Value Building in this Economy in These Markets

Bernanke Recovery, Updated Trickle Down Economics - 7 / 29 / 09

2009-07-28T05:27:00.001-07:00

The real question is why the markets are moving up. And the answers are telling. It's my view that cheap capital does not create opportunities for businesses to borrow or obtain growth financing, the type of 9,10, or 11% money that allows them to compete in new markets, or compete better in old markets. Standard loans of that nature are offered by Banks to their most stable, near risk free customers. Asset backed 9% money is excellent business for the top tier banks. These banks, who have been made custodians of our economy by the US government do not know how to lend or take risks on businesses the way they used to.

Financial institutions newly fattened on tax payer funds have no intention of using government provided funds to extend new loans to their existing or new customers. But these are the loans traditionally needed to jump start the economy. Instead they loan money to private equity managers and private lenders who have huge amounts of cash on the books, and permit the banks to hypothecate the risk to these private funds that seek to earn 20% annually. These private funds can't afford to lend at a few percent above what they are borrowing at. They charge 14% interest plus 20% of the loans value in equity. That's what a growth loan looks like these days in a best case scenario. What companies can afford to pay that?

Here's an anecdotal conversation I have recently had with a Tier 1 bank middle market lending officer (who happens to be a close friend of mine) that explains how the Bernanke / Geithner stimulus package really works.

Me - "We just acquired a company that needs some growth capital. It's a 15 year old business with revenues of $22.0 million, and $4.5 million in EBITDA. Currently it has a $5.0 million note on the books from a tier 2 bank. They have assets recently valued at $30.0 million. Shareholder equity is greater than $9.0 million. They would like to borrow an additional 3 million and refinance the $5.0 million into a single $8.0 million note."

Banker - "Well, I don't think its for us. Too risky. I but I could introduce you to 3 private lenders who would definitely give you a proposal."

Me - "How do you know these lenders?"

Banker - "We lent the money to them."

Now I understand that this conversation was held with a single bank, but I have received a similar response from at least one other top tier bank (Wells Fargo) and 2 mid tier banks. Banks don't want to take lending risk. They want to make easy money.

One way they do this is to acquire or build a good trading floor. This trading floor uses a portion of the capital on the banks books to trade / invest in equity, commodities, and secondary debt to generate profits for the shareholders. In good years they pull in 30% on the money - that's a great business. Margins on this type of business are terrific, even after paying high salaries. In a bad year the trading floor covers its costs. Rarely do they lose money. They have access to prime brokerage products. Prime Brokerage products rarely lose value. So why would banks do anything more than proprietary investments and lending to other lenders?

Given this model, for the Bernanke / Geithner stimulous package to work banks need to have enough cheap capital that they are inclined to trade a portion of it and in so doing put money into the capital markets creating buying and upside. This is what has caused the equity markets to rise, not value building in the economy. The real hope here is that the equity markets rise enough and remain at new highs long enough to entice IPO and secondary investors to return to the equity markets. Equity investments are the only reasonable money available to growing companies. And I believe that Bernanke and Geithner know this to be the case. Which is why the US government makes whatever announcements it can make to sustain or improve the equity market's performance. And it is also why the stimulus package will take a very long time to work.

Build Value Every Day

Bradford van Siclen

Perspective 2009 - 7 /26 / 2009

2009-07-27T10:42:00.000-07:00

Its an interesting time for market pundits. On the one hand we are in the midst of a terrific market rally. But on the other hand there is really not much to base this rally on. It is the opinion of at least one pundit that the low of this market in March represented the gamblers / speculators worst case US economy valuation, and that recent highs represent these same gamblers / speculators view of a perfect year end US economy value. What we do not have is the rush of value based institutions and I wonder, do any still exist?

More troubling, A few months back we witnessed consistent "surprise" earnings to the upside, and a resulting market surge. Talking heads stated "The economy is showing signs of improvement", "Green shoots" and other knee jerk responses. But the truth is a bit more mundane.

In March and April the earnings surprises were based upon 2 key items:

1) the standard inability for industry and market analysts to accurately predict anything at all and instead heading their statements with negativity - "It's better to miss low than miss high". This concession to their fallibility combines with their refusal to recognize that CFO's of Fortune 500's are far superior to them in managing their businesses for the benefit of market valuation, and

2) the Fed had given all banks the opportunity to operate with virtually no cost of capital. Meanwhile the failed financial sector heavily infused with low cost government capital declined to lend to any new emerging businesses, or even new divisions of established businesses in favor of refinancings to businesses which did not need the assistance and the calling of loans from companies who did. That equates to some profitability gains for established companies as interest payment go down. But no growth capital for companies or divisions that need it - more on this later.

The Fortune 500 responded to this environment through the only methods available, by cutting costs (firing hoards of folks and eliminating expansion investing) then delaying the payment of current costs (increasing payables for example) and the results nearly across the board were lower revenues but higher earnings. Of course the esteemed analysts somehow did not anticipate the bottom line results. Thus the "surprise".

However we recognized this well ahead of the pack, and began looking at the companies who use these practices as a daily business method and were thus among the first to "surprise" to the upside. Our bellwether value companies - Dell, GE - both purged themselves of costs and balance sheet losses during the market's slide, leaving themselves with only one way to go, up, based upon fully disclosed and real value. I expect many of you disagree with my position on Dell and GE citing the continued negative press that seems to circle these two giants. But amid all the negativity take a look at their trend lines since March. Why does that trend line exist? Its called value. Sure there are companies whose shares have fared better on a percentage basis. But DELL and GE are our true value players. Limited volatility, tons of liquidity, tons of cashflow and assets, and excellent financial officers and management. They are big and mature.

I'll add one opinion on GE, I do not believe that the dreaded real estate investment write down that prevents its shares from breaking out will have impact on this company's share value at its current position. And once GE has inched its way above $15.00 there will be a rebound in another GE division which will offset the effects of a writedown of real estate assets. And then while no one is looking, GE will readjust its real estate valuation to proper (lower) levels and no one but the best analysts will catch it. More importantly, no one will care.

That's how its done in the big leagues value investors. And to me it is the most important reason to be a value investor. The mature value building companies can really do have magic bullets, cash, diversification of revenues, assets, and very agile financial departments who understand how to protect the value of their equity.

Which leads us to the recent earnings reports. More "better than expected earnings". It's my belief that any Fortune 500's (save those operated by risk loving CEO's) has at least 18 months worth of stored profits or losses "hidden" in their balance sheets that can be deployed at any time to react in the best proper way to the equity markets. [PLEASE RE READ THAT LAST SENTENCE] If the S & P had been down for the recent 4 weeks instead of up, these same companies would be producing earnings that would be at estimates or occasionally below estimates citing one time charges or a lack luster quarter. Think of it this way, anyone surprise to the downside over the last 5 months - Nope. Shocking given the economic environment. But not shocking given the equity market's run.

Build Value Every Day

Bradford van Siclen

There and Back Again - 7 / 15 / 2009

2009-07-15T07:29:00.000-07:00

Times like these give a new definition to the term trading range. Here, the past 2 weeks Dow Jones Index closing prices:

7/1 8542
7/2 8280
7/6 8324
7/7 8163
7/8 8178
7/9 8183
7/10 8146
7/13 8331
7/14 8349
7/15 8519 -> at 10:30am

That is a 500 point or 5% swing over 2 weeks. The Financial media loves to scream market up 100+, market down 100+. But this simple table shows the real story, traders control this market and game other traders up and down based upon questionable government financial statistics and surprise earnings or revenues from Fortune 100's.

Meanwhile instead of investigating the reasons why unemployment, housing starts, bank lending seems to improve month by month, while the previous month's numbers are revised down to worse than previously reported virtually every time, CNBC has decided to focus on the new genius at Goldman Sachs (Blankfien), the marijuana and porn industries. One day we may see Lloyd Blankfien and Jamie Dimon speaking at the CNBC Porn / Marijuana conference.

Seriously, these matters leave me wondering whether the investment markets will return. And contemplating the recent Dow Jones price action, my thought is, it has returned. Investors are the support in the market, traders are the noise. Shut out the noise and focus on the 6 month trend of your favorite issues.

Select them because they are trading at real, conservative, multiples to earnings or enterprise value, and also because they have enough cash (or short term securities) to fake their earnings if they need to. Yes I meant to say that. Don't kid yourself. The biggest, best companies manage their earnings, storing them on the balance sheets when the market dynamics won't give their stock price a decent multiple for their full value, and pulling them off the balance sheet and flowing them through the income statement when times are tough.

Earnings, even for the biggest companies are lumpy. Somehow, unless there is a crisis or a one time event, they are not lumpy. This makes virtually no sense unless the company is a utility. But still GE, DELL, AXP, MSFT, XON, they all have consistent, managed, growth or earnings.

Occasionally I come across a writer from a major financial paper, in this case the Wall Street Journal, who some how sneaks through the Editor in Chief's cheer leading requirements and puts out out a quality piece of analysis. Rather than summarize it, I attach it below in full text (as you may imagine, I agree with him entirely):

From the WALL STREET JOURNAL ONLINE

The Bernanke Market

We won't get real growth until Congress and Treasury get policy right.

By ANDY KESSLER

I remember once buying the stock of a small company and I couldn't believe my luck. Every time my fund bought more shares the stock would go up. So we bought even more and the stock kept climbing. When we finally built our full position and stopped buying the stock started dropping, ending up at a price below where we started buying it. We were the market.

Just about every policy move to right the U.S. economy after the subprime sinking of the banking system has been a bust. We saved Bear Stearns. We let Lehman Brothers go. We forced Merrill Lynch, Wachovia and Washington Mutual into the hands of others. We took control of Fannie and Freddie and AIG and even own a few car companies, pumping them with high-test transfusions. None of this really helped.
[Commentary]

We have a zero interest-rate policy. We guaranteed bank debt. We set up the Troubled Asset Relief Program (TARP) to buy toxic mortgage assets off bank balance sheets. But when banks refused to sell at fire sale prices, we just gave them the money instead. Dumb move. So we set up the Public-Private Investment Program to get private investors to buy these same toxic assets with government leverage, and still there are few sellers. Meanwhile, the $1 trillion federal deficit is crowding out private investment and the porky $787 billion stimulus hasn't translated into growth.

At the end of the day, only one thing has worked -- flooding the market with dollars. By buying U.S. Treasuries and mortgages to increase the monetary base by $1 trillion, Fed Chairman Ben Bernanke didn't put money directly into the stock market but he didn't have to. With nowhere else to go, except maybe commodities, inflows into the stock market have been on a tear. Stock and bond funds saw net inflows of close to $150 billion since January. The dollars he cranked out didn't go into the hard economy, but instead into tradable assets. In other words, Ben Bernanke has been the market.

The good news is that Mr. Bernanke got the major banks, except for Citigroup, recapitalized and with public money. June retail sales rose 0.6%. Housing starts jumped 17% month to month in May and will likely be flat for June. Second quarter GDP may be slightly up. And he was successful in spreading a "green shoots" psychology throughout the media. But the real question is, now what? Government interventions are only meant to light a fire under the real economy and unleash what John Maynard Keynes called our "animal spirits." But government dollars can't sustain growth.

Like it or not, the stock market is bigger than the Federal Reserve and the U.S. Treasury. The stock market anticipates only future profits and prosperity, not government-funded starter fluid. You can only fool it for so long. Unless there are real corporate profits from sustainable economic growth, the stock market is not going to play along. It's the ultimate Enforcer.

In mid-May, Mr. Bernanke's outlook seemed to change. Maybe he didn't approve of the sharp housing rebound -- like we need more houses! Maybe he saw inflation in commodity prices -- oil popping to $72 from $35. Or, more likely, he finally realized that he was the market and took his foot off the money accelerator, as evidenced in the contracting monetary base (see nearby chart). Sure enough, things rolled over -- the market dropped 7.5% from its peak, oil prices dropped almost 17%, and even gold has lost some of its luster. But in July, the Fed started buying again and the market rallied.

Can the U.S. economy stand on its own two feet without Mr. Bernanke's magic dollar dust? Eventually, but apparently not yet. Unemployment stubbornly hit 9.5% in June, according to the Bureau of Labor Statistics. Housing prices are still dropping, albeit at a slower pace, and foreclosures are still rampant.

But I think what really bothers the market is that the structural problems that got us into trouble in the first place still exist. We took the easy way out and, with the help of Treasury Secretary Tim Geithner's loose "stress tests," swept banking problems under the carpet. We waved off mark-to-market accounting and juiced bank stock prices to help them recapitalize, but all those toxic mortgage assets on bank balance sheets are still there as anchors on lending. All the pump priming and stock market flows didn't get rid of them.

Hats off to Mr. Bernanke for getting the worst behind us. He'll be pressured politically to keep pumping out dollars, but he should resist the urge. The stock market will ignore his dollars if it doesn't believe they'll turn into real profits. Green jobs and government health-care clerks do not make a productive, sustainable economy. That can only come from innovative companies with access to growth capital. The stock market won't turn bullish until it sees that type of economy.

Again, when it's clear that you are the market you have to stop buying and begin tackling the hard stuff. By not restructuring banks, by not getting bad loans off bank balance sheets, by not standing up to the massive increases in government debt crowding out private capital, the Fed and Treasury are holding back real economic growth. [END]

Thanks Mr, Kessler, real investors applaud you.

Build Value Every Day

Bradford van Siclen

When Will We Begin To Improve? 7 / 10 / 2009

2009-07-10T09:51:00.000-07:00

The Stock Markets - what's up there? Frankly nothing. The government's bail out program of banks has not restored confidence. It has merely created a back stop. Value investors then grabbed onto the recent bottom created by the bail out and propelled by the "green shoots" commentary from Bernanke. And the market moved from its march lows of 6500 to June highs of 8800.

But I think he made a classic mistake, and spoke optimistically, not factually. Facts are valuable to investors. Optimism is valuable to speculators. The program he engineered with the Treasury has done only one thing - back stopped a financial markets slide into 1996 levels (5000).

This economy is still in clean up mode - this is anything but a recovery mode. And the equity markets are telling us precisely that. These markets are jumpy but will not advance until they can comfortably project growth.

The drag is big, its the biggest anchor the financial world has ever seen. Its a combination of a surplus of the asset that America once coveted (real estate)and a surplus in the basis of its value (US Dollars), topped off with more leverage than even PIMCO cares to guess at.

On that subject, ask yourself why PIMCO is making positive statements about the economy and the performance of high grade debt instruments every day? Because if they step out of line, the debt market and their portfolio will tank. They are compromised and begging for a recovery that can support interest payments. You think California is in bad shape now? In technical if not actual default? Who do you think holds the biggest slug of California Debt? (PIMCO). What conversations do you think they are having with Geithner?

Ask yourself, why is it that employment and consumer price indexes meet or beat (positively) expectations every month only to be revised negatively the following month..Because if speculators and investors both knew the truth - that the economy is still in decline - the capital markets would slide back to the March lows very very quickly.

I agree that the problem created was so large that only the government could have stopped the process of a reset in values that may have wiped the last 12 years of growth and value off the world's balance sheets. I agree that this government was heroic in its efforts to stop or stall this decline. But their job is not done by a long shot. The same characters who were in charge of this fiasco are still, for the most part, in charge. And they are now afraid to make further mistakes, afraid to take any risk because the government is watching them very carefully. All of a sudden their business models which propelled their stock prices to 2006 - 2007 highs are not functional in a regulatory enviornment with real oversight.

Our economic system depends on the ability of our best (in general) and brightest (in general) entrepreneurs and business men getting together and compelling lenders to give them a chance to develop their business.

Now, unfortunately these methods have been forgotten. The people who were competent in lending to growing businesses have been removed, down sized. Middle Market banks and local business lenders are still reducing their loans outstanding to businesses and the loans they are extending are refinancings of performing loans. Worse, the equity markets are languishing. So equity investors are very cautious about putting money into growing companies. In the past, tough lending markets led to accelerating private equity markets as investors searched for a return. Those days will return, but given the current economic enviornment, companies need to be cleaned up first.

They still have a long way to go. At this rate, November seems a likely economic turn around estimate -

Build Value Every Day

Brad van Siclen

7 / 1 / 2009

2009-07-01T06:07:00.000-07:00

No changes in this market yet. The Dow Jones is still in the the grips of wealthy hedge fund managers who, lacking any real desire to evaluate discrete issues or sectors they view as momentum plays, are now satisfied moving large sums back and forth along the Dow Jones Index. Everyday these professionals show up and say "You have to be in this market and trade it.", referring to the myriad equity index trading instruments. They don't know when a turn up or down is coming, and so they are left protecting principal and speculating on daily moves. Clearly lacking in this market is position trading and investing.

One subject I happen to watch closely, but avoid spending too much time on is Gold. To me, gold is simply a hedge against loss of value in your currency of choice. Do you think the government is printing too much money? Do you think that the money supply is increasing? Do you think that interest rates are too low? Any one of these is a reason to own gold. But own it, do not trade it. Gold seems to be second to oil, the most manipulated commodity, in volatility on a week to week basis.

Lately the trading of this commodity is giving me great concern. Gold's action is a great indicator of future economic condition. And its action suggests great uncertainty in our economic near future with a very strong negative long term bias.

Beginning with a look at the 5 year gold chart an amateur can see we are still in the first leg of a Bull market in gold. That's bad for the economy. It says that investment professionals don't trust the future of the world and US economy to create value. As a market analyst with an investment banking back ground I learned early on that the only thing protecting an equity issue in the public market is its underlying value by fundamental standards. After the honeymoon and the speculation surge of an IPO, unless the company can produce stable earnings results, the value must ultimately go down. Gold is like the post IPO perspective on the world and US economy. Except that it rises inversely to prosperity. It speaks for itself in its value against the US dollar / US economy - here's a link to the 10 year chart against the dollar. If you are looking for expert perspective on the US economy, click on it or copy it into your browser window.

http://goldprice.org/charts/history/gold_10_year_o_usd.png

Financial writers have it easy. We have 360 days a year and myriad statistics to include or exclude in making our ultimate argument. I could very easily argue that the rise in gold is due to a dynamic industrial world that, driven by greater numbers of participants, primarily China and India, a gold shortage exists that production has yet to catch up with. And the supply and demand imbalance has created Gold's 10 year climb.

But that's not how I see it. What I see is the result of the US economy growing by virtue of financial leverage and cost cutting measures that have created little additional value since 2005 but at the same time created huge amounts of leverage.
Industrial production, which creates real value, continues to be imported by the US in exchange for US currency. US currency value continues to erode because its value is based upon the US economy's overall ability to repay the government's debt. That amount owed is offset by the US government's ability to repay loans through intl. treasury auctions that raise money to repay old loans and interest owed. Each time this occurs, money being borrowed to repay borrowed loans in conjunction with an economy that is creating less value during that time period the value of the dollar is dilluted and the US economy takes on more real leverage.

I have read that the value of an ounce of gold will eventually cross the value of the Dow Jones Index. I have heard ranges between 2500 and 6500. Either way its Armageddon if it occurs, and I for one do not agree that it will ever happen. My optimistic view is that ultimately the dollar will weaken to the point that manufacturing and industrial production increase in the US so value can be created which suggests more than a recession recovery. That will be a valuation overhaul and ultimately the restructuring of the US economy we desperately need.

Build Value Every Day

Brad van Siclen

Bernanke Under Attack - 6 / 25 / 2009

2009-06-25T08:18:00.000-07:00

Finally it would appear that Congress is beginning to wake up. Is this because its constituents, the American People, are finally catching up with the detail of the Fed/Treasury/Executive Branch's gross over stepping of financial powers? Have the American people finally realized that we have simply repeated the same mistakes of the past that brought us to this financial precipice? This government, in combination with investment and commercial banks that brought the American Real Estate, Industrial, and Financial systems to the brink of destruction, has now used leverage yet again to solve ALL problems.

Mr. Benanke is a bunch smarter than me, and he certainly speaks more clearly than Greenspan and, pleasantly is not at all sneaky like Greenspan was. So why would he be knowingly adding leverage in historic proportions to the largest pile of leverage ever created? The simple answer is that the problem is really so big that only the world's faith in US government could keep the US and therefor the world's economies from imploding (and entering a dark age of finance). Perhaps that is a bit dramatic. But this is the argument the US government would have us all believe.

But my fear is that there are darker forces at work here. CEOs of the world's financial corporations that are not only smart like Bernanke, but are exceedingly more street smart. You don't rise to the top of these institutions without being very smart, very expert, and very good at understanding and using pressure points on your employees, bosses, and regulators. And in the case of our recent financial crisis, these players who gamed the system with leverage to create fat returns for themselves, were able to compel Benanke and earlier on Paulson to save their firms..all of them but for a few sacrificial lambs - Lehman and Bear Sterns

Unfortunately for these CEOs, Bernanke is no dummy either. He has quickly caught up and has begun revealing the reality of the past bail out events. And what do the Financial CEO's do when they fear more dark secrets will be disclosed to the public at large? They do what they do best and use pressure points to redirect Bernanke's over all efforts. Somehow, miraculously, right at the moment Bernanke is requesting that Bail Out money not be returned by banks yet, his entire leverage package which has saved all of their jobs, and most of the banks they ran into the ground only 6 months ago - the CEO's are no questioning the merits of their career saving bail out packages.

Queue the anti- Bernanke debate. Drag him out in front of the congressional panel and begin knocking holes in the processes he funded. Remember though, he did not create these payment / bailout solutions - the Treasury did. The Fed's only job is to use economic data to determine the prime interest rate. The Fed can then use its balance sheet to prepare for the needed liquidity or contraction of the money supply as may be required by the regional Fed banks to support the financial markets requirements that a change in the prime interest rate creates.

Now, given the fact that the President uses any opportunity to give a speech (he's already given more televised speeches than Ronald Regan and George Bush I combined), why isn't Obama stepping up and giving a speech or a press conference in support of Bernanke? I am not certain. But I do not like it. It suggests that this engineered solution of the financial crisis is in serious question among the world's financial powers, that regardless of the stock market performance since hitting its March low, there are real concerns about the effectiveness of the financial rescue package. And the Executive Branch knows this well. So being politically astute they have used bi-partisan committees to put hard questions to both the Treasury and the Fed. Whoever cracks first will be the scapegoat should this bailout prove to have limited effectiveness.

