some help to find a way to agree?http://www.nytimes.com/2013/01/19/business/negotiation-experts-consider-how-to-reach-a-budget-deal.html?ref=business

    The building blocks of our society are in databases-http://techcrunch.com/2013/01/19/your-database-is-probably-terrible/

    A nice story on why the future is always bright-http://techcrunch.com/2013/01/18/the-weekly-good-the-problems-of-today-will-be-solved-by-the-minds-of-tomorrow/

    Thank you for reading the blog and hopefully I will be more timely in getting my posts up. Have a happy and healthy week!

    Y H & C Investments, Yale Bock, and the family of Yale Bock own positions in securities mentioned in the blog post. Investing in stocks can lead to the complete loss of your capital. As always, on any company mentioned here, past performance is not a guarantee of future returns. Investing involves risk of losses on invested capital. One should research any investment and make sure it is suitable with your objectives, risk tolerance, risk profile liquidity considerations, tax situation, and anything else pertinent to your financial situation. Also, the CFA credential in no way implies investment returns will be superior for any charter holder.

    Disclosure: I am long BRK.B, HPQ.

    Stocks: HPQ
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