Donald Coxe and his colleagues at BMO Harris provided their post-election views following the Obama victory:
Donald Coxe, Global Portfolio Strategist, BMO Financial Group
- Obama’s victory will lead to a “feel-good” attitude within America at a time when gloom and sourness have become excessive. That favours financial assets generally at a time that fall is moving into winter.
- Obama’s spending plans will be seen as economy-favourable with the nation in recession. Stocks should benefit near-term.
- Obama is fully committed to continuation of all the ethanol subsidies and tariffs that McCain opposed. That is good news for the reeling ethanol stocks that have been buffeted by falling oil prices and still-high corn prices.
- Obama has threatened to impose carbon taxes on coal-fired electrical generating plants.
- None of the candidates promised significant revisions to the extremely favourable royalty structure for mining on federally-owned properties, mostly in the West. That is important for Canadian gold miners operating in Nevada.
- He famously said that on his first day in the White House he would “call up the President of Canada to announce he was tearing up NAFTA.” We believe he won’t do that.
- Worldwide, the election of a new U.S. President with a change agenda will be greeted favourably. This should facilitate America’s dealings with other nations on such hot topics as Russian expansionism and response to Iranian nuclear weapons development.
Andrew Busch, BMO Capital Markets, Global FX Market Strategist
- Expect a U.S. stimulus package of $150 billion to be enacted and checks out the door by March with an impact on consumer spending by late April and May.
- Expect very expensive bond deals issuance to be done over the next three months with those issuing likely to only be high quality to get done and with high spreads to Treasuries. This should mean they get snapped up.
- There is going to be massive government bond issuance in 2009 across the globe to pay for bailouts, stimulus packages, and social spending. This means we should see a further steepening of the yield curve in 2009, but it won’t necessarily point to a big economic recovery like it has in the past.
Jack Ablin, Chief Investment Officer, Harris Private Bank
- Both an Obama victory and a Democrat-controlled Congress are currently factored into markets.
- When looking at Europe vs. U.S. price-to-sales comparisons, one can see the U.S. is beginning to trade like a “nationalized” country.
- Tax rates are expected to increase which will give an edge to municipal bonds.
- A move towards socialized medicine appears to be already discounted. In examining the valuation of U.S. vs. European pharmaceutical stocks, the U.S. valuation already incorporates nationalized health care.
- Large cap is set to outperform as small cap moves back to normal valuation.
Paul Taylor, Chief Investment Officer, BMO Harris Private Banking
- We are a long way away from a sustainable equity market rally. A sustainable equity market rally will only occur when it is clear that the spectre of a protracted, significant U.S. economic recession is not in sight.
- Leading economic indicators signal a meaningful U.S. and global economic recession. This will cause policymakers in Washington to focus attention on the economy as the number one priority.
- Investors should have a defensive strategy, with an overweight in Consumer Staples, Telecom, Utilities and underweight in Energy, Materials and Technology. This will be more appropriate until the spectre of recession is past.
- With Fed Funds at 1.0%, monetary policy will be impotent moving forward.
- A global economic recession is bearish for commodity based currencies (Canadian and Australian dollars) and is bullish for other currencies. The current “crisis of confidence” is bullish for the U.S. dollar due to its position of reserve currency.
Source: PR Newswire
Tags: Australia, BMO, BMO Capital Markets, Canada, Currency, Dollar, Donald Coxe, Economy, energy, Euro, Fed, Focus, Gold, Markets, Mining, Monetary Policy, Oil Prices, Recession, REW, Russia, spreads
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CLSA Asia-Pacific Markets, a division of Credit Lyonnais/Credit Agricole, are one of the best groups of analysts providing background on China.
Included here are excerpts from a report by CLSA’s macro strategist Andy Rothman regarding China’s recent decision to stimulate its housing sector.
Beijing is cutting mortgage rates to as low as 5.23 percent, reducing required down payments to buy a home from 30 percent to 20 percent for first-time buyers, comparatively still far above what most Americans have put up to purchase a house, and also lowering some taxes and fees.
CLSA views the government’s action as a move to get people to invest their wealth in real estate, which will serve to shrink an overbuilt housing inventory and help keep the broader economy from slowing down further.
“Beijing had succeeded in cooling off price growth, taking it from 25 percent year over year last fall to about zero year over year today. And, having achieved the objective of avoiding a bubble, the last thing the Communist Party wanted to do was crash the property market.
“(This week’s) policy changes will have two effects:
“First, they make home-buying more affordable, with a combination of lower interest rates, lower down payments and lower transaction fees.
“But the second effect is most important, as affordability has never been the big problem in China. (The) measures represent the government reversing its anti-property stance adopted one year ago. Back then, Beijing said, in effect, ‘we will do our best to depress prices and discourage home-buying.’ Consumers responded rationally by delaying purchases.
“Now, the government is saying, (my words), ‘we encourage home-buying and you should anticipate that property prices will start rising again.’
“With affordability good, household debt almost non-existent, and banks ready to lend (they are all controlled by the Party), homebuyers will return to the market in response to Beijing’s message.
“(The) move can be considered part of an overall effort to give a light stimulus to the economy, but in my view is primarily focused on the real estate sector. These changes also illustrate that the Party is capable of taking proactive steps to deal with a changing economic environment.”
Tags: Asia, Banks, China, Credit, Economy, Focus, interest rates, Markets, Mortgage, Real Estate
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Andrew Lahde, the hedge fund manager, who last year, was catapulted into the limelight when he successfully returned 886% to investors, betting against subprime mortgages, closed up shop last month, claiming that counterparty problems were making it far too difficult and stressful for him to want to keep on going.
Below is Lahde’s farewell and f— you letter to those who deserve it.
Dear Investor:
Today I write not to gloat. Given the pain that nearly everyone is experiencing, that would be entirely inappropriate. Nor am I writing to make further predictions, as most of my forecasts in previous letters have unfolded or are in the process of unfolding. Instead, I am writing to say goodbye.
Recently, on the front page of Section C of the Wall Street Journal, a hedge fund manager who was also closing up shop (a $300 million fund), was quoted as saying, “What I have learned about the hedge fund business is that I hate it.” I could not agree more with that statement. I was in this game for the money. The low hanging fruit, i.e. idiots whose parents paid for prep school, Yale, and then the Harvard MBA, was there for the taking. These people who were (often) truly not worthy of the education they received (or supposedly received) rose to the top of companies such as AIG, Bear Stearns and Lehman Brothers and all levels of our government. All of this behavior supporting the Aristocracy, only ended up making it easier for me to find people stupid enough to take the other side of my trades. God bless America.
