Tag Archives: The MArket

Ding, Ding, Ding, The Bells Are Ringing; Search

Corp profits as pct of GDP

 Buy them when they are up, and sell them when the margin clerk insists on it. It is obviously impossible for the thinking Wall Streeter to avoid acting on that principle. He certainly can’t buy them when they are down, because when the are down “conditions” are terrible. You can ask an experienced Wall Street man to buy stocks when carloadings have just hit a new low and unemployment is at a peak and steel capacity is less than half of normal and a very big man (“of course I can’t tell you his name”) has just informed him in confidence that one of the big underwriting houses in the Middle West is in really serious trouble.

Unfortunately for everyone concerned, these are the only times when stocks are down. When “conditions” are good, the forward-looking investor buys. But when “conditions” are good, stocks are high. Then, without anyone having the courtesy to ring a warning bell, “conditions” get bad. Stocks go down, and the margin clerk sends the forward-looking investor a telegram containing the only piece of financial advice he will ever get from Wall Street which has no ifs or buts in it. (Source: Where Are The Customers’ Yachts? by Fred Schwed, Jr.)

John Hussman (www.hussmanfunds.com)

The fact that profits as a share of GDP are more than 70% above their historical norm should immediately raise a question as to whether current year earnings or next year’s projected “forward earnings” should be used as a sufficient statistic for long-term cash flows and equity market valuation without any further reflection. Then again, more work is required to demonstrate that such an approach would be misleading. We’re just getting warmed up.


GMO_QtlyLetter_ALL_3Q2013  Be Careful!  Future returns expected to be negative over the next seven years.

Csinvesting: Stocks are probably fairly valued IF long-term bonds were normalized.  4% to 5% is a far cry from 3% in the Ten-year Treasury.

For Whom the Bell Tolls Bob Moriarty Archives  Nov 25, 2013

I’ve heard it said that they don’t ring a bell at the top. That’s bullshit, of course. In March of 2000 I read that inmates in a jail in Baltimore were holding stock picking contests. If you wanted to pick the very last group who would ever be likely to participate in a stock market bubble, it would probably have to be inmates in a jail in Baltimore. Ding, ding, ding.

Luckily for the poor prisoners in Baltimore, they can go back to doing drugs, extortion and getting correctional officers pregnant, they don’t have to waste any more time on the stock market. They did ring a bell at that top on March 10, 2000.

They just rang another bell. Only time will tell if it’s a top but I can clearly hear the clanging of a bell.

There are times that you know intuitively that some people have way too many dollars and way too little ‘cents.’ Ten days or so ago, Mark Zuckerberg, CEO of Facebook offered $3 billion in cash for an application named Snapchat. Snapchat was co-founded by a 23-year-old named Evan Spiegel.

Snapchat is an interesting app that provides a 14-year-old young lady the opportunity to send her 15-year-old boyfriend a nice picture of her budding boobs. She can be secure in knowing that the competitive advantage of Snapchat is that the picture disappears in 1-10 seconds depending on the option of the person using it. Luckily for her boyfriend, he can do an instant save and pass the “sext” around to all his friends. This is known as “sexting” and is a lot more fun than anything I ever did in high school.

Snapchat CEO Evan Spiegel promptly rejected the $3 billion offer despite having no revenues and no business plan but runs a handy application for every 14-year-old.

Somebody is being really flipping stupid. It’s a tossup as to whether it’s Zuckerberg for offering to overpay for an application that anyone could duplicate in a month, or Spiegel for not taking the cash and running for the nearest French beach where all the women will show you their boobs and you don’t need a cellphone to look at them.

You don’t have to be the mayor of Toronto to smoke crack and do really stupid things. Applications come and go. Computers come and go. I can remember when the Trash 80 from Tandy Radio Shack was the hottest computer in the market. Then the IBM PC and AT and PCJr and now Apple. All things change.

Actually I think they are both being dumber than a brick.

