Investors Are Fearful (AAII Sentiment)

Posted on July 20, 2012 | Leave a comment

I spoke to a group of investors about buying high quality companies like NVS, DVN, (KMB, CLX too expensive), and Goog but was booed off the stage. This is only one indicator–and a very volatile one at that–but the 22% bullish number is about the lowest reading for the past few years. The last time the bullish readings were near 20% was February 19th and March 5th 2009 during the depths of Hell.  Fiscal Cliff, sub-4% money growth, European Crisis and the political news are wearing on the little (and big) guy (gal). Be careful but greedy.

AAII Sentiment Index

For 25 years of historical AAII Sentiment Data:AII Sentiment

The AAII Investor Sentiment Survey measures the percentage of individual investors who are bullish, bearish, and neutral on the stock market for the next six months; individuals are polled from the ranks of the AAII membership on a weekly basis. Only one vote per member is accepted in each weekly voting period.

Survey Results
Sentiment Survey ResultsWeek ending 7/18/2012    Data represents what direction members feel the stock market will be in the next 6    months.
Bullish 22.2% down 8
Neutral 36.0% up 1
Bearish 41.8% up 7.1
Note: Numbers may not add up to 100% because of rounding.

Change from last week:Bullish: -8.0 Neutral: +1.0 Bearish: +7.1
Long-Term Average:Bullish: 39% Neutral: 31% Bearish: 30%

Sentiment Survey Past Results

Reported Date Bullish Neutral Bearish
July 19: 22.19% 36.02% 41.79%
July 12: 30.23% 35.05% 34.73%
July 5: 32.64% 34.03% 33.33%
June 28: 28.67% 26.96% 44.37%
June 21: 32.89% 31.23% 35.88%
June 14: 34.04% 30.18% 35.79%
June 7: 27.45% 26.80% 45.75%
May 31: 28.02% 29.96% 42.02%
May 24: 30.47% 30.86% 38.67%
May 17: 23.58% 30.45% 45.97%
May 10: 25.40% 32.54% 42.06%
May 3: 35.40% 36.13% 28.47%
April 26: 27.64% 34.96% 37.40%
April 19: 31.18% 34.98% 33.84%
April 12: 28.14% 30.30% 41.56%
April 5: 38.17% 34.02% 27.80%
March 29: 42.47% 32.05% 25.48%
March 22: 42.38% 29.80% 27.81%
March 15: 45.61% 27.20% 27.20%
March 8: 42.38% 28.62% 29.00%
March 1: 44.51% 28.66% 26.83%
February 23: 43.69% 28.80% 27.51

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The Danger of Investing in a Technology Franchise (Nokia)

Posted on July 19, 2012 | 10 comments

http://online.wsj.com/article/SB10001424052702304388004577531002591315494.html

Learning from mistakes

CsInvesting: This is an important lesson for investors who buy technology “franchises.” Companies like MSFT, CSCO or Nokia that have or had high returns on capital. In the interests of full disclosure, I bought Nokia (NOK) in 2011 and sold for a 38% pre-tax loss. Ouch! I followed my rules and stayed in my diversification limits so I took my lumps and moved on. I thought that Nokia would maintain its economies of scale in R&D for phones. Wrong!

Too late, did I discover that Nokia’s return on investment in R&D was low despite the huge sums spent  on R&D vs. competitors. Look at the rapid collapse in ROA and ROE–no regression to the mean here–when returns declined. NOK_VL June 2012. Nokia–in its own market–got blindsided by Smart Phones.

An important focus is on understanding a business’ return on invested capital and, perhaps more importantly, its return on incremental invested capital, which I’ve learned to appreciate more and more.  One trick is to add back the past write-offs to capital so as to not overestimate management’s ability to generate return on capital (ROC).  There are limits to knowledge and foresight. In companies that have to constantly reinvent themselves, give yourself a wide margin of safety and expet to be wrong at times.

Nokia’s Bad Call on Smartphones

By ANTON TROIANOVSKI and SVEN GRUNDBERG

In an interview with The Wall Street Journal, Nokia CEO Stephen Elop talks about innovation, management, and guiding the embattled company through a difficult transition.

Frank Nuovo, the former chief designer at Nokia Corp., gave presentations more than a decade ago to wireless carriers and investors that divined the future of the mobile Internet.

More than seven years before Apple Inc. rolled out the iPhone, the Nokia team showed a phone with a color touch screen set above a single button. The device was shown locating a restaurant, playing a racing game and ordering lipstick. In the late 1990s, Nokia secretly developed another alluring product: a tablet computer with a wireless connection and touch screen—all features today of the hot-selling Apple iPad.

Dan Krauss for The Wall Street Journal

Former Nokia designer Frank Nuovo says the company had prototypes that anticipated the iPhone.

“Oh my God,” Mr. Nuovo says as he clicks through his old slides. “We had it completely nailed.”

Consumers never saw either device. The gadgets were casualties of a corporate culture that lavished funds on research but squandered opportunities to bring the innovations it produced to market.

Nokia led the wireless revolution in the 1990s and set its sights on ushering the world into the era of smartphones. Now that the smart phone era has arrived, the company is racing to roll out competitive products as its stock price collapses and thousands of employees lose their jobs.

This year, Nokia ended a 14-year-run as the world’s largest maker of mobile phones, as rival Samsung Electronics Co. took the top spot and makers of cheaper phones ate into Nokia’s sales volumes. Nokia’s share of mobile phone sales fell to 21% in the first quarter from 27% a year earlier, according to market data from IDC. Its share peaked at 40.4% at the end of 2007.

The impact was evident in Nokia’s financial report for the first three months of the year. It swung to a loss of €929 million, or $1.1 billion, from a profit of €344 million a year earlier. It had revenue of €7.4 billion, down 29%, and it sold 82.7 million phones, down 24%. Nokia reports its second-quarter results Thursday and has already said losses in its mobile phone business will be worse than expected. Its shares currently trade at €1.37 a share, down 64% so far this year.

Nokia is losing ground despite spending $40 billion on research and development over the past decade—nearly four times what Apple spent in the same period. And Nokia clearly saw where the industry it dominated was heading. But its research effort was fragmented by internal rivalries and disconnected from the operations that actually brought phones to market.  Amazing!

