jayjayjay1212

Top Brand Names and Stock Returns

Hello,

Thank you for the article. Sorry to seem skeptical but would you have a link to the research Weseed did? I'd like to see the details of their research and all the stocks that were included/excluded.

I see for example that Research in Motion was included in the Top Brands portfolio. In 2000, RIM was still quite unknown outside the business world (its market cap was around 4-5 billion and market share was way smaller) and not what I would call a top brand at the time. Palm was much better known at that time, and we can't see if it was included or not as a top 100 brand.

The time frame studied is quite small (9 years) and included two periods of serious stock declines (2001 and 2008), where value stocks (normally top brands are generally categorized as value) with strong balance sheets fared better than growth stocks.

But indeed this research might be promising. A longer time horizon (or other short horizon research starting at different dates) and presenting results on a risk-adjusted basis would enhance the value of this research.

Bottom line is research needs to be incredibly exhaustive, properly conducted and unbiased before suggesting people take investment action upon it. In this article, we do not have the details, so we cannot judge its value.

An Investor's Look at Early Cycle Indicators

Thanks for the info.

What has me worried is that inventory levels at firms are still incredibly high. Stockpiles contributed 1.3 % to the GDP growth in the fourth quarter, which basically means firms are not selling what they are producing. Hence many firms will continue with the layoffs and try to liquidate their inventories before starting to produce and hire again.

The savings rate is also on the rise, home prices continue to tumble and job cuts are announced daily, so this indicates that consumers (who represent the biggest portion of GDP) are nowhere near feeling as 'confident' about the future.

In this recession I would be looking mainly at the NAR (National Association of Realtors) data. When home prices stabilize, consumers will cease to see the value of their main source of wealth fall, not to mention the positive effect it will have on the MBS market. Of course, signs of stabilization in the financial sector (in terms of delinquency rates at banks, tier 1 capital ratios, etc.) will also have tremendous effects on the market.

Bottom line is I don't see a sign to buy yet. I don't necessarily see a general sign to sell either. Perhaps the best idea for the risk/reward focused investor would be to wait for some more favorable economic signals. Trying to bottom-pick stocks is a bad idea in this market.

The Detour Around Banking Disaster: How We Lost the Roadmap

Great article.

I really think that politicians are inherently unfit to decide on economic policies, as their reelection is based on near-term results as opposed to the long term. They will almost never react when the economy is growing, no matter if this growth is sustainable or not. Indeed, trying to SLOW the economy to its sustainable growth rate would be political suicide. Can you imagine an incumbent president at the presidential debate bragging about how well he slowed the economy and put millions of people out of work?! Somehow I don't think voters would be thrilled!

On the other hand, politicians will tend to overreact when things are going bad, in order to look pragmatic. We are seeing this right now all over the world, as governments, just like chicken with their heads cut off, scramble to get some sort of economic stimulus passed. Unfortunately, their acts will not always be the BEST for the economy. That leads to a lot of taxpayer money being wasted trying to put forth a politically correct government response. When THAT fails, then the government might start to think about taking some unpopular measures to correct the fundamental problems. Maybe some tougher decisions on the US banking sector will need to be taken if all those TARPs, costing trillions to taxpayers, fail to reinvigorate the economy...

I'm sure the politicians of Kennedy and Vento's era knew there was potentially a problem looming in the future, but didn't act proactively upon that threat because it would have been unpopular to do so. This phenomenon is not confined to US soil or US politicians, the Japanese boom of the 70s and 80s representing another great example.

Bottom line is democracy and smooth economic growth might be, as surprising as it sounds, a paradox!

Risk Management, Or Risk Manipulation

I agree with this article in general. VaR, if used blindly, is indeed quite useless. However, I would like to add a few points, if I may, to give a few counter-arguments to the ones you made:

1. VaR models are ex-post models of risk. Everyone knows that you can't exclusively use the past to predict the future. However, the past can give indications of general patterns in asset returns over time, which can help. Because of that, most if not all firms use VaR in conjunction with many ex-ante (ie forward-looking) risk models. Those models normally integrate implied volatility curves, correlations and many other qualitative inputs to create a picture of the future risk portrait. Monte Carlo simulations are also widely used.

2. VaR models are not unique and differ in quality. Indeed, there is no definitive, objective and straightforward way to run your VaR model. The assumptions made are a major aspect of the end result. This means some are better than others, and that the quality of the management team will determine whether the VaR model is realistic or not. Obviously, companies with poorer VaR models (and poorer risk management in general) did much worse than the ones with better models. The better ones incorporated the real risks associated with options writing and selling credit default swaps. Poorer ones viewed them as steady gainers, where the losses fell in the ''unnormal'' part of the distribution. Knowledge of financial products along with common sense made it clear that CDS and options increase risk. Which leads to my next point:

3. The Board of directors of many firms lacked the knowledge and/or courage to question risk models and decisions made by management. The best example is with Lehman Brothers ; their board members were mostly from a non-financial background, were friends of the CEO, were advanced in age and inexperienced with the characteristics of the exotic products the firm was venturing into. Corporate governance was as much if not more to blame than risk management failures in Lehman's case.

