Mike Rivers' Blog Headline Animator

Friday, September 26, 2008

With trouble comes opportunity

Things look pretty grim out there right now.

Credit markets are freezing up. Unemployment is climbing. Housing sales, both existing and new, are hitting new lows. Orders for durable goods are down signficantly.

Our government has helped bail out 3 of the 5 largest investment banks. Fannie Mae and Freddie Mac, upon which the housing market depends so much, are in our government's conservatorship. The largest insurance company in the world, AIG, has sold itself to our government's majority ownership. Washington Mutual, the largest thrift bank in our nation, was siezed last night and parts were sold off to JPMorgan.

The U.S. executive and legislative branches are struggling to put together a multi-billion dollar plan (the bill will probably come to over a trillion, in my opinion) that will allow the government to purchase and liquidate currently illiquid securities. The Securities and Exchange Commission is preventing a growing number of companies from being sold short.

Baby, it's cold outside.

So, where are the opportunities? Let me tell you!

The only thing building up faster than the credit market "snow" outside: bargains! I've never seen so many great quality companies selling at cheap prices. And, best of all, the strongest companies are able to grow while weak companies are wallowing in too much debt.

It's always hard to buy when things look bleak, because they almost always seem to get bleaker. But, that shouldn't prevent a long term investor from taking advantage of the great opportunities available right now.

It's hard to remember how things looked in the fall of 2002 and spring of 2003. It's hard to remember how bad the market and economy looked in the fall of 1990 and spring of 1991. It's hard to remember the brutal recession of 1982 that followed a recession in late 1979 and early 1980. Same for 1974 and 1970, and on back in history.

The best time to invest is when things look terrible! That doesn't mean we are at a bottom in the stock market--no one can predict that with any degree of accuracy. But buying when things look terrible has been a pretty good method to use over time, and now looks pretty dreadful.

With touble comes opportunity. This is an outstanding time to invest, and I will be glad to point back to this point in time several years from now and say, "wasn't that a GREAT time to invest!"
Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.

Friday, September 19, 2008

Dumbfounded

It first started to occur to me around 5 years ago that the housing market would probably crash and that it would almost certainly drag credit markets down with it along with home builders, mortgage insurers, bond insurers and several financial institutions.

But, if you had asked me 5 years ago what the Dow Jones Industrial Average (DJIA) would trade at given that:

1) 3 of the top 5 investment banks in the US would no longer be independent and the final 2 would be tottering
2) the US government would take over Fannie Mae and Freddie Mac because they were insolvent
3) the US government would own 80% of AIG's equity because it was also insolvent

I would have said the DJIA would be at $5,000, not $11,388.

What color is the sky in most investors' world? Does anyone really believe all these bailouts will be cost free?

I'm dumbfounded.

Don't get me wrong, my investors and I are doing very well both absolutely and relatively to the market.

But, isn't the US economy entering what could be the worst recession since the early 1980's? Isn't government intervention on a scale not seen since the Great Depression an indication of how bad things are? Isn't the world economy entering the first widespread slowdown in a generation?

Then, why is the market down so little?

I have no idea. In fact, I'm dumbfounded.

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.

Friday, September 12, 2008

The (temporary) triumph of momentum over value

As I've mentioned before, momentum investments have been out-performing value investments over the last couple of years.

If you had just picked what had gone up in the past, it continued to go up.

Value investing, instead, focuses on understanding the value of a business and trying to buy below that value, thus providing a margin of safety (like building a bridge to handle more than you think it will bear over time).

Value has been, over the long run, one of the (if not the) smartest ways to invest.

Just because it hasn't done well lately doesn't mean it won't do well in the future. In fact, quite the opposite is true--value investing is VERY likely to out-perform momentum investing in the near future.

As additional support for this contention, take a look at a recent Motley Fool article by Andrew Sullivan, CFA. In it, he gives you a flavor of the returns that are possible for value after it has under-performed.

Trying to time when momentum will out-perform value and vice versa is a fools errand, but, at times like this, it's very easy to be patient and wait for value to begin out-performing again.

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.

Friday, September 05, 2008

The Wall Street Journal gives short sellers a hand

In October 2007, I took the Wall Street Journal to task for a weak article hammering Wal-Mart. Their timing turned out to be impeccable, as I wrote about in July of this year. Wal-Mart's stock has handily beat the market since the October 2007 article.

Last week, I think the Journal may have done it again, this time with Sears (full disclosure: my clients and I own shares of Sears Holdings).

The Wall Street Journal's article, titled "Mr. Lampert, Fire Thyself," again seems thin on facts and long on generalized evaluations.

The gist of the article is that Eddie Lampert, Chairman and majority owner of Sears Holdings, should fire himself because his strategy with Sears has failed.

To support this claim, the article says another dismal quarter at Sears proves its strategy is failing. The article states that rivals are eating its lunch, too. Missing from the article is any support for these contentions. Which rivals? What made Sears' quarter so dismal? How has Sears done versus rivals both in terms of stock performance and fundamental economics? None of this information is provided.

The article goes on to mischaracterize Lampert's strategy with Sears. It claims that Eddie simply decided not to invest in Sears in hopes that would jack up return on investment. If you read any of what Lampert has to say, you'll see that he would love to invest more in Sears as long as it provides an adequate return on investment. That's what companies are supposed to do. The author either deliberately or ignorantly misses this distinction.

The article highlights same store sales are down 6% at Sears, but no mention is made of how Kohls, JC Penney, Nordstrom, Target, or any other competitors are doing. The author seems to believe these facts are not important, only the negative evaluation of Sears.

The article does point out that Sears has had a revolving door of executive managers. That's fair. And, the author points out that Lampert will have a hard time using financial engineering with crunched credit markets and a difficult real estate market. That's true, too.

But, a couple of facts and a lot of evaluative statements not supported by facts isn't good reporting. Sears is generating a ton of cash, and its balance sheet is more solid than many rivals. This can be seen in share buybacks if nothing else. Why isn't that mentioned, I wonder?

Sears isn't investing much in stores, but perhaps that's a smarter strategy than throwing good money after bad. Why isn't that highlighted? And why didn't the author differentiate between not investing in stores as a strategy versus not investing in inadequate return on capital projects?

I have a guess. I think short sellers are eager to see Lampert and Sears fail. At the same time, Wall Street Journal journalists are hungry for a sensational story. Combine these two ingredients and mix liberally with lack of scruples, and you get a Wall Street Journal article thin on substance and high on sensation.

Perhaps the Journal has called the bottom on Sears like they did on Wal-Mart. I'll be eagerly watching to see what happens.

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.