There are far too many people for me to sincerely thank for my success. However, I do not want to sound like a Hollywood actor accepting an award. The money was reward enough. Furthermore, the endless list those deserving thanks know who they are.
I will no longer manage money for other people or institutions. I have enough of my own wealth to manage. Some people, who think they have arrived at a reasonable estimate of my net worth, might be surprised that I would call it quits with such a small war chest. That is fine; I am content with my rewards. Moreover, I will let others try to amass nine, ten or eleven figure net worths. Meanwhile, their lives suck. Appointments back to back, booked solid for the next three months, they look forward to their two week vacation in January during which they will likely be glued to their Blackberries or other such devices. What is the point? They will all be forgotten in fifty years anyway. Steve Balmer, Steven Cohen, and Larry Ellison will all be forgotten. I do not understand the legacy thing. Nearly everyone will be forgotten. Give up on leaving your mark. Throw the Blackberry away and enjoy life.
So this is it. With all due respect, I am dropping out. Please do not expect any type of reply to emails or voicemails within normal time frames or at all. Andy Springer and his company will be handling the dissolution of the fund. And don’t worry about my employees, they were always employed by Mr. Springer’s company and only one (who has been well-rewarded) will lose his job.
I have no interest in any deals in which anyone would like me to participate. I truly do not have a strong opinion about any market right now, other than to say that things will continue to get worse for some time, probably years. I am content sitting on the sidelines and waiting. After all, sitting and waiting is how we made money from the subprime debacle. I now have time to repair my health, which was destroyed by the stress I layered onto myself over the past two years, as well as my entire life — where I had to compete for spaces in universities and graduate schools, jobs and assets under management — with those who had all the advantages (rich parents) that I did not. May meritocracy be part of a new form of government, which needs to be established.
On the issue of the U.S. Government, I would like to make a modest proposal. First, I point out the obvious flaws, whereby legislation was repeatedly brought forth to Congress over the past eight years, which would have reigned in the predatory lending practices of now mostly defunct institutions. These institutions regularly filled the coffers of both parties in return for voting down all of this legislation designed to protect the common citizen. This is an outrage, yet no one seems to know or care about it. Since Thomas Jefferson and Adam Smith passed, I would argue that there has been a dearth of worthy philosophers in this country, at least ones focused on improving government. Capitalism worked for two hundred years, but times change, and systems become corrupt. George Soros, a man of staggering wealth, has stated that he would like to be remembered as a philosopher. My suggestion is that this great man start and sponsor a forum for great minds to come together to create a new system of government that truly represents the common man’s interest, while at the same time creating rewards great enough to attract the best and brightest minds to serve in government roles without having to rely on corruption to further their interests or lifestyles. This forum could be similar to the one used to create the operating system, Linux, which competes with Microsoft’s near monopoly. I believe there is an answer, but for now the system is clearly broken.
Lastly, while I still have an audience, I would like to bring attention to an alternative food and energy source. You won’t see it included in BP’s, “Feel good. We are working on sustainable solutions,” television commercials, nor is it mentioned in ADM’s similar commercials. But hemp has been used for at least 5,000 years for cloth and food, as well as just about everything that is produced from petroleum products. Hemp is not marijuana and vice versa. Hemp is the male plant and it grows like a weed, hence the slang term. The original American flag was made of hemp fiber and our Constitution was printed on paper made of hemp. It was used as recently as World War II by the U.S. Government, and then promptly made illegal after the war was won. At a time when rhetoric is flying about becoming more self-sufficient in terms of energy, why is it illegal to grow this plant in this country? Ah, the female. The evil female plant — marijuana. It gets you high, it makes you laugh, it does not produce a hangover. Unlike alcohol, it does not result in bar fights or wife beating. So, why is this innocuous plant illegal? Is it a gateway drug? No, that would be alcohol, which is so heavily advertised in this country. My only conclusion as to why it is illegal, is that Corporate America, which owns Congress, would rather sell you Paxil, Zoloft, Xanax and other additive drugs, than allow you to grow a plant in your home without some of the profits going into their coffers. This policy is ludicrous. It has surely contributed to our dependency on foreign energy sources. Our policies have other countries literally laughing at our stupidity, most notably Canada, as well as several European nations (both Eastern and Western). You would not know this by paying attention to U.S. media sources though, as they tend not to elaborate on who is laughing at the United States this week. Please people, let’s stop the rhetoric and start thinking about how we can truly become self-sufficient.
With that I say good-bye and good luck.
All the best,
Andrew Lahde
Tags: Bear Stearns, Canada, capitalism, energy, Euro, Focus, FT.com, Mortgage
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Niels Jensen and Jan Wilhelmsen of Absolute Return Partners (www.arpllp.com) produced an informative analysis of the credit crisis and provide the following observations. Here is our summary:
Loans and Mortgages are getting much harder to come by on average, globally.
This has bold and negative implications for property prices everywhere.
Observation # 1
It all began with housing and it will end with housing.
The current overhang caused by the tightness of credit (mortgages) will take years not months to unwind and housing prices will not begin to rise again until this occurs.
Observation# 2
Don’t trust central banks to always do the right thing.
Evidence suggests that while their intent seems to be genuine, central banks around the world have not been very effective at taming inflation. For example, simply raising interest rates in the underlevered economies of the BRIC countries has been futile, since most consumers and companies do not employ credit to the extent that those of us in the west do.
In the case of the BRIC countries, it appears the problem does not consist of sustaining growth, but rather containing growth. China, for instance, has a record of under-reporting both real and nominal GDP growth, and may have only recently more accurately stated inflation owing to the fact that they could not hide from skyrocketing oil and food prices.
Observation # 3
Policy mistakes are likely to be repeated.
The US is currently at risk of making the same policy making mistakes Japan made 10-15 years ago. US residential property prices have risen more during 2000-2006 boom than did the Japanese during the late 80s boom.
Japan too, though more rapidly, reduced the cost of money dramatically to fend off its crisis.
Japan bailed out many of its institutions and used taxpayers money to fund the activity of fixing the ‘unfixable,’ and this could have profound implications for the US GDP growth in years to come.
Observation # 4
The golden era of investment banks is over.
The biggest independent investment banks have just become banks. The US investment banking business is becoming more like Canada’s where the business is dominated by the large schedule “A” chartered banks and America’s “free” market just became a little more socialist. How ironic…The folding of GS and MS into banks also has valuation considerations for the venerated firms as their revenues and earnings are sure to decline under the auspices of Fed regulation. Further de-levering also has negative implications for the market as it entails more liquidation. Hopefully this will be done in an orderly fashion now that the conversion is underway.
Observation # 5
The final shoe hasn’t dropped yet.