So this market, and the near term value of the US economy as a whole remains uncertain. We have created liquid, efficient markets and added to it instant top level information. We have yet to determine the bottom of this market. It may have been in March 2009 - but its a long summer ahead. I still believe that the stock market will bet at 10,000 before the end of the year. But it won't be on fundamentals, it will be on speculation, better than expected dollar strength, a weak pound sterling, and a series of positve government and commercial bank performance releases. If we can't build value we will certainly speculate on its eventual return.

Build Value Every Day

Bradford van Siclen

Vaule Based Reality Bites - 6 / 23 / 2009

2009-06-23T07:28:00.000-07:00

Yes, I have been silent for a period of time. I have done a bunch of thinking over the last few days. Here are my conclusions.

1) As an investor in equities, you are taking great risk in these markets.

2) There may not be any actual support levels in the markets, and there may never be again by traditional, technical standards.

3) On the other hand, there will be value and fundamental based support levels for discrete issues.

4) Investors can not ever be long term holders of single funds or stocks again.

5) Cost averaging works only with stop loss positions on each entry point. Averaging down means you have made a mistake and now are compounding that mistake.

6) Experts making daily or weekly market direction calls are not only fooling themselves, but they are also fooling investors.

7) The economy has not turned around, nor has it bottomed.

8) The dollar has begun, likely 2 years ago, its inevitable slide to 70% of its 2005 - 2006 values. World currencies are performing similarly.

9) Cash Flow remains and will always be King.

10) Gold is not an investment, it is a hedge.

11) Oil is a manipulated commodity, by governments, by traders, by producers. And because of this, the dollar is a manipulated currency as well.

12) It is not possible to be a long term investor in any traditional asset - real estate, commodities, currencies, equities, or bonds - given the lack of investment and financial experience at the US government Treasury, Fed, Executive, or Congressional levels. Without an expert and consistent theme from the US government, there will be no stability.

Watch your step very carefully.

Build Value Every Day,

Bradford van Siclen

Thoughts - 6 / 16 / 2009

2009-06-12T12:03:00.000-07:00

First a note about this market, be very very careful. Anytime there is an upside market hesitation the result can be a short but significant downside event. What event could trigger this? Well in this market all it takes is a government report, a missed estimate in housing, a missed estimate in unemployment, in manufacturing. Any reports from the government that would suggest the bottoming out of the economy is not yet at its bottom. These announcements will trigger speculators to sell or short the Dow Jones Index. And when this occurs, the Dow Jones takes a rapid decline - and then waits for the government to put some good news out. This has been happening repeatedly throughout the crisis. Good news is released, followed by more good news if the dow jones rises, followed by bad news when the Dow Jones stalls. The Bush,Obama,Paulson,Greenspan,Bernanke,Gheitner government has made a gigantic error in how to deal with the capital markets. Timing the markets with news releases is a sure way to create uncertainty, and that leads to volatility, and ultimately lower volume. Each one of these issues is troubling to investors in the equity markets and poorly performing equity markets remove more funding groups from the markets themselves.

The Credit markets remain closed to developing businesses and to troubled mortgage holders. Of the first amount of TARP that went to the banks, who enjoyed the benefits? Only the companies and mortgage holders WHO DID NOT NEED IT. The troubled mortgage holders saw very very little of it. Developing businesses are out of luck. And it is credit to those growing businesses that creates economic expansion.

Bill Maher, comedian and political pundit, said it best. "The banks we bailed out are laughing at us. They [wrecked] the economy and then got to keep their jobs and businesses." He is right. The rationale for bailing these banks out was a simple one...this crisis will expand if we don't keep these banks alive and functioning and lending. But all we have done is allow executives from these banking institutions that ran their assets and shareholders into the ground keep their jobs. Meanwhile they refuse to extend credit to business owners and home owners who, in turn, lose their homes and jobs. And meanwhile these bankers are bailed out ultimately by the taxes of the people they refuse to do business with....

We can't even sit back and wait it out because inflation is growing at a faster pace than the banks are willing to pay us in interest for saving money. We are forced to actively invest simply to maintain the value of our savings. Our method of choice, invest in the highly liquid, under valued, equity of Fortune 100 companies. Consistent historic earnings and low multiples relative to their peers.

Its a broken record, but it works people.

Build Value Every Day.

Brad van Siclen

Let's collectively start thinking about how to live through this. I believe perspective is the cornerstone of any business or investment related decision.

So Where Are We 6 / 10 / 2009

2009-06-10T10:12:00.000-07:00

Readers of this news letter must be feeling pretty good these days. In the face of a horrifying market, we have learned the basics of value investing and risk reduction, and how the global markets ultimately catch up or move down to the real value of companies. Of our value based company selections, one American Express, we were forced to exit due to the added government risk and we lost $1.20 or 5% on that trade. American Express may eventually rise back to $40.00. But we don't like the risk of future government regulation on credit card companies. Our other 2 companies, GE and Dell continue a healthy trend toward our Fair Value or fully valued calculations just north of $15.00. Our gains there have been at least 30% - this is important because it was the use of key value based investment methodology that triggered our buy in pricing at a greatly reduced risk level. As for the markets, yes they are getting ahead of themselves, but they are certainly on track to meet our expectations. Indeed the Dow recently closed above 8500 for 5 straight days - creating a new floor.

So here we are, where do we go next?..I wonder what will propel the investment markets from here. My guess is inflation. Inflation is the rise in price of assets. Stock is an asset. Prices for shares will rise. I know to most of you that statement seems backwards. Finance heads would say that a weakening dollar will reduce buying power and will reduce spending which will reduce corporate revenues. Finance heads will say that as inflation rises, the value of US bonds decreases, and ultimately that manifests itself in increased interest rates, further cutting the consumer's ability to spend. That's what Wall Street "experts" will tell you.

Here is the truth though - US corporations are a safe haven for the world's investors because the big ones get bailed out which means their service providers reap the rewards. What does a virtually frozen credit market mean to the stock markets? Nothing right now. Why? Because the the largest US companies whose fundamentals drive the Dow's performance are beneficiaries of inflation environments. They can set prices, they have the largest margins, and they have the greatest reserves to manage their inventory and raw goods costs and ultimately earnings reports.

So while it may seem counter intuitive to Wall Street pros, the truth is, stocks rise during inflationary periods.

Another theme that has been crossing my screens is executive pay and alignment with shareholders. Here's an easy way to do it Boards of Directors. Pay real dividends. When hired offer a significant amount of shares to key executives that vest at 20% over a five year period. Next tell executives their bonus will be paid from dividends in shares they own and have fully vested. Just watch how fast executives align their interests with shareholders.

My recent favorite theme is shareholders calling for the removal of CEO's when their stock falls. Its not a new theme I know, its just one that has surfaced again. Get a grip on yourselves people. CEO's don't control share prices, and they certainly don't prevent you from selling your stock at any time. Investors are a stupid lot, in general. And I'll lump the professional "expert" investors into that grouping as well. They have no issue buying pieces of companies at a price equal to 25 years worth of earnings. That's what you do when you buy stock at a 25.0x earnings multiple. And then these experts wonder why ultimately the stock price falls because the real earnings growth doesn't compel speculators to buy shares at a price equal to 30 years worth of earnings.

Next they blame CEO's for the falling price of the stock they hold...my answer, don't hold it, sell it. Blame CEO's for adding risk to the balance sheet, for falling revenues, for falling earnings, for compensation that is disproportionate to their efforts. But not for stock prices. Investors have shares they are able to sell any time..sell them folks.

Build Value Every Day
Bradford van Siclen

Shock and Awe - 6 / 3 / 2009

2009-06-03T08:19:00.000-07:00

It is shocking to me the lessons learned by the US Government during the last 10 years. While I believe there is a need for proper regulation and taxation in the creation and management of overall US and Global productivity (a.k.a. the world economy), the US Government continues to err on its approach in good times and bad. The United States has at least 25% of the greatest economic and business minds the world has to offer. And ultimately it's these men and women whose collective actions or decisions drive the US Economy and its productivity. Some are entrepreneurs who have become Fortune 500 CEO's, some are commercial and investment banking CEO's and Executive Officers. Some are top end academics, some are capital markets investors or speculators. And some are US Government Finance Officials. Make no mistake that these US Government Officials and the people mentioned before them are as smart as they come.

What shocks me is that the US Government Finance and Executive Branches have since 1999 and Greenspan's "irrational exuberance" speech, decided that they must communicate with the US Equities Markets. That some how the fate of the US Economy is determined by the direction of the stock market. The belief is that higher, bullish trending, stock markets result in better funding opportunities for established and growing businesses. Better funding opportunities means economic expansion and economic expansion means economic prosperity. This magic bullet for American prosperity, the Executive branch, the Fed, and Treasury believe begins with the US Stock Markets.

This could not be more wrong and, could not be more damaging ultimately. Right now, the US Markets are trading at the direction of the Fed and the Treasury. The Fed and Treasury in turn are being directed, as they have been since 1999 when Greenspan let his term "irrational exuberance" slip, buy the Executive Branch. That was the moment that the Executive Branch recognized that if the economy was going in the wrong direction their ability to fix it quickly could only be effected via a super liquid capital markets enviornment combined with an advancing stock market. That simply reducing interest rates was not fast acting enough for the Executive Branch. Readers this government, and the Clinton and Bush governments, have had an active economic policy that supports and endorses speculation as the way out of economic down cycles.

What they should endorse is an economic policy that supports productivity. Why have we seen 2 speculative bubbles in 10 years? Because that is the type of economic policy that our governments, democratic or republican, endorse through the Federal Reserve and US Treasury. And now we are trapped in yet another cycle of announce good news when the markets are trending down, and announce bad news when the market starts to surge. This is managed speculation and it continues to add NO VALUE to our productivity base.

Why is this? The sources of capital to grow productivity, Commercial and Investment Banks, have no interest in long term investments that enable the creation of productivity expansion in small and mid sized businesses because, ultimately, they can make more money over a shorter time horizon, speculating in the capital markets. You want answers to the decline in the value of the dollar, the decline in wage growth, the decline in employment rates (or the increase in unemployment), the decreased time in economic cycles...It is all because the US Government has by its economic policies over the last 10 years, created speculative markets, rode them higher, and then stepped aside and searched for scapegoats to describe the result of any speculation that comes without relative increases in productivity, a crash. In 1999 it was CS First Boston and Carlucci, now its AIG and Citibank.

But really, it is the short sited government economic policies that have us bound to a boom / bust economy. These policies serve their purpose. They transfer wealth from one group to another (creating new wealthy), and they enable the Executive branch, if managed properly, to point to a rising stock market as a sign of successful policies and point to the beneficiaries as the bad guys of the those markets in a crash.

What has been lost in all this is the US industrial state. Once the envy of the world. We have lost US productivity and US quality. Short sited speculative economic policy can't support value creation and productivity over a 10 year cycle. It is Shocking to me that this is the approach the government continues to take, and I am in awe that they have been able to keep the media from recognizing it.

So if you are an investor, or a trader you have no choice. There are no rewards in this system for long term investors in productive companies. No rewards for people who save their money (because inflation robs value). So ride the next wave of speculation, just put your upside and downside limits in and you will be protected. We may be in a Bull Market, but it cannot be sustained without productivity gains. And this government just like the past 2 governments, is not addressing that issue properly.

Build Value Every Day

Bradford Van Siclen

Dow Jones - a Victim of Mixed Messages - 5 / 27 / 2009

2009-05-27T07:32:00.000-07:00

In this individuals opinion, it is a crucial week for the the future of the Dow Jones. There are many news items that are competing for trader's mind space. And there are a few questions we as individual investors or as individual speculators need to get our heads around as we look out 30, 90, and 180 days. Ultimately we must decide if the Dow Jones is an indicator of today's sentiment, yesterday's sentiment, or tomorrow's sentiment. The keys in any market driven investment strategy are 2. The first is to understand your own personal risk or exposure tolerance. The second is to recognize your own strategy, trader / speculator or investor. And then stick to that perspective no matter what. When you hear fund managers discuss or advertise a "disciplined" approach this is the process that they are attempting to describe. Under what circumstances are they buyers or sellers? The best managers never veer from the circumstances that determine their own buying and selling. And neither should you. Ignoring your discipline may be the biggest single mistake you can make as an investor or as a trader / speculator.

Of all the questions I receive from readers, the direction of the Dow is the most asked. Consistent readers know that I think following the Dow as a guide to one's personal investment strategy is a losing proposition. The Dow in my opinion is a puppet of large funds that day trade its index for sport more than as a value strategy. Since 9/11, the Dow has been little more than a measurement of professional investor sentiment on any given day. So while it is a good indicator of the present, it is not a good indicator of the future. And whether investing or speculating either approach to the capital markets is based upon the future value, higher or lower, of an individual issue or a group of individual issues. The Dow is no longer that. It is the sentiment indicator of the big money day traders. News items reverse it as much as discrete non-component company performance announcements. How is this an indication of the future?

So in fairness to my readers consistent questions, here is my current perspective on the Dow Jones. There is a ton of competing news out there. Consumer confidence higher, existing home sales lower, GM bankruptcy, Bank America raising capital. We are one headline away from a surge in the Dow or a plunge in the Dow. The question is which will it be?

It's a very difficult task from a value perspective. All value signs for the US Economy show a continued fall in productivity, continued decline in employment, consumer credit, housing. Increases in gas prices, food prices, commodities, inflation. We have nothing more than predictions by academics as to when all these decreasing value indicators will reverse. Now throw into the mix US government agencies, The Fed and The Treasury, willing to over extend their powers and ability to offer liquidity of any size and scope to mistaken lenders (debt holders in failed Fortune 100 companies) in order to limit the decreasing productivity effect on the US Economy. These efforts ultimately leading to significant inflation, misuse of funds by those in charge, and in this analysts opinion an eventual devaluation in the world's US Dollar keyed assets. For every negative announcement, the government throws out a positive announcement. When the Dow moves higher, the government uses the opportunity to release its negative news. Watch the financial media and see if I am right.

But leaving financial conspiracy out of the mix, this Dow Jones, barring War in Korea or Pakistan / Afghanistan - over the next 30 days will trade in its current range with a down side bias. By August we will see the Dow approach 9,000 based upon more and more corporations saying the recession, for them, is ending. And by December the Dow will make a run at 10,000. Unfortunately it will be a hectic and choppy market to that number. Ultimately the US Government led mixed message smoke will clear enough and combine with a weakening dollar (look for a dollar value slide in June and July) so that enough Fortune 100 companies will see productivity increases. And these increase will lead the day trader speculators to a higher Dow Jones Index conclusion.

Build Value Every Day.

Bradford van Siclen

Housing Crumbles - What's the Meaning? - 5 / 26 / 2009

2009-05-26T06:23:00.000-07:00

Housing Prices fell 19.1% alone in the first quarter 2009 and is now down 32% from a peak in 2006. The noted "20 City Index" fell by 18% in this quarter. These numbers all came from S & P. What's going on? You all know the answer. You all became real estate experts during the boom times of 1999 - 2007, right? Your homes are all worth more than you paid for them, right? Your mortgages are all less than they were 10 years ago, right?

Congratulations. You are one of the very very few brilliant real estate investors.

There are two ways to look at a home. One is as an investment, the other is as a savings account. My view is the latter. It's one of those assets that you can use without diminishing its value, generally speaking. But that assumes you have purchased it with more equity than debt or at a low in the housing market. It is unlikely that you were able to do both. Why? Because homes are almost always purchased when you need them, and when there is a need, market dynamics take a back seat. The housing markets do not care what stage your family is in, growing, contracting, making more money, making less.

A home is a savings account that grows in value by at least 5% year over year, even with the recent housing value slide, buyers of homes pre-2006 are up in value across the board. That's actually better than a savings account because as the value of the dollar decreases, creating inflation, assets like homes increase in value relative to the dollar. The proper way to look at your home is to pay it off as soon as you are able to. Now the savings compound over time, and you get to use the asset every day.

For you real estate investors, these concepts may seem conservative, or maybe a bit nutty. You select your home, size, location, based upon your belief that the price of it will increase, and based upon that your equity value will increase with it. The bank offers you credit to buy the home and you leverage that credit into creating value that exceeds the rate of value growth in the area you own the property. Its a great model, except when hosing prices drop.

See the Federal Reserve convinced home owners to dip into their savings by offering cheaper and cheaper refinancing rates. That led to lower monthly payments and more free spending cash into the economy. Banks then churned this cheap money and instead of building their reserves they too, like consumers, leveraged their balance sheets with an eye to increase profitability. We all know what happened, the value of these real estate assets purchased since 2007 fell by 30% or more across the board and by October 2008 we had our 2nd major financial bankruptcy (Lehman) and a world financial crisis caused by the rapid contraction of asset values as speculators and investors ran from real estate investment securities. But this is old news.

So now we are left to search for answers. Increasingly, "expert minds" in finance are suggesting that the size and scope of the problem can only be addressed by the government. This weekend, Alan Greenspan said the same. I won't be fooled by this esteemed gentleman again, and I hope neither will the US government. Now is the time to allow the $1.6 trillion of our tax dollars to go to work. Stimulus must begin with the banks holding the access to the money, and our solution is a simple one..ALL BANKS NEED TO BEHAVE LIKE WELLS FARGO AND ITS WACHOVIA BRANCHES AND REFINANCE AS MUCH OF THE HOUSEHOLD DEBT ON THEIR BOOKS AS THEY CAN. This act alone will stop the mortgage crisis, will stop the foreclosure crisis. No more government stimulus is necessary, nor should it be requested. The World Economy will support the Dollar well enough now, but calls for an additional trillion in stimulus will crater the dollar an additional 25%.

Unfortunately the US government (BUSH / OBAMA / GREENSPAN / BERNAKE / PAULSON / GEITHNER) is not predictable in its selection process and its bail out process. That in itself is a real issue for the economy. Businesses which should have been bankrupted were not (Citibank, Bank America, AIG, GM, Chrysler) and businesses that should have been saved (Bear Sterns, Countrywide, Lehman) were not saved. Had the government (yes the names BUSH / OBAMA / GREENSPAN / BERNAKE / PAULSON / GEITHNER are all the same government to the US economy) saved Bear, Country, Lehman at the cost of $300,000,000,000 this crisis would have been very, very different.

Instead we are left with a housing crisis that has no end. Expect deeper and deeper housing price losses until this government forces refinancing to those who need it. Bring Fannie and Freddie back to do just that. Let the Banks ride their coat tails out of the forthcoming housing market depression.

Build Value Every Day.

Brad van Siclen

Which Way Now? 5 / 21 / 2009

2009-05-21T08:13:00.000-07:00

Here follows a brief discussion of our current perspectives in these markets:

1. Value / value drivers: When we analyze different companies for the purpose of investing in their publicly traded stock we seek out companies that have grown their profits consistently over the most recent 3 year period. We then seek those companies that are both trading at an historic discount to its own P/E multiple at fair value and are also trading at a relative P/E discount to its peers. As we see it, our value drivers are simple - earnings and earnings growth. Can a company's management use its own assets to generate improved earnings over time? We can be much more analytical and research minded, but we are not investing 10,000,000 in any position, and therefor we remain unconcerned about incremental valuation metrics - asset turn over ratio aside.

2. Trading / stock market action: We remain very cautious in receiving and even listening to technical analysis. In our opinion, technical analysis is nothing more than the application of statistical analysis to historic sentiment. Whether the history being reviewed is 1 hour or 1 year, the use of statistics and graphs on buying and selling volume, speed and acceleration in either direction is dangerous. Technical analysis is dangerous because it assumes the market is rational and will recognize and anticipate value properly. Investing has risks, but fundamentals in our opinion reduces our downside risk while making us behave as owners of the business, not traders of common stock which leads to speculation, and ultimately to "investment" decisions that rely heavily on market timing and not business analysis.

3. Economic Drivers - There are none in today's market. Earnings, Labor, and productivity are still heading lower. All this talk of "decreasing losses" as an indicator of a forthcoming economic bottom is absolute spin. Decreasing job losses in a recession, that's like a meteor breaching the atmosphere. It may slow down, but it still has to hit bottom before it stops. And how are we to rely on government statistics and research analysts to provide us with accurate forecasting or information? We can't. Hundreds of millions of dollars are being paid to these professionals, and the information is not accurate. Its simply not accurate. Government statistics and research analysts are not audited. Corporate numbers are audited. Why are all revisions of government economic statistics downward revisions? Spin. Stick with audited numbers and consistent historic earnings growth.

4. Finance / monetary - Right now, the dollar is worth less than the Canadian dollar. In fact as of this morning, it costs $1.20 to buy one Canadian dollar. I'm old enough to remember driving with my parents on New England Toll roads and seeing signs that stated, "Toll: $0.25, Canadian Currency: c 0.40. In the last 20 years the value of the dollar has dropped by near 50% against Canadian currency. Folks Canada has managed its resources, its productivity, and its monetary policy much better than we have. Want another Greenspan era legacy? Our dollar is worth less than the Canadian dollar. Still think he was a genius? I respect Bernanke, but he has been left with a near impossible task. His only solution is to so devalue the dollar that the economies that rely on the value of the US dollar to function, and that's virtually all world economies, will be forced to devalue their own currencies. Watch. This will be reported by the media as the dollar strengthening. It will be reported as proof the Bernanke method works, when in fact any chimp can print dollars and sell treasuries at 14% returns. Bernanke, you are smarter than this, what you need to be is tougher. Face this administration, the one I voted for. It has gone so far afield, so fast, our great grand children will look at us like idiots. The generation that reduced America to a G8 participant rather than a leader.
Now for finance. Consumer Credit will shrink to 50% of 2006 levels. Consumer spending will not recover until savings begins to fill the lost credit gap. And this needs to happen in a shrinking economic enviornment coupled with higher taxes and reduced productivity. See what we are getting at here? Banks will not lend to even modest credit risks. So the Obama / Bush / Paulson / Geithner plan will not work. Until they fund real productivity and value creation AND that begins to take hold in the economy we will not see economic, financial, or monetary improvement. Green investing may be needed, but it will not create any significant productivity for years. What happened to infrastructure spending? It has gone with the wind. Any money we could have spent creating jobs and rebuilding our transportation, communication, and education infrastructures has been handed to the banks and they have created NO VALUE with it for the American people. These banks will offer financing only to the largest and most stable enterprises. And here's the good news, these are the enterprises we like to invest in at current discounted levels. Simply stated, the only enterprises (individuals as well) that will receive credit are those that really don't need it to fuel their expansion. The result will be an increased concentration of wealth among the already wealthy and a decrease of wealth among the middle class.

