July 2014

……………….Thoughts and Comments


Today’s Research

The internet has made gathering information significantly easier and allowed almost anyone to learn about almost anything, quickly and conveniently.  When I first stated in the business 30 years ago, in order to get company information, I would call the company and have them mail me the past three years of 10Ks and annual reports, the past three 10Qs, the past three 14Fs and their latest presentation.  Two weeks and 10 pounds of paper later, the package would arrive.  Then, after hours of plugging in numbers for calculations by hand, we would have some financial understanding of the company.  Now, I turn on the computer and download ten years of data with all of our proprietary calculations embedded in our spreadsheets in under five minutes.

While there is no question that the internet has sped up the dissemination of information, it has also sped up the dissemination of disinformation.  Unfortunately, along with the increased speed and ease of finding data, there has been the increased acceptance that if it is on the internet, it must be a fact.  With people able to easily express opinions stated as fact, it has become even more important that investors verify information independently.  Whether they do it themselves or their advisors do it for their benefit, it is critical that information is actually verified rather than simply accepted.

A “research report” – and yes, I use the term very loosely – that I recently found online reminded me of this issue, and I share it to emphasize my point.  The research report was published on Seeking Alpha, a website where anyone can publish comments or opinions on stocks, which has gained an air of respectability although my experience leads me to disagree.  As the report was published there, I cannot reprint it here and for that reason I won’t mention the author’s name, either.

What I can share is that it was a six-page report and seemed be chock full of detailed information that eloquently explained why ownership in the subject company was a complete mistake and that, instead of it selling at $48/share, it was worth only $15.  There were quotes from the company’s 10k, references to its SEC filings, and analytical details.  The stock had recently touched $61 and was falling quickly – this guy must be correct!

I decided to do some independent work on the company to see if there was an opportunity here or not.  After contacting the author and getting some details on how he calculated some of his numbers, I spent time going through his analysis line by line.  I then spent time speaking with the CFO of the company to get a deeper understanding of the industry and the company’s strategies.

After several days of intense work, I had finished my analysis.  Interestingly, my work completely contradicted every point the short seller had published.  To me, the company appears to be well run, to have little leverage and to be growing its cash flows, revenues and earnings.  I believe that some of the points the author had made were just wrong – incorrect in every way.  Other points implied his lack of understanding of the industry and of the company’s business strategy.

Regardless of whether this author meant to be misleading and disseminate inaccurate information or whether we simply strongly disagree with each other, the important point is that without doing our own work, we would have missed the opportunity to purchase what we believe to be a great company at a price we think is very attractive.  In the end, time will tell which of us is correct.  However, if we simply depended on someone’s opinion whom we do not know and have no way to judge their work, we would be doing nothing more than speculating – hoping that we had guessed correctly.

Investing is not about guessing or gambling – that is what visiting Las Vegas is for. Investing gathering information from various sources and developing an opinion based on the research.  It take a great deal of work, but in a time where there is an overload of unqualified opinions being expressed on absolutely everything, real research will pay investors back in spades.

(part 1 of a 3 part series)


The Fed Feed False Hopes and Frankly We are Fed UP!

Speaking of doing research, let’s play a game of connect the dots.  Here are our dots:

Economic Dots

  • “…monetary policy faces significant limitations as a tool to promote financial stability: Its effects on financial vulnerabilities, such as excessive leverage and maturity transformation, are not well understood and are less direct than a regulatory or supervisory approach; in addition, efforts to promote financial stability through adjustments in interest rates would increase the volatility of inflation and employment…”  Janet Yellen, IMF Luncheon speech – July 2, 2014
  • “…At least one guest left a New York restaurant with the impression Bernanke, 60, does not expect the federal funds rate, the Fed’s main benchmark interest rate, to rise back to its long-term average of around 4 percent in Bernanke’s lifetime, one source who had spoken to the guest said”.  – Reuters – May 16, 2014
  • Before raising the fed funds rate, the Fed said unemployment would have to fall below 6.5%.  Now that rates are below that (6.1%), the rate has been redefined.  In addition, the Fed added a second target, stating that inflation would need to be 2%.  That was then raised in Yellen’s latest comments that there was a half-percentage variance on that so 2% was now 2.5%.
  • The CPI over the past four months is now at 3.0% on an annualized basis.  When asked about the fact that inflation seems to be rising faster than expected, Ms. Yellen’s response was, “So I think recent readings on, for example, the CPI index have been a bit on the high side, but I think it’s – the data that we’re seeing is noisy.  I think it’s important to remember that, broadly speaking, inflation is evolving in line with the committee’s expectations.  The committee has expected a gradual return in inflation toward its 2% objective.  And I think the recent evidence we have seen, abstracting from the noise, suggests that we are moving back gradually over time toward our 2% objective, and I see things roughly in line with where we expected inflation to be.” – Interview with Federal Reserve Chair Janet Yellen by CNBC Reporter Steve Liesman after the FOMC June meeting.
  • Corporate and Public debt levels are higher than they were in 2007.
  • Wage growth is anemic still after seven years.
  • The Fed recently floated the idea of regulating money market funds by adding a fee for selling during times of stress and/or requiring institutional money market funds to float rather than be fixed at $1.00.

Market Dots

  • There is currently a shortage of U.S. Treasuries.  This is due to a decrease in new issues and a change in regulations that require banks to hold larger amounts of treasuries as collateral.  This has led to a sharp spike in the number of repo failures recently.  – Investment News 7/9/14
  • Corporate earnings are slowing, margins are at highs and debt levels are at highs.
  • U.S. stock markets hit new highs on low volume.
  • Volatility is at historic lows.

International Financial Dots

  • ECB has recently increased their stimulus efforts, as has Japan and China.
  • The Bank of International Settlements (BIS) – the central bank for central banks in Europe – stated in its Annual Report dated 6-29-14, ““Overall, it is hard to avoid the sense of a puzzling disconnect between the markets’ buoyancy and underlying economic developments globally…[P]rogress in strengthening banks’ balance sheets has been uneven and private debt keeps growing.  Macroeconomic policy has little room for maneuver to deal with any untoward surprises that might be sprung, including a normal recession.”
  • The Middle East is collapsing:  ISIS has declared itself Caliph over a Muslim state which includes part of Syria and Iraq.  The U.S. is seeking Iran’s help in stabilizing Iraq.  Israel has started a new front against Gaza and has recently made attacks into Syria.  Iraq produces over 3 million barrels of oil per day (FT.com 7-8-14).

Okay, so now let’s try connecting the dots.  The first part is pretty easy and is not terribly new – we have reported and written about it several times in the past six months.  Leverage, both public and private debt, is very high due to the easy money policies that central banks have embraced around the world.  Margin debt (investors leveraged in stocks and bonds) is higher than in 2007.

Then add in the new regulations adding to the leverage and the reports of repo failures.  On top of this now add the Fed recognizes they cannot raise interest rates with so much leverage and thus their continually moving target on when they will raise rates.  Next, add the market-complacency dots and what do you end up with?


The Leaning Tower of Pisa (check a photo – those are where the archways are!)


Alan E. Rosenfield, Managing Director

July 2014


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