In finance there is a group of people who tend to think they are just too smart and too well educated for everyone else. A lot of these guys run "quant" funds, investment funds that essentially trade using fancy formulas. There is a certain arrogance in thinking that a computer can understand markets in ways that humans cannot. Unfortunately for our quantitatively minded friends, sometimes humans do things their models don't anticipate.
This week Goldman Sachs is defending their Global Alpha fund. Global Alpha is one of the biggest, and probably the most famous quant fund in the world. While its track record is impressive, in recent years returns have been tepid as the models the fund uses have lost some of their horse power.
This year Global Alpha is down 16% after losing 8% in July. According to the Journal, the humans who run Global Alpha have stepped in and begun selling the riskiest positions in the fund, positions the model still likes. One has to wonder what the future holds for Global Alpha when the humans begin over ruling the computers. Officially Goldman is denying rumors that they are liquidating the fund, but if they admitted liquidating the fund, other traders would immediately take the opposite positions and crush the fund.
The Journal also quotes Keith Campbell, head of his own eponymous quant fund (which is down 10-12%). Cambell falls back on the "perfect storm" excuse. It is amazing how many "perfect storms" there are today, in fact the "perfect storm" seems to be so routine that I think we should just start calling them "storms".
Today it seems that any time two bad things happen at close to the same time we have a "perfect storm". The real situation may just be that Mr. Campbell's trading model isn't very good or very well designed. It would be difficult for anyone to admit that you aren't as smart as you think you are, and not as good at computer programming as you told your clients you were.
It seems like a lot of these models incorporate sunny days 365 days a year, which makes even a small shower look like "the perfect storm".
Thursday, August 09, 2007
Wednesday, August 01, 2007
Greedy When Others are Fearful...
I'm certainly not an expert on finding the bottom, but I think i can see value when it is presented to me. So, on a day with the S&P down a percent and in a week where it just seems like everyone is ready to crack, let me throw out a few names that I think you buy an forget for a while.
PCAR - I love this company. Some of the best brands in heavy trucks. The EPA put new emissions requirements in effect this January, which prompted a huge pre-buy during 2006. there is another cycle coming in 2009 and Paccar will benefit. The stock has fallen back into a range where you can feel good buying it. At 16.5 times trough earnings, a nice dividend yield and a ton of cash on the balance sheet, this is a stock you could own through some price volatility.
USG -- First off, I know, I have liked this stock for along time and for the past couple of months it has gone in one direction, down. The company is tied closely to residential housing and that makes it toxic waste in today's market. However it is also cheap and very well run. USG recently bought a building product distributor in California, is improving the quality and efficiency of its plants, and has cash on the balance sheet to make timely acquisitions.
The stock is tipping towards $40 per share, which means that today you can buy it for less than I did, and less than Warren Buffett did.
BAC - Everyone is worried about "liquidity" and thus has sold off the financials. Bank of America has a undersized mortgage division and continues to grind out growth by attracting new customers every day, every week, every month. At less than 10 times earnings and a dividend yield of 5.4% (44 bps above the 10 year treasury) you can sleep at night knowing that every quarter a check is in the mail.
(Correction: in the time it took to type this the S&P went from down 1% to up 1%, welcome back price volatility)
PCAR - I love this company. Some of the best brands in heavy trucks. The EPA put new emissions requirements in effect this January, which prompted a huge pre-buy during 2006. there is another cycle coming in 2009 and Paccar will benefit. The stock has fallen back into a range where you can feel good buying it. At 16.5 times trough earnings, a nice dividend yield and a ton of cash on the balance sheet, this is a stock you could own through some price volatility.
USG -- First off, I know, I have liked this stock for along time and for the past couple of months it has gone in one direction, down. The company is tied closely to residential housing and that makes it toxic waste in today's market. However it is also cheap and very well run. USG recently bought a building product distributor in California, is improving the quality and efficiency of its plants, and has cash on the balance sheet to make timely acquisitions.
The stock is tipping towards $40 per share, which means that today you can buy it for less than I did, and less than Warren Buffett did.
BAC - Everyone is worried about "liquidity" and thus has sold off the financials. Bank of America has a undersized mortgage division and continues to grind out growth by attracting new customers every day, every week, every month. At less than 10 times earnings and a dividend yield of 5.4% (44 bps above the 10 year treasury) you can sleep at night knowing that every quarter a check is in the mail.
(Correction: in the time it took to type this the S&P went from down 1% to up 1%, welcome back price volatility)
Tuesday, July 24, 2007
Q: When is a Buyback not Really a Buyback?
A: When you cancel 80% of it because you don't have the cash and don't have a prayer of borrowing it.
"Expedia Inc. said Monday it is slashing the number of shares in its planned buyback by 80% due to a lack of acceptable funding, sending shares down 8.3% to $26.90 in early trading. On June 19, Expedia said it intends to repurchase up to 116.7 million shares (approximately 42% of common stock) at a price range of $27.50-$30.00, giving shares their biggest boost since the company went public in July 2005. Under the amended offer, Expedia now says it only willing to purchase up to 25 million shares (about 9% of the total outstanding) at the same price range, to expire August 8. "While we remain confident in Expedia's long-term prospects and will continue to be net buyers of our shares, the terms available to us in the current debt market environment were simply unacceptable," said chairman Barry Diller."
