Monday, April 25, 2011

Private equity markets grow and prosper

In Saturday's post, "Future Shock", it was mentioned that private information flows and private equity markets were in the center of prescient wealth creation. Here's an example of that in the private equity markets, not that one is needed when we watch the private valuations of entities like Facebook and Groupon soar, outside of the broader investment public's reach.

In areas of technical and technological innovation and research, one might think that investing in ETF representing a sector of opportunity would be a great safe way to benefit. As examples, there are alternative energy, nanotechnology, biotech, water, the "cloud", and other areas, even social networking, that represent areas where rapid growth and significant research is underway. Investing in an ETF representing an area (in the experience here, water, nanotech, and biotech) often leaves an investor with a security that performs in line with or modestly better than the overall market. Why would that be the case?

By the time a company in those areas reaches the public markets, much of the money, the big payoff, has already been made. Private investors hold on for longer periods of gestation for many reasons, not the least of which is to avoid the legal problems and risks of being a public company and the reporting demands of regulators and Sarbanes-Oxley. With so much money held out of the public markets after the '08-'09 debacle, there are far more resources with the patience to wait for the bigger payoff and dig deep in pockets to fund a build out a company before hitting the NYSE or Nasdaq.

I wish that I had the exact statistic at hand but I don't. That statistic would suggest that the number of publicly traded companies has declined by about 40% since the year 2000. What is available to the general investor public, both individual investors and mutual funds, has become more limited. Private equity is an opportunity generally for high net worth, very high, and pension funds and other institutions that have access and choose to allocate a portion of their portfolios to private equity investments.

The playing field tilts further.

Saturday, April 23, 2011

Future shock

"The only function of economic forecasting is to make astrology look respectable."

That's a quote from John Kenneth Galbraith, cute, witty, and to some extent it feels like the truth. Published economic forecasts generally stay within a narrow range and rarely project the unexpected. They are for the most part of little real predictive value because they are merely taking what is known today and adjusting trends based on that knowledge. As has often been said here when projecting the performance of an equity holding, "all things being equal" the stock will... In fact all things rarely remain "equal". So much for my stock forecasts, although they usually work until they don't.

Some outlying economists do stick with provocative forecasts, but they are less forecasts than stubbornly held opinions which may eventually turn out to be right. As they say, even a broken clock is right twice each day.

What Galbraith's long quoted comment refers to, in this observer's opinion, is what we see in the public domain. That is especially true today. What we don't see is where the risk is being taken and where some economists and market players have an informational or intelligence edge. With the boom in private equity markets and the insular networks of information and opinion that are within the hedge fund and the high net worth communities, much of the valuable and more accurate forecasting and much of the true wealth creation is no longer public.

Galbriath's pithy quote sounds good, but there are some really smart people around, for the most part just not on CNBC or in the business pages for all of us to see.

Friday, April 22, 2011

A taxing season

I'm still recovering from doing my own taxes, three sets for the family. Several years ago I mentioned to a friend that I put myself through this masochistic episode each year and he laughed, couldn't believe I didn't use an accountant. Finally broken, it will be an accountant doing this work from now on. Form 8615, AMT, K-1's, estate integration, rule changes, it all almost got the best of me this year.

Why did it take so long to realize this? For many years my taxes were simple and as they grew a little more complex I had this stubborn belief that any citizen, and certainly one with a finance and banking background, should be able to do their own taxes. There was also the belief that I wouldn't really understand what was going on unless I did it myself.

As early as the late '90's it became apparent that the complexity was growing and the tedious process was driving me nuts. At that time, however, and through 2003, I was working all of the time, almost literally, and if not working taking some intense but enjoyable vacation with my family to reward myself. I did not have the time to organize myself for someone else, an accountant, and was somewhat leery about explaining all of the trading I was doing to someone else, all above board but who wants to be second guessed.

When the big job ended, my rationalization was that now I really do have the time to do this, why hire someone else. Why? This year the IRS published "Tax Guide 2010 for individuals" was 270 pages. That really just scratched the surface because filling out various schedules led to 8 - 15 pages of instructions for each, in my case. The IRS estimate for completing one form related to schedule E was 14 hours, 40 minutes. It is highly unlikely that any form with that complexity would be one that I could do accurately even if I took the time. I did a short cut on that one and may have paid a little too much, but no choice there, my sanity was at stake.

