Wednesday, November 28, 2012

INSIDE INFORMATION OR GOOD RESEARCH METHODS...

Grab the phone.  You grab the other phone.  You get that one.  Syntex collapsed 50% in a short period of time due to rumors of cancer being caused by their birth control pill.  On the phone was three doctors.  How many of your patients are getting cancer we asked.  All three doctors didn't seem to know what we were talking about since none of their patients were getting cancer.  They further stated they were just doing some preliminary tests and if there are crazy rumors circulating, they didn't know anything about it.

Our brokers had been recommending Syntex to clients.  We were in a state of shock as the stock collapsed and we put out the word "It seems that the Syntex rumors may be false - we are going to bet that they are but there are no guarantees.  We are going to buy more but that's all we can tell you".

Did we use inside information?  In today's world, some government officials would think we did.  But what in the world is research if you don't try to learn more about the companies you are interested in than other people have learned about the same company?  How do you draw the line between thorough aggressive research and guaranteed inside information?   I am absolutely certain that more so called "hot" stories both negative and positive, are right as often as they are wrong.

The SEC is busy indicting specific individuals for alleged use of inside information.  That might be a good idea or a bad idea, but to me it makes very little sense.  For every investor that wins with an inside tip one loses - the net effect on the market is really zero.

Why doesn't the SEC randomly pick 25 investigators.  Then pick 25 brokerage offices around the country.  Then subpoena the records of 10 brokers in each brokerage firm they select.  Then call each of the selected brokers into a room and ask them what they know about the companies that they had been recommending to their clients.  Having done this in my own mysterious way in the past, I am certain they would discover that most brokers had little to any specific knowledge on the companies they were recommending.

Now we have cases where money managers, who are paid a lot of money, break their backs trying to ferret out information for their clients so that they have a chance of achieving a positive return on their investments.  If inside information was of any particular value, there would be all sorts of money managers achieving returns far in excess of the overall averages.  If the government wants to claim that the only thing money managers should do is read public reports, then there really won't be any need for research at all. Any investor could attempt to ferret out the same information as the money manager.

I guess we will get to the point where someone invents something and is required to expose their invention to the marketplace before they even make the product.  Some investigating agency could claim they had "inside invention" because the inventor spoke to a scientist, who was sitting in his rowboat in Fiji and mentioned a molecule he felt may have some promise, and the inventor used the molecule.

If Jim Cramer gets some information from somewhere and recommends it on his program, and I don't happen to watch his show because I don't subscribe to his station, did his viewers have inside information compared to me?  There is a reason why our standard of living doesn't increase anymore.  That's why sunshine turns into stormy days.

A PARTICULAR MONEY MANAGER TOOK A LARGE STAKE IN THIS COMPANY KNOWING THEY WERE GOING TO THE MANAGEMENT FOR THE PURPOSE OF INCREASING SHAREHOLDER VALUE.  THE  INVESTORS WHO SOLD THEIR SHARES TO THE MONEY MANAGER DID NOT HAVE THIS INFORMATION WHEN THEY SOLD THEIR SHARES.  THAT'S A CLEAR CUT EXAMPLE OF INSIDE INFORMATION THAT GOES TOTALLY UNNOTICED BY THE INEXPERIENCED PEOPLE, WITH LITTLE INVESTMENT BACKGROUND, WHO HAVE BEEN AND ARE NOW INVOLVED AT THE SEC.  

Tuesday, November 27, 2012

WILL WALMART BECOME THE NEXT TWINKIES?

You can talk all you want about the give and take among the various entities that comprise the economy.

But as we ponder today's headlines one that would seem worthwhile to me is "Will Walmart become the next Twinkies?"  We have written before about how the inflexibility of union attitudes has resulted in the decline of a number of major industries from airlines, to textiles, to steel, to aluminum, to the post office, to automobile makers, etc.

Here is an approximate set of facts that never appears in the mainstream media, probably because it's above the analytical capability of most media personnel.  Walmart did approximately $450 billion dollars of sales in it's latest reported year.  Since there are approximately 3.4 billion shares outstanding, each shareholder was entitled to approximately $132 a share of sales for each share that is outstanding.

There is a second part.  Walmart had to pay for the items that it sold in its stores and then pay it's almost 2 million employees for all the things they do to run the business.  Those cash costs amounted to $423 billion or 94% of the $450 billion dollars of sales, and on a per share basis $124 of the $132 per share of sales to each shareholder. Consequently each outstanding share of Walmart generated income of $8 a share which theoretically and indirectly were assigned to a shareholder.

