Screening: Best in Class Monday, November 17, 2008
Posted by ei-forum in Screening Criteria.3 comments
In order to have a good basket of stocks that we would be willing to research in detail, we have to make sure that they are in the best possible condition to get through this difficult economic cycle. As with the first time we ran this screen, our aim is to look for and highlight strong players in specific industries – instead of looking across the board, we really wanted to focus on companies that are outperforming and more solid than their competitors.
Keeping the above in mind, we used the MSN Money Deluxe Stock Screener to find companies that are profitable, efficient and not uniquely focused on leverage to fuel their growth:
- Return on Equity >/= to Industry Average Return on Equity
- Price/Book </= to Industry Average Price to Book
- P/E Ratio </= to Industry Average P/E Ratio
- Income per Employee >/= to Industry Average Income per Employee
- Inventory Turnover >/= Industry Average Inventory Turnover
- Debt to Equity Ratio </= Industry Average Debt to Equity Ratio
- Dividend Payout Latest Fiscal Year >/= Industry Average Dividend Payout Latest Fiscal Year
- Net Profit Margin >/= Industry Average Net Profit Margin
And finally, we checked for even more distress, adding:
- Previous Day’s Closing Price ‘Near’ 52-Week Low
The only companies to come out where:
- Total Systems Services Inc. (TSS) – it provides electronic payment processing and related services to financial and non financial institutions -> Quite a tricky sector to try and understand seeing the possible ramifications of all the different dynamics currently in play.
- Microsoft Corp. (MSFT) -> definitely worth looking into.
- Norfolk Southern Corp. (NSC) – rail transportation of raw materials, intermediate products, and finished goods primarily in the United States -> Well, pretty straight forwards and despite the slowdown, rail remains a cost effective way to transport goods and we are fairly bullish most operators as we already discussed in the past.
Our feeling is that Microsoft is and will remain a driving force in the tech sector. The main factors that support this view is that they have a dominant position, a good pipe-line and an extremely solid balance sheet… they are bound to emerge from this crisis with an even greater advantage over their competitors.
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Hedge Fund Managers Testify before Congress Friday, November 14, 2008
Posted by ei-forum in Miscellaneous.add a comment
Philip Falcone, Kenneth C. Griffin, John Paulson, James Simons and George Soros testified before Congress. The House was trying to get a better idea of how they operate, their use of leverage and their overall take on the situation. There are a lot of controversial issues surrounding these hedge fund managers and calls for more regulation in this industry…
All-in-all, this issue is quite controversial as many feel that hedge funds are somewhat responsible for the situation we are in but many forget that they have been calling this crash for quite some time… at the end of the day, we feel that a lot of it is driven by a fundamental misunderstanding of the hedge fund world (which is by no means perfect but not responsible for the turn of events) and the search for guilty parties… and since these guys have made a lot of money in the markets, they are easy targets.
DealBook has a good write-up of the testimonies of each of the managers: here.
Enjoy!
Mortgage Banking Meltdown Explained Thursday, November 13, 2008
Posted by ei-forum in Miscellaneous.1 comment so far
Enspire Learning Network does it again! After their video on the explanation of the financial crisis (here), they have just released one on the mortgage banking meltdown.
They go through how mortgage banking has changed over the years with the move from banks lending to credit worthy clients to the new model where mortgage brokers acted as the middle men. Incentives changed, so did the terms, the fees, the repackaging and so on…. clearly even though the teaser rates ended after the first couple of years, as long as borrowers could refinance, they still had the illusion that the whole system was working but when things look to easy or too good to be true, it’s usually not sustainable!
Once again, they do an extremely good job at clearly explaining what actually happened and how we got to the current situation. Furthermore, apart from having distilled this issue to the real key points, their use of graphics is really great – it is a lot harder then you think to make one of these videos.
Enjoy!
TARP Explained – Revised Thursday, November 13, 2008
Posted by ei-forum in Miscellaneous.add a comment
Well, we’d just recently finished our post on the ORNIGINAL TARP (here) and Mr. Paulson decided to shake things up a little!
“Our assessment at this time is that this is not the most effective way to use Tarp funds,” Mr Paulson said.
The new TARP will focus on:
- increasing capital injections in troubled institutions
- increased assistance to the frozen securitization markets
- foreclosure prevention
“I will never apologize for changing an approach or strategy when the facts change,” Mr Paulson said.
All-in-all, it looks like the focus will shift to helping consumers, which is probably a good thing. However, is this the last change under Paulson? Is it going to change again in January? We all know that the markets hate uncertainty…
To be continued.
The First Billion is the Hardest: T. Boone Pickens Wednesday, November 12, 2008
Posted by ei-forum in Book Reviews.1 comment so far
If you want an easy and blunt explanation of what the current energy situation is, look no further. T. Boone Pickens tackles what the current status is, what the options are and how he thinks America should move to try and solve them, starting to aim for American energy independence.
Most of the reviews written on this book tackle Boone’s spot-on analysis of the current situation, how he has been incredibly successful due to his understanding of the energy business and the impact he had on the oil business. Whilst all of this is true and the book does a great job of introducing everyone to not only the overall commodity business but also futures trading, we would like to talk about the human side of his story.
