Other Finance

  • The Enduring Principles of Graham and Dodd

    Although financial markets have been transformed in ways unimaginable since Benjamin Graham and David Dodd published the first edition of “Security Analysis” in 1934, the lessons that can be learned by gleaning its pages are timeless. A review of only a few of the underlying principles upon which their value investing philosophy is based will reveal whether the stock being analyzed is Facebook (NASDAQ:FB) or Boeing (NYSE:BA), whether the market is in the throes of a roaring bull market or in a cyclical downturn. Analysts can benefit greatly by incorporating these maxims in their quest for ascertaining a stock’s intrinsic value.

    One of the underlying tenets of “Security Analysis” as Seth Klarman (Trades, Portfolio) appropriately noted in the Preface to the sixth edition is that, “The real secret to investing is that there is no secret to investing…that so many people fail to follow this timeless and almost foolproof approach enables those who adopt it to remain successful.”

    For the past decade, with the caveat of exactly how one defines certain terms that form the basis of the analysis or comparison, many within the investment community contend that value investing has failed to keep up with growth or momentum investing.

    A roaring, historically unprecedented, 10-year bull market that has heavily favored the tech stock sector would seem to validate such a proposition. However, there is nothing in the lessons enumerated in Security Analysis that contain any suggestion by its authors of an inherent bias towards one sector versus another. What is paramount for successful investing is the relationship between price and value.

    A central thesis that underlies their entire treatise on value investing is Graham and Dodd’s approach or consistent methodology for apprising whether a contemplated purchase of a security can be characterized generally as either an exercise in speculation or a bona fide investment. Put another way, will the investor receive “value” for his money? This paradigm for investing is useful even today, regardless of which sector or particular stock is fancied by Wall

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  • Who’s In Control? The Federal Reserve Or the Stock Market?

    As the historically unprecedented bull market crosses over the ten year mark, what explains the continuing vitality of the stock market? Will the rally never end?

    Comments made by federal reserve chairman, Jerome Powell in December 2018 that the fed was leaning towards making two additional 25 basis point rate hikes in 2019 sent the market into a tailspin as 2018 drew to a close. Despite previous Powell’s previously stated position that the fed was not in the business of maintaining a bull market, he relented and abruptly quashed the idea of any 2019 rate hikes.

    Undoubtedly, the reaction — or overreaction — was due to investor unwillingness to believe that the halcyon ten-year period of zero-interest rates was finally over. The extent of the selloff can be explained, in part, by the fact that a decade of unfettered quantitative ie easing by the fed, led to a mismatch in asset pricing; an inverse bond/equity relationship took hold.

    As the yield on alternative, fixed-income investment vehicles barely pierced the 1% threshold. Investing in risky assets during this easy money period, in essence, implicitly had the fed’s blessing. In earlier comments, made in 2018, Powell noted that he was more concerned with asset misplacing than in runaway inflation; he believed investor speculation could have adverse ramification for the economy.

    The current posture of the fed in conjunction with investor’s confidence that the low rate environment will remain unchanged, has created a bizarre stasis or equilibrium . As long as the fed remains concerned or circumscribed by its fear of causing another October bloodbath, the more comfortable, or less circumspect investors become for favoring riskier assets like stocks and below investment grade corporate bonds.

    This symbiosis provides support for a market in which tech stocks continue to rise beyond their previous all-time highs.

    Where this will all end, only time will tell.

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  • What Happens if Corporate Profit Margins Start to Decline?

    Before 2018 drew to a close, those analysts not mesmerized by the steady and considerable rate of profit margin growth were already adjusting their first-quarter and annual 2019 margin projections downward. After record-setting increases in 2018, several factors will coalesce to break the favorable decade-long trend that has supported historically high margin levels.

    Some of these factors are already working their way to the corporate bottom line, crimping profits. Unprecedented low unemployment has increased the bargaining power of employees — this is despite the long-term decrease in the number of employees that are union members. The past several years have seen wages rise on a percentage basis that is the highest in 30 years. According to the U.S. Labor Department, average hourly wages in February were 3.4% higher

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  • Does an Inverted Yield Curve Always Precede a Recession?