People, this is a call to you and your families. You must take control of your financial future. You must be productive and you must recognize how to create value. To do this look at enterprises that have created value and simply invest in them.

GE: 13.10
Dell: 10.74

As for American Express, we had a good selection there, but the government has stepped in and over regulated them. This to us is much like fraudulent reporting. Clearly AXP has been in lengthy discussions with the Government concerning the future of credit charges dating back 2 reporting periods. But none of that information was disclosed, as it should have been, by any of the credit card issuers to the investment public. Rather, they guided lower and then beat expectations...watch for more of the same as their revenues continue to decline. We move this position to speculative - It could double or be cut in half. So we take our first loss of $1.50 per share or 6%.

As for the Dow, our call is a retest of the new floor some where between 7,800 and 8,200 soon.

Build Value Every Day.

Bradford van Siclen

Conclusions

Geithner Passes the Buck - 5 / 20 /2009

2009-05-20T07:06:00.000-07:00

Chris Dodd, asked an excellent question today of Treasury Secretary Tim Geithner. And Geithner's response frankly scared us very badly. He asked the same question we have written about in this blog quite a few times. "Why the US government continues to use tax payer money to pay 100% of claims to financial institutions that were insured by AIG." Geithner's response was long winded, and shocking. The Treasury Secretary said "We, as a government, have no authority to make those decisions."

Does anyone feel weak in the knees hearing this? This is a government that continues to say one thing and do another. They are bailing out all the folks that voted them in and, by coincidence, all the folks that caused this systemic crisis to begin with. The list is long and wide but includes Goldman Sachs executives and union laborers building crappy cars. This government has convinced itself that the solution to the financial crisis is to give all the reins to its friends...and no one is raising this issue publicly because our elected officials are too frightened to speak out against the Obama administration.

I voted Obama in because in my mind the Bush administration had passed huge amounts of tax payer money into a war that seemed to benefit the businesses of his cronies while at the same time keeping the US economy churning through a series of Federal Reserve interest rate maneuvers. These moves were amplified by a reduction in oversight and regulation which, over 10 years, created the greatest credit and asset recession in world history. But that was 6 months ago. Since then huge amounts of the remaining economic value and influence have transferred to the Obama supporters.

To a certain extent, these scenarios are part of every political state. Friends of those in power always get the sweet heart deals. But in this financial crisis, with the future role of American global economic influence in question, the answer to our economic recovery can not be to give the keys to our financial system to our friends and let those who are not our friends fail.

And now under pointed questioning by the senate finance committee, the Secretary of the Treasury says, "We (the government) have no way of making decisions that effect these businesses." Except this government is the majority or the largest shareholder in the very businesses that Geithner claims the government can influence only minimally.

When will this Government take responsibility for its actions and decisions. Who votes the government's shares? They do not want you to know.

This subject will require further discussion - I wait for the review of the Blackrock Mortgage Asset Deal. A sad sad statement made by this administration.

Build Value Every Day

Brad van Siclen

Silly Silly Media Commentary - 5 / 18 / 2009

2009-05-18T12:09:00.000-07:00

"US stocks rebounded on Monday following their first bruising week since the rally began in March as encouraging results from Lowe’s, the home improvement retailer, raised hopes the economy would soon reach a bottom." - This statement is from the overtly pessimistic Financial Times of London.

To suggest that there has been any improvement in housing or retail flys in the face of recent Fed announcements. Folks all that we are seeing is a result of the new Dow Jones index, the index driven by day trading speculators of all sizes, jumping on a story, positively positioned by the rah rah media.

Here is the real story -

"Lowe's Cos. reported a smaller-than-expected 22% decline in first-quarter profit after expense control, reduced discounts and demand for paint and other smaller-ticket merchandise helped limit the impact of a decline in sales of big-ticket items.

Shares of Mooresville, N.C.-based Lowe's rose 7.6% to $19.86 in late afternoon trading. "

Does this sound like an optimistic outlook? Lowe's executives managed their existing inventory to properly address a bleak out look, resulting in losses that were less that those these same executives originally told Wall Street Analysts to project. Lowe's is not even a member of the Dow Jones Index, so why would it's rise in price have any effect on the Dow's near 200pt move up? Answer: It wouldn't.

We are witnessing is a Dow Jones head fake courtesy of the trading professionals. In the last 6 weeks, excluding today, the Dow has climbed 300 pts from 7,975 April 6th. We have witnessed an interday high of 8657. Yes the trend looks better, but it is not at all due to improving housing markets or even less worse housing markets. Our opinion, this Dow trend is due exclusively to the cheap money given by the Fed to financial institutions which now have fresh capital to invest. And while it is true that many many mortgages were refinanced by respectful and responsible commercial banks like Wells Fargo, those newly classified commercial banks, Goldman and Morgan, were able to re-inflate their prime brokerage lending to their best hedge fund clients, and these clients bought more equities than they sold.

Not much, if any, significant capital investments have been made into the parts of US companies that are productive and create value that are represented by the shares of the .

In fairness, we believe some value has been created by US corporate finance executives who have deftly adjusted their balance sheets, converting inventory to revenues at better than projected rates and reducing the costs of debt on their books (both are cash flow positive). But what we haven't seen yet is any value creation by these companies. Mainly because they can't. Who is buying products or services in greater numbers than they were 6 months ago...few companies. And until we see revenues growing, not beating reduced projections, we can't believe that value has come back to these markets, regardless of what the Dow Jones and its media followers are ranting about today. When the Dow closes above 8,500 and then stays above 500 for 5 consecutive days, then and only then will we know that a new floor has been placed in the markets.

GE - $13.44 / Stop Loss $10.75
Dell - $11.27 / Stop Loss $9.52
AXP - $26.13 / Stop Loss $22.20

Build Value Every Day

Brad van Siclen

The Dow and the Economy - 5 / 14 / 2009

2009-05-13T06:39:00.001-07:00

Its been a few days for me readers, a busy schedule is partly to blame. The other part is watching the markets and seeing nothing new to report. Our collective analysis is playing out as we have written it and now we need to be patient until the next catalyst hits the markets.

We have been hearing and reading a great deal about bad news and the markets. The standard comment is that "All Bad News is Built into current market levels." Don't believe it. At 7,500 bad news or good news the market was heading higher. This was confirmed by 3 weeks of earnings announcements that trounced analysts expectations on the way to a near term Dow high of 8574. But now we have exhausted the appetites of the value buyers that created the last rally. A new floor has been created some where around 7800. And the traders are back fully in charge of these markets.

Here's the bad news for market Bulls and the thinking that a new Bull market has launched. There needs to be a catalyst that turns this Market into a Bull market, and so far we have had none. In 1995 the market rocked past 5,000 on technology IPO's. In 2002 the markets climbed on cheap money and interbank rates that systemically altered investor and finance professionals perspectives, vastly inflating values beyond rational analysis.

We all know the rest.

The problem is that for the next 6 months, there will be nothing but consumer contraction towards stability, job contraction, and business contraction and bankruptcy. It took enormous amounts of capital to stabilize the financial system, 1.7 trillion US dollars, and now we have no choice but to sit and wait for the next, well positioned company and industry to lead us into the next Bull market. WE ARE NOT THERE YET. So be very careful about ignoring or re-entering equity based funds with your savings. We have real issues to overcome.

Here are the 2 issues:

1. The Fed has publicly committed so much money in stabilizing the financial system that as they pursue the job of auctioning off bonds to supply these funds, a massive devaluation of the dollar is occuring and huge inflationary forces are set to take off. In certain cases this may act as a stimulus, further cheapening the value of US exports and making the US more competitive. But that means that the value of US assets will ultimately fall as well - by some estimates by another 25%. Meanwhile home values have stabilized (seemingly) by virtue of the cheap Fed / Obama money and the entry into the lower end of the market by first time home owners - that's the part of the market worst hit by the real estate bubble bursting. My gut tells me the safest place to put money is gold. You may have to deal with volatility, but its the only investment that hedges your savings account balance.

2. We have a significant issue with regard to the Dow Jones Index - it has become a puppet of Day Trader sentiment. It has accelerated past it current fair value in recent speculative bliss, and now has no more legs, no more breath until our next catalyst. Growth buyers (I like to call them value minded speculators) are very reluctant about purchasing equity under these circumstances. Its these growth company buyers that truly lead us into the next Bull market, and they have much to over come. Earnings will stagnate, home values have stagnated, the value of US goods and services will decrease too.

The only way to create sustainable value in a company, or in an economy is by increasing productivity and thereby producing more value. The stimulous packages have done nothing yet but keep the financial infrastructure from crashing around us. They have yet to create value, and unfortunately given the fact that the stimulous money went entirely to groups that have a recent history of taking or leveraging value created by others, I am not hopeful.

Build Value Every Day.

Brad van Siclen

The Fed Chairman Speaks - 5 / 7 / 2009

2009-05-07T06:51:00.000-07:00

Bernanke spoke this morning to his nation, the Financial Nation, a nation of which he is Commander and Chief. He speaks slowly and simply to financial professionals and, very much unlike Alan Greenspan, there can be no question what his message is. Here's the message I heard and then, in italics, my view as to the ultimate effects the public companies we care about.

1. The Fed has finally grabbed the Regulatory agencies by the horns and will hold them accountable for future misses, bubble creation, lax or inconsistent review and, action or inaction.

In short, the days of hands off industry self regulation are over. The SEC will become bigger, badder, and go after the larger sized offenders (Investment, Commercial, Mortgage Banks) as a priority, rather than justifying their existence by over regulating and punishing small offenders that have little impact on the financial system. Lax oversight of the big banks directly contributed to this economic crisis. Virtually all SEC heads, NASD heads, and FINRA heads came from industry - that is to say they came from these big companies, and their cronies at these biggest institutions were given by them, in many cases, a free pass or a less regulatory environment to operate in. Meanwhile these agencies went after the smaller, regional and local, broker dealers and commercial mortgage lenders with aplomb. They may have been offenders too, but their reach was not systemic. Expect to see Government employed legal minds and Phd's taking over the top spots at these agencies. And expect that these agencies will double in size.

2. This speech by Bernanke will be referred to for years by the regulators, congressional, and senatorial oversight committees as the May 2009 address. In this address Bernanke said to all Public Company Boards and Executives in all industries that you are required to and will be held accountable for managing your balance sheet risk.

This means that after the US Economic Machine is stabilized to the Fed's satisfaction, the US government is finished saving companies, finished saving jobs, finished financing broken industries.

3. Bernanke said that bigger, more economically critical firms in any industry, will be subjected to greater scrutiny and changes in laws and regulations that will reduce their ability to create systemic risk.

So long as Benanke is in place, and barring illness it will be at least 10 years, the rules and regulations governing US public corporations in any industry of significant size will be subject to changes at a moments notice. This does not exclude Microsoft, Google, Pfizer, GE, and, of course any money center bank or equivalently sized Investment bank.

4. Executives of leading institutions of any industry must understand their responsibility to their shareholders as well as to the public at large.

If, in the future, you as an executive or board member, presides over an institution that takes advantage of the US Economic system to the ultimate detriment of the system or to the detriment of your shareholders, you will be paraded out in the public and held accountable for your management actions or inactions which caused the problem.

5. Banks will need to raise more capital to satisfy the newly determined risk / volatility in the world financial markets.

Ultimately this means that the banks must maintain stronger balance sheets and must issue more equity to meet these new requirements which should cause their equity value to fall due to the added dilution.

In my view Benanke has set the foundation for future action by the government, by its regulatory agencies, and by the law itself which will slow economic growth in the near term, but ultimately create a more level playing field for all institutions participating in a US led World Economy. If I were an executive in any systemically important institution I'd realize that my days of huge profits and salaries at the expense of the US and World economies are over. You can keep all the salary and bonus you want once the government is satisfied you are adding value to the system, the economy and the public at large.

so executives, Build Value Every Day, or else.

Brad van Siclen

Our Valuation vs. Their Valuation - 5 / 5 / 2009

2009-05-05T06:52:00.000-07:00

A short one today readers, but maybe the most important one yet:

A few comments from the well paid talking heads this morning: "Its a Bear Market Rally", "We've gained nothing this year, the S & P is just back to even", "There is no way to value companies in this economy. There are no clear projections."

Let's address the last one, "There is no way to value companies in this economy. There are no clear projections." The speaker actually added, "We need to see 2nd and 3rd quarter results to be comfortable with re-entering the equity market."

I use him as an example as to why fund managers almost never keep up with the S & P 500 index. Folks, I want this guy to be a warning to you all. This is the standard mentality running your portfolio and your pension and 401k investments. Invest with guys like this, and unfortunately he is like most others, and you add risk to your investments - He would prefer to speculate with your money in momentum markets and stocks, rather than buy the best companies at significant discounts right now.

Investments in the public market are the purchases of companies undervalued by historic metrics, AND undervalued by historic performance. Speculative purchases are made by buyers of common stocks in public markets based upon forward looking information and estimates.

If you want to buy value, which has the effect of protecting your principal, you can't look at a company like Google or Apple that have been over bought based upon future projections and have price to earnings multiples of 30.0x and 25.0x respectively. Because at those prices you are betting that earnings will grow more and more every quarter, and that there is more future value in these companies than present value. And while you may be right in that perspective on these two fantastic companies, you are still speculating on their future value not investing in the value they have already built.

The often quoted Warren Buffet made a statement many years ago concerning Berkshire's value. He said that his goal is to provide transparent information on Berkshire to his shareholders and the public. If he was doing that right, the stock would be trading at fair value all the time. But he added, if someone wants to pay more than fair value and speculate on the future value of Berkshire's stock, I can't stop them.

Please re-read that last paragraph if you consider yourself a value investor. You might consider getting it tattooed on your arm.

GE - 13.10, stop loss moved to 10.48
Dell - 12.28, stop loss moved to 10.44
AXP - 27.28, stop loss moved to 23.18

Build Value Every Day

Brad van Siclen

Stress Tests - The Real Story - 4 / 4 / 2009

2009-05-04T06:34:00.000-07:00

Six months ago a close associate of mine who was working as a NASDAQ trader for a top 10 Investment Bank in NYC received a call from a former employer. This employer was in desperate straights. They needed former analysts who knew their internal process, systems, and models to come back to work for them on the largest financial project in their history. It did not matter that my close friend had left that job 15 years ago and had done nothing but sell NASDAQ blocks in the interim. They would match his salary, give him better benefits, long time job stability, and offer him an inside look on the US and World economies every day. Since the NASDAQ was cratering in October and most traders were getting the axe, he rejoined his former employer, The New York Federal Reserve Bank.

I shared a cocktail with him 8 weeks later on New Years Eve and the subjects of Citibank, Wells Fargo, Wachovia, B of A, and Merrill came up. His statement shocked me. He said - It is so bad, I am being told that all major banks are insolvent by our standards. That no one has a clue how bad it will get, and that teams were being formed to monitor all domestic and international money center banks, analyze them, and provide recommendations on how they might be saved.

We all know the rest, in January and February word began to leak on what the Fed was up to. Financial stocks dropped dramatically, and the Fed and the Treasury used every available means to stop the bleeding. But, we were told, "stress tests" were being launched and results were a few weeks away.

Here we are, May 4th, and the results of the Stress Tests have yet to be released. Well folks, here is my best guess as to why these results are being delayed further and further every day. -

I think the answer is obvious here - The results are in, and the government is cutting back door deals with banks that failed the tests so they can announce that all banks they tested have either passed or been stabilized. There are more banks that failed the tests than the Fed wants to admit to. Some are foreign banks. Some are foriegn government subsidized banks. The real pandemic out there is the weakness of all the world's national and money center banks. And the US government and G - 7 equivalents are trying like mad to cut back room deals among any party that will participate in an effort to shore up the banks that did not pass.

Once this has been done then we will get a public announcement. It's just a repeat of October's insider deals between Wells Fargo, Citigroup, Wachovia, Countrywide, Berkshire, Merrill, B of A. The government is just being more careful this time given the results of the B of A / Merrill forced deal.

These, folks are trying times, and I believe that in addition to the back room stabilization deals, the Government is also waiting to see where this interim capital markets rally ends. They are afraid that a stress test results release without proper solutions and fixes in place for weakened banks, will cause more capital markets panic and a reversal in recent optimism.

I believe the capital markets came to this conclusion 2 weeks ago and the capital markets have no real fear of unknown weakness in money center banks. They know already that the world's reserve banks will not let another crucial bank tank. If nothing else, the US Government understands the sentimental connections by and among banks, corporations, and the equities markets - a trick picked up from the Greenspan Era - and recognizes it is a tricky path to walk. So they will most certainly hedge their bets and stabilized banks that failed their stress tests ahead of announcing any stress test results. Let's hope that the deals they are making do not weaken more banks. Because one thing is for certain, this Fed is running out of silver bullets. You want an answer as to why the capital markets seem to be ignoring bad news? You at least have my answer.

Build Value Every Day

Brad van Siclen

Misguided Media Questions Buffet - 5 / 1 / 2009

2009-05-01T05:41:00.000-07:00

This weekend, Warren Buffet's Berkshire Hathaway hosts its annual Shareholder's meeting. This event needs no description. A group of lovely, cash flowing companies set up booths at a local convention center and answer questions from fellow shareholders while they wait for Warren Buffet or Charles Munger sightings.

These last 12 months however have been difficult for Berkshire Hathaway's shareholders to understand. One year ago, Berkshire's bellwether shares, BRK - A, sat comfortably at $133,000.00 per share. Today the price per share sits at $94,000.00. A 30% annual loss. So the financial media has taken this opportunity to send up flares and interview investors who are asking if Buffet still has the magic touch. Or if Buffet has lost his way.

Buffet too may be feeling a bit out of his element. Beginning October 2008 he began a series of interviews with the major financial channels, wrote a few op ed's for the major news papers, and recently began comparing the share performance of the company he chairs to that of the major stock indexes. In one quote he sounds like a lowly fund manager suggesting his stock out performed the comparable markets (by virtue of a smaller annual loss).

What he should do is take the opportunity to do what he does best. Communicate his disciplined value approach to equity investments and re-educate his shareholders on his simple formula. Here it is, and readers, it really is the best way to invest.

First Berkshire only looks at companies that can show significant and consistent earnings over there most recent five year history. Next he determines the Present Value of the company, based upon the company's likelihood of maintaining its earnings growth given historic levels. He won't ever expect a company to grow its earnings by a greater percentage year over year than it has historically. Next step, he determines the return he needs his shareholders to receive on their investment annually, and compounded over the next five years, that return number is 21%. This math ensures the price he is willing to pay on his shareholders behalf is accretive or adds value to the share holder's current value (most acquisitions don't benefit shareholders because they are dilutive to the companies equity value on day one). And, he rarely moves from this model, unless he is buying insurance companies which become banks for him in that they provide a nearly free float or financing source for the company(a subject we can review another day.)

What has been created is a collection of cash flowing businesses bought at significant discount to their future value. Businesses that grow modestly, but whose values on an individual basis add significantly to the shareholders of Berkshire.

The share price also has a very favorable effect on the company's value in the market. It is much much too high to permit significant numbers of speculators from trading for a daily 1% or 2% move. So its liquidity, although growing every year, is not comparable to other companies (136,000 shares a day in the last 3 months). This share price reinforces the notion that investors need only apply. No speculators please.

But to this point of speculators, the last 15 months market crash has had an interesting effect on Berkshire's shareholder base. Fund managers searching for ways to reverse their shoddy returns, put some of their investments into Berkshire (which is a holding company with a fund manager's discipline). The result, speculators jumped in to. And these are the folks that need to be reminded by Buffet that their needs and perspective are not aligned with the Berkshire disciplined value approach. Announcements from Berkshire are few and far between. He holds one research analyst meeting a year to keep research speculation to a minimum (also a great indicator of how Buffet feels about the value added of research analysts in general). Buffet buys value, he buys cash flow and earnings, and if other's want to speculate on the value of his stock, let them. He lives only as a value investor under the same model which only acquires companies and investments that fit his criteria at a price that ensures future returns.

All this said, he does have to explain how and why his insurance groups got involved with mortgage based derivatives. He attempted this in his annual report, but the explanation wasn't very compelling.

The real point is that anyone can apply this model to their investment methodology. The key is having the patience to ignore the media and dow jones noise which will tell you that you could be making 30, 40 or 100% returns a year if you are willing to be a speculator. And if you have made those returns in a year, you are either a speculator or have been the beneficiary of other speculators. And those returns and that approach will never be sustainable.

Build Value Every Day

Brad van Siclen

Excellent News From Well Managed Firms - 4 / 30 / 29

2009-04-30T05:33:00.000-07:00

From the front page of Investor's Business Daily, "Visa EPS Climbs 40% and Tops Views Raising Outlook for Operating Margins". But the real story from this earnings report actually appeared in this site's 4/27/2009 posting.

Visa cut quarterly operating costs by 50 million dollars while revenues remained stable. This resulted in better than expected income results on a per share basis.

When the economy and the equity markets go into a tailspin, the best public companies, Visa among them, use these times to trim the fat, cut off the dead wood, push back vendors, and emerge more profitable, leaner and more efficient. And for the value investor, these times are really really good because the cost of assets and future earnings is half what it was 12 months ago. (Value Building 4 / 27 / 2009).