In a state with an 8.5% sales tax, a marginal state income tax rate of 9.5%, and property tax that is huge, getting caught in the IRS's sweet spot for AMT was the clincher for a miserable experience. All of the property tax benefit on Schedule A was wiped out and then some by the AMT trap. Many things that require some discipline and hard work at least end with a feeling of satisfaction. Completing my taxes did not.

The complexity can be daunting and at this point is almost inexcusable. If Congress is not getting kickbacks from H&R Block they should be. That said, many folks could live with the system, however flawed, if they thought they were being treated fairly. Several days ago I saw an article saying that the average tax rate for individuals making over $5 million in 2010 was 17%. I can assure you that we paid much more than that.

Tax shelters, managed write-offs, and top notch accountants do their job. AMT can catches many with over $125,000 of income and peaks out at about $650,000, and somehow plays no role after it catches this segment of productive members of the top third of the middle class and what would be called the upper middle class or the marginally wealthy. People in high tax states get hit the hardest, somehow seeming doubly unfair as those states are generally the most expensive to live in.

This quote from mystery writer Donna Leon's Venice based detective Commissario Brunetti in the book "A Question of Belief" caught my eye:

"Underlyling it all, and this is what troubled Brunetti, was a sense of despair. He was troubled by the helplessness which so many people felt and their failure to understand what had happened, as if aliens had taken over and imposed this system on them. Governments came and governments went, the Left came and then gave place to the Right, and nothing changed. Though politicians often talked of it and promised it, not one of them gave evidence of having any real desire to change this system which worked so very much to their real purposes."

Sunday, April 17, 2011

"The Troubled Man"

This crime novel by Henning Mankell is billed as the final one in his now 12 book Kurt Wallander series. It seems that the "brilliant brooding detective" has solved his last case. This book was first published in Sweden in 2009, the year that both Mankell the writer and Wallandar the character hit their 60th birthdays. It was published in its English translation last month.

"The Troubled Man" title refers to a character in the book that could be either a victim or a suspect. It could be applied to the detective Wallander as well. This book is, in fact, two intertwined stories; one is the mystery involving a missing person, a murder, and leaks from the Swedish intelligence services to other countries in the past, and the second is the narrative of reflections on life by the slowly deteriorating Wallander. Like the aging Italian crime writer Andrea Camilleri and his fictional protagonist Inspector Montalbano, one can wonder here if there is any line between the personal reflections of the writer and those of his main character.

The following thoughts from our detective Wallander capture the creeping angst of his aging experience. Standing alone, these brief excerpts from the book may sound somewhat stilted, but they convey the ideas pondered, and work better in the context of the overall book.

---"History isn't something that's behind us, it's also something that follows us."

---"He thought about remembering what he would prefer to forget, and forgetting what he should remember. He didn't know if it was the same for everyone."

---"All his life he had tried to be part of the forces of good in this world, and if he failed, well he wasn't the only one."

---Responding to his thirty something daughter's nostalgic reminiscence of her childhood --- "I have similar memories. They were the best years of my life, when you were a little girl."

---"What scared him more than anything else was an old age spent waiting to die, a time when nothing of what had been his life was still possible."

---"There was no going back in life, even if he were naive enough to wish that was possible."

Reading those quotes may not send anyone rushing out to buy this book, but they may be misleading as they do not reflect the subtlety of the plot and the observations by the detective at every turn. There is even humor to be found, although subtle may be too strong as a word to describe it.

One thing about the book that troubled this reader at times was a concern about the translation. At times it seemed repetitive(everyone was always "tipsy") and perhaps superficial relative to the thoughts that were apparently being conveyed. I have no basis for making that statement other than an intuitive feeling that perhaps the original form of the book may have somewhat more depth and wondered if I was missing something. On second thought, I'm not sure I could absorb that and sleep well at night.

