Radu Haraga submits:It took me a while to get my fingers on this Princeton University Press book. I was a bit anxious, since this corporate study textbook (published summer 2009) has already become quite well known in the academic environment. It is used as a study text by many universities and it can be cited as a different approach on the already over-published field of the super-trooper and sophisticated corporate management of finances.If you are a seasoned professional working in corporate finance or as investment analyst, it is very probable that you've them all. This means that you saw the CFA (Chartered Financial Analyst) -endorsed books, such as the famous Investments by Bodie and Kane. You probably saw also the stock market analysts’ books – those written by the guys or girls who have been very successful as investor managers. You also probably saw the books written by various academics in the field of finance. So probably right now your head is spinning at the mere invocation of all these names and handbooks. If this is the case, you've probably noticed that much of the information is repeated. You can find the same topic in various shapes and sizes coming to you and waiting to be served in various shapes and with changed examples. Take, for example, the dividend payout theory – we all know that a company should pay a dividend as long as the expected outcomes of the company’s actions are less than the cost of capital. With examples,etc etc. Well, The Theory of Corporate Finance by Jean Tirole claims to be different. The Theory of Corporate Finance book takes off by laying out the foundation. An overview of the corporate institutions gives Tirole the occasion to show off a bit and offer us a cold view on the main governance issues faced by the today’s big corporations. Then it goes deeper, on the social contract which binds the corporations and their financiers – shareholders, bondholders, banks or other stakeholders. But this is just the beginning. The Theory of Corporate Finance starts slowly by building your awareness of various financial instruments which a corporation uses. Then it goes through the famous agent theory, which by definition states that the owners of the company appoint agents (in the form of the Board of Directors) to run their company. And this is just the start. The book it is very well written, in the sense that it offers a practical twist to almost any corporate finance aspect. For example, in Chapter 5 (Liquidity and Risk Management, Free Cash Flow, and Long-Term Finance) there is a sub-chapter where Tirole reflects on “Endogenous Liquidity Needs, the Sensitivity of Investment to Cash Flow, and the Soft Budget Constraint”. Basically, here the author shows that the cash flow decisions are very similar to the ones taken under the “real options” assumptions. The cash flow decisions are made in a real world with imperfect data, so the corporate decision makers have to choose among various alternatives which by themselves are not perfect. I liked a lot the chapter called “Product Markets and Earnings Manipulations.” In a sense, most CFOs are tempted at least once in their careers to do a bit of “window dressing” for the results of their companies. Therefore, even if you are an outside investor in the modern corporations, The Theory of Corporate Finance might be a good read. It teaches you to perform a thorough and realistic fundamental analysis on a stock-exchange listed corporation. Tirole shows you the basic factors that impact on the financial performance of a corporation. And, even more important, Tirole's book demonstrates how these performance indicators affect the financial behavior of the companies. Given the fast and big advances made by corporate finance in the last decades, it is important to have such a book in your library, at least for reference. It is even more important if you are an investor, since most of the financial data is now readily available via the internet. Anyone can get a set of financial statements and run a set of indicators on these. The question is – “what conclusions can you draw from this analysis?”Complete Story »
Stephen Rosenman submits:Recently, I wrote about how Joe Sanderson's prayers had been answered by the recovery in his chicken business. Much of that recovery came from the booming chicken wing business. Last quarter, wing prices climbed 62.6% over a year earlier.Per the company's August conference call: Complete Story »
There is very little wrong fundamentally with Amazon. The financial statement and the balance sheet could, arguably, support a +50% forward multiple. The stock is up over 34% in the last month with powerful volume.On the technical side of the equation, however, the stock is overbought (not a revelation) and may be showing signs of a potential short term pullback. This first chart illustrates a measured "target" move from the trough breakout we saw in September projecting to the current 130 area. A goal achieved in record time. [See chart]Complete Story »