Visa is an excellent example for us to analyze from a value perspective for a number of reasons. Visa's executive management really does squeeze the most equity value out of its operations that it can. Here is a company that exists and thrives almost entirely on consumer credit. And when the general equity market trends turned against Visa, and their stock dropped from year ago heights of 85.00 per share to a January 2009 low of 47.00, management steadily cut is operating costs, squeezed its vendors, wrote down its bad loans at times when no company had any influence in their share price, took advantage of a very favorable credit market (FOR COMPANIES WITH GREAT CREDIT RATINGS) and now has emerged leaner and more profitable. Of course to our readers it comes as so surprise that the illustrious Wall Street analysts missed another one. When everyone, businesses and consumers alike needed to rely on credit, Visa was in the financial position to offer it, at a higher price which is why their revenues remained stable.

The problem with Visa is that it is too expensive at its current 54.0 P/E Ratio for any self respecting value investor to approach it. As great a company as this is, are investors really willing to pay a share price equal to 54 years of earnings results to own it? Leave it to the speculators I think, but kudos to management for maintaining such a P / E ratio in this credit market environment.

Its main competitor, American Express sits on a relative value advantage with an 11.0 P/E Ratio. Hmmmm. Get any ideas readers on another company we may need to add to the list? American Express has an even more conservative approach to consumer credit, has much lower and selective market share and is likely trading below its fair value currently. Which means unless there is a systemic issue the company is not reporting, American Express, currently priced at 25.00 should approach $37.00 within 12 months. Let's begin watching it.

DELL - $11.25, Buy in price $10.00, Stop Loss $9.56
GE - $12.22, Buy in price $10.60, Stop Loss $9.70
AXP - $24.95, Buy in price $24.95, Stop Loss $19.96

Build Value Every Day

Brad van Siclen

Value Creation in the Land of Day Traders - 4 / 27 / 2009

2009-04-27T05:29:00.000-07:00

We have recently established that the market gyrations of late amount to deep pocketed day traders trying to beat other speculators into the next index momentum move, up or down. I add to that today's "Swine Flu" concerns. "Futures Lower Based Upon Swine FLU". This is time to be investing people. The financial media has lost its way. And when unsure how to bring value to their viewers and readers, they resort to attaching silly explanations to the momentum trades of the day. Put your value caps on and seek out those great companies you could not afford only a year ago. They are selling at relative bargains.

Meanwhile has any one been paying attention to the earnings announcements from major public companies? Here's what we have learned.

Public Company Executives took advantage of Fall 2008's banking crisis to fool the current crop of shoddy research analysts into reducing their earnings and valuation projections. Then, being masters of operational and profit efficiency, set about restructuring their businesses for a return to profits and profit growth, and "poof" virtually all component companies have beaten earnings expectations for Q1. Still most public company executives are once again cautious about their forward looking earnings commentary. But in truth this is simply more misdirection. I am not suggesting that the economy will improve, just simply that the best companies and executives are excellent in consolidating market share and profits during recessions.

Public company executives have learned long ago that you can't buck the general market trends their common stock trades in. So they have now begun to use this to their advantage and in times like these when their shares should be valued higher they cry the blues, discuss common buzz terms like China's Currency Manipulation, Consumer Confidence, European Protectionism, Health Care and Pension Costs, and my favorite generalization, "Unfavorable Economic Environment".

Well these are the supposed outlooks of companies who continue to operate in an economy that has seen 1) no real wage growth in a decade (labor costs flat), 2) a dramatic rise in out sourcing to cheap wage countries (production costs down), 3) A favorable dollar (low compared to its competitors), 4) inexpensive cost of capital (low low interest rates), 5) supreme financial management software (adds to efficient capital decisions), and 6) a hands off regulatory and tax system.

Sure the systemic banking crisis has created a recession, and has revealed significant issues with our regulatory systems, I don’t belittle this issue in the slightest.

But the best companies, the smartest companies, the companies with the most value use these events to trim the fat, cut off the dead wood, push back vendors, and emerge more profitable, leaner and more efficient. And for the value investor, these times are really really good because the cost of assets and future earnings is half what it was 12 months ago.

So let’s dust of our financial texts books and go bargain hunting. Sell your failed, professionally managed equity funds. And buy the great companies you always wanted to own. They will be the leaders out of this recession. They will be the leaders in earnings growth.

Set realistic investment return expectations. Select companies with a solid price base (we’ll discuss this later). Then sit back and let the speculators extend your returns. As you are hopefully a bit more expert in how the best company execs use Wall Street research experts as just another tool in managing their value creation.

Build Value Every Day
Brad van Siclen

At a Loss For Words - 4 / 24 / 2009

2009-04-24T06:14:00.000-07:00

Yesterday's announcement concerning Paulson, Bernanke, and Bank of America CEO Ken Lewis may have sent shock waves through a less savvy market. But the US markets took it all in stride. I will use this fact, again, as proof that traders are running the indexes now. That new investment money is still on the sidelines. And lastly as a reminder that the US Government sees Wall Street firms and the Commercial Banks that acted like them, as speculators and taxation profit centers, and not value builders.

Essentially, Paulson and Bernanke told Bank America that the American public should be kept in the dark concerning the condition of Merrill Lynch. That saving Merrill Lynch and its shareholders was more important than lying to and damaging Bank of America's shareholders. That Bank of America had enjoyed the favorable economic and regulatory conditions of the US markets for many years by the good graces of the US Government, and now the US Government was telling them it was pay back time. Oh, and if you are not happy with the US Government's position on this matter, we will remove you and your board and put another Liddy (AIG's government appointed CEO) in charge. I am truly at a loss for words. This public revelation essentially tells all CEO's that the cost of capitalism is, at any time, at the bidding of the US Governement and that the shareholders rights are nearly worthless in the Government's mind. That is a terrible precident.

Perhaps more shocking is that Paulson, a man who benefited enourmously from the government's lax regulations when working for Goldman Sachs, was able to lead the charge in the selection of survivors among AIG, Citibank, Lehman, Bear, Merrill Lynch, and now Bank of America, while maintianing and funding via government requirement, the stability of Goldman Sachs. One can only imagine the books that will be written on this era in the future.

In the past you may remember that JP Morgan bailed out the government. Well these days are long gone. And in their place seems to have arisen the greatest theft from American shareholders and investors ever perpetrated. It may not seem like it, but I really am at a loss for words on this subject.

But one thing is true. The President I voted for has proven to be a greater light weight than the most conservative media could ever have guessed at. Virtually all of Wall Street's value has been consolidated by this government's direct decisions into 2 banks, Goldman Sachs and Morgan Stanley. That, people was not through survival of the fittest, but through government selection led by former Goldman Sachs partners and consultants. This President has permitted this to happen and has yet to show that was his vision or even by his influence or approval that this consolidation occured.

So what good has come from all this? Perspective. You can rely on no one to make proper invesment decisions but yourself. And even when you make them the government may, at some point in the future determine that your equity position does not deserve the proper free market information its agency, the SEC, requires of its public companies by law. You have learned that the government has always been working with these large banks, and only during a bear market is that marriage exposed.

Wall Street professionals always knew this, they just didn't tell you. And that is why the markets shrugged off this news of forced collusion of public entities and the government at its highest levels.

I wonder, who other than Goldman Sachs will ultimately benefit from this government's efforts in the US economy? I also think we now know the conversation that was had with Warren Buffet and the US Government prior to his preferred investments in GE and Goldman Sachs.

GE closed yesterday at $12.03. Dell at $10.20 no changes needed.

Build Value Every Day, become more expert.

Brad van Siclen

You Are Officially Alone - 4 / 22 / 2003

2009-04-21T10:51:00.000-07:00

Citibank. If you are invested in a fund or index, you own some. How? Your fund certainly owns a few index spiders. Citi is a part of most portfolios and equity indexes. And those in charge of managing your investments in equity funds have just officially vacated all fiduciary responsibility to you, the investors.

They have done this by allowing the Citibank board to be unanimously re-elected. These board members, super smart people, are paid to ensure that the executives of the company manage the corporation for the benefit of the shareholders. Do you think they upheld their end of the contract? This Board has sat back and done absolutely nothing for 2 years and presided over one of the greatest loses in value and operational in competence in the history of American Banking. And guess what? The professionals you pay to manage your investment and to cast your votes by proxy decided to reconfirm this excellent board.

It's official people, you are alone. Professional management of your money does not exist. And fiduciary responsibility is not at all a requirement in the eyes of Fidelity, Janus, Vanguard. I am terribly sorry if I offend some readers who work for these named funds and really do a great job for investors. But at some point they need to ask themselves if they take any responsibility for the record redemptions they have seen at their funds in the last 12 months. Those redemptions are investors casting their votes on the fund managers. Its that simple. Perhaps if fund managers had taken more responsibility in looking out for their investors money, had remained disciplined, had not been caught up in the speculative momentum of the last few years, and had made the necessary public statements and actions to ensure the boards of companies they invest your money in were beholden to the shareholders first, we would recognize their value in the process. Instead the vast majority of equity fund managers are little more than clearing houses for your investment money. They are not expert, or they were once but now take credit when the markets go up, and point fingers when the markets go down.

This is the very reason you must be more expert. You must learn some investment basics. You must decide your investment profile. And you must act on it. It's called taking responsibility. Because if these results of the Citibank Board re-election tell you anything, its professionals you pay to watch your financial back are not going to do it at all. Read future and past postings, send in your comments or questions or suggestions. Together we can become more expert.

Learn. Be Conservative. You worked very hard for your 401k.

Build Value Every Day (on your own).

Brad van Siclen

The Volatile Legacy of Netscape - 4 / 21 / 2009

2009-04-21T04:45:00.000-07:00

We have a significant perspective issue that over took the equities markets in 1995. And we fear this perspective will haunt the markets for many years to come.

This was the dawning of the the internet bubble, and Netscape was the band leader. It was followed by companies like EBAY, Amazon, and AOL. These Companies were treated by IPO bankers as high risk propositions. And their IPO process and structure were all very standard for unprofitable, modest revenue concerns that were unable to raise the capital their business models needed to become profitable from the private markets. The IPO bankers offered a small amount of shares, typically between 5 and 7 million shares, to the public representing 10 - 20% of the company's total shares outstanding. The thinking was fairly sound at the time, no one knew when or in most cases how these companies would become profitable. All, including the companies, believed that more money would need to be raised in future secondary rounds from the public. So a modest IPO issue of a modest amount of Company equity, leaving more equity on the table for future public offerings was the preferred route. This was a sound model in an uncertain era not yet realizing it was the leading indicator of an explosion of new money, new share structures, new shareholder / management relationships.

The problem began when the demand for Netscape shares exceeded the availability of these shares by multiples. Some bankers believed that for each share offered in the initial offering, 20x that amount was requested by the investment public. Thus created an IPO issuance that doubled from $14 to $28 per share initial pricing and soon, once available for public buying, became $75.00 a share. This for a company who reported revenues of less than $1.0 million US in the 12 months prior to its IPO and had spent nearly all its money invested to date, accumulating losses of nearly $7.0 million dollars.

The question is why did the stock trade to $75.00 within a few days of its IPO given the historic financial performance of the company. The real reason - an imbalance of shares offered to satisfy the public demand. But Wall Street can't tell you that. It would be admitting to a mistake in the greatest IPO in more than 20 years. Instead, Wall Street set about using Netscape as an example of its forward looking genius. Its analysts spoke of new paradigms, future valuation models that proved the stock was under valued. And raving about a market capitalization value which exceeded 6.0 billion dollars based upon expected future earnings.

The reality was that Netscape's market value on a per share basis was more than 80% based upon shares that would never trade or be available to the public, held by insiders who were restricted by both the IPO bankers and the SEC's regulations from selling their shares. Had those insider shares been available for sale, it is highly unlikely that the shares of Netscape would have reached even $30.00.

But what was created was a new model that IPO bankers replicated for years during the tech bubble. By creating supply / demand imbalances in the public markets for interesting tech companies, investors were forced to go to the public markets to acquire shares, rather than the company directly, and share prices for IPO's soared. Now analysts were faced with the task of justifying the public prices and market values of these capitalization challenged firms. They wheeled out Excel spread sheets and began creating new rationale for value. And while this occurred these same valuation applications (Projected Revenue Multiples, Projected future customers, Discounted Cash Flow with Terminal Earnings Multiples) were being applied to the tried and true cash flowing companies of the S & P 100 index whose values soared with the markets.

It became normal to see a company trading at 25.0x earnings. Or to see a company trading at 3.0x projected revenues. And now today we are left with this legacy. Because who would pay 25.0x (or 25 years times) a company's earnings in order to own a company? The answer unfortunately is today's fund managers. They are caught in a cycle of over valuation that will take many many years to get to equilibrium, and until then, volatility in the markets of the last six months won't be an aberration, it will be the norm.

GE - $11.35, maintain stop loss at $9.90
Dell - 10.37, maintain stop loss at $8.50

Build Value Every Day

Brad van Siclen

Dow Jones No Longer A Good Thing - 4 / 17 / 2009

2009-04-16T07:57:00.000-07:00

I have not written in 3 days for the following reason - nothing has happened in these markets that is surprising to traders, to you, or to me. Ask yourself why the market has traded sideways (compared to recent weeks) amid earnings season reports. Traders have learned to limit their own exposure in this market, not get caught by intraday market reversals, and now we have a market that reacts independently of Large Cap and Dow Component earnings surprises. It continues to amaze me that research groups find any value in paying Banking sector research analysts, and frankly that they continue to appear in the media restating what every other bank analyst has said and that is considered at all valuable.

What we do have is a problem. Dow Jones Components will trade in relative collusion so long as traders continue to enjoy the liquidity and expected volatility the index DIA offers. The only breakouts we are likely to see in any of the shares of these companies in the index will be to the down side as short sellers pile in against earnings misses. But unless there is a bankruptcy fear, funds will use these short term down swings to cost average their existing positions and modest price swings will occur. Here's the problem: membership in the Dow Jones index will reduce a company's upside share price potential. It would seem that Dow Jones Index inclusion, in anything other than a bull market, is detrimental to shareholders. Look what happened to the mighty Intel and Microsoft (MSFT) when they became Dow Components. Their earnings increased dramatically, but their multiple to earnings decreased dramatically reflective of the super stable growth of its Dow Component co-members. MSFT was so beaten down, even though their growth opportunity remained dramatic, that they announced a dividend. Forced by the Dow Jones investors to behave like Du Pont.

Meanwhile I have already heard the talking heads justifying the lack of market upswing in individual stocks that have dramatically beaten earnings expectations, by stating "there was no surprise in results". Have traders and fund managers already decided to ignore research analysts in favor of their own analysis? No. Unfortunately we have proven our Dow Theory for this period of market history. Dow Index day traders are in control of the value of our economy. And their sentiment is "How do I make money today with the least amount of risk". I don't see this changing for many months to come. Stick with components that have been unfairly beaten down on a P/E relative basis, expect 30% appreciation in those components over the next 12 months, and be happy with those returns. Momentum, bad, Value, good.

Build Value Every Day

Brad van Siclen

More Banking Upside Surprises - Analysts Caught Napping Again - 4 / 14 / 2009

2009-04-13T10:32:00.000-07:00

First: Followers should move stop loss on GE from $7.95 to $9.60, maintaining the 20%down side protection. GE closed yesterday at $12.20. Dell at $10.40 needs no chnages.

Talk of the day surrounds Goldman Sachs and the PPI. Goldman has clearly hired excellent PR representatives to manage its new found national recognition as being the smartest, best commercial and investment bank the world has ever seen. Goldman now calls its need to pay back TARP funds a "Duty". Goldman like other stable commercial banks has enjoyed the same no-cost-of-capital advantages that Wells Fargo recently dined on. It must be great to have fired ten's of thousand's of employees, reducing the largest portion of its variable costs, and then have the Government hand you essentially no cost money from which to access the capital markets on a proprietary trading basis. (If you note only a hint of sarcasm, you are not reading my posts daily.) This is akin to a farmer not having to pay for seeds, fertilizer or feed, and then selling everything for pure profit minus the value of his own sweat labor - all in 90 days..amazing.

Does anyone know where Goldman's profits came from this quarter? Trading profits. During the first quarter, markets were up 25% across the board. Goldman took its share of the TARP money and money at 0.25% interest on federal interbank loans and invested it in the stock markets. Bang, $1.9 Billion in profits. Profits that will ultimately go to its remaining executives pockets in salary and bonuses. They are raising funds now by selling equity to repay the TARP loans. Then they ride their commercial bank designation and low, low cost of capital all the way to the Bank. Isn't US Government Led Capitalism great?

At least Wells Fargo made their surprise profits from fees generated in refinancings of business and home loans, and in capturing the increased spread from the same $0.25 interbank rate. That TARP and Federal Reserve money at least trickled down to you and me.

But I must ask readers of yesterday's posting...where were the banking experts on Goldman Sachs? The "experts" again did not do their homework and instead took the easy way out by following the herd all the way to a significant under estimate of Goldman's 1st quarter profits. Banking analysts are beginning to remind me of tech analysts of the late '90s. Except being banking analysts and more conservative by nature, they wildly underestimate bank operational performance. Worse it would appear they follow the same pack leaders that missed the banking stock crater of 2008. Just last week (4/7) Mike Mayo, esteemed banking analytical expert, who you may recall launched coverage on the banking sector with extraordinary bearishness sending the banking industry stocks into a tailspin. This was followed by Richard Bove, another "great" banking sector analyst who answered Mayo with an "agreed" except for Citibank, JP Morgan Chase and Bank of America. Neither one of these analysts said buy Goldman or Wells Fargo. Am I making myself clear? If you want to follow the herd read the Wall Street Journal and listen to analysts who follow large cap banks and continue to play the momentum game with your investment decisions. Or you can keep reading and become more expert yourself.*

Now for the PPI. Bernanke should be very very concerned, as should we all, about the level of unexpected drop in the PPI. This index is used to gauge the prices producers earn for their goods available for sale. And what it suggests is huge price slashes to generate sales across the board. I like to call price slashes at the retail level forced devaluation of inventory. And we are all left to wonder, have the federal stimulus packages already begun to hint at the future negative effects of massive currency printing? We all live in a global economy, but it is clear that US Business and the US consumer remain the targeted buyers of products made in other countries. So massive inflation (or reduced value) of the US dollar forces other nations who sell to the US to ultimately devalue their own currency simply to make sales to the US. Did the reduced PPI hint at that after effect? Doubtful yet, but it must be a great concern to Bernanke. Deflation has a nasty habit of making everything less valuable and making workers and savers less motivated.

Initially when a government prints massive amounts of money, economists fear inflation. That's an easy concept to get, there is more money out there representing the Full Faith and Credit of the US Government. So if you assume, like most do in this analysis, that the Full Faith and Credit of the US Government is based upon its ability to increase its revenues through tax collections on an domestic economy that is growing slowly, and, there are more dollars now than there were 3 month ago, each dollar is worth a bit less as a representation of the Full Faith and Credit of the US Government. Which means sellers of goods need to raise their prices to maintain the same relative profitability. That's inflation. And that's step one in a long process of global currency devaluation (which I'll discuss in more detail another day).

*in fairness to Mayo and Bove, they rely on discussions and review of historic performance data provided them, in large part, by executives of the same banks they cover. Making their foundation of information modest at best.

Build Value Every Day

Brad van Siclen

What to Expect this Week - 4 / 13 / 2009

2009-04-13T06:40:00.000-07:00

The business world remains in flux. Having read many of the financial sections this weekend and listening to the financial networks and radio hosts this morning no one can agree on the path for the US economy for the next 3 months. Will it worsen, plateau, improve? I heard all three this morning.

One thing is for certain, volatility will remain in the medium to high range because we have extremely liquid markets and large amounts of uncertainty. Our best defense to this volatility remains large cap, industry leaders that are purchased at a relative value discount to their overpriced peers. And do not forget a 15% - 20% stop loss down side protection which moves up when your investment moves up. Sure your broker may complain, but its your money, right?

And when he's done complaining, ask where he or she is invested personally. Then watch those positions / issues carefully. It will give you some real insight into their value to you. You need to determine whether your broker is good at managing their firm's infrastructure (trade disputes, executions, clearing), research selection (discussing with you new ideas they believe in as well as new ideas they do not), and actual investment selections that match up to your investment profile. Anyone of these broker profiles is good enough. The key is knowing which one you are working with and remember the vast majority react to momentum in the markets and their tone on a specific day will correlate strongly to the Dow Jones Index daily trend.

This week should be more volatile yet again. We have a slew of earnings to be announced in this market combined with a overly cautious regulatory and reporting environment. We will see huge misses (because a small miss and a large miss is the same in a bear market), and smart public company executives who know they will miss their projected earnings or show a loss will use this opportunity to clean house. That is they will write down and expense everything they can from their balance sheet. These write downs will flow through the income statement and push earnings down further. The result for earnings misses is that we will hear 2 numbers from many reporting companies that miss their projected earnings, one will be earnings from operations, the other will be earnings from operations and one time charges.

The second type of earnings announcement we will hear is beating estimates by a large margin. This will be due to frightened financial and research analysts who would rather underestimate company earnings than due real research and economic application in the industry they are being paid to be "expert" in. I ask anyone with half a brain who paid attention to last week's huge beat of earnings expectations by Wells Fargo how this can ever happen? How is it that banking analysts can miss by that much? Does it not occur to them that Wells Fargo wrote off much of its bad debts already, reduced its variable costs dramatically (wages primarily), and has been operating on a virtual cost free basis (on capital) thanks to the government may actually show a real profit? Being fluent in research and industry speak and writing thick reports in support and poorly researched and analyzed information does not make anyone a good analyst.

Too many research analysts are making a living discounting the financial information provided them by self serving CEO's and CFO's of public companies. And this should be your perspective when surprises up or down on earnings occur.

Readers, corporate performance and results should not trend upward like a 20 degree angle. They should move about that trend line at least, sometimes higher, sometimes lower. Its when we see 2 deviations from that trend line we know that there is an issue. That's also when we as investors need to do our own investigation for value.

