Tag Archives: IBM

Prof. Bruce Greenwald on the Market Today

Confessions of a Quantitative Easer

We went on a bond-buying spree that was supposed to help Main Street. Instead, it was a feast for Wall Street.
By Andrew Huszar Nov. 11, 2013 7:00 p.m. ET

I can only say: I’m sorry, America. As a former Federal Reserve official, I was responsible for executing the centerpiece program of the Fed’s first plunge into the bond-buying experiment known as quantitative easing. The central bank continues to spin QE as a tool for helping Main Street. But I’ve come to recognize the program for what it really is: the greatest backdoor Wall Street bailout of all time.

Five years ago this month, on Black Friday, the Fed launched an unprecedented shopping spree. By that point in the financial crisis, Congress had already passed legislation, the Troubled Asset Relief Program, to halt the U.S. banking system’s free fall. Beyond Wall Street, though, the economic pain was still soaring. In the last three months of 2008 alone, almost two million Americans would lose their jobs.

The Fed said it wanted to help—through a new program of massive bond purchases. There were secondary goals, but Chairman Ben Bernanke made clear that the Fed’s central motivation was to “affect credit conditions for households and businesses”: to drive down the cost of credit so that more Americans hurting from the tanking economy could use it to weather the downturn. For this reason, he originally called the initiative “credit easing.”

My part of the story began a few months later. Having been at the Fed for seven years, until early 2008, I was working on Wall Street in spring 2009 when I got an unexpected phone call. Would I come back to work on the Fed’s trading floor? The job: managing what was at the heart of QE’s bond-buying spree—a wild attempt to buy $1.25 trillion in mortgage bonds in 12 months. Incredibly, the Fed was calling to ask if I wanted to quarterback the largest economic stimulus in U.S. history.

This was a dream job, but I hesitated. And it wasn’t just nervousness about taking on such responsibility. I had left the Fed out of frustration, having witnessed the institution deferring more and more to Wall Street. Independence is at the heart of any central bank’s credibility, and I had come to believe that the Fed’s independence was eroding. Senior Fed officials, though, were publicly acknowledging mistakes and several of those officials emphasized to me how committed they were to a major Wall Street revamp. I could also see that they desperately needed reinforcements. I took a leap of faith.

In its almost 100-year history, the Fed had never bought one mortgage bond. Now my program was buying so many each day through active, unscripted trading that we constantly risked driving bond prices too high and crashing global confidence in key financial markets. We were working feverishly to preserve the impression that the Fed knew what it was doing.

It wasn’t long before my old doubts resurfaced. Despite the Fed’s rhetoric, my program wasn’t helping to make credit any more accessible for the average American. The banks were only issuing fewer and fewer loans. More insidiously, whatever credit they were extending wasn’t getting much cheaper. QE may have been driving down the wholesale cost for banks to make loans, but Wall Street was pocketing most of the extra cash.

From the trenches, several other Fed managers also began voicing the concern that QE wasn’t working as planned. Our warnings fell on deaf ears. In the past, Fed leaders—even if they ultimately erred—would have worried obsessively about the costs versus the benefits of any major initiative. Now the only obsession seemed to be with the newest survey of financial-market expectations or the latest in-person feedback from Wall Street’s leading bankers and hedge-fund managers. Sorry, U.S. taxpayer.

Trading for the first round of QE ended on March 31, 2010. The final results confirmed that, while there had been only trivial relief for Main Street, the U.S. central bank’s bond purchases had been an absolute coup for Wall Street. The banks hadn’t just benefited from the lower cost of making loans. They’d also enjoyed huge capital gains on the rising values of their securities holdings and fat commissions from brokering most of the Fed’s QE transactions. Wall Street had experienced its most profitable year ever in 2009, and 2010 was starting off in much the same way.

You’d think the Fed would have finally stopped to question the wisdom of QE. Think again. Only a few months later—after a 14% drop in the U.S. stock market and renewed weakening in the banking sector—the Fed announced a new round of bond buying: QE2. Germany’s finance minister, Wolfgang Schäuble, immediately called the decision “clueless.”