Now the third part.  After paying taxes and capital expenditures, each dollar of sales that Walmart generates it EARNS 1.3 PENNIES.  If you added that back into all the expenses, Walmart would have no more money than it currently has to pay for running their business.

We live in a country where the media is allowed to present union leaders and left wing professors claiming that Walmart makes billions of dollars of profits and should give large pay increases to its personnel.  As you can see, from the very simplistic analysis above, their comments are destructive, misleading and incorrect.  One day the management and shareholders will just walk away and say enough is enough.  ONE PENNY, ONE PENNY, ONE PENNY.

If you don't think you are watching the next Twinkies...Wake Up!


Thursday, November 15, 2012

THERE IS NO OTHER WAY OUT...

The only thing that has sustained the economy has been the Federal Reserve.  Up until this point, Fed Policy has been as close to 100% correct as it could have possibly been.

The Senate and the House of Representatives have been totally wrong. Until such time as their policies become appropriate, the status of our economic well being will stay diminished.

The only policies that will help us into a healthy and long term uptrend must consist of some of the following.

1. Confidence on the part of the business community.

2. Recognition by the President that you can't pay people in the middle class or any class steadily increasing wages, if corporate profits are not increasing at the same time.

3. The only way to get out of our deficit is to increase individual income, increase corporate profits, increase dividends and increase capital gains. These increases will result in a growing tax base and will allow the deficit to eventually be wiped out.

4. Avoid anything that increases taxes, reduces consumption and weakens confidence, as this will only cause the deficit to grow.

5. Government spending has to be increased by putting into place infrastructure, such as new schools, on a massive basis.

6. Tax deductions have to remain in place as long as they induce economic growth.

7. Tax rates have to stay approximately where they are.

8. The leaders of Congress and the Executive branch must stop creating an environment where "success" is not respected and rewarded but is diminished and punished through taxation and regulations.

If you don't grow the economy steadily there is a smaller and smaller pie to take from, which is an absolute recipe for diminished returns to all segments of society.  

Wednesday, November 14, 2012

OBAMA'S CLAIM - ONLY FOR THE USA IS 100% POLITICAL

As Gandhi praised Hitler (Blog dated March 2, 2012), along with Joseph Kennedy Sr., Ambassador to Germany and as Chamberlain called for "peace in our time" praising Hitler, and as actors praise Chavez, our President seems to have joined this list of infamous overrated men.

In the newspaper in New York, one of their editorial writers, a master of words, and a confused soul, likens the Prime Minister of Israel to a party boss concerned with his political power.

Think of the absurdity of this writer's views on Israel's Prime Minister.  Almost beyond belief.  On Israel's one side are eighty million people with 40% illiterate and one the lowest per capita incomes in the world, who just elected a radical President concerned about a Palestinian state, when his own country's people suffer immensely.  On its borders to the north lives Hezbollah and Hamas,  terrorist organizations.  Syria, to its west, is filling up with Iranian arms and terror.  Jordan barely hangs on by its teeth.  Libya is hardly put together.  Iraq is trying but is a mess.  North Korea seems intent on making matters worse. Iran's President sounds like Hitler reincarnated.

This newspaper writer must know that security, which is almost impossible to achieve, is what drives Netanyahu, not some stupid coalition.  That means nothing to him or his party or to Israelis, as should be obvious when anyone weighs the risks of living in Israel.  This famous newspaper editorialist probably is so concerned with his sources of information in the Middle East that he obviously has lost his right to be taken seriously on Israel's security.

As hard as we try to show an even hand in the Middle East, we will unfortunately learn over time that the radicals have their eye on the oil.  Israel cannot sway to the appeasers and weaken its position any further.  If atomic weapons proliferate, how can anyone expect to live in peace.  

OIL IS THE ONLY ISSUE - NOTHING ELSE...(Originally Published 9/14/12)

Look at a desk.  Put a dot on it.  That's the land size of Israel in comparison to the land size of other Middle Eastern countries.  Can you really logically believe that this tiny little place is so repugnant to Muslims just because the inhabitants of Israel are significantly Jewish? Also the Jewish population is Israel is mainly secular, not religious.

The entire issue is over the control of oil.  As long as the United States continues to be so dependent on Middle Eastern oil, Israel will be the scapegoat.

Israel acts as a beacon of protection against the tyrants, terrorists and power seekers who would use oil as the ultimate power source.  It's not Jews that are the problem, it's the ultimate euphoria of being able to have world domination through the oil.  Until we get off the oil addiction, (the sooner the better), there is no hope for real stability, ever, in the Middle East. 

I am reposting a blog that we wrote in 2011 about how to break the oil addiction. 

 

Shepard Osherow. All Rights Reserved