Instead of producing hit devices or software, the binge of spending has left the company with at least two abandoned operating systems and a pile of patents that analysts now say are worth around $6 billion, the bulk of the value of the entire company. Chief Executive Stephen Elop plans to start selling more of that family silver to keep the company going until it can turn around its fortunes.

“If only they had been landed in products,” Mr. Elop said of the company’s inventions in a recent interview, “I think Nokia would have been in a different place.”

Nokia isn’t the only company to lose its way in the treacherous cellphone market. Research In Motion Ltd. had a dominant position thanks to its BlackBerry email device, but it hasn’t been able to come up with a solution to the iPhone either.

As a result, the company has lost about 90% of its market value in the past five years, and its CEO is trying to convince investors the company isn’t in a “death spiral.”

Whereas RIM lacked the right product, Nokia actually developed the sorts of devices that consumers are gobbling up today. It just didn’t bring them to market. In a strategic blunder, it shifted its focus from smartphones back to basic phones right as the iPhone upended the market.

Mobile Designs

Dan Krauss for The Wall Street JournalSome of the devices Mr. Nuovo designed for Nokia.

“I was heartbroken when Apple got the jump on this concept,” says Mr. Nuovo, Nokia’s former chief designer. “When people say the iPhone as a concept, a piece of hardware, is unique, that upsets me.”

Mr. Elop, a Canadian who took over as Nokia’s first non-Finnish chief executive in 2010, is now trying to refocus a company that he says grew complacent because of its market dominance.

Shortly after taking the job, Mr. Elop scrapped work on Nokia’s homegrown smartphone software and said the company would use Microsoft Corp.’s Windows mobile operating system. By doing so, he was able to deliver a new line of phones to compete with the iPhone in less than a year, much quicker than if Nokia had stuck with its own software, he says.

Those phones aren’t selling strongly. The company hasn’t broken out numbers but said in April that initial sales were “mixed,” and two months later said competition had been tougher than expected. Mr. Elop was forced in mid-June to announce another 10,000 layoffs and $1.7 billion in cost cuts that will fall heavily on research and development. On Sunday, Nokia cut the U.S. price of the phones in half, to $50.

Nokia has a long history of successfully adapting to big market shifts. The company started out in 1865 as a lumber mill. Over the years, it diversified into electricity production and rubber products.

At the end of the 1980s, the Soviet Union’s collapse and recession in Europe caused demand for Nokia’s diverse slate of products to dry up, leaving the company in crisis. Jorma Ollila, a former Citibank banker, took over as CEO in 1992 and focused Nokia on cellphones.

Nokia factories eventually sprang up from Germany to China, part of a logistics machine so well-oiled that Nokia could feed the world’s demand for cellphones faster than any other manufacturer in the world. Profits soared, and the company’s share price followed, giving Nokia a market value of €303 billion at its peak in 2000.

Mr. Ollila and other top executives became stars in Finland, often requesting private dining rooms when they went out to eat, senior executives said.

Early on, the CEO started laying the groundwork for the company’s next reinvention. Nokia executives predicted that the business of producing cellphones that do little but make calls would lose its profitability by 2000. So the company started spending billions of dollars to research mobile email, touch screens and faster wireless networks.

In 1996, the company unveiled its first smartphone, the Nokia 9000, and called it the first mobile device that could email, fax and surf the Web. It weighed slightly under a pound.

“We had exactly the right view of what it was all about,” says Mr. Ollila, who stepped down as chief executive in 2006 and retired as chairman in May. “We were about five years ahead.”

The phone, also called the Communicator, made an appearance in the movie “The Saint” and drew a dedicated following among certain business users, but never commanded a mass audience.

In late 2004, U.S. manufacturer Motorola scored a world-wide hit with its thin Razr flip-phones. Nokia weathered criticism from investors that it was expending too much effort on high-end smartphones while its rival ate into its lucrative business selling expensive “dumb” phones to upwardly mobile people around the world.

After Olli-Pekka Kallasvuo, Nokia’s former chief financial officer, took the helm from Mr. Ollila in 2006, he merged Nokia’s smartphone and basic-phone operations. The result, said several former executives, was that the more profitable basic phone business started calling the shots.

“The Nokia bias went backwards,” said Jari Pasanen, a member of a group Nokia set up in 2004 to create multimedia services for smartphones and now a venture capitalist in Finland. “It went toward traditional mobile phones.”

Nokia’s smartphones had hit the market too early, before consumers or wireless networks were ready to make use of them. And when the iPhone emerged, Nokia failed to recognize the threat.

Nokia engineers’ “tear-down” reports, according to people who saw them, emphasized that the iPhone was expensive to manufacture and only worked on second-generation networks—primitive compared with Nokia’s 3G technology. One report noted that the iPhone didn’t come close to passing Nokia’s rigorous “drop test,” in which a phone is dropped five feet onto concrete from a variety of angles.

Yet consumers loved the iPhone, and by 2008 Nokia executives had realized that matching Apple’s slick operating system amounted to their biggest challenge.

One team tried to revamp Symbian, the aging operating system that ran most Nokia smartphones. Another effort, eventually dubbed MeeGo, tried to build a new system from the ground up.

People involved with both efforts say the two teams competed with each other for support within the company and the attention of top executives—a problem that plagued Nokia’s R&D operations.

“You were spending more time fighting politics than doing design,” said Alastair Curtis, Nokia’s chief designer from 2006 to 2009. The organizational structure was so convoluted, he added, that “it was hard for the team to drive through a coherent, consistent, beautiful experience.”

In 2010, for instance, Nokia was hashing out some details of software that would make it easier for outside programmers to write applications that could work on any Nokia smartphone.

At some companies, such decisions might be made around a conference table. In Nokia’s case, the meeting involved gathering about 100 engineers and product managers from offices as far-flung as Massachusetts and China in a hotel ballroom in Mainz, Germany, two people who attended the meeting recall.

Over three days, the Nokia employees sat on folding chairs and jotted notes on an array of paper easels. Representatives of MeeGo, Symbian and other programs within Nokia all struggled to make themselves heard.

“People were trying to keep their jobs,” one person there recalls. “Each group was accountable for delivering the most competitive phone.”