Describing Amazon.com (AMZN) as an overvalued stock, which I’ve often seen, is about as sensible as criticizing the New York Yankees for never having beaten the Pittsburgh Steelers.Case in point: The November 13 Seeking Alpha article entitled Amazon-Sized Craziess, wherein Anthony Davian goes through a long recitation on Ben Graham and Mr. Market (if you’re unfamiliar with the latter allegory, Davian summarizes it well) and how he wound up sticking with AMZN despite its exorbitant valuation. I like his conclusion, I like AMZN (though I don’t own it right now), but feel a need to address the pat on the back the author gave himself for having stuck with AMZN despite warnings by the value police, as well as the misplaced attitude of the latter. Complete Story »
Karl Denninger submits: It never, ever ends, does it? Our company, J.P. Morgan Chase, employs more than 220,000 people, serves well over 100 million customers, lends hundreds of millions of dollars each day and has operations in nearly 100 countries. And if some unforeseen circumstance should put this firm at risk of collapse, I believe we should be allowed to fail. As Treasury Secretary Timothy Geithner recently put it, "No financial system can operate efficiently if financial institutions and investors assume that government will protect them from the consequences of failure." The term "too big to fail" must be excised from our vocabulary.Complete Story »
Tom Armistead submits:U.S. Financial Institutions are interconnected – as the fall of Lehman demonstrated, they are tied together and interwoven in a complex web of obligations which can rip, run or unravel with unexpected consequences. As such, they may be regarded, for analytical purposes, as having one balance sheet. Double entry bookkeeping, which underlies all GAAP accounting, suggests that assets should equal liabilities for this giant composite balance sheet. I doubt that it does. The purpose of the article is to raise questions on two areas that do not seem to add up, and suggest that exploring these relationships would be a good task for the systemic regulator.Derivative Assets and Liabilities – Five large banks together constitute the bulk of the U.S. Derivative market. The nature of the derivative transaction is such that each position has two sides, an asset and a liability, which will be on the books of the counter-parties. While numerous hedge funds and other bit players add complexity to the picture, it is evident that collectively derivative assets should equal liabilities for the banks involved, since a majority of the trades eventually make their way back to the largest players.Complete Story »
Reggie Middleton submits:After dealing with European banks during my work with GGP, I have come to the conclusion that most regional, community and even global banks have no where near the capacity and/or expertise to properly evaluate and value the projects/assets that they have invested.Well, if that is the case, this is their chance to rectify that problem - on the cheap, at least on a relative basis. Here is the broader macro argument for lenders pulling bad debt from under the REIT and CRE industry, thus supporting a bearish thesis for said players.Complete Story »
Howard Richman submits:According to this morning's press release from the Bureau of Economic Analysis (BEA), in September the overall U.S. trade deficit in goods and services rose to $36.5 billion per month, up from $30.8 billion per month in August. The trade deficit sums the aggregate demand that is escaping our economic tire while our government tries to pump it up through stimulus programs.The bulk of our rising monthly trade deficit is our goods trade deficit with China which rose to $22.1 billion in September from $20.2 billion in August, after a slight decline the previous month, as shown below: Complete Story »
Chuck Carnevale submits:Warren Buffett told an audience of cheering Columbia University students last night that the worst of the financial global crisis is over. Moreover, he also said that stocks have bottomed out. His advice was not to pass on something attractive today. He was joined by Bill Gates, who agreed with his sentiments. What struck me about watching the interview was the strong faith in our country and its future they both displayed. Both men acknowledged that mistakes can and will be made. However, they both are confident that the free enterprise system, we live under will survive and prosper. Neither man would forecast the short run. However, both held sensible and insightful positive long-term views. I thought it might be entertaining to look at the companies both of these business giants started and control from the perspective of our earnings correlated Fundamentals-at-a-Glance research tool. Even more fun is to examine them first over 20 years, a real long run, then over the past 10 years, a shorter long run. Figure 1 looks at Microsoft’s (MSFT) stock price correlated to earnings and its track record. Note how overvalued Microsoft got during the irrational exuberance tech bubble from 1995-1999. This