Any investor that hasn’t learned about what happens to markets when they go curvilinear will soon find out.

Ding, ding, ding, ding.

How to Generate Stock Ideas

24 Nov 2013 08:55 pm | Vishal Khandelwal

In an interview with Warren Buffett in 1993, Adam Smith, author of Supermoney, asked how the small investor can find good investment ideas.

Warren Buffett: I’d tell him to do exactly what I did 40-odd years ago, which is to learn about every company in the United States that has publicly traded securities, and that bank of knowledge will do him or her terrific good over time.

Adam Smith: But there are 27,000 public companies.

Warren Buffett: Well, start with the A’s.

Everybody knows that Warren Buffett gets his investment ideas largely from annual reports.

Of course, now he has become so influential that companies call him to share their own ideas. But, fifty years ago, Buffett was not the go-to guy if you wanted to sell your company or raise capital for your failing bank.

He was a small investor who was clawing his way up the investing street by reading whatever annual report came his way, and then finding his investment ideas that worked wonders in the subsequent years.

You are probably at the same stage Buffett was fifty years ago. But there’s a big advantage you have over the early day Buffett.

That advantage is – technology.

With annual reports now available at the press of a few buttons (on company websites and BSE), you can look through hundreds of companies in lesser time than it took Buffett to access ten companies.

You may ask, “But how do I select companies whose annual reports I should read?”

Well, one quick suggestion is what Buffett told Adam Smith – “…start with the A’s.”

I would simplify this for you…

  1. Take, for instance, the BSE-200 list of companies
  2. Remove all companies that you “know” are outside your circle of competence (Don’t worry if you remove lot of companies…because the size of the circle is not important, knowing its boundary is)
  3. For companies that remain, start reading annual reports of companies whose names start with A, then B, and so on. :-)

If you find this difficult to implement (and it is), here are a few other ways you can create a list of companies you would like to do a deeper research on to generate stock ideas…

Remember, good ideas rarely come from…


  • TV, newspaper analysis and breaking news
  • Brokers and research analysts
  • Friends, colleagues, and people you meet at social gatherings

…so you may rather do your own homework than relying on free tips, however enticing they may sound.
Screening Your Way to Stock-dom!
While I am not anymore a big fan of using readymade screeners to generate stock ideas – because you tend to substitute thinking with a lot of data – simple screeners still help me in doing the initial groundwork.

Also, while there are a few paid (and expensive) screeners available in the market – like Ace Equity, Prowess, Capital Line – I find a few free screeners to be very effective when it comes to the value I can derive from using them.

Here are three steps you can use while using three free screeners I use to do a basic analysis on companies…

Step 1: Use a Google Screener
Visit this Google Finance Stock Screener page and select “India” from the drop down list of countries, and then BSE or NSE from the stock exchange list.

Remove all entries like “Market Cap”, “P/E Ratio” etc, so that you can set your own criteria for screening. Then, screen for companies using these key numbers (you may add more screening criteria from those available)…

  • 5-year sales growth – Between 10% to 50% – Neither too low nor too high to avoid extremes or cases with sharp rise and sharp falls that may revert to the mean
  • 5-year EPS growth – Between 10% and 50% – Neither too low nor too high to avoid extremes or cases with sharp rise and sharp falls that may revert to the mean
  • Latest Net Profit Margin – Between 5% and 75%
  • 5-year Avg. Return on Equity – Between 15% and 100%
  • Latest Debt/Equity Ratio – Less than 1x
  • Latest Market Capitalization – At least Rs 2.5 billion (Rs 250 crore) to exclude extremely small companies
  • Latest P/E ratio – Between 5x and 25x
  • Volume – At least 100 shares traded daily

Here is how the screening and its output look like…

Note: Another good screener that a tribesmen has directed me to is from Financial Times – FT Equity Screener. It has greater number of criteria than Google’s screener, but does not display the results in INR. You must however try it out for sure.