GE - buy in 4/6/2009 @ $10.60, S/L $7.95, ClP $10.76
DELL - buy in 4/6/2009 @ $10.00, S/L $8.50, ClP $11.33

Build Value Every Day

Brad van Siclen

Ahead of the Weekend, Something to Consider - 4 / 9 / 2009

2009-04-07T11:34:00.000-07:00

1) Not Doing your own Research - Folks it shocks me that day traders and individual investors alike pick up the paper, look at a trend line, log into their on-line account and buy. That's reckless. Stocks are the currency of corporations. They are money, and too many of us throw money at a stock as if we were gambling. And Guess what, the odds are worse than at the casino. Want to reduce your investment down side dramatically? Take an extra 5 minutes and determine the relative value of your potential investment (Price Earnings Ratio, Operating Income multiple) against its industry competitors. When I look at Dell as an investment, I also look at HP. Is Dell by these easy ratio's priced at a lower multiple? An equivalent Multiple? Or at a higher multiple? If you think, as I do, that Dell is a better company than HP, then buy it IF it is trading at a lower multiple. This simple relative value review which can be done on yahoo or google finance will prevent most short swing losses which are your biggest enemy.

2) Momentum Trading - I have watched great traders get burned regularly by momentum plays. The Market for a certain stock goes up quickly and in they go, under the belief that the liquidity is so great that they can get out if they need to. These same expert traders, and many I work with, forget that there are other traders that have already hedged their upside in the very same stock, and therefor they have already locked in their profits and are now just watching the rest of the herd speculate.

3) Not Staying Disciplined - Here's what I mean. Each one of us has our own investment model / reasons. Write it / them down. Stick it to your computer screen. Each time you make a trade or investment, look at your model before you click "buy". Think about how many times you have hurt yourself by playing outside that model.

4) Believing that a Quick Investment Return Validates Your Expertise - Guess what, you are not an expert. Not even the so called experts are experts. See the Market recently? Quick Investment returns are luck people. They were made by your decision to speculate on an issue before some other Speculator bought those shares from you. That's called the Greater Fool Theory. If you think it something else, you will be the Greater Fool next time.

5) Blindly Following Your Broker - I know you have heard this one before, but having run 400 Broker's myself during the late '90s and through 2006 - I can tell you that Brokers, Investment Managers and Advisers, have no better information than you do. In fact their information is almost entirely speculative and momentum driven. Please do not agree to a trade without being in front of your computer screen so you may at least follow the steps laid out in 1) above. And by no means believe that the research analyst suggesting the trade to your broker has done this either.

Remember, you can't grow your portfolio unless you protect the gains or principal you brought to the table. Disciplined investing by your own definition with a few helpful downside protectors is really the best method to winning in the stock market.

Build Value Every Day.

Brad van Siclen

Dow Jones Neck Snapping - 4 / 7 / 2009

2009-04-07T06:04:00.000-07:00

Daily Market watchers beware. Do not get caught by the talking heads providing clever prose like "Bear Market Rally", "Value Shopping", "Lack of Bull Market Conviction", "by historical measures, standards", "Backing and Filling". These folks are not expert in the market because they have yet to recognize that the Dow Jones Index is ruled by day traders. And day traders trade the index against news announcements. Today for example, Alcoa announced bad earnings. This was used as the rational for the Dow Jones futures being down. Bad earnings in this market are a surprise? Definitely not.

So ask yourself why the markets are moving lower. Its the emotional response by traders who are Bearish and sell the index into bad news. They are not selling Alcoa, they are selling the index. Volatility exists in an uncertain market. But volatility is amplified by index day traders who have more interest in liquidity and volatility and virtually no interest in individual companies. There are no downside earnings surprises during a recession. There are only upside earnings surprises in this market.

My latest "expert" bashing surrounds the amazing banking analysts who have begun releasing (finally) downgrades in bank stocks. WOW, brilliant. It just shocks me that after 6 months of the greatest financial crisis of the last 50 years analysts are still comming to the table with bank down grades or initiating coverage with a "sell" or "underperform". Where people is the value here? And what should we be doing ourselves.

First, enjoy the entertainment. Second, seek the best quality large caps trading at a discount to their peers on the simple P/E standard. Yesterday began my new value based portfolio with GE at $10.60, and Dell Computer at $10.00. GE has a 20% downside stop loss given its inclusion in the Dow Jones Index. Dell has a downside stop loss of 15%. I expect these companies operations and profitability to perform modestly better than their publicly listed competition.

So unfortunately we can not use equity indexes, the Dow, the S & P, NASDAQ as anything more than entertainment purposes right now. When the market is up 100 points, "experts" and the media make statements like "all the bad information, and bad earnings have been built into the current market levels". When the market is down 100 points, suddenly bad banking sector information is a reason for the slide of the market. But in truth none of this information is new and it is all, again, simply an excuse to sell or buy the indexes.

Pick shares in companies with proven value that have been unfairly beaten down over the last few months. They will have the best principal downside protection built into their long term investor base, and they will have be the first to move fundamentally when fund managers think its safe to put money back into the market.

GE - buy in 4/6/2009 @ $10.60, S/L $7.95, ClP $11.19
DELL - buy in 4/6/2009 @ $10.00, S/L $8.50, ClP $10.33

Build Value Every Day

Brad van Siclen

The Capital Markets Offer New Value - 4 / 6 / 2009

2009-04-06T09:03:00.000-07:00

Having poured over financial journals and newspapers this weekend, it would seem we have reached the Rubicon. This is one of the rare instances in which we can truly say the Dow Jones index has found its fair value. New information has turned to a slow drip from the torrential gushers of financial information in January, February, and March. The upside last week was really the balance of remaining short covers and some new found optimism from the G20, and this weekend analysts had either nothing new to say or nothing to say at all. So this, value minded folks, is the time to go hunting. It's the time to begin seeking out great, large cap value and begin rebuilding that portfolio.

Please remember that there will be ups and downs as non-value minded speculators fuel daily momentum each way. There are very important disciplines to remember in value investing. Value looks out a year at least. Value sets its price targets the day of purchase. And value puts a minimum 15% downside stop loss into its principal purchases.

I won't pretend to have the ability to pick the best performers this year, but I will discuss the why's and hows of the companies purchased, always keep an eye on principal investments made, current pricing, and also manage stop loss barriers so those that chose to follow have a decent road map and understanding of my current thinking on each of the positions discussed today and in the future.

Also please recognize that in the spirit of keeping this daily piece limited to a 2 minute read, I won't include tedious competitive industry analysis, financial statement reviews, discussions of management, foolhardy projections, and misguided valuation models resulting in a 10 page research report for each. If you want to know why, please re-read past postings paying close attention to statements on research analysts and wall street's so called experts.

I'll begin with 2.

1. General Electric - "GE", NYSE, current price: $10.60 - This Company's stock price is down 60% in the last 12 months. Why? First, they are one of the most fully valued companies at any time. More analysts cover GE both in the US and in the World than cover virtually any other company. GE is considered the bell weather stock for the US economy. Fear of GE's GE Capital division's liabilities and massive redemptions in mutual and equity funds were also responsible for the price collapse. So now GE sits with a 6.3x trailing PE multiple. In recessions GE, like IBM, is able to sustain its operating margins and grow its sales. They can do this while their competitors fall victim to expenses assumed with overly optimistic fixed costs. Most of these costs were added by competitors in 2007. I expect GE to show modest revenue growth, but significant earnings growth (vs. Research "experts" predictions) and have a price target of $15.50 (that's 50% growth this year). My stop loss is a bit more than 15% given its Dow Jones index related volatility, and in at $7.95.

2. Dell Computer - "DELL", NASDAQ, current price: $10.00 - This company has the same industry position advantages as GE. They are the Walmart of the computer industry in the following way - their inventory management and supply chain management combined with their assembly costs - provide them with decisive margin control advantages its competitors do not yet have. Add to this their customer loyalty and quick service and you have a perennial winner in a commoditized segment. Currently trading at 8.0x earnings, this company's stock was beaten down by fund redemptions as well, and while I do not expect to see $30.00 any time soon, i do expect limited downside risk at $8.50 (15%) and have a price target in at $14.00 - that's 40% this year.

There you have it, 2 really great value investments beaten down unfairly by market forces.

Build Value Everyday

Brad van Siclen

Lets Talk Executive Pay - 4 / 3 / 2009

2009-04-03T06:48:00.000-07:00

How do you put an end to this crazy argument about executive pay? Here's a novel idea, align executive pay with the owners of the businesses they work for. And remeber the owners are shareholders. Ever since I have been in the Merger and Acquisition and restructuring business, I have found the executive pay issue to be one of the largest sticking points. And now, as we see more and more outrage on the issue of bonuses when shareholders have lost 20%, 50%, even 80% of their value the knee jerk reaction to executive pay is understandable, but completely misguided and counter productive.

I am the first to speak out against executive pay. But I speak out against executive pay, that is disproportionate to the operational performance of the businesss. And 10 million dollar share issuances in any market condition is silly. Or is it? The truth is, there are healthy, aligned situations in which Executives should receive these types of bonuses.

But let's take a step back. First, let's stop treating shareholders as captive, no rights, holders of paper. Shareholders can sell their shares at any time. They are not beholden to any investment in any public company. So any argument that suggests that shareholders should be outraged by big executive pay when their stock has plummeted is really very foolish. Why did they hold the shares? So let's stop with the "How can CEO's take huge pay when shareholders have lost so much?"

Second, there is a total disconnect that has occured between shareholders and their perceived rights. And to understand why, we need to look back to the Internet Bubble. These were the times when companies could not pay cash bonuses because they were not profitable. So the thinking was, give them their bonus equivalent in shares. Sounds neat and tidy. One would think that if Executives were earning the bulk of their compensation in stock, then their decisions in operating their corporations would lean heavily toward increasing the value of the stock and ultimately that is what the shareholders want.

Here's what we found. When Executive officers are receiving the bulk of their compensation in common shares of their company, they manage their revenues, profits, balance sheet and cash to sustain and propel their share price based upon Wall Street's valuation methods for the industry they compete in.

This is entirely backwards and over the course of any 3 year period is counter productive to the value of shares. One need only look at stocks of 3 great or once great companies for the proof in this. In these examples, Management became so concerned with the growth of stock prices that they risked their company's economic futures to satisfy shareholders needs (and their needs) in the short term. Further to this, does it surprise anyone that theses CEO's considered the greatest by their shareholders over the last 10 years retired at the height or near height of their share price values - AIG's Maurice Greenburg, GE's Jack Welch, Citibank's Sandy Weil - each man was a master at operating their business for maximum shareholder value, each was a huge shareholder, and each knew when times were changing..and left.

So here's the solution. Pay the CEO's bonuses through their portion of company profits, or dividends. Pay dividends quarterly, annually, semi-annually. And pay all the other shareholders too. This simple process aligns shareholders with executives and places each shareholder on an equal footing with management. This dividend policy needs to have a permenant distribution ration. Let's use 50% of earnings for my example, but it really can be any percentage.

Now let's apply that to GE in 2000. In 2000, GE earned 10.7 billion dollars. 50% of that number is 5.35 Billion. There were 3.2 billion shares outstanding. Each shareholder would therefor receive $1.67 in annual dividends per share. If Jack Welch was holding 10,000,000 shares ( less than 0.5 % of the total outstanding) he earns a bonus of 16.7 million in cash. That comes on top of his salary. And, If you held 100 shares, you as a shareholder could take the cash ($167.00) or buy more shares. Either way you have the decision that an owner of a business would have, do I reinvest in the business? Or do I take the cash due me as a an owner of the business.

This is alignment.

There is another point which I will touch on here only, and pursue in a later posting. When an executive team focuses on increasing earnings through proper expansion and the pursuit of operational efficiencies then the value of the business goes up. But this does not mean that the stock market will respond to the increased value created by this team. Eventually share prices will align with earnings, but that does not mean that increased profits means increased share price, and executives should not be held responsible for both...and wouldn't be if they paid out a real percentage of the earnings the business created to its owners, the shareholders.

Build Value Everyday

Brad van Siclen

The Dow Jones Speaks - 4 / 2 / 2009

2009-04-02T05:42:00.000-07:00

Feels good for a change watching the Dow go higher on bad news, doesn't it? One week ago we were still uncertain about what the Dow Jones Index moves were saying. This week though it has become clear. The speculators, the day traders, the risk takers believe a bottom has been made. They believe the total down side of the US economy for the next six months has been priced into the market. That US corporate and asset values won't go down any further, and that the risk of a deeper economic slide during the next six months is reducing. Reducing to the point that they want to begin speculating on consecutive upside days.

The recent week's Dow Jones gains are strictly sentiment moves though. These are days when any good news from the government on regulation, economic data or economic stimulus is released and regardless of its potential near term impact, it completely over runs any bad news released from corporations or the government. But sentiment moves are what market reversals are made of and over time they create momentum, renewed investor interest in the markets, and index moves to the upside.

At our economy's ground level, job losses keep advancing on a weekly basis. And while a few cheeky analysts suggest that the rate of decline is "declining", until we see 4 weeks of reduced job losses we can not be certain we have hit bottom. Job losses or gains are the only indicator of economic direction that we have been able to trust.

But for investors and investments, now is the time to get back into your favorite equity issues. Seek out the big names, the companies we know, who the speculators have beaten down equal to or below their industry competitors. Most have reasonable P / E multiples now, use that indicator alone as a relative value gauge. In this environment they will be the issues that protect your principal investment (your downside) while they continue to gain market share over their less well capitalized competition. These are easy days for value investors. Take advantage of your perspective.

Build Value Every Day.

Brad van Siclen

G20 - More Wasted Value? 4 / 1 / 2009

2009-04-01T05:33:00.000-07:00

The all inclusive G20 are meeting in London today. Protesters will flock to the London Streets. There are many angry out of work Brits, so I expect the numbers of protesters to exceed estimates by 2x. President Obama and his 500 man entourage, will spend a few days trying to explain why the US was not the sole creator of today's financial mess. And he will be wrong.

When you are the worlds largest economy and by a multiple its largest supplier of financial "products" and the world economy tanks with systemic causes and effects originating from your economy, its your fault. Period.

Let's not spend anymore time discussing who or what groups are responsible (Greenspan, Clinton, Bush II, Greenspan, Wall Street and Money Center Bank CEO's and CFO's, Greenspan, China). Let's focus on this G20 meeting. Obama needs to spend his time reviewing the policies Fed and Treasury wonks are pinning together as solutions to this problem. Because 1 week from now no one is going to care that Obama has given an additional 4 "We are doing everything we are able to" speeches, or that the G20 members have each complained about the US and the international banking system.

But everyone will still care about where the economy is, and that we still do not have a handle on key corrective issues. Like how much longer are we going to keep non-productive white and blue collar workers in jobs with tax payer money? When are lazy fund and pension managers whose failed BB rated corporate debt bets on financial and manufacturing institutions going to write down their asset value? When will the clean out occur?

The longer managers of our economy put off the inevitable, the longer they seek to prolong the full write down of the US Economy, and thereby the World's collective economy, the longer they hope that interim fixes (Trillion dollar bailouts are not tiny I know) will limit the economic slide long enough so that stimulus packages can turn the economy around, the longer it will take for the markets to fix themselves and move forward and grow again.

See the managers of the US Economy (Money Center Banks, Federal Reserve, Treasury Department, Investment Banking Heads, the Executive Branch) have known for years what is coming. The US economy can only grow by growing the World Economies it sells its services to. Grow your business by growing the customer base, right? Basic economics but at a macro level. The problem is that you lose your position of dominance over time. You may still be the biggest and the best, but you are less dominant. When your manufacturing base is lost, and you are not building value but advising on how to leverage value, your position as world economic dominator is coming to an end.

The United States economy managers need to allow the forces of the world markets to reset the US value, much like they reset the Japanese value in the '90's (don't forget, Japan was "THE" Economy in the '80s), and they need to do it quickly. The current process allows non-value producers to cling to their jobs much longer then they should. Let our wages sink to a point that it makes sense for us to recapture and rebuild our manufacturing base. We make the best products (other than cars) it just costs too much right now to make them.

So here is the solution, devalue the dollar - force everyone to take their lumps. The dollar devalued will have a huge ripple effect through out the world's economy. It would cause political and social unrest in much of the third world, and damage most of the G20 economies to some extent. But it will force all currencies to devalue over time so they may access our markets. And given the efficiencies of the world markets, the recovery will be much faster than the 10 years of the Great Depression. Maybe 2 years.

Make no mistake, this day is coming, but let's hope its on Obama's watch, and not on the next President's watch 4 years from now. If the US fails over the next 4 years, the world's economy may take 50 years to recover to 2006 levels. Obama and the US economy managers can not fail to lead the US through the necessary changes. If this President wants to bring value to the G20 summit, he needs to tell the World Economy just how bad things are. Let them react, let the markets reset and then in 4 weeks when the dust settles present bold solutions to fix the problems managers of the US economy created over the last 15 years. Do not delay the process any longer or the value of the US economy will continue to erode.

Build Value Every Day

Brad van Siclen

P.S. Here is the list of the G20 members. Make your own conclusions -

* Argentina
* Australia
* Brazil
* Canada
* China
* France
* Germany
* India
* Indonesia
* Italy
* Japan
* Mexico
* Russia
* Saudi Arabia
* South Africa
* South Korea
* Turkey
* United Kingdom
* United States
* The Head of the European Union

We Need a Reality Check - 3 / 31 / 2009

2009-03-31T11:26:00.000-07:00

If I hear another so called Wall Street expert tell us in an interview that mark to market is a poorly designed policy and that the value of the TARP assets are significantly higher than currently represented I may just wait outside the studio where the interview is held and egg the the "expert". What ridiculous planet have these "experts" been living on?

Oh yeah its Planet Wall Street. Were values are not based on replacement value plus a 4x cash flow multiple, but on 2x replacement value and 12x cashflow.

Conversation between bulge bracket Wall Streeter ("WS") and a true investor ("TI"):

WS. If a bank is not getting capitalized by Uncle Sam and it can not sell its assets at the value they were purchased at what does that mean?

TI. It means the assets are worth less than they paid for them.

WS. How much less?

TI. Whatever anyone will pay for them.

WS. What if I can't get a bank to finance me so I can pay even a much less amount?

TI. You are still paying too much.

WS. But the Banks are saying they can't lend money because they have had to mark down assets too much.

TI. If they hadn't paid speculative values they thought were discounts to future value for these assets they would not be in the bind they are now.

WS. That's ridiculous , do you really believe that all the value, cost, labor, materials used to build these assets also have less than half the value they were paid for and compensated at?

TI. When it comes to the assets you are claiming the Banks won't lend against and have been more than halved in value by mark to market accounting, yes.

WS. That makes no sense at all.

TI. I am not surprised to hear you say that.

We have been living in a hyper inflated world for so long, 20.0x multiples became the norm. $1.5 million for a 1 bedroom apartment seemed reasonable. Billionaire 30 year olds were becoming common. $85,000 cars were common. People, these values were created by unrealistic economic policies and thinking that moved 3 deviations from real for so long that 2 deviations seemed like bargain hunting.

Tomorrow we'll discuss finding stocks in any market that protect your principal and build value for you over time in any market.

Build Value Every day

Brad van Siclen

But

US Government Owns Car Companies Too? 3 / 29 / 2009

2009-03-30T08:20:00.000-07:00

We have now officially crossed the chasm. There is no turning back. Any company considered large enough that its failure will result in large scale, prolonged unemployment benefits payments, the US Government will come in and save. Folks, President Obama just stated that the US Government will honor all car service plans and warranties. Does anyone find this remarkably shocking even in this era of daily government bailouts?

So, does this mean that when a corporation has a bad year or a bad few years in a row, all it need do is suggest that a bankruptcy is coming and beg for a hand out? You know folks it's all well and good that Executives and CEO's are seeing reduced bonuses and pay cuts. But what of the millions in salary and bonuses they "earned" between 2001 and 2008? Granted, there are a lot of issues that burn us all. But perhaps the biggest issue is the refusal by the US Car makers to refine and improve the qualities of their models in favor of profits. 40 years ago the US made the best cars, period. And beginning with the first oil crisis of the 70's, Auto makers began squeezing out profits by cutting manufacturing and parts costs. Seeing the car as a commodity and consumer disposable, and less like a business critical tool, luxury good, or consumer durable.

In the name of profits they started putting cheap parts and cheap engines into great product lines and poof, consumers and brand identity eroded. Ford made us all endure decades of crappy Mustangs. GM ruined the Cadillac. Crysler..well they destroyed the Jeep. And while this was all happening, and consumers moved to Honda and Toyota, the Big Three began to convince the consumer to drive their trucks instead of their crappy sedans and charged us more for the privilege.

Ok so I have over simplified here, but not by a lot. The real point is that when Honda and Toyota were building substandard cars in the 70's, they competed on price and poured profits into improving their quality, and ten years later were able to charge 25k for their cars and gain significant market share. Hyndai is the latest example of this business model - though they are 20 years behind Toyota and Honda in the cycle.

The sad part is that the Big Three knew this was happening. They knew that they were trading all their build quality and brand strength for short term profits. And the proof is their recent response. Each of the big three has taken a portion of profits and began rebuilding their signature cars to Toyota and Honda quality - the new Cadillacs, Mustangs, Camaros and Corvettes are as good as they ever were. But rather than having the ability to leverage this renewed value, they have run out of time. And only the government believes they can and will endure. The workers are refusing to recognize their position or the long term vision, the executives continue to point fingers, and the build quality for 90 percent of their fleets still lags the Koreans, Japanese and the Germans. In all consumer durables, build quality is synonymous with value at all price ranges.

So maybe it is up to the US Government to step in and save the industry. Maybe in this case the same government who the auto workers voted in has no choice but to save them. But once saved, we should all be afraid of these companies repeating the same mistakes in the future. Maybe they need to hire foreign workers and Japanese and German executives who still understand that value is built incrementally every day year over year. If we were this government, we'd do what Regan did. Lock'em all out and take over the assets on behalf of the shareholders. Then hire cheaper and importantly better workers. Yes extreme, but that's what's needed these days. These companies lose vast amounts each week they remain open in current state.