There is more to come. For instance, the financial system has yet to deal with $1-trillion in Alt-A securities and further degradation of the CDS market and counter-party risks.
Absolute Return Partners states that the commodity bull is just the final leg of the liquidity super-cycle: take a look the Economist’s VAR-VAR-Voom chart.
Observation # 6
Leverage is ‘dead’ but capital is not.
Global savings rates now exceed 20%, except in the US, and while this is a positive for global stability, the question remains about whether investors are willing to invest money where it is most needed, the shore up the world’s banks. Failing that, property prices will need to stabilize before we can expect better times.
Observation # 7
The end of the crisis looks further away than it did a year ago.
Its complicated, very complicated.
Commodity price induced inflation has made it hard for policy makers to reduce interest rates. Despite this, interest rate cuts may not be the magic bullet and in 20 of the 36 countries recently surveyed by Morgan Stanley, real short-term interest rates are currently negative.
At this point the $700-billion Treasury/Fed proposal appears to be a solid response, as does the stimulus injections of cash into markets around the world.
This problem remains possibly years away from being done with.
Observation # 8
Traditional risk management has lost its way.
Paul McCulley of Pimco touched on the subject in the July 2008 issue of Global Central Bank Focus:
“[...] every levered financial institution - banks and shadow banks alike - decided individually that it was time to delever their balance sheets. At the individual level, that made perfect sense. At the collective level, however, it has given us the paradox of deleveraging: when we all try to do it at the same time, we actually do less of it, because we collectively create deflation in the assets from which leverage is being removed.”
In fact, while it is known that PIMCO was regularly consulted by Secretary Paulson, it was Paul McCulley who rightly proposed in his newsletter during the summer, that the only real solution would consist of the formation of a new government agency to create a market to thaw frozen or cemented assets. This would be the only viable long term solution.
Conclusion
Where is the opportunity? According to Absolute Return Partners, real value is to be found in credit instruments. This is where the most damage has been inflicted and it is where the biggest bargains are to be found in today’s markets.
What would you rather own? Equities which trade at 15-20 times earnings or credit instruments trading at a fraction of that cost? Deutsche Bank estimates that senior secured loans are trading at an implied PE ratio of 5-less than a third of the cost of equities.
You may read the full original version, at Observations on a Crisis, Courtesy John Mauldin
Tags: Banks, BRICs, Canada, CDS, Chart, China, Credit, Credit Crisis, EFU, energy, Fed, Focus, Food prices, GDP Growth, Gold, inflation, interest rates, Japan, liquidity, Markets, Mortgage, Paul McCulley, Paulson, PIMCO, Savings Rate, Trading, Value
Posted in Markets, inflation | 1 Comment »
September 17, 2008 - The fall in the price of oil during the past two months may not have surprised everyone, but its dramatic nature and swiftness was unexpected. One analyst who got it right was Rob Fraim of Mid-Atlantic Securities. With crude down by almost 40%, a new report on energy has just been published by Rob.
This report is worth perusing for two reasons: (1) Rob has a good long-term track record in this sphere, and (2) a common-sense approach and findings with which I mostly concur. Here are some excerpts from his current report.
Today I will tackle one of the (many) issues with which market participants are grappling. And I will have a sector recommendation that has “hero or a goat” implications for the writer of this missive.
I am cogitating on the disruptions and disasters in the financial sector – and the implications for the broad market. At some point you will hear from me on that subject as this mess unfolds and I feel that I have actionable thoughts to share.
Today though – we talk energy.
I’ll probably get tons of e-mail taking exception to my conclusions and citing multitudinous arcane bits of Economist World data. And I will gladly receive these and will appreciate the input. But that doesn’t have to mean that I will necessarily agree or find reason to change my conclusions.
I am approaching this … and I don’t want to use the word “gut feeling” – given that I believe that I have sound reasons for my opinion on this – but there is a certain amount of “feeling” involved in the process and conclusions. What I see in market action, what I hear from clients, what I sense in the mood of market participants, what I observe in the market’s reaction to events. And with all due respect to economists, the market is often more art than science. So I don my proverbial beret, pick up my figurative brushes and paint, and present my art project. Some fact, some feel, lots of opinion.
What a bleak mood in the energy patch. What a sickening slide. What the h*** happened? What an … opportunity?
Back on June 10, in a piece I wrote entitled “Oil – Whither Goest Thou? ”I gave the opinion that crude oil – then at $136 a barrel was overextended and due for a correction. I said that the $100 or so area looked about right. Of course oil promptly rallied to $147 or whatever it was and I was a stoopie-head for a little while. But since then, well … hey, hey what a genius, huh?
You don’t believe that I actually got something right? OK, you force me to quote/copy/paste. Here is an excerpt from the June 10 flash in which I recommended lightening up on energy stocks:
“Do I think that oil is going to $50? Not a chance? Not $50, not $60, not $80. But I do think that there is a better than average chance that we are going to revisit $100-ish and stabilize there for a while.
“This being the case I am suggesting that reaping some profits and reducing energy positions a bit might be a wise move – at least on a trading basis. Keep a core holding for the long-term, but lighten up. Sell some stuff. Write some covered calls. Hedge a bit. Maintain the core but trade with part of your energy investments. Do something other than get whipsawed.
“… It would not surprise me to see $100-105 oil by the end of the year. That probably equates to gasoline in the $3.50-ish area.”
Of course after that I went on to elaborate brilliantly (oh all right it wasn’t that brilliant, but I did elaborate) on the reasons why I was – at that time, in June – becoming cautious on energy. Recapping (sans the details) the reasons for the selling recommendation were:
a) Demand destruction resulting from changing consumer and transportation industry driving habits and vehicle choices
b) The potential for a rise in the US dollar
c) Slowing demand for China with the Olympics build-out winding down
d) Modest production growth – specifically from Russia
e) Comments from the Saudis saying that there was no justification for the rise in oil prices that had occurred.
Hmm … not too shabby on those points if I do say so myself.
And then I stated the following:
“When the crowd is virtually all leaning in one direction on a sector, you have to take advantage of it at some point. You just have to. Right now everybody says that financials are garbage and energy is gold, and we of course know all of the reasons for both. But just you wait and see… 12 months, 18 months out – when quality banks have risen 30% in price – the analysts will fall in love with them again. And if energy stocks go down 20% the cries to sell will erupt. We have to take the opposite side of the masses sometimes. We. Just. Have. To.”
So as it turns out I was reasonably on target with those comments and the call to reduce energy holdings for a while. (You know what they say about even a blind squirrel finding an acorn every now and then.) Now the burning question on the minds of my readers is this: “What now, Rob?” Well, again, I don’t know how many minds are burning and hearts yearning to hear the answer, but I’ll take a crack anyway.