Bottom line is VaR alone is a horrible way to manage risk. However, quality VaR models, in combination with ex-ante risk models, competent management teams and good corporate governance are all important factors in successfully managing the risks of a financial institution.

Buy American = Goodbye Global Friends

Very good article. I agree with the fact that it's very dangerous to go back to protectionism. Dangerous not because of the EU, but because of fragile emerging markets heavily dependent on exports, ie Indonesia, the Philipines, China and most ASEAN countries. If they see their export market collapse, a huge recession will hit them, leading to political uncertainty AT BEST (upheaval or civil war at worse).

Bottom line is the US can't afford to have more enemies than it already has... And the world can't afford more political tensions than there is already... This could lead, as the author says, to something veeeeeeery dangerous.

Gross: 'Stop the Asset Price Decline'

HAHAHAHAHAHAHA!!! Wow that article really made me laugh!

Bill Gross might as well have said : Pleeeeeeeeeeeeeease make the asset price decline stop! I can't stand it anymore! I'm losing my shirt out here!

Just a crazy idea : Why not let the markets decide how much assets are worth?!

Preview from Europe: All Eyes on Non-Farm Payrolls

Imagine if 2 years ago we were to say that the markets in 2008-2009 would rally exclusively when bailouts or government intervention plans are announced... Incredible!

Hopefully one day it will be corporate or economic news that will make the stock market go up, or else we are setting ourselves up for quite a long and painful fall!

Oil: A Slippery Slope Ahead?

Interesting point about OPEC's inherent weakness. Indeed, the 'unfriendly regimes' (Iran and Venezuela and non-OPEC Russia) need very high oil prices to fund their expenses. They are caught in a prisoner's dilemma and will probably not implement OPEC's suggested production cuts.

Also, very interesting about the renting of tankers to store unbought oil. I did not know that at all, and shows how weak demand really is!

Where I strongly disagree and where I find you lack adequate research is for your Oil Sands argument. Let's set something clear... Cash costs for Oil Sands ARE NOT 80$ per barrel. You mention Canadian Oil Sands Trust. Had you read their quarterly report (biz.yahoo.com/cnw/0810...) you would see their cash costs per barrel are at 35$ and funding for their investment projects are 10$ per barrel, meaning they are profitable and self-sufficient at 45$ a barrel (more or less). Suncor and other oil sands companies also have cash costs in the low 30s. Low natural gas prices and weaker demand for oil workers will actually make that cost go down.

Oil sands in Canada are often misunderstood. Some 'unconventional projects' indeed might have marginal costs of 80$ a barrel, but these have already been shelved. Most active fields actually have quite low cash costs, so the barrel would still need to come down a lot in order to cause important losses.

Whether the barrel will go as low as 30-35$ is another question to ask, and of course I do not have the answer... But I guess if speculating sent the barrel to 147, speculating can equally send it to 30. Just by listening to the trader sentiment (on Fast Money) on oil, it is insanely bearish.

Anyways the market is setting itself up for a supply squeeze in 5 years that will send oil prices back up again.

Conclusion: Neutral/Bearish short term and Bullish long term

Disclaimer: I own Suncor shares

Oil Sector Flush with Cash, Expect M&A - Canaccord Analyst

HAHAHA 30$ oil... What an irrational investor, I'm guessing he was the first one to call oil at 250$ when it was trading at 140$ + ...

By the way, the integrated companies know the long term equilibrium price should be more towards 100-120$ in real dollars, just as the International Energy Agency mentioned in their study. BrotherMaynard, if you know more than the IEA, please tell us how you got this good and why you are not CEO or on the board of any of the big energy companies!

As Warren Buffett says, better to buy a great company at a good price than an average company at a great price. The great names in Oil Sands (Suncor, Canadian Natural Resources and Encana) would fit in the former category, so the big guys in Energy are likely shopping around as we speak in order to boost their growth prospects.

As for your ''Time to move on'' statement, most of us are actually WORKING in this sector, so this is our job, we are not ''moving on'' to the next ''hot sector'' as I'm sure you already have done. We actually study the fundamentals, not what Roubini or Cramer are saying.

Disclaimer: I own Suncor shares



On Nov 21 12:37 PM BrotherMaynard wrote:

> omg, this site is relentless about hoping for commodity names. integrateds
> have been around for almost centuries now...and that for good reason.
> They don't make crazy assumptions, esp. given the crazy nature of
> crude. $49 of oil is historically extremely expensive. Integrateds
> know this. So why would they pay for an incompetent company that
> can't manage when oil falls below $60 now, rather than wait until
> oil hits $30 and it goes out of business...just buy it from the Ch
> 11 judges.
>
> It was a bubble folks...time to move on.

