Dead Money Disses, IPO Heaven, and Buffett's Billion Dollar NCAA Tournament Bracket-

 
"Dead Money" is the term derisively given to an investment which does nothing (like the current President and Congress of the United States, but that is an all together different matter).  The worst thing for anyone investing capital is to plunk your hard earned money down, and then watch the asset lose 20-50% of its value very quickly.  If you do your homework, having a bad experience like this should be the exception but not the rule.  Once in a while it happens to even the best investors.  Look at what happened to Warren Buffett with his investment in TXU bonds, it went south real fast.  Ackman's short of Herbalife cost him at least 25% last year, and that is starting to change, but still, the position went against him very quickly. Still, these kinds of experiences are not something anyone wants to get accustomed to.  However, probably much more common is the idea of "Dead Money."

Of all the situations investors have to handle the most, a non performing asset has to rank up there as the most common and the most frustrating.  When you own something for one, two, three, five, or even more years, and it gives you no benefits, well, an intelligent person has to question why they own it.  My own opinion is dealing with the non activity portion of investing is incredibly important if you do want to have better than average returns.  In all too many situations, while an asset may not increase in market price for a long time, the fundamental value of the company may be growing quite substantially.  The disconnect between market value and business value gets overlooked by those who have to see market price gains to think they made a good investment decision.  Then, with no announcement, and no fanfare, the pet rock which you thought you owned suddenly starts to become your favorite item in the whole world.  The next time you hear anyone, especially traders, start pontificating on the "deadness" of a specific company, you might take a very good hard look at that particular area. 

 

Janet Yellen's commentary this week sent the market into a bit of a tizzy on the idea interest rates might actually get increased sometime before the next century.  Still, I find it questionable, at best, that the difference between 2.6875% and 2.87986% on the 10 year bond is going to be your determination on whether you want to own a risky asset like a stock.  If it were judging between 2.6875% and 12%, I could see the concern.  Since we are nowhere near that variance in interest rates, well, some people might want to just calm down a bit.

 

The IPO activity and pipeline keeps getting more active as it certainly is time to cash in for a few lucky groups.  The investment banks and Silicon Valley venture capital firms have to be loving 2014 as the dollar bills keep raining down from the skies.  Can you just imagine what will happen when Pinterest and Dropbox get ready to go public?  Dropbox has raised capital at a late stage value of $10 billion.  By the time these companies get ready to have an IPO, you could be looking at $30-$50 billion dollar valuations.  If WhatsApp is worth the $19 billion Zuckerberg paid for it, and they don't have much revenue, well, consider Pinterest's sales pitch to the investment bankers.  We have X in revenue and Y in cash flow and Z in users, so we are worth G(azillion).   The bankers just nod their heads and go, kaching, kaching, kaching, in the hope they are selected as the lead underwriter in the syndicate.  Now, if you are buying these IPO's in the hope of an appreciating asset, make sure you do your homework very carefully bv reading the prospectuses, if you can get your hands on one.

 

Elsewhere in the market, the Biotechnology sector had a very rough go of it during the past week.  If ever there was a sector which most closely resembled a dice game, small cap biotechnology would have to be it.  I am not saying it is impossible to do well in this area.  In fact, over the last year, it would be very interesting to see how it performed versus a regular small cap index or the S&P 500.  However, the analyst part of me has to bring up the fact that many of these companies have no revenues, no cash flow, and may have drug pipelines which are limited to a few compounds, and in many cases, only one drug.  Even worse, they are merely at stage one or stage two of the FDA licensing and approval process, and there are usually all kinds of twists and turns in navigating that obstacle course. Consequently, I don't even bother to touch biotech as it is hard enough to invest in companies with revenues and cash flow, let alone those which have none.

 

Apparently some banks and those in charge are starting to rethink their opinion on Apple as the prospects for the I-phone 6 and a larger screen may be better than originally thought.  I also would note it will be interesting to observe how the retail part of Apple is coming along under ex-Burberry chief Angela Ahrendts.  If you combine these things with a new China Mobile partnership, and any innovation in products like the I-Watch, I-TV, I-Car, I-Plane, or I-Underwear (oops, you get the point), well, let's just say don't count out the big shiny red object crew just yet (yes, my company owns Apple for clients).