Build Value Every Day.

Brad van Siclen

The Dow Jones Speaks - 3 / 27 / 2009

2009-03-27T05:18:00.000-07:00

This Dow Jones Index is very different from the Dow Jones Index of the past. What was once an elegant and simple barometer measuring the health and forecast of America's 30 greatest companies, has become a bipolar, reactionary indicator of day trader sentiment. It is this writer's opinion that the creation of the Dow Jones Index shares, which enables you to buy or sell pieces of each Dow Jones component in one single transaction has in fact ruined the very value the Index was designed to report.

Wall Street continues to hail the American Exchange for creating this trading opportunity, and by Wall Street standards, it has been one of the greatest successes of all times. The daily volume trades in the Dow Jones components have soared, and the "Diamonds" as the index shares are called trade as liquid water in the Amazon.

But in market conditions like we have beginning 2007 when valuations on companies far exceeded any rational financial math combined with market liquidity fed by extraordinarily lax margin standards even the most bullish of equity analysts stopped risking large investments in single issues, and instead focused their efforts on the momentum driven index investments. And the Diamonds, with their huge daily move potential and extreme liquidity fit the day trading psyche perfectly. Except unlike the $10,000 positions that fueled the day traders of the Internet bubble, 100,000 - 1,000,0000 positions became the norm as professional money managers and the traders became the new day traders.

With this switch, the Dow Jones became an index of hourly day trader sentiment of the US Economy, and its crazed runs and dips caused by speculative watchers of intraday technical trends and charts. And now we have a Fed and Treasury Secretary to is reacting to this index..How?

Well we and they really do not know how bad the banking system is, nor how far out and how large the legitimate counter party claims on derivatives go. Why does the Treasury continue to give money to AIG? Not to save AIG, but to settle the claims of the parties who bet incorrectly in this economic fiasco who in turn owe money to the parties who bet correctly. See AIG insured the parties that bet incorrectly. And those parties include Goldman Sachs, Bank America, Citigroup, HSBC, Wells Fargo, Barclays, and Society General, to name a few. These illustrious institutions can not afford to pay the claims against them unless AIG covers their losses. And AIG can't cover their losses unless the US government pours more and more money into it.

Now back to 2007. The hardened financial traders only care to make money. They smell blood and they begin selling the Dow Jones Index in massive quantities knowing that a wrong bet may cost them 5% at most because of the extreme liquidity of the Diamonds. Meanwhile, fund managers running your money are, in general blind to this momentum driven equity fiasco. They think, "Hey, i guess selling has started because valuations are too high." Most of these managers recognize that P/E multiples of 20.0x - 24.0x are a bit high, so a 15% retrace of the 2007 valuations is likely and expected. They sell a bit, but hold the vast majority of their Dow Jones component positions. That brings the Dow into the 12,500 range. But the traders keep selling. And by know the losses are piling up at a pace your fund managers who are strapped to individual issues can't keep up with. Traders, interested only in the super liquid Diamonds keep selling. They keep the momentum going and pretty soon Dow Components see multiples go to 8.0 - 10.0 x and the DOW indicated market loses 40% - 50% of its value with your fund managers wondering how and why.

Now bring in the economists who have a systemic financial issue, caused by the ridiculous expanse of the derivatives markets and the abusers of it, combined with their incorrect assumption that the Dow Jones Index is still a great barometer of the US economy, and they, including the Treasury, feel justified in throwing trillions of dollars into the pockets of the ring leaders of this crazed capital market gyration. I listed a few of them above (AIG,Goldman Sachs, Bank America, Citigroup, HSBC, Wells Fargo, Barclays, and Society General).

These institutions will not do good for the world unless the world aligns itself with their needs. But the Treasury and the Fed feel these groups are an integral component to the World Economy Functioning properly. This is no longer the case. while in a Bull Market they are leaders in raising capital for speculative ventures, in Bear Markets they are the leaders of the race to the bottom.

I ask all readers - Who funded India's, China's, Korea's last 20 year trajectory? Commercial lenders and private equity. Not Wall Street World. Wall Street World came in only lately to take advantage of the last 20% speculative growth. So why must we bail them out? If the US government wants to save the US economy, by pass Wall Street, they have become expert in speculating. Give the money to long standing conservative institutions and bring back Glass Steagall. Bring it back now. Wall Street will never self regulate, and when they got their hands on the Commercial Banks, it has been one speculative disaster after another. The Dow Jones may now just be an indicator of precisely that. Wall Street has maybe proven itself to be nothing more than a pass through for professionals who make a living speculating on the economy. The Dow Jones Index is good at telling us only that.

Build Value Every Day.

Brad van Siclen

2009-03-25T07:25:00.002-07:00

fair value and why its important

Part 1 - Observations on Market Gyrations - 3 / 25 / 2009

2009-03-23T14:27:00.000-07:00

Lately, the horror stories concerning decimated 401k's and lost retirement accounts has brought to bear a significant misconception in any kind of investing, and most obviously equities investing. We, and I include myself in this, have been fooled by fund managers, traders, research analysts, the lot for 50 years now.

I recognize this is a statement that offers one response, "No Kidding". But I think it's the reason why we have been misled that offers some of the best examples of how to minimize its impact on your future and your children's futures. I have borne witness to much of what I will explain here for all of my professional career. And it's the investors, institutional and individual, that intuitively understand this and importantly ACT on this information who manage to protect their principal, protect their gains, and compound those gains over a 5 year, 15 year, and 20 year period of time.

So with that statement, we embark on a series of daily called "Observations on Market Gyrations" designed over time to enhance your capital market's perspective and ultimately your expertise. Each posting under this heading will highlight common investment issues and basic solutions to them and the perspective that took us from them.

First and foremost, the concept of professional fund management is, and always will be a farce at one level or another. Fund managers and fund companies exist to offer vast diversification and educated stock selections to individuals who want the opportunity to invest in equities but do not have the time or do not want to make the effort to review and select their own investments. But this said, it is the exception, not the rule that Fund managers perform better over a 5 year period than any of the major indexes. The reason for this is they seek out, as core portfolio holdings, companies with consistent earnings and proven management that come with good Moody's, Valueline, and S&P ratings and receive ample "Buy" recommendations from research analysts at the larger investment banks. Seems like a safe and consistent bet that, importantly, no investor in their fund can argue with.

A quick review of the core holdings from my random sampling of popular Growth and Income funds from major Fund Managers reveals the following corporation's stocks in their portfolios: Exxon, Procter & Gamble, General Electric, AT & T, Johnson & Johnson, Chevron, Microsoft, Wal-Mart, Pfizer, JP Morgan Chase. Big names, great companies. But here is a key problem. The entire research world spends hundreds of thousands of hours quarterly on these very same companies. The result is that each of the shares of these companies are fully valued and fairly valued by any metric that the equities research world bases their recommendations on. And fairly valued or fully valued shares UNDER PERFORM MARKET INDEXES. (P.S. We am not forgetting the dividend factor. But people, these companies pay very poor dividends which, upon announcement, reduce the price per share equivalent by the dividend amount. Its a zero sum to the holder. In our opinion, dividends that are not equal to 33% of the companies earnings are not dividends at all.)

If you invest in one of these companies or "hold" your position in one of these companies you are in fact speculating that the global industry these companies address will grow. That the economic environment that each of these companies operate in will continue to grow. And we all know now that speculation leaves you and your investment wide open for a market corrections and loss. Or does it?

There are simple preventative measures that all of us, fund managers included, can use to protect large losses. We will review these periodically, but the easiest one to remember is called a stop-loss order. In this type of order the investor in say Microsoft can enter an order to sell all or part of a position at a pre-set price that is below the current price of the stock. Thus should a interim correction occur, that ultimately becomes a bear market free fall, you as an investor have pre-set your gains or at least your selling price and therefor are protected from significant future loss.

Now People, we do not want to hear, "yes, but if my position is sold and the market for that position rallies, an hour later I could lose my upside". Because if that is your perspective you are a speculator, not an investor, and that means you are willing to risk your principal investment and perhaps your savings in order to have a chance to participate in a speculative market rally.

This brings us back to "professional" fund management. How is it that managers entrusted with your investments would rather speculate with your money than build its value incrementally? How is it that any of them shows a loss of more than 20% last year? Unfortunately its not for lack of ability of lack of training. It is complete lack of perspective. And hopefully, through this daily piece, we are building real perspective and therefore real value incrementally and over time.

Build Value Every Day.

Brad van Siclen

We Need a Perspective Reset - 3 / 23 / 2009

2009-03-23T04:48:00.001-07:00

We Need a Perspective Reset People. 4 months ago, before President Obama took office, before Tim Geitner became Treasury Secretary, Hank Paulson recommended the very bail out plan we are hearing about today. Readers know that I am no fan of Paulson. He is a very capable and persuasive manager, but when caught in this historic and unprecedented financial crisis, his solution was to rely on answers from the same market cronies (CEOs) who were asleep at the switch when the train went roaring by.

During that uneasy time, the Summer of 2008, I was asked by the BBC to make a statement on my position for the first bail out. This was the late summer bailout that created a blind pool of money that was flexible enough to acquire "whatever" needed to be acquired to stabilize what seemed like a banking sector nose dive to zero value. Hours before the congressional vote I stated that "The President (Bush) has made an international statement that we must bailout bank balance sheets. If we do not the world's faith in US economic leadership will be shattered and the US will lose whatever leadership role it has." Congress declined it. The markets dove, the US dollar dropped. Five days later the Senate approved it, along with the Executive branch, and in a re-vote touted by many as full of pork, Congress approved the bail out 10 days after its first failed approval.

So finally, here it is. And ahead of its announcement, President Obama sat, yet again with the media, 60 minutes. His statement "I think that systemic risks are still out there. And if we did nothing you could still have some big problems. There are certain institutions that are so big that if they fail, they bring a lot of other financial institutions down with them. And if all those financial institutions fail all at the same time, then you could see an even more destructive recession and potentially depression." A very political way of saying, "That's my answer to the statements that AIG is nothing more than a pass through Hank's and Tim's favorite banks."

I credit the Opinion Editor of the New York Times this Sunday in permitting Frank Rich the space to properly call out the systemic cronyism which first created this problem and now continues to benefit from the "solutions". It allowed Governor Corzine (a former Goldman Sach's CEO) to tell it like it is, "The people have a right to be angry. We are rewarding failure with bailouts and bonuses."

He could not be more right about this. A significant reason for the mess we find ourselves in is the short sighted reward strategy put in place by CEO's and Board Members who continued to adjust their strategy to suit the shareholder's desires for quarterly results. It created a culture that produced short term gains at the expense of long term sustainability. And then paid them for leveraging their business model in the short term in order to produce quarterly earnings and annual bonuses. Well, we know now for certain that these business strategies end badly. Enron, Countrywide, AIG, Citibank, Merrill, Fifth Third Bank, Lehman Brothers, Bear Sterns. Will this list ever end? No.

Shareholders do not see themselves as owners of businesses, they see themselves as participants in the gains and losses of these businesses over short periods of time. If they saw themselves as owners, which they are, shareholders would be running at the corporate offices of these businesses listed in the last paragraph with torches and pitchforks. Calling for legal action against Board members and Executives who illegally transferred 100's of millions of profits from their shareholders into their own pockets. In certain circumstances, that's embezzlement.

But shareholders are not taking action. These "brilliant" fund managers who run your investments are simply repeating the same tired mantras. "Unforeseen market environments and historic changes have led to the losses in the companies we invest in and in the value of their stock." No one needs a fund manager who does not see historic changes coming. These historic market moves were being called for 24 months ago. These fund managers simply created index funds weighted in sectors they were comfortable with sat back and watched. Do the words "Fiduciary Responsibility" apply to any of these so called CFA fund managers? ITS A JOKE. Shareholders must must begin to act like owners policing the companies they own to build real value over time. Otherwise you are a speculator, a gambler.

Seek out and invest in companies that are building value. I think it has become apparent that the biggest companies are not building value they are acquiring value and then leveraging it. In a default or failed business model, it's the shareholders that lose. Not the employees who receive cash bonuses that far exceed the value they created for their shareholders.

Wake up people.

Build Value Every Day.

Brad van Siclen

Who is Driving this Bus? 3 / 20 / 2009

2009-03-20T05:44:00.000-07:00

Readers, we are desperate for leaders. I like you have been searching for answers in the financial media. And I have been heartened by the fact that CNBC, Bloomberg, Fox Business and the Wall Street Journal have been doing their best to put long term performing, great Wall Street minds on their programs and in their pages. Unfortunately, not one of these greatest minds has any interest in taking a stand or even making more than a cursory prediction as to the economy. Terms like "very unusual period", "historic" and "unprecedented" are typical in any of these interviews. Not one is willing to risk their reputation with the investment world by making a solid prediction.

This is understandable in a way. Every day seems to bring swift and massive Federal and Congressional actions. And every day the trading psyche (and not the investment psyche) that is nearly 100% of capital markets action these days reacts to the US Government moves. I think it is safe to say that this Government has yet to recognize that it is still chasing a capital market's sentiment led by the same trading psyche that in large part is responsible for the crazed buying frenzy that bid the Dow Jones to record highs in October 2007, and extreme lows just 16 months later, wiping out value that had been building really since October 2002. Its the same trading psyche that took oil from near $150.00 per barrel in July 2008 to $38.00 per barrel 8 months later.

These are but a small fraction of illogical valuation run ups and run downs that say one thing to me. Traders and momentum have taken over the Capital markets. Where are the value investors? Where are the buy and hold investors? They don't exist. And without fundamental investors, that buy based upon historic and single digit deviation projection assumptions traders will continue to run the markets and ultimately direct this Government's intervention plans.

So what are we to do here? First the government has got to stop making historic decisions without real public discussion and description. We need more than feel good "we are determined, we will rise above this" speeches from Bernanke and the President. What we need is detailed rational that 90 percent of non-financial professionals will not understand. But that 90 percent of financial professionals will understand. Financial pros need to know the details, the good and the bad, so that their decisions can be based on an information foundation that looks planned, looks logical, and does not look reactive. Reactive in the financial markets means trouble people. This Government is reactive.

We are expecting to hear from Bernanke later today. I'll write the conclusion to this daily piece after he speaks.

Until then, try to

Build Value Every Day

Brad van Siclen

This Fed and its Mission - 3 / 18 / 2009

2009-03-18T05:35:00.000-07:00

The latest interview of Ben Bernanke which I highlighted in the 3/16 posting said it all, but even the most aggressive pundit could not have predicted yesterday's Fed announcement. Bernanke is really on a tear. He said Sunday that the biggest mistake made by the Fed which led to the Great Depression of the 30's was not forcing liquidity into the markets.

The Fed does this essentially by going into the regional Fed banks' computers and increasing the balances on the regional banks' balance sheets. It then auctions off bonds to any one that will take them at whatever the market rate for the bonds will be. These Bonds are called Treasury Bills and have varied maturities.

Then ultimately the Fed must repay these Bills, and it usually does so by issuing additional bonds in the future, it hopes when the US economy is strong and the faith in the US Economy is sufficient, to issue new Treasury Bonds at better rates. That's like a giant Fed refinancing.

There are no guarantees that this will happen, and no guarantees there will be buyers for them. But so far, with rare exception in my life time, the Buyers have been there and the Fed has been able to refinance itself.

But doesn't this seem to be a bit disturbing? Here we have a bank set up by a vote in Congress attended by very few congressional members in 1913, that essentially has the ability to print money to pay its obligations. And its obligations are covered by you and me in our productivity and in the proceeds of our taxes. Budget short falls at the Federal level are paid for by the US government raising money, primarily through the Fed. And each time this has occurred since we left the Gold Standard, the value of our Dollar becomes less and less.

Some call that inflation. I leaned that way too, until yesterday when in the face of a horrific financial environment created in large part by Fed judgment errors over the course of the Greenspan Fed years, the Fed's only solution is to now print and sell, at any market rate, 1.5 trillion dollars to anyone who will buy them. This, I think boarders on outrageous.

This Fed has now told the entire world that it is deflating the value of the US dollar in order to have the ability to repay its obligations and continue to bail out failed financial institutions. The result of this massive deflationary move will be the devaluing of any and all currencies whose economies rely heavily on the US consumer and the US markets. Which means virtually every world currency. If I were very very liquid I would begin buying gold and Swiss francs immediately.

This level of forced liquidity may feel good in the short run, but if the US economy doesn't return to its former strength and standing in the next 18 months, we as Americans will see near 15% annual inflation rates.

We may not have a choice in the process to recovery, the Fed may not have a choice in its methods for saving the US and the world from a multi year depression. But since most of us are not Russian oil oligarchs, Technology billionaires, Failed US bank CEO's (a bit tongue and cheek), or members of royal families, this Fed move, and it won't be the last, has sealed our collective fates. The US economy must turn around in 18 months or the value of the US Dollar will begin an inevitable run toward $0.50.

Build Value Every Day, and keep in mind the Fed may take half of it.

Brad van Siclen

Ratings Agencies and the Culture of Collusion - 3 / 17 / 2009

2009-03-17T05:52:00.000-07:00

Readers, I have included an article at the Bottom of this piece from the Wall Street Journal On-Line Opinion Section on AIG. I will tell you that it in combination with may past writings it draws the key issues and themes on the subject of AIG's bailout and what Investors and American Business owners can learn from this debacle.

So my subject today concerns primarily the mysterious ratings agencies. Standard and Poor's (S&P), Moody's, and Fitch. I have a reasonable direct experience with these groups that dates back to the mid nineties when I socialized with a core group from the mortgaged backed unit of one of these agencies. I also studied under Ed Altman [http://pages.stern.nyu.edu/~ealtman/] who has consulted to and added dramatically to the financial models of one or more of the agencies. The good news is that these agencies risk models across all forms of securities and asset backed instruments tend heavily towards the conservative. More so than Valueline if you can believe that. The bad news is that they are paid by the groups that require their ratings in order to receive 3rd party financing. And the third parties I am speaking of are pension funds, endowments, and mutual funds.

These funds receive(d) investment opportunities from Wall Street on a sometimes daily basis, many carrying a rating from two of these agencies. Of course if an Agency decided to offer a rating on a product an investment bank wanted to sell that was below a rating institutional clients would buy, the deal would not only fail, but so would the relationship and future business between the ratings agencies and that particular wall street product group.

For example, if the Mortgage Backed Assets Investment Banking Group at Lehman Brothers wanted to sell USD 50,000,000 of packaged mortgages held by The Money Store, they would need to receive a A or AA rating on the offering in order to sell it to its University Endowment Funds or its Pension Fund Clients. These fund managers would then rely, on their experience with Lehman's Asset backed group and the rating placed on the securities in the Offering as delivered by 2 of the 3 major ratings agencies in making a decision to invest their client's capital in the offering.

During the 90's Moody's was considered the preferred agency with Fitch and S & P second. Why? well let's just say Moody's was a friendlier agency. But this made the folks that I knew at S & P feel like they were a lesser agency. They were making a bit less money due to their stricter ratings levels, even though they were doing a better ratings job...Great culture on Wall Street, huh?

I'll get into specifics on ratings processes at a later date, but i can tell you that the client was rarely viewed as the issuer (which it was) and normally viewed as the Investment bank (which was not the client). And guess who paid for this - - The Pension Funds and the University Endowments. Now they are not innocent in this either, but I think the conflicts of interest between the issuer, the agency, and the investment banks are the next item that Congress should look at. How could AIG retain a AAA rating for as long as it had? Why is it that ratings agencies downgrade issuers (corporations) after some series of events has compromised their balance sheets and not before the problem is recognized by the capital markets? What service are they really selling here?

Deregulation not only led to abuses in the banking and investment banking systems, it also created a culture on Wall Street and its third party advisers (ratings agencies, accounting firms, law firms) that so long as no one was getting really hurt, however we can cut corners on due diligence and get ourselves paid and bonused was ok. When I write of systemic abuses as they existed on Wall Street, the abuses are truly through out the systems, and this is why 50 percent or more of the world's value created by the Wall Street firms was recently wiped out. There were professionals who shared my perspective but unlike me ran large pools of capital that saw this culture coming to an end and ran for the hills. They began selling into speculative value peaks back in 2006..mainly because the volume, valuations, and volatility in the markets made little sense by historic standards.

So what's the conclusion here? AA and AAA ratings should always be viewed with suspicion as should the words "perfect", "the Best", "The Sage", "brilliant". These adjectives when used in the context of Wall Street firms and professionals have always given me pause. They should give you pause too.

Value is built incrementally and takes time in any industry. The quick buck artists and the guys making high high bonuses are leveraging other professionals value and likely taking very high risks at the expense of the business owners (the shareholders) to do so.

Build Value Every Day - And please read this excellent piece from the Wall Street Journal Opinion section attached below.

From the Wall Street Journal On-Line 3/17/2009

The Real AIG Outrage Article

President Obama joined yesterday in the clamor of outrage at AIG for paying some $165 million in contractually obligated employee bonuses. He and the rest of the political class thus neatly deflected attention from the larger outrage, which is the five-month Beltway cover-up over who benefited most from the AIG bailout.

Taxpayers have already put up $173 billion, or more than a thousand times the amount of those bonuses, to fund the government's AIG "rescue." This federal takeover, never approved by AIG shareholders, uses the firm as a conduit to bail out other institutions. After months of government stonewalling, on Sunday night AIG officially acknowledged where most of the taxpayer funds have been going.

Since September 16, AIG has sent $120 billion in cash, collateral and other payouts to banks, municipal governments and other derivative counterparties around the world. This includes at least $20 billion to European banks. The list also includes American charity cases like Goldman Sachs, which received at least $13 billion. This comes after months of claims by Goldman that all of its AIG bets were adequately hedged and that it needed no "bailout." Why take $13 billion then? This needless cover-up is one reason Americans are getting angrier as they wonder if Washington is lying to them about these bailouts.