I don’t expect a huge rally in oil in the near term, but I do believe the correction has just about run its course. Recently when crude approached $100 on the way down, OPEC began the “defending” process by announcing some production cutbacks – hoping to maintain $100 as floor of sorts. But now with the disruptions across all segments of the market, oil prices have moved right through that level – particularly yesterday as panic hit all markets, trading below $92 as I write this. I would not be surprised to see OPEC coming back with more production curtailments.
I am somewhat more bullish on natural gas prices than many analysts I have read, more based on seasonality, but also because of increased focus on natural gas use. (We’ve all seen the Boone Pickens/Aubrey McClendon ads. And we are approaching an election – what politician is going to badmouth natural gas? Heck, Nancy Pelosi said that it isn’t even a fossil fuel. As to the seasonality play, I have had some success through the years in buying natural gas stocks in the fall prior to our entering the heating season for a trade out as spring approaches.
So, I’m kind of reasonably positive on oil itself – the commodity – for the short term. I’m growing more bullish on natural gas – against the opinion of some smart people who feel otherwise.
The key point though is that I am getting significantly more interested in the stocks of the energy companies. Why? Because it doesn’t take $140 oil for the energy companies to make a lot of money. They do very nicely at $100 and the resultant decline in gasoline prices (once we get past this hurricane pricing anomaly) will calm down some of the finger-pointing and windfall profit-espousing by the politicians.
And the prices of the energy company stocks – oil and gas producers, drillers, coal companies, energy trusts, MLPs, alternative energy … the whole bunch of them – have just absolutely plummeted over the last couple of months and it (again I hate to use the word but here I go) feels like a bit of a selling crescendo taking place.
I have made the comment to a number of people the last few days that it seems that we have margin clerks running billion dollar portfolios. We know there was a liquidation of a large energy-focused hedge fund recently. The sector action of late feels/smells/acts like there is more forced selling taking place. And as one astute observer pointed out to me, in addition to the margin clerks, you have to factor in the risk management people at the funds. Forced selling of another sort. On top of that there seem to have been some significant fund redemption requests at hedge funds – particularly by fund-of-fund groups, which are notoriously fickle and prone to pull out.
So now that everything energy-related has been hammered we hear all of the after-the-fact cautionary/bearish thoughts: China doesn’t want any energy anymore … all commodities are going to fall another 50% they say … the economy is going to totally destroy energy demand … we’re all going to bike to work and cook on campfires … we’re going to be awash in cheap oil … blah, blah, yadda, yadda.
We’ve heard it all lately. I’m just not totally buying it. I’m not convinced that the big picture has shifted totally.
I believe that the stocks of energy companies have more than discounted the decline we have seen and then some. 50% declines in stock prices have not been out of the ordinary. I don’t think you have to be a raging, snorting bull on the commodities themselves to believe that the producers of energy products and services will be very nicely profitable – even at today’s lower-than-before prices for oil and gas.
And my very astute friend Jeffrey Saut at Raymond James (who has been spot on about energy and who has become more bullish of late) pointed out something very interesting yesterday. Evidently China – the previous “buyer at the margin,” the force that kept sopping up all supply for so long, which contributed to the big rise in energy before – has been pretty much out of the energy markets for a couple of months. The reason: pollution concerns during the Olympics and the Paralympics (the games for those with disabilities.) Many factories and industries were shut down and idled during that period so as to improve air quality during a time of so many visitors and so much world attention being focused on China. (We know China is image-conscious. Just ask the little girl who was not considered pretty enough to sign the anthem live and was replaced by a more attractive lip-syncher.)
The Paralympics end on September 17, and this means that China may very soon reopen manufacturing and transport – particularly so since there is a massive earthquake rebuilding to be done. And they could well be back in the energy market as buyers almost immediately – like on the 18th. The implications for the energy commodities are positive and a psychology shift in those markets could quickly spill over to the beaten up stocks of the energy companies.
Big picture, let’s not forget a few key energy points:
1. Production in many places is peaking or has peaked. Mexico appears to have peaked and Russia – a recent source of supply and the currently the 2nd largest oil producer – is doing things in a way that is short-term profitable for them, but long-term counterproductive. They are investing very, very little in new exploration (the capital intensive part of the business) – opting instead to try to squeeze out production from existing fields. That’s cheaper production for them in the short run, output has peaked and they are depleting those fields. Ultimately, they stand to be left with played out reserves and few new prospects – since they are skimping horribly on cap-ex and exploration now. It’s like the landlord who spends all the rent and doesn’t maintain the building. Eventually it catches up to him as the structure falls apart. Or the pharmaceutical company that does no R&D even though patents are expiring. Russia is milking the cow but not feeding it.
2. The low-lying fruit in the oil business has been picked. The potential “super giants” being explored and developed now – Brazil’s Carioca/Sugarloaf and the Bakken formation in the US for example, while exciting are also challenging and very expensive to produce on a per barrel basis. Same with the huge Canadian tar sands projects. Tar sand fields have been known of for years, but until oil reached high prices it was economically impractical to extract oil there.
There is still plenty of oil out there, but it is not the cheaply available, “poke a stick in the ground and watch it flow” type of oil. Prices will have to remain high to justify development.
3. While the world got a bit “China and India crazy” there for a while as regards energy consumption, the basic premise remains valid. As these huge populations become more urban and industrialized in nature – with cars, the need for electricity, etc. – there will be growing demand for the foreseeable future. Oh there will be the month-to-month ups and downs of course and everybody will obsess about that. But big picture – demand grows.
4. Alternative energy sources – and look, I’m a big believer that we have to develop new ways to provide power – are a long way from meeting our energy needs. And while they may do so one day, for now those needs must be met from both traditional (fossil) and progressive (alternative) sources. I believe that we need to break the oil addiction via new sources. But that is a process over a generation of time, not an immediate reality. For now, to quote Mr. Pickens, we have to drill, drill, drill.
5. We need more electrical power. Badly. Some experts say as many as 30 new power plants are needed ASAP. We might be oil addicted, but we are electricity junkies of the first magnitude. Computers, multiple TV sets, cell phones, iPods, recessed lighting all over the house, floodlights in the yard, plug-in cars on the way, so many appliances and gadgets in every home that it would have seemed like The Jetsons to a 1960s observer. And what runs power plants? While it might be alternative sources as time goes on, right now and for a good while to come, it’s fuel of the old-style. Natural gas and coal mostly.
6. And speaking of natural gas, I like Pickens’ idea of automobile conversion. We have lots of natural gas produced domestically and it is comparatively clean and certainly readily available. And what does that mean for the future price of natural gas? The same natural gas that runs the power plants being used to run our cars? Not too hard to figure out.