 

Finally, the NCAA Tournament began this week and like always, it proved to generate massive interest.  Warren Buffett's Billion Dollar Bracket challenge also created plenty of enthusiasm as the potential billion dollar prize has more than a few people curious, to say the least.  As of this writing, it seems Mr. Buffett's ability to calculate the risk reward ratio of a premium payment weighed against the odds of a winning contestant is quite good.  There are no possible winners thanks to the fine efforts of Harvard, Mercer, and the hard working lads at North Dakota State, among others.  Maybe next year.

I hope everyone has a great spring and thank you for reading the blog this week, I very much appreciate it.



Y H &C Investments, Yale Bock, and the family of Yale Bock own positions in securities mentioned in the blog post. Investing in stocks can lead to the complete loss of your capital. As always, on any company mentioned here, past performance is not a guarantee of future returns. Investing involves risk of losses on invested capital. One should research any investment and make sure it is suitable with your objectives, risk tolerance, risk profile liquidity considerations, tax situation, and anything else pertinent to your financial situation. Also, the CFA credential in no way implies investment returns will be superior for any charter holder.

It Is Getting Tougher-

Five Down Days In A Row as China and the Ukraine Trouble the Market

For the week of March 15, 2014, the Dow Jones Industrial Average fell 2.4%, the S&P 500 dropped 2%, and the Nasdaq retreated 2.1%.  As is usually the case, when the mood of Mr. Market changes, it happens rapidly. After several weeks of positive results, it was time to hit the sell button, especially on Thursday the 13th, when the Dow dropped over 200 points.  Many attribute the weakness to a realization that China is not going to be a source of strength for those looking for growth, but could indeed be a major problem.  The same issues of too much building, commodity weakness, and inefficient use of capital by the large government controlled companies all are seen as root causes of the slowdown in GDP growth.  Many believe the canary in the coal mine for continued market weakness is the sudden drop of the price of Dr. Copper, which could be saying the real concern should be deflation, and not inflation. When combined with the situation in the Ukraine and the eventuality of the Crimean peninsula electing to join an increasingly aggressive Russia, the urge to sell was overwhelmingly elected by market participants.


I noticed the Herbalife situation has, shall we say, taken a sudden change as well.  After nearly a year of seemingly beating his head against a wall, and in the process losing investors hundreds of millions of dollars by shorting Herbalife, Bill Ackman's Pershing Square fund saw a little sunshine as the Federal Trade Commission opened up an investigation into claims Herbalife is really a pyramid scheme.   I would only note Mr. Ackman is an exceptional investor and his track record is such that on something where he has this much conviction, even though it has not gone his way yet, I would not be betting against him.  You know what they say, though, conviction is for convicts.




I would note one of the real interesting situations in the markets these days is how traditionally large, incredibly well known brands across quite a few industries are not very highly regarding by investors these days.  If you look at companies like McDonald's, Coca-Cola, Pepsi, AT&T, Weight Watchers, and others, they are seen as being no or low growth companies.  If you look at the intangible assets on the balance sheet of these entities, you can make a reasonable argument that brand recognition is worth in the billions of dollars, especially of those I just mentioned. Yes, these individual enterprises face challenges, but what business doesn't?  I don't know about you, but you cannot tell me that 10 years from now, people are not going to recognize McDonald's and Coke just as much as they do today.

The U.S. government decided to release 5 million barrels of oil from the strategic patroleum reserve as a way to test market readiness.  The current U.S. government position regarding energy continues to be completely unrealistic as it places far too much importance on alternative energy. A practical approach would be to work with the oil, gas, and coal industries in a more inclusive way to help the country use it's growing energy strength as an effective economic tool against those in the world who might be concerned with U.S. interests.  Is it possible things might change regarding energy policy?  Yes, and if you believe that, I have a bridge to sell you , too.


Finally, it looks as if the long awaited Alibaba IPO will take place fairly soon, to the tune of over 150 billion dollars. Yahoo will get a big cash infusion, and the pressure on Marissa Meyer probably will grow, as investors are going to want to see progress of an operational turn around. I suspect Google, Facebook, and Twitter are going to paying very close attention to the lovely lady running Yahoo nation.

Thank you for reading the blog this week.

Y H & C Investments, Yale Bock, and the family of Yale Bock own positions in securities mentioned in the blog post. Investing in stocks can lead to the complete loss of your capital. As always, on any company mentioned here, past performance is not a guarantee of future returns. Investing involves risk of losses on invested capital. One should research any investment and make sure it is suitable with your objectives, risk tolerance, risk profile liquidity considerations, tax situation, and anything else pertinent to your financial situation. Also, the CFA credential in no way implies investment returns will be superior for any charter holder.