Key business partners were frustrated as well. Shortly after Apple began selling the iPhone in June 2007, chip supplier Qualcomm Corp. settled a long running patent battle with Nokia and began collaborating on projects.

“What struck me when we started working with Nokia back in 2008 was how Nokia spent much more time than other device makers just strategizing,” Qualcomm Chief Executive Paul Jacobs said. “We would present Nokia with a new technology that to us would seem as a big opportunity. Instead of just diving into this opportunity, Nokia would spend a long time, maybe six to nine months, just assessing the opportunity. And by that time the opportunity often just went away.”

When Mr. Elop took over as CEO in 2010 Nokia was spending €5 billion a year on R&D—30% of the mobile phone industry’s total, according to Bernstein research. Yet it remained far from launching a legitimate competitor to the iPhone.

Before the latest round of cuts, he said, the company was still struggling to focus on useful R&D. Mr. Elop has sifted through data and visited labs around the world to personally terminate projects that weren’t core priorities—like one to help buyers in India link their phones to new government identification numbers.

Mr. Elop is refocusing around services like location and mapping, which came with the company’s $8 billion 2008 acquisition of Navteq.

But he is having trouble rolling out products that catch on with consumers. Nokia’s latest phone, the Lumia, has been well reviewed, but sales may suffer as consumers hold out for the next version of Microsoft’s software, due later this year.

Jo Harlow, whom Mr. Elop appointed head of smartphones shortly after he became CEO, said Nokia will launch lower-priced Lumia devices in the coming months to better compete with aggressive Asian device makers such as China’s Huawei Technologies. Ms. Harlow said the company is also “very interested” in entering the tablet market.

Mr. Elop has shaken up a sales and marketing department, replacing Chief Operating Officer Jerri DeVard and two other executives after the Lumia launch. In June, Mr. Elop picked Chris Weber, a 47-year-old former Microsoft colleague who had been running Nokia’s North American effort, to take over. Ms. DeVard couldn’t be reached for comment.

Nokia still is struggling to turn its good ideas into products. The first half of the year saw Nokia book more patents than in any six-month period since 2007, Mr. Elop said, leaving Nokia with more than 30,000 in all. Some might be sold to raise cash, he said.

“We may decide there could be elements of it that could be sold off, turned into more immediate cash for us—which is something that is important when you’re going through a turnaround,” Mr. Elop said.

 

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G. Edward Griffin – The Collectivist Conspiracy

Posted on July 19, 2012 | Leave a comment

An interesting video on collectivism: http://www.youtube.com/watch?v=jAdu0N1-tvU&feature=youtu.be

Is there really any difference between the right and the left? Republicans or Democrats?

Interview with the Author of The Creature from Jekyll Island About the Federal Reserve http://educate-yourself.org/cn/gedwardgriffininterview02apr04.shtml

Any criticisms of the above video are welcomed. Disagreements?

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Fairholme: Keep Calm and Carry on; Pzena: Value Abounds in Large-Caps

Posted on July 19, 2012 | 2 comments

The news speaks to both bull and bear market–but in a counterintuitive way. Here is a definition from Harold Ehrlich, who was with Shearson at the time and later became president and then chairman of Bernstein-Macaulay: “A bull market is when stocks don’t go down on bad news. A bear market is when stocks don’t go up on good news.”

Long cycle bottoms can be particularly hard to fathom. One famous story is that in the year 1938, when the stock market was still recovering from the crash of 1929 and had lurched along for years and years and years, essentially doing nothing, only three members of the graduating class of Harvard Business School went to work on Wall Street.

To bring this into a contemporary context (2012), my friend Dean LeBaron has said publicly, referring to the more than 100,000 members of the Financial Analysts Federation: “That’s too many analysts; by the time this is structural bar market is over, there will be only 50,000.” History thus suggest that by the time this structural bear market is all over, it may not be socially acceptable to be seeking a career on Wall Street. (Deemer on Technical Analysis by Walter Deemer)

Second Quarter (June 2012) Letters from Investors

Fairholme Stays the Course July 2012

Pzena’s 2nd Qtr. 2012 Letter:Pzena 2Q 2012

Editor: In my opinion, the edge you can gain in large-caps is in the behavioral area based on what embedded expectations are in the current market price rather than expecting an informati0nal edge. What gain can you have in understanding Coke’s operations in 150 different countries and several divisions rather than determining if you believe the market is too pessimistic or optimistic based on current prices? 

Note the differences in expectations between the price of Coke in 1998 vs. 2009 or 2012. KO_VL.

Muddy Waters Releases a New Short Recommendation

A thorough discussion of the risks in Chinese stocks (investing outside your circle of competence):MW_EDU_071812_Sell Short

More videos/Readings of interest

Use your gifts: Video http://www.foxbusiness.com/personal-finance/2012/07/18/all-have-gifts-but-question-is-are-using-them/?link=mktw

A research firm for assessing your aptitudes (natural gifts) is http://www.jocrf.org/

Herd mentality video: http://www.youtube.com/watch?v=xU0cq3UvLaM

Barton Biggs (R.I.P.): http://www.thestreet.com/story/11618931/1/kass-rest-in-peace-barton-biggs.html

Chart Book: http://blog.haysadvisory.com/ (click on JP Morgan link for charts)

http://www.thestreet.com/story/11616900/2/melvin-the-art-of-being-cheap.html

Melvin: The Art of Being Cheap

By Tim Melvin07/14/12 – 06:00 AM EDT  Real Money

Last week, a reader chided me for having an overly simplistic approach to investing. He pointed out, quite correctly, that the old Wall Street mantra of buying and holding quality stocks has not worked for investors for nearly a decade. Those who took it on faith have taken dramatic hits to their net worth.

My approach is not buy-and-hold as traditionally defined. I do not blindly buy or sell anything. I really do try to exercise the discipline to buy what is cheap and sell what is dear. I focus on valuation first — always. I use tangible book value as my chief measure of value but I also calculate intrinsic value and liquidation value for certain situations. I also do comps on takeover and merger situations by industry group to keep a constant measure of what rationale buyers are paying for companies similar to those I own. When a stock I own trades at a significant premium to its underlying value, I sell it regardless of market conditions. If the fundamentals change materially for the worse, I sell the stock. My approach is to buy what is cheap and sell what is expensive.