Step 2: From the list of companies you get, exclude those outside your circle of competence – businesses you “know” you don’t understand (like I would exclude commodity businesses like metals and mining, or oil & gas businesses).

Step 3: Glance at the last 5/10 years’ financial performance on sites likeScreener or Morningstar. Look for trends in:

  • Sales growth – Check for rising and stable growth
  • Net margin – Stable / rising margin. Be wary of margins that are falling
  • Return on equity – Stable or rising. Be wary of falling ROE
  • D/E – Nil or small debt is fine. Be wary of companies where D/E > 1x
  • FCF change – Morningstar gives the free cash flow calculation, which instantly tells you if the company is generating cash or burning it. Look for businesses that have generated positive FCF over the past few years
  • Apart from the ratios given, calculate ones like FCF yield – FCF per Sharedivided by Stock Price, which tells you if the stock is cheap or expensive. An FCF yield of 5% or more is a good number to look at.

The best part about these two screeners – Screener and Morningstar – is that you can download companies’s financial performance in excel and then do you own analyses.

Better Alternative to Step 3
While you may use Screener or Morningstar to study the past 5/10 years’s performance of companies that you get from Step 1 and Step 2 above, a far better way is to pick up the annual reports of the resultant companies and then read them one by one.

After having used ready-made screens for the past few years, I have realized that you should not use numbers prepared by others, but rather generate them yourself. This way you get into the habit of actually reading annual reports and also get to learn what numbers you need to focus on.

Here are two videos that will tell you what you must focus on in an annual report…


If you can’t see the videos above, see here – Video 1 | Video 2


Ultimately, as you would realize, just a few numbers / facts / variables will help you understand what drives a given business.

I have seen analysts and investors trying to get perfect in their analysis by accumulating as many data points as possible.

But then, my experience suggests that trying to increase your confidence by gathering information that is supposedly unknown to most others really only makes you more comfortable with your investment decisions, not better at them, and is generally an unproductive use of your limited time.

Thus, I would suggest that after you arrive at your list of companies using any or a combination of methods suggested above, use a “Less is More Checklist” while reading the annual reports of the companies in your list.

Use the “Less is More” Checklist
Rather than obsessing with the bewildering fusion of news and noise, concentrate on a few key elements in stock selection, i.e., what are the 5-10 most important things you should know about any business you are about to invest in?

Of course, if I knew the exact answer I would have retired long ago! :-)

Even if I could know all the facts about an investment, I would not necessarily profit. This is not to say that fundamental analysis is not useful. It certainly is.

But information generally follows the well-known 80/20 rule: the first 80% of the available information is gathered in the first 20% of the time spent.

So if I were to list down eight questions that, I believe, would help me do an 80% analysis of a business, they would be…

  1. Is the business simple to understand and run? (Complex businesses often face complexities difficult for its managers to get over)
  2. Has the company grown its sales and EPS consistently over the past 5-10 years? (Consistency is more important than speed of growth)
  3. Will the company be around and profitably better in 10 years? (Suggests continuity in demand for the company’s products/services)
  4. How has the company performed on Buffett’s earnings retention test?(Suggests how a company has used retained earnings in the past – a very important question to answer)
  5. Does the company have a sustainable competitive moat? (Pricing power, gross margins, lead over competitors, entry barriers for new players)
  6. How good is the management given the hand it has been dealt? (Capital allocation, return on equity, corporate governance, performance against competition)
  7. Does the company require consistent capex and working capital expenditure to grow its business? (Companies that have to spend continuously on such areas are like running on treadmills, which is not a good situation to have)
  8. Does the company generate more cash than it consumes? (Cash generators have a higher probability of surviving and prospering during bad economic situations)

These questions would help you answer whether the business you are looking into is greatgood or gruesome as Warren Buffett has defined each one of them to be.

Ultimately, successful investing is all about doing your own research carefully and buying good businesses.

If you know a company well and you’ve done your homework, you can take advantage of situations when Mr. Market offers them on a platter, which he occasionally does.

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.