7. If this financial system mess puts pressure on the US dollar that has the obvious effect of causing oil prices to rise, all other things being equal, as it will take more dollars to exchange for one barrel.
By the way, I recently talked to a coal industry contact – a coal broker – who said that although the stock market doesn’t indicate it, the coal business is not bad at all. Pricing is off of the peaks, but still pretty strong and holding. He said that a lot of buyers – utilities in particular – have been playing a waiting game, looking for lower prices. But with winter approaching they don’t have much time left to get their supplies locked in. Some of the buyers have tried to play hardball with him – saying that they would just buy cheaper from someone else. But there isn’t much of “someone else” out their. Demand season is coming up and there’s not a lot of excess.
Additionally, people forget that most coal is sold under long-term contracts, not in the spot market. So the stock market got spooked about falling oil and gas prices and extrapolated that to coal – when in fact these short-term energy market gyrations have less impact on earnings than they do in other energy areas. Heck, lower fuel prices actually kind of help the coal companies in one regard since they are big fuel users for their equipment.
Coal got nutty a few months back and stock prices were way overdone to the upside as hot money chased the relatively small market cap of the whole sector. But after 50% to 60% declines across the board for the coal stocks over the last little bit? Getting very interesting I think.
Oil, coal, natural gas, alternative energy sources, E&P companies, drillers and service companies, energy trusts, MLPs…all have their own particular appeal in a portfolio. I cannot discuss specific companies here, but if you would like to know which stocks I like in which areas, drop me a note or give me a call.
I thought about finishing up this little blurb and sending it out earlier today, but it has been busy – for obvious reasons with the whole Lehman/Bank of America/Merrill Lynch/AIG/Washington Mutual/etc. etc. mess today. And as it turns out it was just as well, since the energy sector (using oil as a proxy) and the market in general have clearly been weak. Some will attribute the $4 drop in crude today to economic weakness and upcoming lower demand. I tend to believe that it is more a function of forced selling, an aversion to risk in the markets, and the old “sell what you can not what you want to” phenomenon. I don’t know exactly where oil bottoms, nor would I be likely to be correct in pronouncing an exact moment for the general market decline.
But I am intrigued enough by energy sector valuations and energy sector prospects to recommend “re-loading” positions starting right now.
As always, I hope that I’m right in the first minutes and days after such a call. But I probably won’t be. However for the weeks and months ahead … I have a good level of confidence in the ultimate success of the idea.
Source: Rob Fraim, Mid-Atlantic Securities, September 16, 2008.
Courtesy: Investment Postcards
Tags: Banks, Brazil, China, Commodities, Crude Oil, Dollar, Economy, energy, energy sector, energy stocks, Financials, Focus, Gold, India, Investment Postcards, jeffrey saut, Market Cap, Markets, Mexico, Mid-Atlantic, Natural Gas, Oil and Gas, Oil Prices, pickens, Rob Fraim, Russia, The Big Picture, Trading, US Dollar
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August 25, 2008 - Courtesy: Bespoke Investment Group - The MSCI World index, which measures global equity market performance, is now up just 68% (not total return) since its bottom on March 12, 2003. After analyzing the performance of various country indices since then, we found some interesting results.
Since the 3/12/03 global market bottom, Brazil, India and Mexico all have total returns of more than 400%, with Brazil leading the way at 427%. Germany has been the best performing Western European country with a total return of 187%. At the bottom of the barrel is Japan, with a gain of 68%, but unfortunately the US ranks second to last at 77%. So while much has been made of how well the US has held up during this downturn, it still lags behind pretty much everyone else when looking at the last bull and the current bear. The most surprising performance number comes from China. After its bubble and bust from 2005 to present, China’s performance is pretty much right inline with the US at 79%. With so much focus on China’s growth this decade, one would think its equity markets would be at the top of the performance ladder with other BRIC countries.
Tags: Brazil, BRICs, China, Euro, Focus, Germany, India, Japan, Markets, Mexico
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August 20, 2008 - Here’s what BCA Research says about China - Growth moderation in the Chinese economy will continue. However, unlike many previous Olympic-hosting countries, the end of the game-related construction will have little tangible impact.
While the growth moderation in China will persist, it will be gradual with limited downside. Olympics-related capital spending (although estimated at a record US$43 billion) is only a fraction of China’s total capital spending and a relatively small portion of its US$3.6 trillion economy. In addition, the Chinese authorities are being proactive and have already shifted their focus to protecting growth, even though signs of the slowdown are still very preliminary and headline inflation remains above their target. So far, domestic demand is holding up well: retail sales volumes continue to accelerate and the softening in food inflation over the past several months is helping to alleviate a meaningful drag for lower-income households. Although it is still too early to expect a rebound in China’s export sector (the weakest link in the economy), the slowdown may already be well advanced. Moreover, the Chinese government has started to increase its tax rebates to exporters of some low-value-added industries, which should help stabilize their overseas sales. Additional fiscal support is expected if excessive weakness in these sectors persists. Bottom line: We expect a further moderation in China’s economic growth but maintain a positive outlook. The two primary risks that we are monitoring are the ongoing shortage of electricity and the rebound in the U.S. dollar.
Tags: China, Dollar, Economy, Focus, inflation, Value
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Ann Davis has this report on an aspect of the selling in the crude market.
Christopher Peel, chief executive officer of London asset-management firm Blacksquare Capital LLP, which launched a new fund of commodities-focused hedge funds in June, says a big contributor to oil’s slide has been momentum trading by computer-driven commodity trading advisors.
Such traders move en masse in and out of commodity markets when prices hit certain thresholds. Sentiment on oil has turned bearish, and “the muscle at the moment is with the trend followers,” says Mr. Peel. Once such computer-driven traders all start to sell, that “by its nature, sucks in the discretionary managers” who also reach a point where they have to sell, if their portfolios have dropped so much that they need to cut their losses.
Another popular energy bet — on natural gas — has hobbled some hedge funds, Mr. Peel said. Several traders recently bet, incorrectly, that natural gas prices would increase, while crude oil would come down, since natural gas has grown far cheaper than oil on an energy-equivalent basis during crude oil’s big runup.
Instead, in July, the opposite happened: while both fuels fell, natural gas dropped 32% while oil fell just 11%, widening the spread between the two fuels rather than narrowing it. Hedge funds who had bought natural-gas futures as part of this bet may have had to unwind them by making offsetting trades to sell natural gas, accelerating the decline of the price of the fuel, he said.
