A lot of action with almost no result YTD.
July 31st, 2010
No comments
Seven months into 2010 all major indices are close to were they started the year.
July 2010 was the best month for the DJIA since July 2009.
Archive
Archive for July, 2010
Ciber is moving up big ahead of its August 5 Earnings Release
July 28th, 2010
No comments
Could a nice earnings surprise be coming? Or perhaps a buyout?
This has been quite a move for just 5 trading sessions.
Has Anyone Noticed?
July 26th, 2010
No comments
With all the talk about the “set to expire” Bush tax cuts…
Has anyone else realized that all the media and politicians seem to think that any dollar that isn’t taken from you by the government is to be viewed as a tax cut?
Isn’t it nice of them to leave us something of the money we’ve earned?
NOTE: If the present rates are extended there is no new stimulus as nothing changes from the current rates. If the tax rates on anyone go up then it hurts the economy by sapping capital and buying power from all citizens as a whole. Raising any taxes is a bad idea if you want job creation.
Value Line’s Timeliness System – Time to Reboot?
July 26th, 2010
No comments
I love Value Line as a source for stock information. It’s the only place to find a full fifteen years of data in one place that shows monthly stock price movements right above the statistics for that same year. This makes it very useful in seeing how changing fundamentals were reflected in the stock’s price action.
Value Line often tries to sell subscriptions based on their “Timeliness Ranking System” where they assign #1 to their best buys, #2 to their next best expected performers and #4 and #5 to their stocks to ‘avoid’. #3’s are rated neutral or ‘market performers’.
If their system worked as advertised the #1 ranked issues should be outperforming their #4 and #5 rated stocks. Has this actually happened? Let’s take a look using Value Line’s own numbers as listed in their July 30, 2010 issue (released on line July 26th).
The source for this data is right from the current issue of Value Line.
|
VL Rank* |
2001 |
2002 |
2003 |
2004 |
2005 |
2006 |
2007 |
2008 |
2009 |
2010** |
|
|
#1 |
-20.3% |
-27.2% |
33.8% |
8.4% |
5.6% |
0.7% |
18.2% |
-53.4% |
15.9% |
-3.6% |
|
|
#4 |
5.9% |
-26.7% |
34.2% |
9.4% |
-6.7% |
11.8% |
-14.3% |
-53.8% |
40.1% |
-4.8% |
|
|
#5 |
-7.2% |
-15.7% |
52.2% |
15.2% |
-12.6% |
7.8% |
-28.0% |
-73.3% |
38.7% |
1.0% |
|
|
* Ranks adjusted weekly by VL |
** First half data only |
||||||||||
In seven of the past ten years (including 2010 through June 30th) the must-avoid #5 rated shares have significantly outperformed the top-rated #1 ranked stocks. In six of those ten periods the #4 ranked stocks did better than Value Line’s #1 ranked issues.
After a decade long losing streak like this I am hoping that the newly installed management figures out what has been going wrong and adjusts their methodology.
Value Line’s own shares {VALU:$15} look extremely cheap sporting a better than 5% yield and a debt-free balance sheet.
Disclosure: Author is long VALU shares.
After the Crisis: Planning a New Financial Structure - Paul McCulley’s Brilliant Piece
July 23rd, 2010
No comments
|
This was reprinted from Ron Muhlemkamp’s Muhlemkamp Memorandum. The Muhlenkamp Fund is a value-oriented open-end mutual fund with a very good long-term record.
Based on Paul McCulley’s comments before the 19th Annual Hyman Minsky Conference on the State of the U.S. and World Economies. |
|
|
Paul McCulley, a managing director at PIMCO, gave a speech at the Hyman Minsky Conference in April 2010 that is particularly useful in explaining how the world go into the financial crisis of 2007-08.