    The yield curve inverted recently, when the gap between 10-year and three-month Treasuries narrowed and finally disappeared, ending with the three-month yield higher than the 10-year note. The gap, or premium investors demand for holding the longer-term Treasuries, had been narrowing for the past year.

    An inverted yield curve has been a reliable indicator of past recessions, having inverted before each of the last seven recessionary periods according to the National Bureau of Economic Research.

    There are several factors, however, that need to be considered before a recession can be reliably predicted. In short, although an inverted yield curve may provide a tight correlation between changes in interest rates and a looming recession, anticipating exactly when a downturn will occur after the inversion is an inexact science. According to data from Bianco Research, past recessions have been preceded by inversions that lasted for 10 days straight. Should the 10-year yield rise back above the three-month Treasury bills and the inversion is broken,

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  • Investors Flock to Emerging Markets

    Ever since Jerome Powell announced an abrupt reversal in the fed’s previously stated intention to raise rates in 2019, investors have whipsawed in and out of low risk funds to riskier asset classes. Shortly after the fed’s change of heart, many investors seemed to believe they were given the go-ahead to jump back in to risky assets that had been market favorites during the long bull run of the past decade.

    In the wake of the fed’s January announcement, many investors subsequently became afflicted with bipolar disorder, jumping in to asset classes from which they had only recently exited with alacrity due to market volatility and

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  • Is Procter & Gamble Worth Its Premium Price?

    Procter & Gamble Co. (NYSE:PG) posted good results for its latest quarter, exceeding analyst expectations for some measures.

    Earnings per share were $1.21, beating the consensus of $1.21. At $17.44 billion, net sales remained unchanged from the prior year. The company’s sales were not uniform across all its segments. While the beauty products logged an 8% increase in organic sales

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  • Investors Rush Back Into Junk Bond Market

    Squeamish from a dramatic market rout late last year, high-yield bond investors are once again entering the junk market, courtesy of the recent rate increase reversal by the Federal Reserve. Many of these investors substantially increased the cash portion of their portfolios in December in response to steep declines in the market as well as continuing concern over the trade dispute with China, a slowing global economy and uncertainty

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  • Why Facebook Is in Trouble

    Last Thursday, the New York Times published a damning exposé about how Facebook’s two most senior executives engaged in a concerted and deliberate scheme to shield from the public the extent of the company’s data breaches and then attempted to minimize the deleterious effects the fallout from these revelations would have for the company.

    The portrait that emerges of CEO Mark Zuckerberg and COO, Sheryl Sandberg, is not a flattering one. Their attempts at damage control have backfired, prompting calls for substantive regulations that will reign in the company in many areas where they have abused their unchecked and unfettered power.

    Despite all the outcry from liberals, the most important aspect of Facebook’s Cambridge Analytica scandal was its impact on demystifying the company and exposing the scope and extent of its surreptitious business practices. The privacy scandal has revealed the enormous gulf Read More »

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  • Trump Warns Facebook and Google to Stop Censoring Conservative Content

    President Trump recently rebuked the social media companies for for their deliberate and incontrovertible censoring and shadow blocking conservative content. The articles and commentary that have been blocked are written by some nationally known commentators as well as other authors whose content is dubbed hateful because they oppose many progressive policies.

    Google and Facebook claim that they only block or take down content that doesn’t meet their “community standards.” This is a term that is pristinely undefined. This pretext has been used as a sword to stifle, and in some cases eliminate conservative content on the Google and Facebook platforms.

    It is indisputable that the reigning religionRead More »

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  • Public is Turning Against Silicon Valley Tech Giants

    Recently, tech visionary, venture capitalist and Trump supporter Peter Thiel decided to leave the ideological conformity of San Francisco for Los Angeles. Thiel found the atmosphere in the Bay Area suffocating and had tired of the inflexible doctrine of identity politics and “diversity” preached and practiced by the commissars of political correctness in the corridors of the tech industry.

    Thiel isn’t the only one disillusioned with the direction of the captains of the social media sectors, whose businesses manufacture no tangible products, but rather are built on the development and utilization of software for harnessing the potential of the Internet.

    Now, many individuals from across the political, social and economic spectrum are questioning the wisdom of allowing these companies to enjoy their monopoly positions. In fact, the increasingly visible loathing of these tech giants, cuts across party lines, with conservatives and liberals both Read More »

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