While it is a very simplistic strategy, that does not mean it is easy. Buying truly cheap stocks generally means you will be underinvested until the market undergoes a serious decline. You will be shopping in segments of the market that everyone hates and that attract negative commentary in the media. Your ideas will not be popular and will often be met with stunned disbelief. During those annual 10% declines and the meltdowns that occur every three years or so, your list of cheap stocks will be long and opportunities will be plentiful.

When everyone loves a stock and your nephew with the 600 SAT scores is racking up triple-digit returns by day trading, your stocks will be overvalued and there will no new opportunities. You will be selling stocks and holding a lot of cash. Even the most disciplined of us will start questioning our process when the hot stocks are jumping several points a day. I have seen the same cycle many times over my career. It always ends the same way: After a significant inventory creation event, stocks become cheap enough that I am a busy buyer once again, and the nephew goes back to waiting tables.

So, you will find yourself completely out of step with conventional wisdom. Buying a stock such as Kelly Services (KELYA) right now when the economic outlook is somewhat dire takes backbone and discipline. You have to ignore the market and focus on the fact that it is cheap. Being underinvested when the talking heads are screaming “Buy!” is not always easy. Neither is reading piles of 10-Qs and 10-Ks to find quality cheap stocks with the potential to recover. Running endless credit tests on companies that appear cheap is not exactly fun for most of us.

Buying the few stocks that are “too cheap not to own” until the stock market stages a sharp decline to create inventory requires discipline and patience. Holding stocks that are cheap when all the news appears negative requires mental toughness and belief in your approach — try being long natural gas stocks and small banks over the past year. The news flow could have you questioning your sanity if you did hold to your belief in asset-based investing.

During my lifetime, owning “too cheap not to own” stocks and waiting for inventory creation events has been exceptionally profitable for those few investors who practice the art of being an owner of assets purchased on the cheap.

At the time of publication, Melvin was long KELYA, although positions may change at any time.Tim Melvin is a writer from Stevensville, Maryland, who spent 20 years a stockbroker, the last 15 as a Vice President of Investments with a regional firm in the Mid Atlantic area.

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Obama, Regulations, and Small Business

Posted on July 18, 2012 | Leave a comment

HOT DOGS

Or in the case of 13-year old entrepreneur Nathan Duszynski in Holland, Michigan, who tried to start a business, and somebody else (government bureaucrats) made that not happen. Here’s what happened, or more accurately, what didn’t happen, according to the Holland Sentinel:

“Nathan Duszynski (pictured above), 13, decided he wanted a hotdog cart, so he could earn some money. But as he was setting up shop Tuesday in the parking lot of Reliable Sports at River Avenue and 11th Street — across the street from Holland City Hall — a city of Holland zoning official shut him down. Now, after spending more than $2,500 to start-up his business, Duszynski is throwing in the towel, his mom said.”

Think of All the Businesses That Did NOT Happen, Thanks to Government Bureaucrats and Regulations

http://mjperry.blogspot.com/
President Obama:

“There are a lot of wealthy, successful Americans who agree with me — because they want to give something back. They know they didn’t — look, if you’ve been successful, you didn’t get there on your own. I’m always struck by people who think, well, it must be because I was just so smart. There are a lot of smart people out there. It must be because I worked harder than everybody else. Let me tell you something — there are a whole bunch of hardworking people out there. (Applause.)

If you were successful, somebody along the line gave you some help. There was a great teacher somewhere in your life. Somebody helped to create this unbelievable American system that we have that allowed you to thrive. Somebody invested in roads and bridges. If you’ve got a business — you didn’t build that. Somebody else made that happen.”

Pictures

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Southeastern Asset Management on CHK and Natural Gas

Posted on July 18, 2012 | Leave a comment

A good article on Natural Gas in the Economist: http://www.economist.com/node/21558432

Southeastern Asset Management (Mason Hawkins) 2nd Qtr. Longleaf Partners Fund Longleaf 06_30_12 Shareholder Letter

In the letter, the portfolio team speaks of their controversial holding Chesapeake Energy (“CHK”). Clients obviously are anxiously calling them about the falling price and controversial news.  There is one important lesson for all who invest in cyclical commodity based companies.

Lessons learned:

Longleaf 2nd Qtr. Letter: “Our conviction about CHK does not mean we are complacent about our path of ownership. We have learned two important lessons as our investment has unfolded.

First, we recognize that in commodity businesses, being a low cost provider is not enough of an advantage for an overweight position since the commodity price is subject to going below the cost of production for an unpredictable period of time.

Second, we learned a lesson that reinforces the importance of being a long-term investor who tries to work productively with management when change is warranted. We had much more influence in the tremendous governance transformation than we would have otherwise had if we had initiated our investment with guns blazing. The board and management listened to, trusted, and addressed our views knowing that our only agenda was to benefit long-term shareholders.”

John Chew: Ideally, you want to buy commodity companies when the price of the commodity is UNDER the marginal cost of production. Certainly when natural gas was trading near $2.00, almost no producer could generate a return above their cost of capital. Why were companies producing? The natural gas market is unusual in that there is limited storage (for now) so all gas produced must be sold immediately into the market and Hold-by-Production (“HBP”)means companies will hold leases by having to drill.

Exxon-Mobil on Natural Gas Market: http://www.forbes.com/sites/cfainstitute/2012/01/30/exxon-and-the-natural-gas-revolution/

Exxon CEO says low U.S. natgas prices not sustainable

ReutersBy Matt Daily | Reuters – Wed, Jun 27, 2012

              (Reuters) – U.S. natural gas prices are too low to allow the energy industry to cover the cost of finding and producing new supplies, the head of top producer Exxon Mobil said on Wednesday.

              Record production, thanks to new technologies that tap natural gas trapped in shale rock formations, pushed U.S. natural gas prices to 10-year lows below $2 per million British thermal units (mmBtu) in April, though prices have since rebounded.

              “The cost of supply is not $2.50. We are all losing our shirts today,” Rex Tillerson, chief executive officer of Exxon Mobil, said in a presentation at the Council on Foreign Relations.

              Gas prices have risen over 50 percent since April’s lows, and were up more than 5 percent on Wednesday to nearly $2.95 per mmBtu.

