Tuesday, November 22, 2005

Where's the Value?

It's going to take more than a cosmetic makeover to turn around Sears/Kmart. I would guess that people shop at WalMart because shoppers know they will find cheaply priced products. I'm not sure how much power Sears has over its suppliers, but as many already know, WalMart dominates many of its suppliers. WMT also has unique, yet sometimes controversial, employee policies. WalMart has also been on top of the supply-chain logistics with things like the hub and spoke distribution network. WMT's control over the costs is what I'd imagine allowed the company to offer cheaper products and establish its current position. I'm not sure how Sears/Kmart's model works, so perhaps it's problem is more than what I've suggested.

It's kinda tough being a value investor in a strong market. Traditional "value" methods of screening for companies will rarely pick out winners in current markets. And if you look at it relatively, SHLD looks more of value play than stocks like WMT. SHLD's enterprise value is almost $22 billion. It's current assets amount to about $14 billion, so if you liquidated all of its assets (including PP&E and excluding intangibles), you'd probably have about $25 billion. Now consider WMT, which has an enterprise value of almost $240 billion. Yet it only has about $40 billion in current assets. And if you fully liquidated all of its assets, you'd probably end up with half that of its market value.Value investing is great and all, but it's so hard finding candidates that meet all the criteria. I guess it really depends on how you define "value." Besides looking at their assets, you'd also have to consider their liabilities and obligations. And compared to many other stocks out there, SHLD looks like a pretty decent value play. SHLD just needs to make sure it can get rid of their inventory, enough to meet its current liabilities. But it’ll take more than that to compete profitably in the long term.

When Mr. Buffett is buying companies like WalMart and Anheuser Busch, you'd really have to wonder how he's measuring value or intrinsic value. I guess he really does weigh ROE greatly into his valuation matrix. But I would've never guessed that he'd go for WalMart at these levels... he's probably using some revenue ratio to value that play.

Monday, November 21, 2005

A Scrooge Christmas?

I remember driving past some retail stores three weeks ago, and I had noticed that they were putting up the Christmas decorations. I thought to myself that it seemed somewhat early to be pushing Christmas. The currently uncertain economic outlook must have led the retailers to act anxious and nervous about the upcoming holiday sales, on which many depend.

Naturally, I thought it would be wise to visit some well-known malls in LA over the weekend to see how shoppers have responded to the early Christmas promotions. Not to my surprise, I didn't see that many shoppers - not even the expected mallrats.

So what does this mean? Well, people could be putting off their shopping for Black Friday or last minute shopping. Perhaps many have planned to avoid the hassles by shopping online. Or maybe it's the retailers fears coming true. A bleak Christmas would mean some difficult times up ahead. People should check under the Christmas tree for the number of presents, which could be called the Santa Claus indicator. If you see less presents, then maybe we're in for a slowdown. If there are plenty of presents, then I suppose we shouldn't worry too much.

Wednesday, November 16, 2005

Phantom Trader

Dealing with China has been less than smooth. First it's currency "manipulation" and lack of intellectual property protection, which have led US authorities looking to take some form of action - whether through its own countering actions via tariffs or through pressuring the WTO to take actions.

Now there's something else going on in China. It envolves a huge short copper position (in the hundreds of tonnes) by a trader named Liu Qibing, exept it's unknown wherther this individual actually exists or not. I'm not going to speculate here, but things smell rather fishy. Here's a link to a story on Asia Times Online that gives some possible explanations to this mystery phantom trader.

Tuesday, November 15, 2005

Don't Cook the Turkey in the Microwave

Convincing a non-blogger to read blogs is like trying to persuade an oven user to use a microwave. Why should a person use one’s time reading blogs, when that time could be spent reading the traditional newspaper? Many people do not like changes, and those who tend to make slow adjustments usually get left behind.

Blogs offer readers various viewpoints of a particular topic, taking away some of the influence of the traditional media views toward certain subjects. How well the blogger convinces one’s readers will depend on the credibility of the information presented in his or her posts.

In traditional method of presenting information, the reporters’ or analysts’ works must be approved by the supervisor, who is careful (in most cases) to avoid any potential litigation dangers. I say “in most cases” because of the CIA leak story (which placed CIA operatives’ identity in jeopardy) by Judith Miller that was approved by the New York Times. Risking people’s lives to sell a story is beyond me.