Chinese Market Annihilated - Cramer's Lightning Round (9/24/08)

Nice bullish call on RIMM... It's only down roughly 30% in 2 days LOL! Apple is the way to go long term, unless of course Jobs crokes.

I like Frontline though. Their dividends are unstable, but I'll live with that for a 23% yield...

New Game, New Rules

The US government was caught up in a losing proposition, that is choosing between a potential financial collapse or taking on an insane amount of risky debt (with taxpayer money and without their consent) by bailing out the big banks that might cause ''systemic risk'' if they were allowed to fail.

No matter what the government did, it would have faced strong criticism. The problems is in the savage capitalism system advocated by Milton Friedman. Each firm has so much pressure to exceed profit estimates that OF COURSE they will take on more risk (CEOs also get bigger bonuses when the profits are record-breaking). Had Friedman gotten his way, there would probably be no government to bail out the Wall Street fat cats, and we'd be plunged in a fear-induced negative spiral that could lead to something as bad as the 1930s.

The assumptions behind the pure market theory (RATIONAL economic agents and PERFECT information, for example) are flawed, and let's hope the government realizes that and goes for a better capitalist system like the one they have in Scandinavia.

Now the government is forced to socialize all the losses to the common taxpayer.

The Oil Bubble Will Meet the Same Fate as Tech, Housing

Very good article.

I don't agree with the 40$ oil statement about industry insiders (Boone Pickens, an insider, sees it at 100$), but still the article is very insightful.

Speculators have an essential role in the oil market, but the so-called index investors (mostly large passive pension funds who look for the diversification benefits of investing in commodities) do not. Index investors do not serve a specific purpose on the market; they only put upward pressure on the price of the barrel that is unfortunately not always corrected by speculators. This has the effect of transfering wealth from net oil importing countries to net exporting countries.

Explanation:

The portfolio of the pension fund that invests in oil will get greater benefits from diversification, but it comes at the expense of its clients (us, individuals) paying significantly more at the pump. Therefore it's actually a very unprofitable and short-sighted strategy by pension funds to invest in oil futures, since their clients lose a lot more than they gain from it!

It would be nice, but unlikely, to see the US government regulate the index investors, and letting speculators do their job.

Key Earnings Reports This Week

Ronjsq, I am willing to make a bet with you that will significantly increase MY wealth:

I bet 250,000$ that Sirius will be NOWHERE near 10$ if and when the merger is announced. Matter of fact, it will be nowhere near 5$. Almost everyone knows the merger will go through, so a big part of that is priced into the stock.

Be careful, Ronjsq looks like a crook. If he does really advise clients on stocks, he is in severe breach of many if not all ethical and professional standards by posting one-sided ''recommendations'' like that.

Exxon Mobil: World’s Safest Investment

I agree with the stockaccumulator in that PBR will offer a better nominal return over the long term. However, its risk profile is not even comparable to Exxon's. PBR can almost be considered a growth company, with its 113 billion $ capital expenditure budget by 2012. Exxon should ''only'' grow somewhere in the mid to high single digits for the next couple of years. Therefore, comparison between the two is not straightforward...

Exxon is definitely a safer investment vehicle than PBR, but personally, I would own both, this way you get the best of both worlds: A strong value company in Exxon and a solid ''growth'' stock in Petrobras. They should actually be a nice complement in a diversified portfolio.

eBay's Looming Identity Crisis

I totally agree with Suki and this article in general. I used to be an avid EBay bargain-hunter a few years ago and was able to land many great deals on electronics and other high-MSRP (manufacturer's suggested retail price) items. However, the site's popularity surged, as did its fees and paypal-related charges, which increased the sellers' costs, and therefore, required sales price.

This translated into fewer bargains to be found, which reduced the ''active return'' for buyers who specialize in finding cheap products on Ebay. The costs (i.e. time and effort) of actively watching the auction now exceeds the benefits, since the spread between the price we would normally pay (on Amazon, for example) and the price we can find it for on EBay is lower. That is why many buyers just gave up on auctions and either stayed loyal to EBay (and used the buy it now option) or switched entirely to Amazon.com (like I did).

I'm not all too sure what EBay can do about it, since it will always suffer from the winner's curse; increased popularity (and therefore higher profits) leads to decreased appeal (and therefore lower profits). It can't rely indefinitely on its non-core businesses for generating growth and returns for its shareholders. Perhaps over the long term it might consider a merger with Amazon (now wouldn't that be something special?!), if of course it can pass anitrust rulings. The same questioning as the Sirius-XM merger would apply to this one I'm sure...

Interesting story to follow.