              Still, prices remain well below the $4-$5 level that makes drilling in pure natural gas fields profitable. Most producers have moved over to more lucrative oil and liquids-based plays to fetch higher prices, which has begun to put a slight dent in U.S. gas production.

              Tillerson also said the recent decline in oil prices appeared to be linked to rising crude oil inventories, economic worries in Europe and a slowdown in China’s growth, as well as a more stable political situation in the Middle East.

DEVON ENERGY (“DVN”)

For those who want more balance sheet strength and conservative management–Devon Energy (DVN) might be of interest to explore. (Let’s check back in two years).

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Leon Cooperman

Posted on July 17, 2012 | 4 comments

Play Video

Cooperman’s discussion of a Great Capital Allocator, Henry Singleton of Teledyne:Teledyne and Henry Singleton a CS of a Great Capital Allocator

June 28 (Bloomberg) — Leon Cooperman, chief executive officer of hedge fund Omega Advisors Inc., talks about his investment strategy, stock picks and the outlook for global economies. The story is featured in the August issue of Bloomberg Markets magazine. (Source: Bloomberg)

“The market is very sick,” Cooperman says. That’s not necessarily bad news for Cooperman, 69, a blustery billionaire from the South Bronx who first made his name as a stock picker during 25 years as an analyst atGoldman Sachs Group Inc. (GS) “We have to take advantage,” he says. “What’s ridiculously priced now?”

Omega, which currently invests its $6 billion in assets mainly in U.S. stocks, has returned an average of 13.3 percent annually since Cooperman founded it in 1991, compared with 11.4 percent for other equity-oriented funds, according to Chicago- based Hedge Fund Research Inc., Bloomberg Markets magazine reports in its August issue.

For more than 40 years, Cooperman has earned a reputation for consistently ferreting out the most-discounted stocks — no matter what the overall market conditions.

“He’s not doing anything terribly fancy; he’s looking for stocks that are undervalued,” says Robert S. Salomon Jr., 75, an Omega client whose grandfather co-founded Salomon Brothers. “He’s had some great success in finding them.” Adds John Whitehead, 90, who was co-chairman of Goldman during Cooperman’s time there, “He’s been around a long time and seen bad markets and good markets, and he’s survived them all successfully.”

Euro Fears

Markets on this particular day in May are being buffeted by fears about the future of the euro region, the possibility of U.S. tax cuts expiring at the end of 2012 and slowing growth in China. After the Standard & Poor’s 500 Index tumbled 6 percent in May, some money managers bet that the market would fall further. John Burbank, who runs the $3.4 billion Passport Capital LLC hedge fund, told Bloomberg News that he’s shorting stocks because he expects the U.S. and much of the rest of the world to fall back into a recession.

Cooperman is more sanguine about the future. As of June 11, his fund was up 6 percent this year–compared with 1.03 percent for hedge funds globally. He says stocks offer the best opportunities for investors, particularly in the U.S., where there are no signs of a recession. Banks are more profitable, household debt has declined and companies are increasing capital spending.

Stocks Undervalued

Yet stocks have remained undervalued, he says, because of economic troubles and uncertainty over the U.S. presidential election. TheS&P 500 (SPX) is trading at a price-earnings ratio of 12.5 compared with an average of 15 during the past 50 years.

“Stocks are the best house in the financial asset neighborhood,” Cooperman says, before adding a caveat: “It’s not clear whether it’s a good neighborhood or a bad neighborhood.”

Filling a large room in Cooperman’s investing house today is student loan providerSLM Corp. (SLM), better known asSallie Mae. With total educational debt in the U.S. ballooning to $904 billion as of March 31 from $241 billion a decade earlier, according to theFederal Reserve Bank of New York, some commentators have talked about a looming student-debt crisis.

Cooperman sees an opportunity. Sallie Mae throws off lots of cash, he says. Some 80 percent of its loans outstanding consist of government-backed debt issued before 2010, when Congress mandated that the government make certain college loans directly rather than subcontracting them to Sallie Mae. Since then, Sallie Mae has been expanding its private lending business, charging free-market rates that can run as high as 12.88 percent.

‘Kids Have to Borrow’

Cooperman started buying Sallie Mae in December 2007, after a $25 billion buyout deal with J.C. Flowers & Co.,JPMorgan Chase & Co. (JPM) andBank of America Corp. collapsed amid the credit crisis, sending its shares plummeting. On April 21, 2011, the company announced that it would reinstate its dividend, sending the shares up 13 percent to $16.13. Cooperman paid an average of $7.36. SLM closed at $15.20 on Wednesday, and Omega predicts that it will rise as high as $22. Omega is the eighth-largest owner of the company, with a 3.51 percent stake.

“Ultimately, it’ll work,” Cooperman says of SLM. “Lots of kids have to borrow money; their parents have to cosign the loans. It’s a profitable business.”

JPMorgan Loss

Not all of his bets work out. Omega had considered JPMorgan Chief Executive OfficerJamie Dimon the best in the industry, and the bank’s management had been aggressively repurchasing stock. Omega started buying shares of the New York bank in 2009 at an average cost of $37.14.

JPMorgan disclosed on May 10 that it had a $2 billion trading loss because of riskier-than-expected credit securities. Omega sold about two-thirds of its position the next day, taking a loss: The shares tumbled 9 percent on May 11, closing at $36.96. They traded at $36.78 yesterday.

At Omega’s staff meeting in May, one of the portfolio managers suggests that JPMorgan shares may now be ridiculously cheap. Cooperman launches into a tirade about how Dimon has been unfairly pilloried by Representative Barney Frank and other critics. “I’m incensed by some of the sh– you’re reading,” Cooperman tells his managers. He says he’ll hold on to his remaining shares as a vote of confidence in Dimon. Cooperman, a self-described workaholic, says there’s no magic formula to finding good stocks.

Sailing and Research

“With an average IQ and a strong work ethic, you can go far,” he says, adding that he sees himself as proof of that. “I don’t have a lot of outside interests. I don’t do well with leisure. I like a structured life.”

 

Cooperman expects stocks to return 7 to 8 percent in the future, below their historic 10 percent returns.