That was when I realized the Fed had lost any remaining ability to think independently from Wall Street. Demoralized, I returned to the private sector.

Where are we today? The Fed keeps buying roughly $85 billion in bonds a month, chronically delaying so much as a minor QE taper. Over five years, its bond purchases have come to more than $4 trillion. Amazingly, in a supposedly free-market nation, QE has become the largest financial-markets intervention by any government in world history.

And the impact? Even by the Fed’s sunniest calculations, aggressive QE over five years has generated only a few percentage points of U.S. growth. By contrast, experts outside the Fed, such as Mohammed El Erian at the Pimco investment firm, suggest that the Fed may have created and spent over $4 trillion for a total return of as little as 0.25% of GDP (i.e., a mere $40 billion bump in U.S. economic output). Both of those estimates indicate that QE isn’t really working.

Unless you’re Wall Street. Having racked up hundreds of billions of dollars in opaque Fed subsidies, U.S. banks have seen their collective stock price triple since March 2009. The biggest ones have only become more of a cartel: 0.2% of them now control more than 70% of the U.S. bank assets.

As for the rest of America, good luck. Because QE was relentlessly pumping money into the financial markets during the past five years, it killed the urgency for Washington to confront a real crisis: that of a structurally unsound U.S. economy. Yes, those financial markets have rallied spectacularly, breathing much-needed life back into 401(k)s, but for how long? Experts like Larry Fink at the BlackRock investment firm are suggesting that conditions are again “bubble-like.” Meanwhile, the country remains overly dependent on Wall Street to drive economic growth.

Even when acknowledging QE’s shortcomings, Chairman Bernanke argues that some action by the Fed is better than none (a position that his likely successor, Fed Vice Chairwoman Janet Yellen, also embraces). The implication is that the Fed is dutifully compensating for the rest of Washington’s dysfunction. But the Fed is at the center of that dysfunction. Case in point: It has allowed QE to become Wall Street’s new “too big to fail” policy.

Mr. Huszar, a senior fellow at Rutgers Business School, is a former Morgan Stanley managing director. In 2009-10, he managed the Federal Reserve’s $1.25 trillion agency mortgage-backed security purchase program.


What Can We Learn from IBM?

PS: I may not post the See’s Candies case study until tomorrow….backed up with work. Until then, tackle this:

Why did Buffett buy IBM?

IBM_VL    Don’t cheat! Look at the Value-Line and write what Buffett sees in IBM. (Disclosure: I own IBM along with BDX, BCR, CSCO, LXK, NVS, TESCO, ORI, etc. and I will not announce if and when I sell. I may be incorrect in the assessment of those businesses either in price paid or assessment of value.)

What do you think of IBM’s growth? Is this a good business? What might be driving returns for shareholders? How would you classify this company?  A rapid compounder? Value trap?

How can a company as well-known as IBM become mis-priced?

Hint: For those who wish to start your own fund….research the studies on horse track betting where favorites are SYSTEMATICALLY under-bet (under priced) while long shots are SYSTEMATICALLY over bet or over priced.


Betting on Favorites

See research:Favorite_Longshot_Bias


One of the common criticisms I (Investor lecture at Columbia GBS) hear about this type of investing is that it is akin to betting on favorites at the race track. Once you have identified a company that is so obviously superior, how likely is it to be undervalued since the whole world will have perceived that it is an extraordinary company? The stock won’t have a margin of safety and may be persistently over-valued. The stock may be over-loved and overvalued.

Let me back up a second. As part of my misspent youth, I spent a lot of time in horse racing and handicapping. In fact, bettors in aggregate in pari-mutual betting are, in fact, very good at picking winners at the racetrack. Favorites do win races. But betting on favorites does not make you money; it loses you the least amount of money. Because there is a tremendous track take. So the horse racing/handicapping is a minus 20 percent on typical betting. If you just put money down on favorites as a mechanical system, the record shows that you will lose over time only 2%, 3% or 4%. If you bet on long shots, you will lose 20+% of your money.

Now in the case of the stock market over a long period of time, it has been a plus 9, plus 10, plus 11% game so it is very much more favorable business than horse betting. But betting on favorites, betting on quality as opposed to junk is a winning bet, as long as the valuation discipline is appropriate.