When I prepare financial and economic reports for formal purposes, those analyses needs to be approved by my supervisors. However when I do research, I find it useful to read various resources which include blogs as well as traditional and formal sources. I’ve learned that some blogs contain unreliable data, but I’ve also found that others have valuable contributions to the information that I seek. This method gives me a wide perspective of the subject, which allows me to make my own careful conclusions.

Blogging represents a good medium to offer a quick thought on a subject or even hold forum-like discussions. If bloggers abuse their sites to express their nonsense, then that will be their demise. Others that offer useful insights will contribute to the sustainability of the blogging trend.

I doubt that the traditional newspaper media will go away. The way I see it, we will still cook our turkeys in the traditional oven. Sure you can reheat the cooked turkey in the microwave, but I would hate to taste the turkey that was initially nuked in the microwave oven. Additionally, as people have learned not to use metallic items in microwaves, I hope bloggers will learn not to use BS and nonsense in their blogs.

Thursday, November 10, 2005

Snap, Crackle and Pop... Not the Rice Krispies Characters

In the 90’s we saw a bubble in tech. Inflationary concerns have led to the Fed increasing fed funds rate, perhaps a bit too much. Imbalances have caused some to be very concerned, while others touted that tech will change everything and that their valuations should reflect this outlook. Smart money got out as many suffered the effects of a bubble popping. The slowdown in the economy had led the Fed to start lowering the fed funds rate in order to pump some confidence in the markets. Instead of going into a major recession, the money had shifted to real estate as these assets currently remain extremely inflated in certain hot markets. What have people learned from these experiences?

The real estate market isn’t liquid as stocks, but we’ve seen that real estate is more liquid than many have thought. Property flippers have come into the market like traders and contributed to the rising artificial price of properties. I’ve seen many people jump into this home purchasing bandwagon (mainly fueled by cheap credit). One of the problems we saw during the rise of the tech bubble was the use of leverage in the form of margin purchases. As the stock market headed southward, many began to receive margin calls, which may have accelerated the bubble burst.

I can’t help but notice the similarities between these two leveraged purchasing patterns. In both circumstances, many have used borrowed money to chase these rising assets – in many cases without fully understanding the risks they have bore. In some cases, those who have learned from the stock bubble have realized their profits from their real estate plays and have been laughing all the way to their banks. However, there still are others who are in a potentially serious problem. These people are those who have bought their properties during the peak using interest-only financing.

When I ask some of these people why they would do such a thing, they tell me it’s because they couldn’t afford a fixed financing, and that it’s ok since they plan on selling the property in a couple of years. They have bought into the idea that these prices will keep going up, just as those who thought the stock market will rise infinitely. Once again, we have “irrational exuberance,” but this time in the real estate market.

Relative to the real estate market, stocks look cheap. However, the US economy remains uncertain. Our principal at RW Wentworth, Tom Au, believes a lackluster future waits in the next coming quarters for our economy. You can read a brief highlight of his interview with The Wall Street Transcript (TWST). Where will the money flow next? Perhaps towards some value stock plays or maybe even toward international markets.

Risk Management

Faire Isaac (NYSE: FIC) has hired a key employee to lead its efforts in Japan. FIC provides analytic and decision management technology to its clients. The Company uses advanced algorithms and programs to gauge risk levels of customers, which allows Faire Isaac clients to make intelligent decisions.

This is exactly what Japan needs. The country has been plagued with problems in the financial institution. Non-performing loans remain relatively high and threaten the health of the Japanese financial system. Japan will need to move away from their past lending policies that are heavily influenced by personal relationships.

Utilizing analytic technologies will allow these financial institutions to better understand their customers and the associated risk levels. The Japanese economy has been in the dumps over the past years, but it appears that real reforms are in the works. Their deflationary trends seem to be reversing, but Japan will need to clean house before things look clear.

Wednesday, November 09, 2005

Changing of the Guard

US Treasury yields have jumped today. According to Bloomberg, approximately 50% of Treasuries are held by foreign holders. It appears that there is a slight stall in Treasury purchases, which would explain this jump on the yields. We will need to keep an eye on the countries that hold large shares of Treasuries such as Japan, China, South Korea and oil producing countries.

On the homefront, we are currently going through a transition period as many observe the various forces that will steer not just the US economy but the global economy as well. Many wonder how well Mr. Greenspan will pass the baton over to Mr. Bernanke. This transition should be relatively smooth, but will the new Chairman push towards a formal “inflation targeting” policy? Will there be a closer tie between the Treasury and the Federal Reserve? Only time will tell.