clearly validates the importance of valuation. Fig. 1. MSFT 20yr EPS Growth and Price PerformanceFigure 2 looks at Berkshire Hathaway (BRK.A) over the same time frame. Note how flat and inconsistent both earnings and stock price were for the period 1997-2001. This clearly validates the importance of earnings. Fig. 2. BRK.A 20yr EPS Growth and Price PerformanceOver the past 20 years, both companies generated substantial wealth for their owners. Bill Gates was the clear winner, although Warren’s numbers weren’t too shabby. The years since 2000 tell a different story. The value of Warren’s stake in Berkshire Hathaway doubled in value. However, due to excessive overvaluation, Mr. Gates saw the value of his Microsoft holdings cut in half. Figure 3 shows Microsoft’s price correlated to its earnings since calendar year 2000 and performance. Fig. 3. MSFT 11yr EPS Growth and Price PerformanceFigure 4 shows Berkshire Hathaway’s stock price correlated to its earnings since calendar year 2000 and performance. Fig. 4. BRK.A 11yr EPS Growth and Price PerformanceConclusionThe skeptics will scoff that it’s easy for these men to be optimists because they are so rich. We say these guys are so rich because they are optimists. Many want to write our country and its future off. We believe they are greatly short-changing the power that our great nation possesses. In every adversity lies the seed of a greater or equivalent benefit. What we have recently experienced was, by any measure, horrible. However, as Warren Buffett indicated in his talk last night, it has hopefully made us all a little smarter. Bill Gates pointed to several industries that he felt would revolutionize our future in much the same way that Microsoft once did. Therefore, let’s move confidently in the direction of our futures. Disclosure: No Holdings in the stocks mentioned at time of writing.Complete Story »
The FHA is running on empty. The FDIC approves the pre-pay plan to build its Deposit insurance Fund. The Housing and Banking Indices remain a drag on the economy and markets. The US Federal Housing Administration (FHA) will likely join Fannie (FNM) and Freddie (FRE) as a ward of US tax payers. The FHA's excess reserves available to cover losses have fallen to 0.53% of the agency's book of business at the end of Q3 2009. This is down from 3% year over year. The cushion mandated by Congress is 2%, so the health of the FHA is a huge Red flag for the housing market and tax payers. If the FHA needs an appropriation from Congress it would be the first time in its 75-year history. Since they are an arm of the US government the Treasury would have no choice but to rebuild its reserves. The FHA insures mortgages for eligible borrowers, and its business has increased to meet demand as private-sector lenders have pulled back during the housing downturn. Rising defaults on FHA loans will mean that a taxpayer bailout will be needed. Defaults on FHA backed loans reached 8.24% in September, up from 8.1% in August and 6.1% one year ago. As a result of this stress, the FHA is tightening its lending standards, which is another drag on housing. The FDIC is requiring member banks to pre-pay fees for 2010 through 2012 to rebuild its Deposit insurance Fund The total take from the banking system is $45 billion. This is a bad decision as banks struggle with increasing bad loans. Remember that more than 3,000 banks are overexposed to C&D and CRE loans. Today is Bank Failure Friday and banks are failing at a faster pace of the past seventeen years. In the first half of 2009 the FDIC closed 45 banks, which cost the Deposit Insurance Fund $12.5 billion. In the second half of 2009 through November 6, the FDIC closed 75 banks, which cost the Deposit Insurance Fund another $19.8 billion. As the FDIC awaits the $45 billion in three year prepaid fees due at year end, I estimate that the Deposit Insurance Fund is in arrears by $9.4 billion. Meanwhile the banks strapped to make these payments will reduce lending, and will become more vulnerable for failure. My idea is to simply turn over the remaining $210 billion in TARP funds to the FDIC and credit the money to the Deposit Insurance Fund. This would take the fund back above the 1.15% ratio of insured deposits, which is required by June 2013. On June 30 the ratio was a paltry 0.22%. I would rather see the FDIC tap its temporary $500 billion line of credit with the US Treasury than tap struggling member banks. The Housing Sector Index (^HGX) failed at its 50-day simple moving average the past two days at 102.67. This indicates risk to the 200-day at 88.67. Charts courtesy of Thomson / Reuters The America’s Community Bankers Index (^ABAQ) stayed below its 50-day and 200-day simple moving averages at 143.31 and 146.82. The Regional Bankers Index (^BKX) stayed below 21-day and 50-day simple moving averages at 44.57 and 45.82 this week with the 200-day as support at 37.34. You cannot have a bull market for stocks with a bear market in bank stocks! Disclosure: I Hold No Positions in the Stocks I Cover.Complete Story »