April 15, 2010 From the standpoint of what I want to talk about tonight, a great deal of it has already been discussed today. I feel a little bit like St. Louis Federal Reserve President Jim Bullard did at lunch when he said that Paul Krugman, who spoke just before Jim, had already given 90% of his speech. That’s basically true for me as well. Paul’s speech was superb, laying out six possible culprits in the financial crisis.1 I want to focus on Paul’s Number 3, the Shadow Banking System. Paul was drawing a lot of his comments today from the work of Professor Gary Gorton, of Yale, which is absolutely fantastic material. Have a lot of you read Gary’s essay, “Slapped in the Face by the Invisible Hand”? 2 I see a lot of nods here. That’s where the phrase that Paul used, “Quiet Period,” came from. Gary coined it. He’d be a great person to have here next year at the Minsky Conference. And one of the fascinating things that he details is the nature of banking. That’s where I want to start tonight. Let’s start with first principles. If we do, then I think we can understand why we shouldn’t look at the conventional banking system and the Shadow Banking System as separate beasts, but intertwined beasts. The essence, or the genius of banking, not just now, the last century or the century before that, but since time immemorial, is that the public’s ex-ante demand for assets that trade on demand at par is greater then the public’s ex-post demand for these types of assets. Let me repeat this, because this is a first principle: the public’s ex-ante demand for liquidity at par is greater than the public’s ex-post demand. Therefore, we can have banking systems because they can meet the ex-ante demand but never have to pony up ex-post. In turn, the essence or the genius of banking is maturity, liquidity, and quality transformation: holding assets that are longer, less liquid, and of lower quality than the funding liabilities. Ex-ante is Latin for “before the event.” Ex-post is the shortened version of “ex post facto,” meaning “after the event.” A bank meets the public demand in two ways:
The depositors and the borrowers are often neighbors and / or family, and may, in fact, be the same person. For its services of “transforming” loans of longer duration (maturity) - which can’t be called back on a daily basis (lesser liquidity) - and of lesser quality than the banks can guarantee, the bank can charge a higher interest rate on loans than it pays on its deposits. This higher interest rate on loans over deposits (called the “spread”) is what makes banking a profitable business. And the business works nicely as long as the depositors who insisted on demand deposits before the event (ex ante) don’t all insist on withdrawing their funds at the same time of the event (ex post). A second principle: A banking system is solvent only if it is believed by the public to be a going concern. By definition, if the public’s ex-post demand for liquidity at par proves to be equal to its ex-ante demand, a banking system is insolvent because a banking system ends up, at its core, promising something it cannot deliver. Everyone following me here? Professor Gorton, in his paper, goes through how that promise was dealt with during the 19th century, before the New Deal Era. There were panics all the time, otherwise known as runs, because we didn’t have a lender of last resort and we didn’t have deposit insurance. During the 19th century, the system dealt with its reoccurring panics in lots of novel ways, including clearing houses which would de facto be a central bank, and suspension of convertibility of deposits into cash. So the problems we’ve been dealing with in the last couple of years are not new. They go back to the origin of banking. |
|
Is Water Really the New Gold?
July 21st, 2010
2 comments
I have heard many people touting water as the next ‘new thing’ for value creation in the investment world. In many parts of the world water scarcity is a reality and large water utility rate increases are likely in coming years. The question for us is “Will these stocks perform well on a predictable basis?”
Water companies are a low-Beta group as they are classified as utilities and are government regulated in terms of ROI. They face mandated costs in infrastructure upkeep and safety measures while needing to apply to regulators for rate increases. Most of these stocks pay decent current yields and their shares tend to attract a ‘sticky’ shareholder base of local customers who are looking for income.
The positives:
Steady customer usage that is not very economically sensitive.
Monopoly status in most service areas.
Reasonable returns on total capital.
The negatives:
Limited growth potential.
Heavy projected infrastructure spending needs.
Potential legislative push-back on future rate increases as prices escalate.
Relatively heavy debt loads with refinancing risks if credit stays tight.
Here are the numbers from some of the major players in the Water industry:
|
Company |
Price |
2010 P/E |
2011 P/E |
Yield |
5-yr EPS growth/yr. |
52-wk range |
|
American Water-AWK |
21.09 |
15.1x |
13.7x |
3.98% |
NMF* |
18.70 – 23.7 |
|
Amer. States Water-AWR |
34.40 |
16.9x |
15.8x |
3.02% |
8.5% |
31.20 – 39.61 |
|
Aqua America- WTR |
19.24 |
21.9x |
20.0x |
3.01% |
5.5% |
15.39 – 19.56 |
|
Calif. Water- CWT |
35.80 |
17.9x |
15.8x |
3.32% |
6.5% |
33.81 – 40.65 |
|
Conn. Water Serv.-CTWS |
21.97 |
20.3x |
19.3x |
4.14% |
-0.5% |
20.00 – 26.44 |
|
Middlesex Water-MSEX |
16.35 |
18.0x |
17.8x |
4.40% |
3.5% |
14.15 – 18.70 |
|
York Water- YORW |
14.12 |
21.1x |
19.1x |
3.61% |
5.5% |
12.83 – 17.95 |
* AWK came public in early 2008 —– all data as of 1PM EST 7/21/2010
Historical growth in EPS has been quite moderate while the P/Es are not cheap. None of the stocks listed have shown gains from their price points from years ago. In my view the projected shortages and rate increases will ultimately happen but only after these companies are forced to absorb enormous costs to maintain and upgrade antiquated pipelines and treatment centers.
I also see political risk as low income customers cry poverty in response to increased water bills. Just as President Obama has lashed out at drug companies for gouging patients I think local legislators will be attacking these profit making providers of essential services. Margins are likely to suffer rather than expand.
I see much better opportunities elsewhere and would avoid this group unless share prices go substantially lower on a valuation basis.
Dr. Paul Price
‘Final Days’ Health Spending Expands as Insurance Coverage and Wealth Allows
July 19th, 2010
No comments
In a recent study it was found that, not surprisingly, actual health care expenditures skyrocketed for all groups but were especially high for those with good health insurance and/or personal financial resources.
Those with poor insurance coverage and lacking wealth received much less treatment (in terms of cost) than either the wealthy or the average dying patient.
This suggests that medical providers are prone to advise marginally effective procedures (all these patients ended up dying within the treatment year) simply because the patient ‘could afford’ to pay for the services.
As we move towards Obama Care expect much less end-of-life care as the cost- benefit ratio will fail to withstand scrutiny in a cost cutting environment. From a societal viewpoint this makes sense. When it happens to your own family member you may not be too pleased with it.
Dr. Paul Price
Recent Comments