We think that Boone’s story is very inspiring and highlights how honest principles, discipline and hard work ultimately pay. Throughout his career, he has always fought for what he believed in, was never afraid to stick his neck out to follow his convictions and never gave up! Seeing him now with the success and fortune he has gathered may fool people into underestimating him and that is precisely the position he likes to be in…
Again, not only a great book on oil and overall energy but a great story of entrepreneurship and guiding principles for life and ultimately, success. All-in-all, a great American story.
Enjoy!
George Soros on the Financial Crisis Tuesday, November 11, 2008
Posted by ei-forum in Miscellaneous.2 comments
Love him or hate him, it’s always worth listening to Mr. Soros. This is a speech he recently gave at Columbia where he discusses the current crisis and his theory of bubbles.
Mr. Soros highlights that financial markets never reflect the true financial picture but a biased or distorted picture of the current financial situation and that sometimes, this misconception can distort actual fundamentals.
We do not want to ruin the speech for you – it is worth listening too:
Very interesting… enjoy!
Poll Results: Market and Obama Tuesday, November 11, 2008
Posted by ei-forum in Polls.2 comments
Just a quick note to let you know that the consensus last week was that the the markets will react positively to Obama.
Here is the breakdown:
- Positive = 45%
- Negative = 39%%
- Don’t Know= 15%
To be honest, we were a bit surprised – not with the outcome – but by the negative sentiment… time will tell but it is clear that it will be a difficult and bumpy ride.
Make sure you vote in the current poll!
TARP Explained Monday, November 10, 2008
Posted by ei-forum in Miscellaneous.4 comments
Chances are that we will be hearing more and more about TARP as the Treasury Department continues to try to improve financial stability and we thought that it might be useful to try and summarize what the program is all about.
TARP is short for Troubled Assets Relief Program and the passing of which effectively allowed the Treasury to create the famous 700 billion dollar package. However, the 700 billion are not all readily available. As far as we understand, there are 3 phases:
- 250 billion available from the start
- 100 billion second tranche to be signed-off by the President
- 350 billion that are subject to Congressional sign-off
The program will be run by the Office of Financial Stability and will focus on the following areas:
- Buying Mortgage-backed securities
- The whole loan purchase program
- The insurance program to insure these assets
- Home ownership program to try and find a way to limit the number of foreclosures
- The Equity purchase program, mainly aimed for financial institutions, trying to define rules for these purchases and hopefully sparking a wave of new capital injections in these companies
- Tackling Executive compensation – very hot topic – basically ensuring that the government is not paying high-comp for executives that failed to save their companies
- Oversight, accountability and compliance program
We will no doubt be discussing this further in the near future…
Future Star Financial Planner Monday, November 10, 2008
Posted by ei-forum in Investing Humor.add a comment
Just a bit of humor but it looks like this could also apply to, ‘I did save but the market crashed’…
Diversified ETF Portfolio Friday, November 7, 2008
Posted by ei-forum in ETFs.5 comments
Some of our readers have asked us about how we would go about constructing a diversified ETF portfolio. Naturally, it always depends on what your ultimate investing goals are, your age, what percentage of your liquid net-worth will be invested in the portfolio, etc, etc… However, we thought that we would offer our view on what we feel could be a starting-point for a well-balanced option.
First of all, since stocks outperform all other asset classes over the long-term (see post & graphs: here), we would aim to have a majority of the portfolio in stocks and would therefore opt for a 60/40 split vs. bonds. In terms of bonds, we would place half of the allocation in a total bond market ETF and split the rest between short-term and long-term bonds. You could also just place it all in the total bond market but since we would aim to slowly build up all of our positions by buying in thirds, we would prefer to have more choice when entering the markets:
- Vanguard Total Bond Market (BND): 20%
- Vanguard Long-Term Bond (BLV): 10%
- Vanguard Short-Term Bond (BSV): 10%
With the remaining 60% of the portfolio that we will invest in stocks, it is important to keep in mind that we want diversification and enough exposure to different markets that will allow us to slowly enter our positions depending on market swings and investment cycles. Naturally, as our reader know, we prefer small cap value (they out perform! – see post and graphs: here) – but generally speaking, we always try to focus on value.
Based on the above, we will complement the total US market with US small cap value and MSCI EAFE Value index that will give us international exposure.
- Vanguard Total Stock Market (VTI): 15%
- Vanguard Small Cap Value (VBR): 10%
- IShares MSCI Value (EFV): 10%
Then we would add some emerging markets and here, apart from overall market diversification/exposure, we like to look for ETFs that hold not only Asian companies but also Russian and Brazilian oil (simply our preference based on our view of future mega-trends), Gazprom, Lukoil, Petrobras,etc…:
- Vanguard Emerging Markets (VWO): 5%
In conclusion, it is always worth having some real-estate in a diversified portfolio, also due to the stable dividend yield. Furthermore, taking into account a stream of dividend yield that would also allow you to rebalanced the portfolio, we would look at high dividend payers and possibly (in the current situation) a financial preferred share ETF:
We feel that ultimately, you should try and have a stable 40% in bonds, 40% in the market and value stocks and 10% in real-estate and then you can try and be a little more opportunistic with the remaining 10% of the portfolio.
Please note that opinions and strategies vary and that this is just one option which we would be happy owning – not only in terms of mix but also because of the low expense ratios and dividend yield.
Happy fine-tuning of your portfolio!
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