I have been away for a few weeks and it is amazing how a break from the day to day grind can put things into perspective. Since I have been gone the Libya crisis has escalated into a civil war and Japan has been hit by a massive earthquake and a tsunami. Both of these have rocked the markets. Oil initially spiked on the Libyan concerns and now appears to be reversing on concerns that the Japanese may not have the ability to use large swathes of oil until they recover from the devastation. Stock markets are swinging violently and micro cap stocks in China have been battered by fraud charges, some of which seem to have merit. The pace at which things are happening and at which news is disseminated is amazing and investor portfolios are destroyed in a matter of seconds. It is a very violent time and not for the faint of heart.
Personally my portfolio has taken a hit but I am not worried as I was able to step back from the madness while on leave and have formulated a truly unique plan to recover quickly and to grow in leaps and bounds in the coming years. It is amazing how easy it is to see the opportunities right in front of you when you are able to switch off all the noise. In my experience these opportunities have often sat there for ages beckoning you but you push them to the side as either irrelevant or not worthy of your attention. Once the noise is gone you have the ability to focus and things become crystal clear and the path is revealed. To say the least it is very exciting.
In the current global economic environment it is very important to protect what you have. Once that is done then comes the hard part, trying to grow the asset base. Currently yields on short term interest rates are at rock bottom and this is affecting everyone from the elderly relying on the income to investors that do not want to take a gamble with their hard earned money. Anyone who is in a short term CD or money market style investment is losing to inflation at an alarming rate (counter to the story that the Federal Reserve is broadcasting).
Offering a solution to this problem was my epiphany. Safe, secure investments that can be backed with liquidity and a decent rate of return will provide a solution to the low interest rates investors are receiving while investors in my fund will be provided an incredible return and a huge opportunity. Furthermore, removing the risk from a volatile market that rewards the high frequency traders at the expense of the general public and the value investor makes complete sense. Protect what you have and grow it as close to risk free as possible is the name of the game right now and I for one am all in on this trade. If you would like to learn more about this opportunity let me know, but for now it is time to hunker down, accept lower rates of return and protect your assets.
Monday, March 21, 2011
Tuesday, March 1, 2011
Company Cash
A lot has been written and spoken about the huge cash build-up on company balance sheets. To be sure the S&P500 companies had over $700 billion on their balance sheets and over $1.2 trillion in working capital at the end of 2010. This is up significantly over the December 2007 numbers when they held $500 billion in cash and had working capital of $900 billion. To say that they are flush with cash is an understatement. So why are they not investing this money and creating jobs? Shouldn't the economy be roaring forward and if not isn't it just a matter of when and not if the economy will recover?
To understand the mindset of the Chief Executives of the world we need to place ourselves in their shoes. The first concern that they have is trying to get sales higher. Who is going to buy their products when a large portion of the economy is still unemployed? Second is to improve profitability. This can be done through cost cutting and lay-offs. To hire right now is a tough sell to the board who see the state of the economy and are holding all powder dry until the right opportunity. Third, and to some CEOs, most important of all is to keep the stock price going up. As a large swath of their incentive is linked to the performance of the stock price they are incentivized to do everything in their power to drive the stock price higher. This presents them with the dilemma of growth versus austerity.
So what presents the right opportunity? Well you can buy back your own stock if you think it cheap, you can increase the dividend or you can acquire other companies. In this way you can grow your company and increase your stock earnings without hiring a person. In fact through the acquisition process you can actually lay people off! All of these uses of cash have been performed. As an example preferred share dividends have increase from $2 billion in 2007 to $20 billion in 2010. The result is a distribution to those that already have rather than to those that have no job. Economic theory says that at some point this wealth is redistributed as the rich spend their money and this creates jobs but as we have already seen, inflation always benefits the few at the expense of the many.
Now don't get me wrong, I am no socialist, but using this study it is easy to see why the CEOs of the world are hoarding. Until they see the light at the end of the tunnel they will continue to hoard. There are glimmers of hope appearing on the macro economic landscape, but there are still too many clouds. For example productivity is up while unemployment is still high. While productivity will lead to greater profits at some point you need people to purchase your wares.
Furthermore, oil just past $100 a barrel and all the costs of raw materials are increasing. Food and gas prices are soaring as are the costs of education and medical expenses. The consumer is strapped and unemployed and we have inflation starting to rear its ugly head. The outlook is not favorable to spend money on new hires or expansion. As large companies with cash are able to withstand the turmoil far more easily than their small cap brethren this is reflected in the stock prices. While I expect this to reverse at some point in time it appears to me that this will take some time.
Until the Federal Reserve sees a significant improvement in the economy they will continue to print money. This will continue to stoke the fires of inflation and will continue to crowd the private sector out of the market. Companies will continue to hoard cash and we will continue to head down the path of stagflation. As the headline in Bloomberg magazine stated this week; " Would you invest in a company that lost $2 trillion last year and has a net worth of negative $44 trillion?" Given this scenario the hoarding will continue.
If inflation becomes too high the fireworks will begin, but until that time large cap stocks should continue to perform well.
To understand the mindset of the Chief Executives of the world we need to place ourselves in their shoes. The first concern that they have is trying to get sales higher. Who is going to buy their products when a large portion of the economy is still unemployed? Second is to improve profitability. This can be done through cost cutting and lay-offs. To hire right now is a tough sell to the board who see the state of the economy and are holding all powder dry until the right opportunity. Third, and to some CEOs, most important of all is to keep the stock price going up. As a large swath of their incentive is linked to the performance of the stock price they are incentivized to do everything in their power to drive the stock price higher. This presents them with the dilemma of growth versus austerity.
So what presents the right opportunity? Well you can buy back your own stock if you think it cheap, you can increase the dividend or you can acquire other companies. In this way you can grow your company and increase your stock earnings without hiring a person. In fact through the acquisition process you can actually lay people off! All of these uses of cash have been performed. As an example preferred share dividends have increase from $2 billion in 2007 to $20 billion in 2010. The result is a distribution to those that already have rather than to those that have no job. Economic theory says that at some point this wealth is redistributed as the rich spend their money and this creates jobs but as we have already seen, inflation always benefits the few at the expense of the many.
Now don't get me wrong, I am no socialist, but using this study it is easy to see why the CEOs of the world are hoarding. Until they see the light at the end of the tunnel they will continue to hoard. There are glimmers of hope appearing on the macro economic landscape, but there are still too many clouds. For example productivity is up while unemployment is still high. While productivity will lead to greater profits at some point you need people to purchase your wares.
Furthermore, oil just past $100 a barrel and all the costs of raw materials are increasing. Food and gas prices are soaring as are the costs of education and medical expenses. The consumer is strapped and unemployed and we have inflation starting to rear its ugly head. The outlook is not favorable to spend money on new hires or expansion. As large companies with cash are able to withstand the turmoil far more easily than their small cap brethren this is reflected in the stock prices. While I expect this to reverse at some point in time it appears to me that this will take some time.
Until the Federal Reserve sees a significant improvement in the economy they will continue to print money. This will continue to stoke the fires of inflation and will continue to crowd the private sector out of the market. Companies will continue to hoard cash and we will continue to head down the path of stagflation. As the headline in Bloomberg magazine stated this week; " Would you invest in a company that lost $2 trillion last year and has a net worth of negative $44 trillion?" Given this scenario the hoarding will continue.
If inflation becomes too high the fireworks will begin, but until that time large cap stocks should continue to perform well.
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