Tags: Commodities, Crude Oil, energy, Focus, Markets, Natural Gas, Trading
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Despite the fact that you may not ever come close to catching up to Warren Buffett’s wealth does not mean you shouldn’t follow his investing style - which entails regularly purchasing or investing in excellent companies selling for less than they’re worth. Oddly, many investors mistakenly believe that the only hope for securing life-changing wealth is to get in early on “the next big thing.” Besides, how would one go about discovering this? It should come as no surprise that successful business-focused value-oriented investors seem to have historically had a lock on this outcome, often cornering the next big thing as a matter of practice, and not luck.
Nothing compares to the kinds of gains investors have enjoyed in “under-the-radar” stocks over the past decade. Disciplined, business-focused stock picking will get you far closer to your retirement goals than almost any other investment vehicle known to man.
With all the downside and volatility in markets both domestic and global, it may be time to allocate core assets to the “business-focused, value” column, given the substantially better margin of safety of buying great undervalued, but not so well known businesses with wonderful fundamentals.
One highly respected business-focused stockpicker in the industry with over 26 years under his belt, and the track record to go with it, is Larry Sarbit, of Sarbit Asset Management. We recently interviewed Mr. Sarbit, and here is the transcript in its entirety.
Larry Sarbit: “Business Owners Behave Differently”
Download a PDF of the Transcript - Click Here
(companies featured in this interview - ITRN, STMP, CLCT, CSTR)
GLA: What are your thoughts on the current state of the markets?
Larry Sarbit: I’m not much of a market commentator. I don’t think it’s anything I can do particularly well nor do I think anybody can do it particularly well. Predicting moves in market and prices on a short- to mid-term basis is a waste of time and potentially hazardous to your financial health. If you’re putting money down on predictions, I think you’re taking a heck of a chance. And that’s not what investing is all about. Investing, in our view, is about finding opportunities where there is a very high probability that something productive is going to occur. And that’s usually dealing with individual businesses. I think we’re in a recession; this is a pure wild guess but it could last longer than people think. We’ve got oil at or near record prices and the demand for it is huge. Everybody knows that the price of food is going up and we know that the price of transportation and heating, and so on, are going up as well. And so, we’ve got inflation and we’ve got potential economic slowdown. Whether all the bad news is out on these financials remains a big question mark. I don’t try to answer them because I think it’s very difficult to handle.
GLA: Larry you’ve been described as a value / focused investment manager. How would you describe yourself?
Larry Sarbit: I’m a business owner - that’s how I describe my investment approach which is defined by the questions, “How do successful business people act and behave?” and, “How did they achieve what they have achieved?” Those are the questions I want answered. “How did they create so much wealth?” “What are they doing and is there anything I can learn from it?”
So, how does this lead to the stock market? The stock market is an opportunity to pick and choose individual businesses that we think are “wonderful businesses,” and to look for those that have those characteristics and that we can buy at terrific prices. That is more closely related to how rational business people act and think. Rational business people who own substantial portions of a company or a whole company aren’t sitting around worrying about the stock market and its movements every day.
They don’t own a business for 6 months and then sell it when the stocks moved up 10%. They own businesses for years, for decades, for generations. Sometimes in a lot of cases they never sell the business at all. So that’s very different from the behavior in professionally managed money. The average mutual fund in Canada turns over its portfolio at least once a year.
Contrast that with business people who own their business for 25 years. How different is that? One of the things that I constructed is a little book that I’ve put together called “Simply Sarbit” and in it there’s a table which contrasts the typical mutual fund investor versus the successful business person. And I contrast them on business ideas. They aren’t just different, they’re opposites. Their behavior is completely different. Completely opposite.
They ask fundamentally different questions. Successful business people are always concerned about what can go wrong. “Where is the down side in an investment?”; “Where’s the down side in the investment in their own business?’ In buying somebody else’s business, where are the problems? Speculators are focused on the upside. They ask a fundamentally different question. They are focusing on the greed factor, which is, “How much am I going to make?”
The successful business owner is asking the question, “How much am I going to lose?” And they are fundamentally different. And from there, they just go of in completely different directions. Short term, long term.
To me it’s just something that I started working on as I was formulating my investment strategy. I realized how different people are in this business. The short-term view of the world, owning a stock for 3 weeks or 3 months versus, 30 years is, is about as fundamentally different as you can get. Successful business people own one business, the typical fund or professionally managed portfolio has at least 100 stocks.
GLA: What is it that gets you excited about what you do and when you’re sitting around with friends, what do you talk to them about when it comes to talking about what you do?
Larry Sarbit: Well, I usually end up talking about one company or another; why I think it’s a marvelous business; why it’s an exciting holding and why I think that its future is very bright, which is something that we need to happen. We look for what appear to be high probability events and what I mean is, there is a high probability that things are going to work out. We are not interested in 75% probability events.
We are looking for businesses, where we look at them and it just becomes obvious and apparent that this business is going to succeed, that it has all the characteristics of a terrific business and that we are buying it at a price where we are going to get what is called a double dip return.
GLA: Some of your holdings that you invested in during the last couple of years have come in very nicely for you and your unit-holders Can you comment on some of those?
Larry Sarbit: Some of them performed better than we would have liked. Typically we like them to stay lower for longer so that we can have more time to buy more… we don’t like paying more for a business than we have to, and the stock market is the only place I know where people celebrate prices rising. When you go to the grocery store, you’re not celebrating because the price of a can of tuna is going up 50 cents a can; nobody does that; I don’t know what you’re paying there for gas, but we’re paying almost a dollar forty a litre. I don’t see anybody, no rational consumer out there celebrating when they pull up to the pump and it’s now $1.35 or a $1.40. You’ve got to be a complete idiot to do that. And yet in the stock market, people celebrate paying more… it’s unbelievable.
For me, the flip side of things is me having an opportunity to buy something I like at a ridiculously cheap price, when people are panicking and upset or frightened. The other side of insanity is the way investors sell on the way down, as the price is getting lower, when they should in fact be buying…and they buy as the price goes up when they should be contemplating holding or selling.
In every other part of life they get it right, and in this part of life they’ve got it backwards. I call it the “frontal lobotomy” way of thinking. People buying whole businesses understand the concept about paying bargain price. They get it.
It’s an incredible mix-up or dichotomy, and still I don’t understand it, and I’ve read a lot of books on the market and psychology. I guess it’s one of those things where there are a lot of reasons for it. Professionals sometimes get forced to do things that they don’t want to. In the wonderful world of professional money management, for example, you see a lot of funds that are 100% invested because that’s what they’re supposed to do, to be fully invested. It just doesn’t make sense.
GLA: What kind of cash position are you sitting on right now in your funds?