Barry Rosenstein, co-founder of the $3 billion Jana Partners LLC hedge fund in New York, admires Cooperman’s work ethic. Rosenstein was a teenager when he first met the fund manager at a sailing club on the Jersey Shore of which both were members. Cooperman would show up with a stack of annual reports, disappear onto his boat and read them all weekend, Rosenstein, 53, recalls.

“If Bruce Springsteen is the hardest-working man in rock ’n’ roll, Lee is the hardest-working man in the investment business,” he says. Cooperman was one of the first to invest in Jana when Rosenstein founded it in 2001.

Share Buybacks

As he scours reports and quizzes executives on earnings calls and at conferences, Cooperman is trying to discover stocks that have a low price-earnings ratio, lots of cash and decent yields and that are trading for less than their net assets are worth. He also looks for what he calls smart managers who own big stakes in their companies and for firms that buy back their own shares cheaply.

While he was at Goldman, one such hit was what’s now called Teledyne Technologies Inc. (TDY), whose founder, Henry Singleton, made acquisitions using the company’s stock when its price was high. When the share price went down, Singleton bought back shares repeatedly. Under Singleton, Teledyne expanded its defense, aerospace and industrial businesses. Cooperman recommended the stock in 1968, and for the following two decades, it generated a 23 percent annual return. Cooperman displays a framed 1982 letter in his office fromWarren Buffett congratulating him on his analysis of Teledyne.

Betting on Apple

One of Cooperman’s largest holdings today is Apple Inc. (AAPL), which Omega portfolio manager Barry Stewart says he likes because of its $110 billion cash hoard. Apple’s prospects for growth are strong, he says, with the market booming for its iPhone smartphones, MacBook computers and iPad tablets.

Cooperman pounced on the stock at an average of $376 a share starting in July 2010, around the timeConsumer Reports said a faulty iPhone 4 antenna could cause the phone to lose its signal. The problem proved to be a hiccup, and Apple shares have since risen to $574.60. Stewart projects that the stock will go as high as $710 in the next year.

Stewart is also betting that growing demand for 3G and 4G mobile phones made by Apple and others such as Samsung Electronics Co. will boost the fortunes ofQualcomm Inc. (QCOM), the largest producer of semiconductor chips for the devices. Omega began buying Qualcomm last August at an average price of $53. The shares traded at $54.91 on Wednesday, and Stewart says they could rise as high as $85 in the next 12 months.

Smart Management

One of Cooperman’s worst-performing holdings this year is McMoRan Exploration Co. (MMR), an oil-and-gas drilling company whose price plunged about 40 percent from a high of $14.55 on Dec. 30 after an equipment malfunction caused delays at one of its wells in the Gulf of Mexico. Cooperman is still enthusiastic about its prospects because it meets his requirement of smart management.

James “Jim Bob” Moffett, the New Orleans-based company’s CEO, is also chairman ofFreeport-McMoRan Copper & Gold Inc. (FCX), the world’s largest publicly traded copper producer, and has a track record of making deals in far-flung places. McMoRan formed a joint venture with Chevron Corp. (CVX) to drill for oil in Louisiana. Omega paid $10 on average for the shares, which traded at $12.30 on Wednesday. If the company strikes oil, Omega predicts that the stock could reach $25 to $30 within 18 months.

When a company considers its own stock a bargain, Cooperman wants in too. That was the case withAmerican International Group Inc. (AIG), the New York-based insurer majority owned by the U.S. government after its 2008 bailout. CEO Robert Benmosche has bought back shares from the U.S. Treasury and repaid funds tied to AIG’s government bailout.

When a company considers its own stock a bargain, Cooperman wants in too. That was the case withAmerican International Group Inc. (AIG), the New York-based insurer majority owned by the U.S. government after its 2008 bailout. CEO Robert Benmosche has bought back shares from the U.S. Treasury and repaid funds tied to AIG’s government bailout.

Lane Bryant

The company bought $3 billion of its stock in March, and $15 billion of planned asset sales should fuel more buybacks, Omega portfolio manager Mahmood Reza says. Omega bought the shares this year for an average of $30.47 and anticipates that the price could rise to $53 by the end of 2013. They traded at $30.82 on Wednesday.

Cooperman also hunts for takeover candidates. Omega zeroed in on Charming Shoppes Inc., the owner of plus-size-clothing retailer Lane Bryant, after visiting the company’s executives. The company’s cash exceeded debt and had the potential for higher profitability as part of a bigger group.

He started buying the shares at less than $3 each last year and added to his position after David Jaffe, CEO ofAscena Retail Group Inc. (ASNA), formerly known as Dress Barn Inc., told a conference that he was interested in buying companies. Omega amassed a 13 percent stake in Charming Shoppes. In May of this year, Ascena agreed to buy the company for $7.35 a share.

Azerbaijan Deal

In 1998, Cooperman bet big on emerging markets — and lost. The misstep was compounded by Omega’s investment of more than $100 million with Czech financierViktor Kozeny in a plan to take over Azerbaijan’s state oil company. New York state prosecutors accuse Kozeny, who now lives in the Bahamas, of stealing Cooperman’s investment, while U.S. prosecutors say Kozeny led a multibillion-dollar bribery scheme in connection with the Azeri deal.

In 2007, Omega paid $500,000 to the U.S. to resolve the – bribery investigation. Omega didn’t admit wrongdoing while it accepted legal responsibility for the actions of an employee who admitted joining Kozeny’s bribery scheme. Kozeny denies wrongdoing.

In all, Omega lost a total of $500 million, or 13 percent of its total assets in 1998, after which Cooperman fired almost the entire emerging-markets team. (He later recovered some of the money.) He says the episode was the worst chapter of his life.

Goldman Career

The younger of two sons of Polish immigrants, Cooperman bagged fruit and changed tires to make money as a teenager in the Bronx. He learned how to analyze securities from the late Roger Murray, a professor at Columbia Business School. Another professor’s recommendation earned Cooperman a job as a research analyst at Goldman.

Cooperman’s office is filled with mementos of his years at Goldman, for which he still manages an undisclosed amount of money. A framed copy of the company’s business principles is displayed in Cooperman’s office, near a curled-up whip — a gift from Goldman salesmen after he completed a 30-city, 20-day roadshow to market a stock fund in 1990. After years in research, Cooperman founded Goldman Sachs Asset Management in 1989.