* * *
Given that the government has never defined "systemic risk," we're also starting to wonder exactly which system American taxpayers are paying to protect. It's not capitalism, in which risk-takers suffer the consequences of bad decisions. And in some cases it's not even American. The U.S. government is now in the business of distributing foreign aid to offshore financiers, laundered through a once-great American company.

The politicians also prefer to talk about AIG's latest bonus payments because they deflect attention from Washington's failure to supervise AIG. The Beltway crowd has been selling the story that AIG failed because it operated in a shadowy unregulated world and cleverly exploited gaps among Washington overseers. Said President Obama yesterday, "This is a corporation that finds itself in financial distress due to recklessness and greed." That's true, but Washington doesn't want you to know that various arms of government approved, enabled and encouraged AIG's disastrous bet on the U.S. housing market.

Scott Polakoff, acting director of the Office of Thrift Supervision, told the Senate Banking Committee this month that, contrary to media myth, AIG's infamous Financial Products unit did not slip through the regulatory cracks. Mr. Polakoff said that the whole of AIG, including this unit, was regulated by his agency and by a "college" of global bureaucrats.

But what about that supposedly rogue AIG operation in London? Wasn't that outside the reach of federal regulators? Mr. Polakoff called it "a false statement" to say that his agency couldn't regulate the London office.

And his agency wasn't the only federal regulator. AIG's Financial Products unit has been overseen for years by an SEC-approved monitor. And AIG didn't just make disastrous bets on housing using those infamous credit default swaps. AIG made the same stupid bets on housing using money in its securities lending program, which was heavily regulated at the state level. State, foreign and various U.S. federal regulators were all looking over AIG's shoulder and approving the bad housing bets. Americans always pay their mortgages, right? Mr. Polakoff said his agency "should have taken an entirely different approach" in regulating the contracts written by AIG's Financial Products unit.

That's for sure, especially after March of 2005. The housing trouble began -- as most of AIG's troubles did -- when the company's board buckled under pressure from then New York Attorney General Eliot Spitzer when it fired longtime CEO Hank Greenberg. Almost immediately, Fitch took away the company's triple-A credit rating, which allowed it to borrow at cheaper rates. AIG subsequently announced an earnings restatement. The restatement addressed alleged accounting sins that Mr. Spitzer trumpeted initially but later dropped from his civil complaint.

Other elements of the restatement were later reversed by AIG itself. But the damage had been done. The restatement triggered more credit ratings downgrades. Mr. Greenberg's successors seemed to understand that the game had changed, warning in a 2005 SEC filing that a lower credit rating meant the firm would likely have to post more collateral to trading counterparties. But rather than managing risks even more carefully, they went in the opposite direction. Tragically, they did what Mr. Greenberg's AIG never did -- bet big on housing.

Current AIG CEO Ed Liddy was picked by the government in 2008 and didn't create the mess, and he shouldn't be blamed for honoring the firm's lawful bonus contracts. However, it is on Mr. Liddy's watch that AIG has lately been conducting a campaign to stoke fears of "systemic risk." To mute Congressional objections to taxpayer cash infusions, AIG's lobbying materials suggest that taxpayers need to continue subsidizing the insurance giant to avoid economic ruin.

Among the more dubious claims is that AIG policyholders won't be able to purchase the coverage they need. The sweeteners AIG has been offering to retain customers tell a different story. Moreover, getting back to those infamous bonuses, AIG can argue that it needs to pay top dollar to survive in an ultra-competitive business, or it can argue that it offers services not otherwise available in the market, but not both.

* * *
The Washington crowd wants to focus on bonuses because it aims public anger on private actors, not the political class. But our politicians and regulators should direct some of their anger back on themselves -- for kicking off AIG's demise by ousting Mr. Greenberg, for failing to supervise its bets, and then for blowing a mountain of taxpayer cash on their AIG nationalization.

Whether or not these funds ever come back to the Treasury, regulators should now focus on getting AIG back into private hands as soon as possible. And if Treasury and the Fed want to continue bailing out foreign banks, let them make that case, honestly and directly, to American taxpayers.

Please add your comments to the Opinion Journal forum.

Where Chairman Bernake Adds Value - 3 / 16 / 2009

2009-03-16T10:54:00.000-07:00

You want to know how bad our economy is? Here is the answer..So bad that the Fed Chairman Ben Benanke and most certainly President Obama decided he better give an interview to the American people, not their congressional representatives as was tradition until last night. Why would Bernanke risk the Fed's reputation and the inevitable market response by going on 60 Minutes this past Sunday night? We'll get to that answer. But for now let's take a minute to discuss what I like about this Chairman.

He is good at plain english. He is does not use jumbled prose approved by lawyers when answering questions. He addresses the financial markets with a consistent message, like it or not, and it would seem with reasonable honesty. He has no opinion, other than he believes in the ability of the US financial system to mend itself and become stronger over time. Leadership and consistency are the two main ways a chairman or CEO can add value to any enterprise be it a small company or the largest economy in the world.

We received none of this from Greenspan. Recall when CNBC thought it was part of the game to decipher Greenspeak? What they and the WSJ should have been doing was calling for Greenspan to speak plainly to the world and to our business leaders. Certainly after his second major economic bubble fiasco there can be no doubt as to why he spoke so mysteriously to congress. The result of Greenspeak was that Congress and the financial media spent more time trying to interpret what he said, and less time predicting the results of the Fed's decisions under Greenspan. Greenspan knew he had made mistakes, and under his leadership he chose other mistakes to fix them. The Fed under Greenspan gamed the American system. They hoped that the financial system, when given enough get rich opportunities, would create its own solutions to the systemic problems it created. We discovered this recently when Greenspan stated "We thought they would regulate themselves." Unbelievable. It was as if he was trying to prove he was more clever than every other financial professional each time he testified.

In all honesty, the greater business minds I know were always very suspect about the Fed's policies since 1998 and the "soft landing".

So why has Bernanke decided its ok for him to do a prime time interview? First it's because this man knows that he himself is a terrible liar, he's definitely not a salesman, and so his style can only convey honesty to the public. It also conveys that transparent disclosure policy that the President has been a champion of. I don't know Bernanke yet, but I do know a great many great economic and business thinkers, and his style - straight, unemotional talk, comes from years of economic discipline and study combined with real world successful application. I suspect that if we looked into his policy writings during his time under Greenspan, we would find that he was both very accurate and very simple to understand. The best leaders have the ability to distill the simple, most valued truths from complex ideas and in so doing give direction to their employees for implementation.

Did Bernanke accomplish this last night? Here are his most important quotes:

"..No doubt the unemployment rate is going to go higher than it is, but i think again if we do succeed in stabilizing the financial system we will begin to see a slower pace of decline and eventually a stabilization that will set the basis for a recovery"

speaking on the Fed itself, "It's an institution that the people don't hear much about, but it's a very important one. It manages monetary policy for the country, its one of the main tools we have for managing our economy and keeping our prices stable....its original purpose was to deal with financial crisis which is what we are dealing with right now."

"The Fed can not put money into companies. It can only lend money against assets."

"In October I spoke to a congressman who said to me that bankers and business owners in his district were no seeing the problems that [secretary Paulson] and I were addressing. And I turned to him and said, They will."

"[The Fed] has been effectively printing money and we need to do that because our economy is very weak and inflation is very low. When the economy begins to recover ....that will be the time we need to reduce the money supply, raise interest rates, to ensure we have a recovery that does not involve inflation."

I believe that Bernanke accomplished the mission of a good leader in times of crisis. Tell the bad, tell the good, be honest to a fault. This becomes the infrastructure for businesses and employees to build on once again. I'll note I was pleased to hear him say that with regard to AIG and other financial institutions recieving huge government aid (citigroup) this Fsed will begin calling its loans when these companies have stabilized and then require the sales of assets and subsidiaries to pay back those loans.

Essentially this is the model vulture or distressed investors use. Invest in companies at deep deep historic discounts. Next determine which parts of the business are valuable. Wait until the business stabilizes and then sell off these parts of the business to recoup the invested / loaned amount. Hopefully leaving a better managed, more focused enterprise in which the investors can participate in the upside value that comes with business growth. The difference of course is that the Fed can print money that ensures they won't be diluted by money invested in subsequent financing rounds should it take much longer than anticipated to restructure and make valuable these businesses.

The Fed - Building Value every day? - If congress lets them I think they will.

Brad van Siclen.

Don't be Caught in a Bear Rally - 3 / 13/ 2009

2009-03-13T05:51:00.000-07:00

I won't pontificate today. There are very simple ways to protect yourself from being caught in a classic bear trap or bear market rally. I don't know if this is one, my bet is that it is, but I don't know for certain, and no one else knows for certain either. If you listen to the pundits, the "experts" on the 3 financial channels this morning (CNBC, FOX Business, Bloomberg) its a mixed bag. Interviews of traders on the floor of the NYSE are returning answers like, "It's a bit early to tell." and "I don't know which way we are headed." It really amazes me. And frankly if I hear another softball interview done by any of these channels of Pandit, Dimon, or Lewis I may start a new anti financial media website.

Readers, it's times like these we need an expert. And unfortunately Wall Street has been defining expertise as the people who bring the most fees into the firm. Not to the people who actually have an ability to determine with reasonable accuracy which way the market or a particular issue will move over the next month. I am telling you there are no "experts" left.

So its up to you to make a decision. Are you a technical buyer of stocks or are you a fundamental buyer of stocks? Longer term readers will know that the fundamental and relative value investors are the only players that make money over the long haul. And unless you are earning a 2% carry on funds you manage plus a 20% take on profits generated, you should be doing the same.

Sharp upside moves in the markets or in particular industries that apply to all major players in an industry are almost always examples of short covering. Why would Citi move up on a percentage basis similarly to Wells Fargo this week? Are they similar companies with similar risk profiles right now? Of course not. Why would all construction machinery manufacturers share the same 5 day chart patterns? Has the outlook for new major construction projects world wide improved by 20% in the last 5 days? You know the answer. (It's "No".)

We need to remember that share prices have always and will always be valued based upon the expected quality of their future earnings. And frankly every other metric or ratio or chart analysis model is really a fancy way of justifying current prices paid for a stock that is in speculation mode. Ask yourself as an investor of your own money, After the past year, do you feel comfortable paying a price per share of any company that is equal to the estimated next 15 or 19 years worth of earnings? Because if you buy a share of a company's stock when its price is 19.0x earnings, that is exactly what you have done.

Instead start by asking yourself, do you like a particular industry. Then look at the companies in that industry. Of the 5 or 6 largest ones that have shown profits in the last 3 years, which one is trading at a lower multiple than the others. That's the one you look at, not because it has the greatest price upside potential, but because it is the greatest protector of your principal. And you can not compound your earnings in the stock market unless your protect your principal investment first.

If you think and invest like a speculator. If you believe what the Wall Street "experts" tell you, that you must always be in the market or you will miss the upside then ultimately you will participate in the downside too. Market returns over the last 5 years have been negative folks. How many times in that period have you heard buy, buy, buy from the "experts'? How many times have you heard sell? (hint: market professionals don't want you to sell before they do.)

Here's another suggestion, Turn off the TV. Spend 10 minutes with a reasonable, objective information source, (Yahoo Finance, or the SEC filings site, or with Valueline as examples). Choose an industry you like, review the top few companies in that industry, and invest in the one that appears to be trading at a discount to the group. That's how you protect yourself best from the short term swings in the general markets. Like Bear rallies.

We'll cover more on picking good companies to invest in in future editions.

Build Value Every Day.

Brad van Siclen

Why Madoff Matters, the Value of Quality Regulation - 3 / 12 / 2009

2009-03-12T05:40:00.001-07:00

Those of us that are forced by our selected news sources, be they financial or otherwise, to wait for the Madoff hearing results should be warmed by the fact that this matter will actually move us all closer to proper, more consistent regulation. That means the rules governing business in America will move one step closer to equality across the board. And I believe that the greatest value to regulation of business and financial practice is that it brings us closer to a truly free market environment.

Now champions of Adam Smith and his 'invisible hand", Ron Paul and Steve Forbes (both super shrewd guys) as modern day examples, would argue that government regulation and oversight is bad. What they really meant was that the current version of government regulation and oversight is bad.

Let me explain using Wall Street as an example. Most folks think that FINRA and the SEC watch the backs of independent investors. But the truth is the system is designed to protect the big guy first, and small investor second. I won't cover all elements of this statement today, but I will use the subject of standard regulatory review process as the theme.

Madoff Securities was permitted by the SEC and the NASD to fool the system for two reasons. The first is that he was a founder and former head of NASDAQ. Secondly, he had a seperate clearing / trading operation (seperate from Madoff Securities the culprit of the ponzi) and it was compliant with SEC disclosure regulations.

Now in my former capacity of Managing Director of investment banking at a 500 man Broad Street based investment bank, and in my consulting roles for other broker dealers, I have ample experience in the way the SEC and the NASD deal with financial institutions of different sizes and reputation. Here is their standard review process. To put it simply, each group, upon entering the premises for a special or annual review presents the firm's head compliance officer with a list of document requests that include investment banking transactions, trading and sales runs, and research examples. A random sampling is then selected from the information provided, and this sampling becomes the basis for the audit process.

Think about how easy, in the case of Madoff Securities, it would have been to pull one account's trading history and run an audit (trace the trades and monetary flow with the clearing institutions) and immediately see that there was a problem. When SEC and NASD professionals find a problem, they then look for a repetition of that same problem in the account being reviewed and then for the same problem in other accounts as well. This first step is done via the internet and can be effected in 20 minutes. 20 minutes. So the only explanation for the NASD and SEC both missing this simple and required process is that they didn't miss it at all. They made an internal decision to allow Madoff Securities to pay fines for 'inaccurate' or lax reporting standards and moved on. Madoff Securities likely had very few if any customer complaints, so why would these regulators want to openly audit Madoff Securities? Madoff securities would simply pay a fine, which is common practice, and move on.

I will tell you that smaller firms generally keep much better records and abide by rules more stringently because they do not have the spare cash available to pay the fines levied by the regulators as a penalty for findings of lax standards or violations. But it is also true that smaller firms, in my experience, are inevitably going to be fined for lax standards. The larger firms, former bulge bracket firms, are so well capitalized that they have their internal legal team monetarily settle out any violations as quickly as possible without admitting or denying the event ever took place.

Special treatment would be afforded the titans of industry, AIG, Citigroup, and Madoff as examples. They, on the outside, would have appeared to be disclosing accurately. These are highly talented and experienced institutions who are big parts of the financial industry. They know what regulators want and they deliver it, whether accurate or not.

And inevitably, this system which grants passes to industry giants while appearing to actively enforce regulations on small and mid sized financial institutions created an environment which allows for Madoffs, Citibanks, and AIGs to take advantage of institutional and individual market participants for decades without real penalty. The more these implosion events occur, the more the SEC and NASD will be required to treat all participants equally. And that consistency creates a foundation for a level playing field and maybe even a "free" market that Paul and Forbes would be pleased with.

Knowledge is value too - Build Value Every Day.

Brad van Siclen

Current Problems in Mark to Market Accounting - 3 / 10 / 2009

2009-03-10T06:23:00.000-07:00

We are in what some consider to be the worst financial crisis in US History. Many elements previously discussed on this site would be classified either the causes or effects of this crisis. But as we continue to peal back the layers of this crisis, there is one certain phrase that continues to appear, "Mark - to - Market" accounting. What does this actually mean?

FASB and the SEC state that a company must value and state its assets at current or "fair" market value. These changes in asset value must be reported quarterly and audited annually. However, the highest value you are able to report during the entire ownership of the asset is the purchase price. Gains can only be reported after a sale.

So if you have an office building (in a good market of course) that you purchased in 1995 for $2.0 million whose current fair market value if sold would be $10.0 million, that increase in value can not be applied to the assets on your balances sheet. BUT should the value, by fair market accounting standards, reduce at any time during its holding, that unrealized loss, say $500,000 must be expensed through your income statement.

For most companies, this is not an issue because they depreciate the asset over time and therefore can argue that they have expensed the declining asset value sufficiently to guide investors as to the true value of their shareholdings.

But for Banks and Investment Banks that bought speculative asset backed financial instruments that were paying them higher interest payments than they otherwise could have earned with less speculative investments, a down market and a requirement to write down those assets to fair value can be catastrophic. Why? Because as the assets on the balance sheets of banks erode, they reduce the overall net capital (or liquid equity) required to be in place by the US Government in order to be considered "solvent". Equity is determined by Assets - Liabilities. If assets are written down dramatically, you can see how a bank moves closer to or becomes insolvent very quickly.

You can now understand why banks want a suspension of mark to market accounting. Essentially they are asking the government to not recognize bad investment decisions or bad balance sheet management decisions. This way they are able to continue to do business while ignoring their asset values in declining markets making additional government solvency loans (TARP and BAILOUTS) not as necessary, and ultimately allowing them to further leverage their balance sheets in extending business and consumer loans.

Recently, Roubini of NYU Business fame stated that by traditional standards, the top 4 US banks were insolvent. The solution to this insolvency offered by our current banking officers, suspend mark to market accounting.

I hope this strikes you the same it strikes me, the banking officials greatly responsible for the current credit market crisis due to over leveraging of risky assets in an attempt in increase profitability, are now suggesting that the answer is more of the same.

You operate your business and personal lives recognizing that there are risks inherent in assuming debt that future cash flows must cover. You are required to report your losses from investments as they occur. You are the owner, and you recognize that insolvency means total loss of all that you have built. So you are sure that you manage your risks appropriately. Officers of Publicly traded banks it would seem do not have to manage their risks appropriately.

High risk means high return in good economic times. Their bonuses in good economic times are so large, that failure in the future is meaningless to their personal security. These officers, for the most part, have built nothing. They are the stars promoted from middle management. They rarely if ever took risks then. But in 2005 - 2007, newly promoted to executive level, they took huge risks because their personal payouts were huge for taking those risks and succeeding. Guess what, these risks were taken at the expense of their shareholder's futures. And the current crisis is the result.

And their solution is - - -Let us do it again, suspend or eliminate mark to market accounting.
They have no interest in building value. They want to leverage value. When a President or CEO begins to leverage value in order to increase current income it is the first sign that the business has stopped growing. Recognize when you are doing it with your business.

Build value every day.

Brad van Siclen

AIG a Passthrough for Goldman, Merrill 3 / 9 / 2009

2009-03-09T06:10:00.001-07:00

Well readers, there is really not much value to report concerning AIG. I am not a conspiracy theorist, but this one makes me wonder. Last week the US government put an additional $85 Billion into the ailing company. That brought their total pledged amount to $160 Billion. These amounts were originally to satisfy balance sheet liquidity requirements. Indeed in AIG's testimony to congress, "federal liquidity requirements" were used as the rationale for the loan. (and let's face it, this is no loan, in its best year (2006) the company reported 23.0 billion EBITDA, but 2007 and 2005 show a more likely 12.0 billion Edita. So in 13 years (at previous solvent balance sheet levels) the government will make its principal back. Anyone care to bet on that happening?

This scenario is akin to me asking my 12 year old to insure my losses with her liquid assets. Not one financial group that had its losses insured by AIG looked past the AAA rating. These are the experts who built their financial future on AIG's balance sheet and Moody's / S & P's ratings.

So where did this 160 billion loan "pledged" by the government go? The AIG CFO said, " the vast majority of tax payer funds have passed through AIG to other financial institutions." Those institutions include Bank America and Goldman Sachs. Bank America and Goldman Sachs. These are the same banks that lobbied the government back in the Fall to halt the short selling of financial stocks for 30 days. This after their traders (Merrill Lynch in the case of BofA) had earned huge profits shorting Bear Sterns and Lehman. Then the market's turned on them and they were able, under Paulson (the former Goldman chief, then Treasury Secretary), to stop the shorting of financial stocks (including their stock). Oh, and to take advantage of TARP funds and Government stimulus they switched their businesses licenses from Investment licences to Commercial banking Licences.

So the AIG bailout is really just a way to conduit MORE funds to BofA and Goldman. (yes that's an over simplification.) But these are firms that did NO homework on the liquidity of the AIG balance sheets when they paid AIG to insure certain of their key investment risks. These so called experts are permitted to take advantage of the system every where they turn to protect or off set their bad investment decisions. WE do not.

Is it a conspiracy? No. Unfortunately, our current government has neither the experience, nor the guts to pull off that kind of maneuver. Was there favoritism, most certainly. Is this a problem? In a free market, yes. It says to investors that there is no level playing field. That the rules can and will change to suit the big boys. So why then would any one invest in stocks? Scary thought.

So what value can we take from this? Your financial partners (AIG was to Goldman and BofA) must be highly scrutinized. If you need to insure your business risk, other than act of God insurance, the risk in the transaction is too much. And finally, do your own homework and use some common sense.

Build value every day.

Brad van Siclen

What Wal-Mart is Really Telling Us 3 / 5 / 2009

2009-03-05T07:24:00.000-08:00

From CNBC -"Wal-Mart, the world's largest retailer, posted a better-than-expected 5.1 percent increase in sales at stores open at least one year, sending its shares up 3 percent in premarket trading. "We believe falling gas prices significantly boosted household disposable income in February and therefore allowed for both more trips and more spending toward discretionary categories," Wal-Mart Vice Chairman Eduardo Castro-Wright said."

Still from CNBC - "U.S. consumers have suffered in the past year from job losses, tighter credit and a weak housing market -- factors that have forced them to conserve money by shopping at discount stores and sticking to basic purchases like food."

Ever been to Wal-Mart? I'll take a wild guess and say that you have. It's at least 20 minutes further away than is your local super market. And US Consumers have decided that the deals there are worth the trip.

This, contrary to Wal-Mart and some Wall Street statements, does not suggest that the Consumer is stronger than we thought. It means quite the opposite. The Consumer is trying to maintain its life style by shopping at the king of discount stores. This result to me is identical to the recent report from Pep Boys - better than expected sales - It says that Consumers are still pulling in the spending reins. Wal-Mart and Pep Boys are lagging indicators.