Larry Sarbit: We’re sitting on about a 35% and we’re buying things carefully, slowly. When we see something we like we get busy and start buying if we’ve got cash. People often see staying in cash in the rising market is about the worst thing that you can have. On the other hand, I’ve often seen markets do things that can turn very ugly. That’s a reality that we face as investors. Paying over 20 times earnings in the S&P 500 is not a price that I think is a good idea to pay. I don’t ever want to wait 20 years worth of current earnings to get my investment back. Rational business people don’t pay those kinds of prices, for a whole business. You’ll see them paying 2 times, 3 times because they want to get their money back in a year or two.
In private transactions the price paid is much closer to getting your money back in, in a year or two or three. They’re not willing to wait 5 or 10 years, they just don’t do it, and never mind 20 times earnings. If you’re a business owner and you’re offered 20 times earnings, you ought to laugh out loud and say, “Where is the guy? Let’s get the lawyer, let’s get the papers signed, I’ll sell my business for 20 times earnings in a heartbeat. And yet with stocks, the same people will go out and buy shares and pay 20 or 30 times the businesses earnings. I mean, what is wrong with them?
A guy goes into a pizzeria and he orders pizza and the baker says ‘How many slices would you like me to cut this into? 4 or 8?’ and the customer says ‘Oh you better cut it into 4 slices, there’s no way I can eat 8 slices of pizza’ That’s the way people think in the stock market?
GLA: Larry, once you’ve decided on a business that meets your criteria, how do you make your decision to buy?
Larry Sarbit: Rational business people don’t just buy a business because it’s cheap, without looking at the quality of the business and they don’t just buy a business because it’s got wonderful characteristics without looking at the price. A rational business person buys with both of these ideas in mind and this ridiculous idea of whether you’re a value investor or a growth investor is a silly separation. Only stock market thinkers end up thinking this way.
Rational business people don’t think like that. If you’re gonna buy an entire business and own this business for the next 20 years, you look at what the business is; what the problems are in the business; whether there are barriers to entry; and whether it costs you a lot to be in that business longer term.
You’d spend more time looking at that, but you’d also not want to overpay for it. So business people have the right approach which is “I want to buy this business and I wanna pay a reasonable or a cheap price for it.” They don’t buy unless they have both. They don’t buy a piece-of-junk business because it’s trading at half of its book value or something like that. On the other side, you can look at the business and say it’s a marvelous business but it’s trading at 30 or 40 times earnings.
How in hell am I going to make money if I have to wait 40 years of current earnings? And, what’s worse than that is the earnings must grow at 20 or 30 percent per year, otherwise you’re in for a negative surprise somewhere down the road and that’s the problem. The optimist’s price leaves absolutely no room for mistakes.
You reduce your risk by buying a great business, at a cheap price. There are a lot of businesses out there that can be had cheaply, but many of them turn out to not be cheap when you look at what they earn and what their requirements are. They’re not really good businesses at all. So, that’s why you must have both, and I didn’t invent this.
And that’s how we behave. Do we like this business? Is it a great business? Does it have operations that create real wealth? Do they have barriers to entry? Is there a sustainable competitive advantage in the business? What does it require in ongoing investment costs? We’re looking for companies that require very little in the way of capital today and on an on-going basis. They have high margins that are sustainable because they have barriers to entry. And we’re buying them at prices where we believe we’re paying 50, 60, 70 cents on the dollar.
GLA: Now, conversely, how do you decide when to sell?
Larry Sarbit: Well, it’s just the flip side. A business may still be great, but the price is now more than recognizing the quality and the future potential of the business. At these prices there’s no room for error. If things slip or even come in on target with their quarterly earnings or their yearly earnings, it’s already priced for perfection. And so, it’s got to do something even more spectacular in order to drive the price even higher. That gets harder and harder as the price gets higher and higher. We like to take our money off the table when the business price gets to or somewhat exceeds we think the value of that business is.
This, I can assure you, is not a science. I’ve sold stocks many times after making very nice returns and watched the stocks double after I sold it. So, that’s painful, but on the other hand if it doubles, it’s a price that makes no sense whatsoever relative to the underlying intrinsic value of the business. You’re in a very dangerous place if you still own that stock after we sold it and it doubles. A very dangerous place. We also sell when there’s a negative fundamental change in the business that will lead to a slow-down, or, it is no longer the business that we thought it was gong to be.
GLA: You recently had some nice gains in Coinstar (CSTR) and a few other major holdings?
Larry Sarbit: Coinstar is a business that has all the characteristics that we are looking for. High barriers to entry, the coin-counting machines that they are manufacturing and installing; they are way out in front in the business. They really don’t have much of competition in North America. They have lost one customer that we are aware of in, in their 15 of 20 year history. It was a bank and they tried to do it themselves and they bailed out. So, the big thing with the entry barrier is that it requires a lot of capital because to place one of these machines costs about $15,000 each.
So there’s a huge upfront expenditure for the machines, but each one generates $17,000 revenue a year on average. You don’t have to wait too long to get your money back. Recently, Wal-Mart announced they’re going to put them into all of their stores. They have about 13,500 machines in WalMart if I’ve got the number right, and at least another two or three large sign-ups. We are talking about huge growth in this business and nobody can get into it. They charge 8.90% to count your change. What a business.
GLA: It’s a terrific business, because you can use the machines to get rid of coins. I used one of these machines and that’s when I realized that I was being fleeced.
Larry Sarbit: Yeah, all that loose change is a pain in the neck and they have a solution for it. Coinstar is a big business that’s growing, and it’s going to grow very rapidly during the next 2-5 years. We bought this thing in the low 30’s and it’s around $37. We’re happy…we think it’s a bargain and I’m not buying any more at these levels, but I’m very happy to own it and that single return of the long-term growth of this business. The other business they have is a 51% stake of a company called ‘Red Box’ which is DVD kiosks. Those are going into Wal-Mart; they’ve got about 8000 machines in total in the U.S already. They’re going into groceries stores. McDonalds is putting them into the restaurants, they’re going into drugs stores. It’s a cheap, alternative to Blockbuster or Rogers video and plunking down 4 or 5 bucks for a rental. Red Box charges a buck a night and they have 150 of the newest movies available and they have the people on the ground to support it. It’s very important to have the people in place to go around and collect the DVD’s and put them back in the right order, collect the money, and fix the machines when they break down.
GLA: Larry, how many names (positions) do you have in your fund?
Larry Sarbit: 13 names. 13 names that account for roughly 60, 65%. Actually, invested capital has moved up a bit because we’ve been buying a couple of names (stocks) that I’m not going to talk about today. It’s a very eclectic group of companies but they all have the characteristics that I talked about. They all have a barrier to entry, they all require very little capital, and they all generate a ton of free cash flow and very high returns on invested capital and all have tremendous growth in front of them.