Despite being a billionaire, Cooperman, who has three grandchildren, says he has no plans to retire soon. “He’s the first one in the office, the last one out,” says Tomas Arlia, head of hedge funds at GE Asset Management Inc., which has had money with Omega since its inception. “He loves what he does.”

A piece of paper taped to his computer monitor reminds Cooperman of the simple investing rules that have helped Omega weather market storms for the past two decades: “Buy low, sell high, cut your losses, let your profits run.”

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The Annuity Puzzle by Richard Thaler

Posted on July 17, 2012 | 12 comments

“Annuities and the Puzzle of Income”

Can anyone point out several omissions and/or fallacies in this article by the famous professor Richard Thaler? Just a sentence or two.

Prize to be emailed. (Hint: biggest bubble today)

The Annuity Puzzle

By RICHARD H. THALER

IMAGINE a set of 65-year-old identical twins who plan to retire this summer after long careers. We’ll call them Dave and Ron. They have worked for different employers and have accumulated retirement benefits worth the same amount in dollars, but the benefits won’t be paid out the same way.

Dave can count on a traditional pension, paying $4,000 a month for the rest of his life. Ron, on the other hand, will receive his benefits in a lump sum that he must manage himself. Ron has a lot of choices, but all have consequences. For example, he could put the money into a conservative bond portfolio and by spending the interest and drawing down the principal he could also spend $4,000 a month. If Ron does that, though, he can expect to run out of money sometime around the age of 85, which the actuarial tables tell him he has a 30 percent chance of reaching. Or he could draw down only $3,000 a month. He wouldn’t have as much to live on each month, but his money should last until he reached 100.

Who is likely to be happier right now? Dave or Ron?

If this question seems a no-brainer, welcome to the club. Nearly everyone seems to prefer the certainty of Dave’s pension to Ron’s complex options.

But here’s the rub: Although people like Dave who have them tend to love them, old-fashioned “defined benefit” pensions are a vanishing breed. On the other hand, people like Ron — with defined-contribution plans like 401(k)s — can transform their uncertainty into a guaranteed monthly income stream that mirrors the payouts of a traditional pension plan. They can do so by buying an annuity — but when offered the chance, nearly everyone declines.

Economists call this the “annuity puzzle.” Using standard assumptions, economists have shown that buyers of annuities are assured more annual income for the rest of their lives, compared with people who self-manage their portfolios. One reason is that those who buy annuities and die early end up subsidizing those who die later.

So, why don’t more people buy annuities with their 401(k) dollars?

Here’s one part of the answer: Some people think that buying an annuity is in some way a bad deal for their heirs. But that need not be true. First of all, a retiree can decide to set aside some portion of a retirement nest egg for bequests, either immediately or at a later date. Second, if a retiree chooses to manage his or her own money, the heirs may face the following possibilities: Either they get financially “lucky” and the parent dies young, leaving a bequest, or they are financially “unlucky,” meaning that the parent lives a long life, and the heirs take on the burden of support. If you have aging parents, you might ask yourself how much you’d be willing to pay to insure that you will never have to figure out how to explain to your spouse, or whomever you may be living with, that your mother is moving in.

There are other explanations for the unpopularity of annuities, but I think two are especially important. The first is that buying one can be scary and complicated. Workers have become accustomed to having their employers narrow their set of choices to a manageable few, whether in their 401(k) plans or in their choice of health and life insurance providers. By contrast, very few 401(k)’s offer a specific annuity option that has been blessed by the company’s human resources department. Shopping for an annuity with hundreds of thousands of dollars at stake can be daunting, even for an economist.

The second problem is more psychological. Rather than viewing an annuity as providing insurance in the event that one lives past 85 or 90, most people seem to consider buying an annuity as a gamble, in which one has to live a certain number of years just to break even. But, as the example of Dave and Ron shows, it’s is the decision to self-manage your retirement wealth that is the risky one.

The most complex and unknowable part of that risk is in predicting how long you will live. Even if there are no medical advances in the coming years, according to the Social Security Administration, a man turning 65 now has almost a 20 percent chance of living to 90, and a woman at this age has nearly a one-third chance. This means that a husband who retires when his wife is 65 ought to include in his plans a one-third chance that his wife will live for 25 more years. (A “joint and survivor” annuity that pays until both members of a couple die is the only way I know for those who are not wealthy to confidently solve this problem.)

An annuity can also help people with another important decision: when to retire. It’s hard to have any idea of how much money is enough to finance an appropriate lifestyle in retirement. But if a lump sum is translated into a monthly income, it’s much easier to determine whether you have enough put away to afford to stop working. If you decide, for example, that you can get by on 70 percent of preretirement income, you can just keep working until you have accrued that level of benefits.

IN the absence of annuities, there is reason to worry that many workers are having trouble with this decision. Over the last 60 years, the Bureau of Labor Statistics reports that the average age at which Americans retire has trended downward by more than five years, from 66.9 to 61.6. Of course, there is nothing wrong with choosing to retire a bit earlier, but over the same period, live expectancy has risen by four years and will likely continue to climb, meaning that retirees have to fund at least an additional nine years of retirement. Those who manage their own retirement assets can only hope that they have saved enough.

Annuities may make some of these issues easier to solve, but few Americans actually choose to buy them. Whether the cause is a possibly rational fear of the viability of insurance companies, or misconceptions about whether annuities increase rather than decrease risk, the market hasn’t figured out how to sell these products successfully. Might there be a role for government? Tune in next time for some thoughts on that question.

Richard H. Thaler is a professor of economics and behavioral science at the Booth School of Business at the University of Chicago. He is also an academic adviser to the Allianz Global Investors Center for Behavioral Finance, a part of Allianz, which sells financial products including annuities. The company was not consulted for this column.

July 18 Update: To the Editor:

Re “Annuities and the Puzzle of Income” (Economic View, June 5), in which Richard H. Thaler described some advantages of buying annuities:

Annuities are superficially attractive, but they have important flaws the column did not discuss. People don’t tend to buy diversified sets of annuities, and because they are issued by inherently leveraged financial intermediaries, there can be material credit risks that are hard to assess over the 20- to- 40-year horizon of their payouts.