"Expedia Inc. said Monday it is slashing the number of shares in its planned buyback by 80% due to a lack of acceptable funding, sending shares down 8.3% to $26.90 in early trading. On June 19, Expedia said it intends to repurchase up to 116.7 million shares (approximately 42% of common stock) at a price range of $27.50-$30.00, giving shares their biggest boost since the company went public in July 2005. Under the amended offer, Expedia now says it only willing to purchase up to 25 million shares (about 9% of the total outstanding) at the same price range, to expire August 8. "While we remain confident in Expedia's long-term prospects and will continue to be net buyers of our shares, the terms available to us in the current debt market environment were simply unacceptable," said chairman Barry Diller."
Wednesday, July 18, 2007
2 To Watch Today
PFE -- down 4% today on a quarterly report that contained bad news about their biggest drug, Lipitor. The stock sports a P/E under 12 and a dividend yield of 4.65%. The patent on Lipitor will expire in 2010, the main fear that overhangs the stock. Assuming reasonable growth of the rest of the business and loss of 40% of EPS due to Lipitor in 2010, if you believe that post Lipitor the stock can trade for a P/E of 20, the stock is a screaming buy at $22 and looks pretty good at $25 today.
UNP -- Railroad CSX reported strong pricing this morning and the stock is up considerably today. UNP is cheaper and has more old contracts left to reprice, it report tomorrow and I wouldn't be surprised if the stock jumped tomorrow.
UNP -- Railroad CSX reported strong pricing this morning and the stock is up considerably today. UNP is cheaper and has more old contracts left to reprice, it report tomorrow and I wouldn't be surprised if the stock jumped tomorrow.
Thursday, June 28, 2007
Blackstone Shares Fall
Blackstone Group's share price is now below its IPO price of $31. The shares, which shot up to $38 following the company's IPO can now be bought for $30, 3% lower than price the shares were sold to the public at.
While four trading days isn't really that significant, if I had just taken the other side of a trade with some of the shrewdest investors in the world, I would be very uncomfortable when the price of those shares falls, I might begin to think someone had outsmarted me.
While four trading days isn't really that significant, if I had just taken the other side of a trade with some of the shrewdest investors in the world, I would be very uncomfortable when the price of those shares falls, I might begin to think someone had outsmarted me.
Tuesday, June 26, 2007
Lunch With Buffett -- $265,000
Every year Warren Buffett auctions off the opportunity to join him for lunch. The proceeds from the auction benefit Glide, a San Francisco charity that Buffett supports.
This afternoon, the lunch is going for $265,100.
This afternoon, the lunch is going for $265,100.
John Mauldin previews Paul McCulley's new book in his letter this week. Overall, I think it sounds like a great book, but this excerpt really stood out:
"There is nothing investors can do about the potential deficit problem now. It is often true in investing that even when you anticipate a problem correctly, there is not much you can do about it in advance, if most investors have decided not to worry about it for now. In fact, acting too early can be a big mistake. So, in the case of budget deficits, it will have to be wait and see, and be ready to act."
While the specific example of budget deficits (and bond yields) is true, I think this applies to a lot of issues. While many people argue that markets fully discount all future events, I don't think that is really true. Life is really a long curved road, and I think markets often only discount around the first turn, they aren't very good at thinking two turns ahead, meaning that prices can easily go up or down more than someone with perfect knowledge (or even a reasonably good guess) about the long term would expect.
"There is nothing investors can do about the potential deficit problem now. It is often true in investing that even when you anticipate a problem correctly, there is not much you can do about it in advance, if most investors have decided not to worry about it for now. In fact, acting too early can be a big mistake. So, in the case of budget deficits, it will have to be wait and see, and be ready to act."
While the specific example of budget deficits (and bond yields) is true, I think this applies to a lot of issues. While many people argue that markets fully discount all future events, I don't think that is really true. Life is really a long curved road, and I think markets often only discount around the first turn, they aren't very good at thinking two turns ahead, meaning that prices can easily go up or down more than someone with perfect knowledge (or even a reasonably good guess) about the long term would expect.
Monday, June 25, 2007
Calling All Lawyers
Davita's (the country's number two kidney dialysis company) CIO was interviewed in today's Journal about his time working on the front lines at one of the company's dialysis centers. The company is one of many that is trying to get top execs some experience working in front line positions to learn more about their employees and customers.
While this generally seems like a good idea, it may not work so well in the medical field, and regardless of what field you are in you don't want management saying anything like this (emphasis added):
"The immersion experience prompts changes far from the clinic floor. Harlan Cleaver, DaVita's chief information officer, felt terrified when dialysis-machine alarms sounded during his clinic work -- even though a technician was nearby. "I didn't have a clue what I was doing but I had [the patient's] life in my hands," Mr. Cleaver recollects.
While this generally seems like a good idea, it may not work so well in the medical field, and regardless of what field you are in you don't want management saying anything like this (emphasis added):
"The immersion experience prompts changes far from the clinic floor. Harlan Cleaver, DaVita's chief information officer, felt terrified when dialysis-machine alarms sounded during his clinic work -- even though a technician was nearby. "I didn't have a clue what I was doing but I had [the patient's] life in my hands," Mr. Cleaver recollects.
After the program, Mr. Cleaver accelerated plans to extend the training period for new analysts on the company's computer help desk, and lowered his expectations of productivity from such new hires. Before Reality 101, he notes, "I never really realized how incompetent entry-level people are when they start their jobs."
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