GLA: How do you feel about Collector’s Universe (CLCT), which you’ve owned for some time?
Larry Sarbit: I’ve been in Collector’s Universe for a while. They’re going through growing pains in the diamonds and the colored gemstones evaluation business. What they do is they evaluate and authenticate precious objects like stamps, coins, baseball cards and autographs, and now they’re in the diamond business, precious diamonds and gemstones. They’re still losing money in that business, but they’re building a formidable barrier to entry into that business and they’re forming links with retailers across the United States who will use their authentication as a selling tool. We talk to them every quarter and find out when we get a break-even in the diamond business. The potential of the diamond and colored gemstone business is multiples of all the other businesses that they have, so they’re in a painful growing stage. We’re willing to wait, we’re patient people. In the meantime, we’re getting a 10% dividend yield on our stock. Unless I’m missing something, I think this is a business that will eventually, over the next 3 to 4 years, generate a huge amount of free cash flow in this business and I don’t think it will be a $10 stock 3 years from now. They dominate this business; they really are the leaders in the industry of evaluation. If you’re buying your wife a $10,000 diamond, is it worth a couple hundred of bucks to know that it is what you think its worth?
If I’m the owner I going to want to have it guaranteed and authenticated and warranteed so if it turns out that they screwed up on the evaluation they have to make good on it. They’ve screwed up on clients and they’ve come forward in the last quarter and they’ve paid the customer because they got the evaluation wrong.
GLA: You’ve got another very interesting company named Ituran (ITRN). What is it?
Larry Sarbit: Yeah Ituran; its a little Israeli company; they just reported their earnings today and things are ready to take off. They’ve got about 450,000 cars that have their location sensing devices on board and these are the best in the business and this is the best technology in their business that we’re aware of. There are other companies that have location devices that are installed on cars but [with others] you’re only going to find out when you go out your car is gone and then you have to phone them to try and track the thing down. With Ituran, the minute somebody tries to break into your car they’re notified. And 80 to 85% of the time they get your car back within 20 minutes.
This was a technology that they bought from the Israeli Air Force that they had to keep track of their jet fighters. They’re now in 450,000 cars right and the service costs around $12 a month. They’re dominant in Israel as you might expect, but they are becoming dominant in Brazil and Argentina. The reason they are going there is because a lot of new wealth is being created there and there’s also a great deal of theft in those countries. And they’re signing up new customers faster than originally projected.
GLA: I imagine that’s going to be a growth area. The emerging markets, automotive markets are going to be…
Larry Sarbit: It’s massive. The next place is to go into Eastern Europe. What do you think the potential of Russia and Ukraine and Poland and with guys driving around with $100,000 cars where they get stolen all the time? So they’ve set their sights on these countries and, and the turnover rate is pretty low in this business. Like once, if you’re a rich guy, and you’ve got this system in your car, you forget about it, right? You just get billed, 12 bucks a month on your credit card and that’s the end of it. You don’t even have to think about it until your car gets stolen and they get it back for you.
GLA: How’s Ituran’s stock doing?
Larry Sarbit: I think it’s cheap. I still think you can make a heap of money in it. If you’re comfortable with an Israeli company. Their earnings were excellent. They’ve had an increase of 20,000 subscribers in the quarter. Start doing the math and you realize how little it costs to put this technology in. Now they’re working with auto makers to try to get their units installed at the point of manufacture. To have them installed automatically. Also, they’re sitting on a ton of cash. They have $96.8-million in cash. Total assets are 211 million.
They sold a company and that’s why I think the cash is up. They sold a company called Telematics. It’s no longer included in their revenue base. So they got $4.38 per share in cash and the stock’s trading at $12…Ituran has no debt. It’s a cash machine. Once you get this thing in the car, it just spills out cash and they probably got pricing built into this. In other words, if they increase the price of monitoring by a buck a year, do you think a guy who can afford a Mercedes in Argentina is going to give a damn?
GLA: When you investigate your investee companies do you go out and see them?
Larry Sarbit: As for the American companies I usually go and see them personally. It’s really easy to get down to the US and visit with management at the companies we have invested in or are looking at.
Another company we like is Stamps.com (STMP). What they do is sell postage online. It took them two and a half years of testing with the USPS in order to get them to okay the product and the service. There are only three licensees in the US, and there have been no applications in 7 years by any other companies to do this. What’s unique about Stamps.com is they do it online, and customers can process and create postage on their PC.
They’ve got almost $5 per share in cash, and they bought 12% of the stock last year and no debt, and there are no capital expenditures; I mean it’s a beautiful business. And do you think there’ll be around in 5 years? That’s when you look and you ask, “Is it a high probability event?” To me this business has the potential of being huge!
They’ve got South West Airlines as a client now, so how long will it be before they start capturing larger and larger companies? It’s a versatile tool for companies.
I don’t think it’s gonna be a long, long time. I think it’s a terrific business, and I think the management is terrific. It’s a huge holding for us. We’ve looked at this thing inside and out. Unless the technology turns out to not work, and I told you they spent 2½ years of working with the United States Postal Service.
GLA: Larry how do you uncover these eclectic not-so-well-known but great businesses?
Larry Sarbit: Well, first of all you have friends on the grounds that are helping you find these ideas. You talk to people who look for the same kind of thing that you’re looking for and then on top of that you run screens where you look for companies that have high margins, low capital expenditures over the last five years and have high returns on invested capital.
GLA: So that grabs your curiosity?
Larry Sarbit: Yeah and if it is a business that I’m comfortable with or I can live with: does it have a predictable future?; is the business going to go through massive changes over the next two years?; and does it have a sustainable competitive advantage?”
GLA: Your rational approach to what you do, I think it’s something that’s in short supply.
Larry Sarbit: Well, I hope so.
GLA: It’s your edge. You can talk openly about it till you’re blue in the face and most people will still not be able to grasp what’s required…
Larry Sarbit: Well, it’s called work. And a lot of people don’t want to do the work. I can’t help those people if they’re not comfortable with what we’re doing. And, what we’re looking for are people who are comfortable with our investment approach and are saying,”How do you find a good business to invest in?” That’s what we do. We’re this little niche of the investment business where we think we might be able to do a little better than the average guy, and go out and find these companies for them. And that’s what they pay us for.
GLA: Well Larry, it’s been a distinct pleasure talking to you. Thank you.
Tags: Business focused, CLCT, Coinstar, Collector's Universe, CSTR, Focus, ITRN, Ituran, Larry Sarbit, sarbit asset management, Stamps.com, STMP, Value
Posted in Markets, Strategy, US Stocks | 2 Comments »