Do not be fooled by Wal-Mart's positive reports. When they report declining Sales or lower than expected earnings that is when we will know the economy has finally begun to recover. That will be the proof. Wal-Mart's price / earnings is 14.0x (pep boys still shows negative earnings so a P/E ratio is "Not Applicable") . That means investors are willing to value Wal-Mart at 14 years worth of current earnings. Does that seem like a great value to you? No, this is speculation in its most obvious and purest forms.

Now, I am not here to build a case against Wal-Mart. If you are a business owner then you know that Wal-Mart is hard at work building market share in products that can grow store revenues in any market environment. Remember their shift last year to Personal Electronics, a good economy indicator. There are many more.

Wal-Mart's only risk is becoming lazy in their efforts to serve their customers. Study Wal-Mart and you will see a business model which is very similar to the US auto makers. Demand better and better parts, from fewer and fewer sources, at better and better margins. Eventually this model crushes the manufacturers of your products and reduces the overall quality offered your customers.

But that scenario is at least a decade away for Wal-Mart. They are still looking at ways to build value over time, incrementally. When they start pushing Wal-Mart credit cards at their customers, that is when we should begin to think Wal-Mart's retail efforts have reached their peak.

Build Value - like Wal-Mart - Everyday.

Brad van Siclen

Uncertainty, the "Great Value Killer" 3 / 3 / 2009

2009-03-03T06:06:00.001-08:00

Look into the markets and what to you see? Hesitation. Why? The G7, while taking certain actions that may be value building, has primarily looked to the creators of our economic problems for answers and solutions. They are in no particular order, the regulatory agencies, the self regulated industries, and the corporations that gamed our economies to transfer value from shareholders to themselves. They built no value, in fact they knowingly drained value and transferred their risk to shareholders and the G7 economies as a whole.

So what is the result? Each of these enterprises, and make no mistake the regulatory agencies are enterprises too, is doing what it has done best, perpetuating the mirage of its overall value to the world economy even in current state in order justifying the need to feed them even more of our funds.

The result, beyond the general anger of the populace, is simple..the friends of these enterprises are supporting their requests, and the foes of these enterprises are calling for their downfall. No one knows which way to go here, the Fed and the Presidents of the G7 included. That creates uncertainty and uncertainty prevents investors and lenders from entering the markets.

Until these economic engines come off the sidelines, the values of all companies must continue to decline because a lack of investment and funding sources adds risk to the future of these enterprises. And since the only sources of capital seem to be the G7 governments, and their investment choices are the illiquid, no value companies, Citigroup, AIG, Car Companies, Foreign Banks, which in turn are not able to provide the capital to fuel the real businesses of the G7 nations, the overall value of the businesses and the G7 economies have no choice but to decline.

Building value in this environment is not possible. Maintaining value is difficult. The most troubling issue is the clear lack of understanding of how to build and maintain an economy by the G7 governments. How hard is this? AIG, Citi, GM, Chrysler, HSBC. If anyone of these companies goes away will we suffer more than we already have? No, in fact our economies will most certainly improve because the uncertainty surrounding their bail outs will be pulled from the funding markets.

Build value everyday.

Brad van Siclen

What is the AIG Value? 3 / 2 /2009

2009-03-02T07:15:00.000-08:00

At this point AIG, and frankly many more insurance underwriters, finds itself in a horrific situation. Let me try to distill this into a simple discussion and answer why. Insurance companies make money by leveraging premium payments (they call it "investing") with the knowledge that, year to year, they will pay out an average of 100% of those premiums in claims. I'll repeat that, Insurance companies make money by leveraging premium payments (they call it "investing") with the knowledge that, year to year they will pay out an average of 100% of those premiums in claims. Some companies, the more conservative underwriters (Berkshire Hathaway for example) routinely pay out in the low 90% of premium receipts annually. The idea is to invest the premiums in very very low risk investments and pocket the difference (the underwriter's operating profits) and use these profits in enhance the underwriting capabilities next year, or to launch new lines of business.

But in the case of AIG and even Berkshire this year their investments with these premiums proved to be anything but low risk. It seems that cash and gold were the only "investments" that could be made this last year. So this requires highly liquid assets on the balance sheet to cover the shortfall. In the case of Berkshire, they had the highly liquid assets to cover the shortfall. In the case of AIG, they did not. So the government stepped in to cover their shortfall.
Why?

By this point each of us recognizes that AIG had extraordinary laxes in internal oversight. So extraordinary that many of their so called derivative strategies were in fact adding additional leverage to their balance sheets in a strategy which transferred risk to their shareholders and, as we will see to their insured, then paid big bonuses to executives and insurance salesmen.

BUT after bonuses are paid, AIG still had to pay claims. THE LARGEST OF WHICH WERE INVESTMENT AND BOND RELATED INSURANCE. Yes, AIG for a premium would insure returns on financial instruments. What do you think their exposure was in those insurance underwritings this year? And finally, when you add up all the banks, investment banks, pension plans, mutual funds, and other financial institutions that were covered in a downturn by AIG policies by AIG and its AAA rating (considered ridiculous my most industry experts) you face a systemic collapse in realized losses and redemptions in the investment world causing a ripple effect that creates immediate recession if not long term depression.

How was this mega house of cards created? Its simple, Fraudulent Accounting Practices. If value is misrepresented in order to justify a AAA rating, and that AAA rating forms the basis for the insured parties to further extend their balance sheets, the risk to the financial system grows geometrically, that's exponentially to some.

The Board members and executives of all of these companies have failed all of us, many have thrown their fiduciary responsibilities into the trash by ignoring questionable accounting practices to save their share price and save their bonuses and annual stipends.

This is criminal, not negligent. And worse, at AIG the executives in charge saw this coming 2 years ago and made little effort to stop it, in effect to insure the liquidity of their own enterprise.

So where is the AIG value - gone and hopefully gone forever. This was not value adding to our economy, this was gaming our economy for the benefit of their executives.

Build value every day - even in the face of shocking public company behavior.

Brad van Siclen

Citibank, Value Mirage 2/27/2009

2009-02-27T05:25:00.000-08:00

So its official, The US Government has been convinced by the failed Banking Senior Executives that breaking up Citibank in orderly liquidation is NOT they way to go. Instead, to allow the bank to meet its capital requirements , (set by the US Government) a portion of the US Government loans will now be converted into equity and enable Citi to retain capital requirements. No surprise this comes on the last business day of the month. I am shocked bank stock investors missed this and are now forced to sell positions.

Rumors abound concerning the conversion rate (at a 30% premium to the closing price). Also that the US government is requesting (forcing) many other Intl. and domestic lenders to convert as well. Its worse than this actually.

The truth is the conversion rates and amount of conversion were determined not by valuation, but BY MATH. It leaves additional equity on the table giving the Government and Citi's lenders the ability to convert more debt in the future to save Citi's balance sheet and liquidity requirements.

The ripple effect is going to be significant today and Monday. Watch for big "positive" announcements coming out of the Government talking heads this weekend to stave off a further sell off, especially from China and Hong Kong who didn't get a chance to trade on this information (their markets are already closed for the weekend).

Its a sad state of affairs. CitiBank is NOT INFRASTRUCTURE. Citibank is not a required investment by the government. This continued funding is being perpetuated for one reason - its failure would force all equity investors in bank stock and financial stocks to sell their positions to fair value. I estimate fair value of the World Financial system to be at 25% of current values. Why? An extremely savvy, long term Banks and Thrifts only investor who began selling his fund's positions (not buying any new shares in banks) more than 5 years ago tells me that Banks' values must trend to 1.0x book value. And that's for stable Banks. Look at where the industry is valued now: 1.5x.

Value is built by protecting and investing your company's infrastructure. That may be people, that may be technology, that may be trucks or machine tools. Constant monitoring is needed to be certain your company's strategy is being supported by your infrastructure. Speculation is Risk. But so is spending on non-value producing infrastructure. The Government just spent money on non-value producing infrastructure - before it was a loan, now its pure speculation.
Its over for Citi. Don't let the same happen to your enterprise.

Build value every day.

Brad van Siclen

Infrastructure and Value 2 / 25 / 2009

2009-02-25T06:12:00.000-08:00

I am pleased to see that President Obama delivered the ('till now) speah of his life. By being forward looking, telling it straight, and taking responsibility he proves to all the value of good leadership in crisis.

Now for the part he is making drastic mistakes with. The recovery plan. First and foremost, this plan should build infrastructure and infrastructure alone (or 90%). It should then buy homes that have been foreclosed (and still occupied) and then put the homeowners who can't afford those mortgages to work on the infrastructure projects in their local area. Let them keep their day time jobs, and work during the weekends to cover their short falls. That way, the government gets assets and value for our money and the American People get real benefits. An example is the Internet (infrastructure!) which was paid for by the Government...look at the value it has returned!

The worst possible thing this government can do is continue to bail out car companies and banks that failed in the most lucrative point in their industry's histories. Failed.

I disagree with many VC's I work with concerning the shutting down of their investment companies that either can't grow or can't get profitable. But I admire their discipline, and for the VC's that are still around from the bubble burst, they understand how to preserve the value they have built and get rid of the costs that take from that value.

The government should do the same.

Build value every day.

Brad van Siclen

Note to President and his Value in Crisis - 2/24/2009

2009-02-24T05:44:00.000-08:00

Dear Mr. President,

I voted for you, I voted for Change. I was witness to the leveraging of the US economy in funding the war against terror. I was witness to the reliance on Wall Street to fuel the Economy through the reduction of margin requirements. I was witness to the end of Glass Steagall and commercial bankers thinking they should be the same risk takers as investment bankers. I was witness to the greatest stimulus package and economic disaster likely in world history, the reduced fed funds rate that resulted in extreme leverage in the stock market, bond market, mortgage market, all of which led to the ultimate leverage gambit, the derivatives market. One voice rang out as the word of "Economic God", it was Greenspan's. The perfect non-committal, wishy washy, economic spin doctor and front man needed to legitimize the concept that leverage and speculation leads to permanent value creation.

The Change we need is straight talk. The Change we need is an end to political rhetoric in times of crisis. What we need is a change in how the world perceives us. Straight talk, accepting blame, taking responsibility. Then and only then will we know if you stand for the current and future value of America or if you are simply looking to leverage America's value for the benefit of the politicians and political gain for the next 4 years.

Don't be Clinton, Don't be Bush. Don't be Greenspan. Do not leverage your office to "punt" yet again. Real leaders understand value. They understand what their value is in crisis. We are in systemic crisis. We need to be told, not reminded, of our value and your value. And your value is straight talk, the acceptance of responsibility, and action.

Stop the daily no value speeches. You either bring value to the people, to America, or you don't. We voted for change. Now it is time to change.

(Now Entrepreneurs and CEO's read this again as if written by a key employee to you as President of your Company).

Build value every day.

Brad van Siclen

More Money For Citi -Where's the Value? 2/23/2009

2009-02-23T05:02:00.000-08:00

When will the lunacy stop? How much money has been sent Citi by the government? At last count we were at 40 Billion. Now we are hearing the government will step in again possibly upping their stake to 40%? Can anyone explain to me why more money is the solution? This "bank" stopped functioning as a bank years and years ago. It stopped marking its assets to market properly years and years ago. We have no idea what the value is at Citi. They are not making small business loans (they are not able to), they are not making personal or mortgage loans (they are capital constrained due to an upside down balance sheet (more liabilities than assets). So other than an ATM machine, what is Citi? Its over Washington. Citi stopped offering value when they were first to raise ATM fees to $3.00. That, in hind sight was the leading indicator that their business model was malfunctioning.

Why has Washington decided that the Executives that brought on the Citi mess while misrepresenting asset value in order to pay gigantic bonuses on bogus profitability SHOULD REMAIN IN CHARGE OF US GOVERNMENT MONEY? Has anyone familiar with the capital markets funding process ever seen a funding above market values raised for a company and management team that has failed by over extending their business model, not managing their risks, and expects to retain their position?

Santellian rant aside, what value does Citibank bring systemically to this country other than managing existing accounts and loans? Now compare that value with the amount of value Citibank has removed from our economy. I don't know the answer to that one, but our government has staked he bad side of the bank.

Real investment, not speculation, in your business is determined by faith in management, faith in business strategy, and importantly historic performance.
Set your goal each day to improve those key areas. You'll likely not need outside funding if you do, and you'll be amazed how much of it will be available since you do not need it.

Build value every day. Take care in leveraging the value you have built.

Brad van Siclen

Seeing Gold for its Value - 2/20/2009

2009-02-20T05:53:00.000-08:00

It's Friday and we need some quick perspective to start up our day. Here it is. Gold is not an investment. It is the original hedge. Gold never changes value. It is the currency you do business in that changes value. I will say that again;

Gold never changes value. It is the currency you do business in that changes value.

So when you see gold up from $700.00 an ounce to $900.00 an ounce what does that really mean? It means that the capital markets or in this case the gold experts think the value of the US Dollar has decreased in that time period by 23%. ("1-700/900=0.233333 is the math calculation for those who forgot how to determine percentage change). Well that's alarming. What we are seeing is the value of the US dollar being eroded by over leverage and over printing by our government. The history of Fiat or Paper currency is that it always trends to zero value. Well that's scary enough to think about, but it will be a gradual process. This is because the value of the US dollar is heavily determined by the relative value of the currencies of its trading partners.

These are huge concepts that miles of documents have been written about. Send me a question or comment and I'll respond to it.

Perspective based upon knowledge is ultimately the most valuable building block in business. It is developed incrementally and over time.

Build value everyday.

Bradford van Siclen

How Housing Bill Helps Value - 2/19/2009

2009-02-19T05:52:00.000-08:00

Tax Payers and Mortgage Payers you are the bedrock the new administration is banking on. In return, they will save only those individuals who have jobs and could pay their mortgages if they had taken fixed rates instead of adjustable rates. Now if you happen to be one of the few with a job who can not pay your mortgage, can you imagine what the government loan application will look like? Apply today and 60 days from now you may have approval. That's 2 more mortgage payments. And if you can't make the payments, guess what foreclosure proceedings.

I know what you are thinking - How does this solve anything? Well the answer is it doesn't solve the mortgage crisis. What it attempts to do is repeat the efforts of the Bush and Paulson strategy - If you act like you are helping, and allocate funds to help a sector of the economy, lenders will pause their collection proceedings. If collection proceedings are paused or slowed, maybe some good news will come to the fore and the economy will reverse direction. Rumor and Conjecture and News Releases - These are the standard Wall Street and Capital Market's responses to bad times.

But in this case, perhaps the allocation of new money to assist the mortgage crisis will accomplish the goal of the real smart guys of the US economy. And that is establish a floor of downside so we may be able to value US real estate properly and efficiently again.

The value of a home is based upon the relative value of similar homes in its neighborhood. One or two homes selling at low rates and the value of all homes declines. I have it on good authority that a group of Ft. Lauderdale real estate agents were pooling personal funds as early as June 2008 and buying homes at ABOVE MARKET PRICES in a silly attempt to bolster selling prices of their clients homes based upon relative value. Is it legal? We'll see.

So what's the value of the Obama Housing Bill? Not much. The US public has been leveraged, US business has been leveraged, US markets have been leveraged, and now the US government has been leveraged..each one is showing signs of cracking. Look out below readers. You'll know when the entire system goes into free fall when the US dollar begins to fail.

Build value on a simple strategy - earnings and unencumbered assets - and ignore the noise of leveraged returns. They are false, short term returns. See your business like a farmer sees his business - incremental returns, and protect your assets every day.

Build value every day.

Brad van Siclen

Valuing the Dow Jones - 2/17/2009

2009-02-17T17:14:00.000-08:00

Not long ago the Dow Jones was actually an Index - something that serves to guide, point out, or otherwise facilitate reference - of the US Economy. Each component was selected because of its size and importance in its industry. Those industries were selected based upon their importance to the overall US GDP. Some industries would grow and some would stall, even shrink during any given period of time. And each Component's share price behaved with great independence of other component's share prices. That combination of similarities (importance to the US Economy and core industries) and independent price action created an elegant barometer of the stock market which is the great predictor of the US economy 6 months out.

But that is not what the Dow Jones Index has become. The moment traders and investors could buy or sell all shares in the index at once, through the DIAA shares, the Dow Index stopped being a leading indicator and became a current emotional indicator. It trades much like the T-Notes - it is a current events driven index. Which makes it a lagging indicator. When will it stop falling? I think we are getting close because the Price earnings multiples (the value of the current share price / LTM earnings per share) are getting closer to parity. 8x - 14x is still a big spread, but most are between 8x and 10.5x.

So let's bring this back to value. Your value. The value of a company to its investors is its predictable future earnings. The value of a company to a buyer of the company is its Net Assets plus its predicted future earnings. Everything else is speculation. So as a business owner, your business model must be fine tuned to create predictable earnings with unencumbered assets. For the public company Executive your goal is to create predictable earnings. That is it. All other metrics, revenue multiples, revenues per customer, multiples to EBITDA, Discounted Cash Flow to name a very few. These "methods" of determining value were created by finance underlings to justify speculative investments or over valued acquisition pricing.

Let that sink in. If building value is your goal, and it should always be, focus on what is real, earnings from unencumbered assets. And let your investors or potential buyers speculate on your real value.

Build value every day.

Brad van Siclen

Here's the other issue.

What's with Europe and the G-7? 2/15/09

2009-02-15T09:55:00.000-08:00

More complaints about the US economy out of Europe? Is anyone shocked? This is after all the group of economies that ride US coat tails in good times, and blame the US in bad times. Does anyone find it amazing that a group of economies whose governments run their heavy industry off of government subsidies is complaining? These are subsidies that artificially inflate the cost of labor while simultaneously enabling their goods to be competitively priced for export. These same economies "prefer" buying European and selling to the US, Middle East, and Asia. And now they are complaining that the US stimulus plan favors buying American?

World Bank head, and former Goldman Sachs Executive, Robert Zoellick agreed with the G-7 ministers saying how crucial it was to keep the world economy open and to "avoid the protectionist policy errors of the 1930s. The Buy American provision is very dangerous,” he said.

In fairness, the US and its lax economic management created our recent economic debacle. Leverage and more leverage was used to prop up the value of non-competitive companies while their market share eroded. Market share was taken by Asian manufacturing and frankly a boom in non-leveraged investing led by the Middle East.

Add to this commercial bankers thinking they should be paid like investment bankers, commercial bankers who levered their balance sheets at the expense of their shareholders, and ultimately the US dollar to take value from others...and the US is fair game for criticism. But not by the Europeans..they were simply the last to the party.

Has anyone really thought about what leverage really does? It allows those who are able to use it the ability to take more value than they are due. And when you as an individual or executive can leverage your shareholders wealth to super size your personal wealth and returns without repercussions should you guess wrong, that creates an environment for economic disaster. Sound familiar?

Isn't it time that all these grey haired heads of finance, heads of economies, heads of banks determine what their real value is today? Give us a starting point to rebuild the economies of the world. Stop pointing fingers while more and more people get laid off. We can't create value until we know what values exist today. THINK ABOUT IT. How can we buy or sell anything if we don't know what it is worth?

In order to build value, we all must define value. Value must be defined by each industry's leader. Why do we keep looking to the Government while the Government keeps looking to the Finance Industry for a definition of value.

NOT ONE OF THOSE GROUPS WANTS TO ADMIT TO THE REAL VALUE OF THE DOLLAR AND THE US FINANCIAL SYSTEM. If they were forced to truly admit to the results of their errors, they would never work in government or finance again.

Once more, in order to build value, we all must define value. And today, value must be defined by each industry's leader. They are the experts NOT ELECTED or APPOINTED officials.

Build value every day.

Brad van Siclen

What Value Will Come Of This? - 2/14/09

2009-02-14T08:12:00.000-08:00

The New York Times Business Section is reporting on $7,000.00 suits, a slowdown in luxury home club sales, and a column on the stimulus package. Guess what all three of these have in common? Not one will create consistent, on going value. Not One. When will American Business get its head on straight again? Let's consider the long term value created by businesses like GE, Microsoft, Exxon - Each one recognized its value in its growth stage, and set about improving it daily. The Stimulus Package, The luxury vacation home company, the $7,000.00 suit - these are one time transactions people - they are designed to make us feel good in the short term with no concern for next year. We'll never feel as good about any of these items as we do on the day we buy into them.

We just leveraged the American Dollar for 4 years to support a war and the companies that support our war efforts - What value has come to America? And now the solution is to leverage America even more. We need to understand that Value in all things must be built on fundamental, consistent efforts. We can build value from any starting point with that prospective.

So Business Associates and Executives - the government is making things worse - it is up to us to make American Industry, Business, Workers valuable, to maintain the value we have built our government representative by their decisions continue to wreck value. And I voted for this new government hoping it would be the lesser of two evils.

How should a government operate with value building for its people in mind - Look to Mayor Bloomberg. Simple, accurate, astute recognition of how to preserve and create value in any economic climate.

Build some value every day. (Bloomberg does)

Bradford van Siclen

Let's Keep it Simple - 2/13/09

2009-02-13T05:55:00.000-08:00

We all want value from any time spent during the business day. The question is how to find it, or how to provide it. Having been tasked to provide morning value strategies for for a financial advisory firm during the Tech Bubble, the Post 9-11 Era, and now to way layed public company executives, I learned very quickly that value must be simply defined, logical, and motivating.

Value also needs to be a bit like farming, every day improve upon your strategy, even the smallest bit, while at the same time protect the value you built in days past. So what is the value strategy today? You already have been thinking it on the way to the office.

Today I find the talking heads talking TARP / BANK BAIL OUT. What value do we take from these ongoing discussions? 2 pieces - One, the more opinions you have the closer you can get to the perfect answer. Two, you'll never get the right answer to fixing a problem of any size by getting these opinions from the people who created the problem. Seek out the people in your organization that were not directly involved in creating the problem you are addressing in your enterprise. And get their opinions. You'll identify talent you were not certain existed. Empower team members who were sent down the wrong path, and maybe even find a new captain to solve your enterprise's problem.

So between phone calls and meetings, write that value effort down on a Post It in 10 words or less. Stick that Post It on your computer screen's frame each day and take them down after reviewing them Monday morning.

Build some value every day.