Prize awarded: Boom, Gloom, and Doom Report for the BEST reply.

Ok, now take a look at these articles: http://tech.fortune.cnn.com/2011/11/14/warren-buffett-ibm/

and  http://seekingalpha.com/article/510371-what-does-warren-buffett-see-in-ibm

Lessons learned?

If I can stress anything–and it took me TEN years to learn and I fall off the wagon occasionally–keep things simple!

Buffett Case Study on IBM

Do you understand Buffett’s reasons for investing in IBM?  What are the financial characteristics of IBM that are attractive to Mr. Buffett? Look at IBM’s annual report provided in the link below.

From a CNBC Interview

BECKY: Wait. Wait a second, IBM is a tech company, and you don’t buy tech companies. Why have you been buying IBM?

BUFFETT: Well, I didn’t buy railroad companies for a long time either. I—it’s interesting. I have probably—I’ve had two interesting incidents in my life connected with IBM, but I’ve probably read the annual report of IBM every year for 50 years. And this year it came in on a Saturday, and I read it. And I got a different slant on it, which I then proceeded to do some checking out of. But I just—I read it through a different lens.

JOE: What’s the different lens? What’s the different slant?

BUFFETT: Well, just like—just like I did with—just like I did with the railroads. And incidentally, the company laid it out extremely well. I don’t think there’s any company that’s—that I can think of, big company, that’s done a better job of laying out where they’re going to go and then having gone there. They have laid out a road map and I should have paid more attention to it five years ago where they were going to go in five years ending in 2010. Now they’ve laid out another road map for 2015. They’ve done an incredible job. First, Lou Gerstner, when he came in, he saved the company from bankruptcy. I read his book a second
time, actually, after I read the annual report. You know, “Who Said
Elephants Can’t Dance?” I read it when it first came out and then I went back and reread it. And then we went around to all of our companies to see how their IT departments functioned and why they made the decisions they made. And I just came away with a different view of the position that IBM holds within IT departments and why they hold it and the stickiness and a whole bunch of things.
 And also, I read very carefully what Sam Palmisamo…

BUFFETT: …Palmisano, yes, has said about where they’re going to be and he’s delivered big time on his—on his—on his first venture along those lines.

BUFFETT: The other thing I would say about IBM, too, is that a few years back, they had 240 million options outstanding. Now they probably are down to about 30 million. They treat their stock with reverence which I find is unusual among big companies. Or they really—they are thinking about the shareholder.

JOE: But you’re buying this after it’s really broken out the new highs this year, new all-time highs.

BUFFETT: We bought—we bought railroads on highs, too.

JOE: Yeah? They sent it—you know, stocks at new lows that, you know, can hit new lows where they…

BUFFETT: Right. I bought—I bought control of—I bought control of GEICO at its all-time high.

BUFFETT: No, I never talked to Sam. I’ve never talked to Sam. I’ve got this—I competed with IBM 50 years ago, believe it or not. I was chairman of a company, had, and I testified for IBM in 1980 when the government was attacking about on the antitrust situation. But I’ve never—I have not talked to Sam or now Ginni.

BECKY: You—this is the second time in the last several months that you’ve told us about a purchase you’ve made of a company you’ve been the reading annual reports for years.


BECKY: Bank of America was the first.

BUFFETT: Right. I read those for 50 years.

BECKY: Read those for 50 years and you’re looking at companies a little differently. You never really bought tech stocks before. You had always said you don’t understand technology stocks.


BECKY: Does this mean that this is a new era and you’re going to be looking at a lot of tech stocks and I guess chief among them, would you consider Microsoft?

BUFFETT: I—well, Microsoft is a special case because Microsoft is off bounds to us because of my friendship with Bill and if we spent seven months buying Microsoft stock and during that period they announced a repurchase or increase of the dividend or an acquisition, people would say you’ve been getting inside information from Bill. So I have told Todd and Ted and I apply it myself that we do not ever buy a share of Microsoft. I think Microsoft is attractive but that—but we will never buy Microsoft. It—people would just assume I knew something and I don’t, but they would assume it and they would assume Bill talked to me and he wouldn’t have. But there’s no sense putting yourself in that position.