Annuity providers also incur sales charges and operating expenses, and need capital and a cushion of economic earnings. Those costs may not be incurred by someone making their own investments, or doing so through lower-cost vehicles.

Finally, inflation is an even more important consideration. Not discussing it is like playing “Hamlet” without the prince. In 30 years, the level of consumer prices in the United States might double or sextuple. The first would be painful, and the second ruinous, to someone who relied only on a fixed annuity.

Paul J. Isaac

Manhattan, June 5

The writer is the portfolio manager at Arbiter Partners, a hedge fund.

Editor:A devastating critique of annuities: Credit risk, high costs, and inflation risk.  Right now might be the WORST TIME in the past 100 years to buy an annuity. Be careful out there in your search for returns.

For those who gave a good answer, claim your prize. This link will disappear in a day and the prize will go into the Value Vault (under spins). Remember just email me at aldridge56@aol.com with VALUE VAULT in the subject line (don’t write anything else). The value vault has over 200 books, videos, case studies and just plain great material for learning about investing and business analysis. Reward given ($$$) to someone who can find a better resource on the web.

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Valuation Cases

Posted on July 16, 2012 | 2 comments

http://www.covestreetcapital.com/

Posts from the ‘Stock Ideas’ Category

I noticed their articles on various investments. This is not an endorsement of this firm. I often use this blog as a place to set aside reading materials. These articles may or may not be useful.  Glance, read or pass. You decide.

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Zeke Ashton Teaches a Lesson in How to Learn–A Mistake Not Made

Posted on July 16, 2012 | 4 comments

Entrepreneurs making a new market!

Centaur Value Fund:

http://www.designs.valueinvestorinsight.com/bonus/bonuscontent/docs/CentaurProcess.pdf

http://www.hedgefundletters.com/wp-content/uploads/2011/09/CVF-One-Page-Summary-July-2010.pdf

 A Mistake Not Made

We have long been devoted to the practice of maintaining written research on each of our Fund’s investment ideas as a way to document our thoughts and expectations for each idea. Generally, our research should explain why a given investment should work, the risks that might keep it from working, and define a range of plausible scenarios that we use to formulate our valuation assumptions.

As ideas play out, we document the interim events and any decisions we make along the way. If an investment doesn’t work out, we try to determine whether there is a lesson to be learned that will benefit us in our future decisions.

While this research process is time-consuming, over the years we have come to believe in the approach even though there can be periods where the process doesn’t seem like it is helping our performance. Even worse, we occasionally succumb to mistakes that we should have recognized from prior experience, usually after sufficient time has passed to take the sting out of the prior event. Recently, however, we encountered a situation where we did benefit from having documented our experience with a similar investment many years ago.

Betting on the Jockey Rather than the Horse

As part of our search for promising investments, we look for management teams with great long term track records and that are strongly aligned with common shareholders. Over time, however, we have learned that so-called “jockey” investments can be a form of a value trap in certain conditions. Often, the reputation and track record of a manager or team can overshadow the quality and value of the underlying business. An investment based on faith that a given management will create value without careful analysis of the assets in place can be dangerous, and such stocks are prone to a “halo effect” that lasts until something goes wrong. It is easy as investors to become infatuated with a great management team to the extent that one might be willing to buy a stock without being entirely sure of getting great value for the underlying business. It is therefore quite common for businesses with well-known and well-regarded management to trade for a significant premium to comparable peers.

What we’ve learned is that while we very much prefer to have great “jockeys” directing our investment horses, it is usually a mistake to pay a premium for the privilege. It is usually far better to patiently wait until the stock gets cheap enough to eliminate any management premium. By not paying extra for management, we protect ourselves from the same types of errors in judgment that can occur when assessing business quality or business valuation. When the management team either turns out not to be as good as hoped or alternatively where good management simply makes what turns out to be a mistake that impairs investment value, capital is protected to some degree by ensuring that we do not overpay for the underlying assets or business.

Back in 2006, we decided to make an exception to the above rule of buying the assets at a discount and getting the management for free. The stock was Sears Holdings, and the “jockey” was Edward Lampert.

At the time, we wrote an internal research document arguing that Lampert’s track record was so good that we should purchase Sears Holdings even though we couldn’t make a strong and convincing case that the stock was undervalued. Rather, we made the case that the risk of missing out on the potential benefits of such an obviously great manager in his prime would be the greater sin. In essence, we were willing to pay up for value that hadn’t yet been created because we were so sure it would be. We realized our mistake a year or so later and sold the stock. We never had any real idea what Sears Holdings was worth, and we still don’t.

(CSInvesting: an honest, brave assessment of a permanent loss of capital)

Recently we were struggling with the temptation to invest in a new idea featuring many of the same ingredients: a management team with impressive credentials that is highly incentivized to create value for shareholders taking over a business that has been performing poorly relative to peers, making it ripe for a management turnaround. The stock was JC Penney, which was trading for about $35 at the time of our initial analysis.

After working through several iterations of the potential valuation case, we still couldn’t come up with a clear picture of what the business is worth with any high level of conviction. Still, the idea seemed to pull at us, until we asked ourselves a simple question: if this idea doesn’t work out, is there an obvious mistake that we will be able to point to and kick ourselves for having made? The answer was yes – that we would be making the Sears Holdings “jockey” mistake. We decided against the investment.

In any event, JCP now trades at a much lower price than when we first looked at it, and the market no longer views the management through the same rose-colored lenses it did even three months ago. While we still have a very high regard for the management team at JCP, we haven’t been able to get any more comfortable with our ability to value the business. So even at the much lower price, JC Penney is not an easy call for us.

While we won’t be surprised to see JC Penney work out as an investment – particularly from the recent $20 price – we simply have been unable to get to the point where we have great conviction in the idea. Until we do, we will leave it to others who may understand it better — and we won’t kick ourselves if it turns out to be a money maker for someone else. We are grateful, however, for the benefit of having documented a mistake we made back in 2006 so that we did not repeat it in 2012.

http://seekingalpha.com/article/598621-sell-j-c-penney-too-much-change-too-soon?source=kizur

 

CSInvesting: This is an example of how you can learn from your investing experience. The author recorded his investment, then honestly assessed how it developed and used what he learned to avoid a future loss.

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