BUFFETT: I can say I’ve never met Sam but I can’t say I’ve never met Bill.

BECKY: But does this change the rules of the game that you would actually look at technology stocks now?

BUFFETT: I look at everything but most things I decide I can’t figure out their future.

BUFFETT: Yeah, it’s a—it’s a company that helps IT departments do their job better.

JOE: Yeah.

BUFFETT: And if you think about it, I don’t want to push the analogy too far because it could be pushed too far. But, you know, we work with a given auditor, we work with a given law firm. That doesn’t mean we’re happy every minute of every day about everything they do but it is a big deal for a big company to change auditors, change law firms. The IT departments, I—you know, we’ve got dozens and dozens of IT departments at Berkshire. I don’t know how they run. I mean, but we went around and asked them and you find out that there’s—they very much get working hand in glove with suppliers. And that doesn’t—that doesn’t mean things won’t change but it does mean that there’s a lot of continuity to it. And then I think as you go around the world, IBM, in the most recent quarter, reported double-digit gains in 40 countries. Now, I would imagine if you’re in some country around the world and you’re developing your IT department, you’re probably going to feel more comfortable with IBM than with many companies.

JOE: Well…

BUFFETT: I said I competed with IBM 50 years ago. Go here: http://csinvesting.org/2011/09/17/buffett-investment-filters-and-cs-on-mid-continent-tabulating-company/

BECKY: Yeah.

BUFFETT: We actually started—I was chairman of the board, believe it or not, of a tech company one time, and computers used to use zillions of tab cards and IBM in 1956 or ‘7 signed a consent decree and they had to get rid of half the capacity. So two friends of mine, one was a lawyer and one was an insurance agent, read the newspaper and they went into the tab card business and I went in with them. And we did a terrific job and built a nice little company. But every time we went into a place to sell them our tab cards at a lower price and with better delivery than IBM, the purchasing agent would say, nobody’s ever gotten fired from buying—by buying from IBM. I mean, we probably heard that about a thousand times. That’s not as strong now, but I imagine as you go around the world that there are—there’s a fair amount of presumption in many places that if you’re with IBM, that you stick with them, and that if you haven’t been with anybody, you’re developing things, that you certainly give them a fair shot at the business. And I think they’ve done a terrific job of developing that. And if you read their reports—if you read what they wrote five years ago they were going to do and the next five years, they’ve done it, you know, and now they tell you what
they’re going to do in the next five years, and as I say, they have this terrific reverence for the shareholder, which I think is very, very important.

And I want to give full credit, incidentally, to Lou Gerstner because when he came in, I was a friend of Tom Murphy’s and Jim Burke’s, and they were on the search committee to find a solution when IBM was almost broke in 1992, and everybody thought they were going pretty far afield when they went to Lou Gerstner. And look what…

BUFFETT: Well, you don’t have to think of—you don’t have to think of another one, Joe. And if you read his book, you know, “Who Said Elephants Can’t Dance?” it’s a great management book. Like I said, I read it twice.

ANDREW: What was it when you’re reading the report? I mean, most investors who are trying to invest like you, they’re reading annual—what is it in the report that you said, ah, I missed it?

BUFFETT: Well, it was—it was a lot of interesting facts and you know, I
recommend you read the report, you know. Go here: http://www.ibm.com/annualreport/2010/
And I didn’t look at the pictures and I’m not sure there were any pictures.
I kind of like that, too. But there were—there were lots of things in that
report but the truth is, there were probably lots of things in the report a
year earlier or two years earlier that you say, why didn’t I spot it then? And
I think it was Keynes or somebody that said that the problem is not the new
ideas, it’s escaping from old ones. And, you know, I’ve had that many times in
my life and I plead guilty to it.

BUFFETT: I will tell you one very smart thing that Thomas Watson Sr. said. I knew Thomas Watson Jr. just a little bit. Tom Watson Sr., this applies to stocks. He said, “I’m no genius but I’m smart in spots and I stay around those spots.” And that’s terrific advice.