Mankell's strongly held, enlightened but rigid and decidedly left of center beliefs are for the most part not at all visible in this book and only surface at the end in a way that might not even be picked up by readers who are not familiar with Mankell himself. The book will not offend the politically sensitive.

So all of you 60 something folks out there can give this book a try and for the most part be relieved that you are not as tortured as our dear now departed soul Wallander, or be reassured that you are not alone.

Thursday, April 14, 2011

Google's earnings - do they care about shareholders?

Last summer when Google was trading around $450 I gave an uneqivocal endorsement of the stock saying it would easily be above $600 and probably higher in a year. It had to go up. It did, and now it's coming back down.

Google today reported earnings below most securities analyst's estimates and below general market expectations. They say that the miss is due to marketing expenses, hiring 6000 new employees, and giving all non-executive workers a 10% raise. Speaking with all of the animation of Eeyore, Larry Page said that everything is happening just as planned and he was completely optimistic.

Over the years Google has, in some ways refreshingly, always had a distant relationship with the investment community. They do not give guidance or often speak to securities analyst or investor meetings, if at all. That may be a good approach, but certainly when the consensus view has it wrong Google could choose to issue mid-quarter press releases or official statements that refine expectations. That is not their style.

Is Google so absorbed with its quest for domination of its markets and its new ideas that they can't be bothered with their shareholders? Are all of the executives so extraordinarily wealthy due to their ownership in Google's first few public years that they have no incentive to care about stock price? They should, because the ability to gain and keep new engineers and creative types will be severely hampered by a lanquid stock that offers no upside on options or stock based compensation awards.

Google presently has no long term debt, $46 billion in shareholders equity, and $36 billion in cash and short term liquid securities. What is that $36 billion doing? Perhaps earning 2%, way below any firm's cost of capital. Any opportunity to use that cash for acquisitions seems now to be stymied by anti-trust actions at every turn. Why not have a major special dividend or a mind bending stock buyback or both, and reward shareholders for their investment. At this point there is really no excuse for the company's shareholder ambivilant attitude.

Monday, April 11, 2011

Market sluggishness --- some cautionary observations

The equity markets have been kind since September and are now in a low volume holding pattern. Oil prices, inflation concerns, consumer spending outlook dimming, international concerns continue, all of these are subsumed by the outlook for corporate earnings. If there is any dent in that armor, we're in for a sell-off.

There may not be a problem. Cisco's John Chambers and his moribund Goliath have taken media atttention away from the generally solid corporate earnings picture and the multinational firms, be they large cap, mid cap, or even small cap, that benefit on the margin from export growth and indigenous operations in growing emerging economies.

Right now, as in the last few days, we have begun to see sell-offs in names that have had huge gains over the last eight months, profit taking to protect those gains and gird portfolios for a decline. There are stocks followed here that have seen significant declines in the last few days on no news, that's nothing new, just the kind of mid caps that are favorites here and have left plenty to harvest in recent months if an investor is so inclined.

We could even be in for a "sell on the news" market decline, when good earnings reports create enough liquidity for major institutions to take some money off of the table at decent prices, rather than waiting for a summer slumber.

Then again, what we have been seeing is that money must go somewhere and have some expectation of a return, so a good earnings season could underscore the value of equities, certainly relative to any outlook for bonds and certainly a possible value for foreign investors given the recent weakness of the dollar.

---just meandering through market thoughts---

Thursday, April 07, 2011

New York City's magic custodians

---they can make themselves disappear!

Yes, you thought only such magic was on the boardwalk at Coney Island but in New York City schools it's a proud tradition. Yesterday's Wall Street Journal had a headline in the city section - "Custodians Charged in Scam - schools paid for work done on private properties; checks for 'no-show' staff".

This is not news. It's an ongoing absurdity of corruption that hits the headlines every four or five years but never stops. It's the custodian union's tradition and they somehow have it locked in.

In 1986 I had a secretary whose husband was a school custodian, in name. He went to his job whenever he chose to do so which was not so often. From time to time he worked off the books home construction with friends, he went to the track, and I could hear my secretary on the phone looking for him some days, not knowing where he was. This was not a case of union seniority out of control. Husband and wife were in their early thirties. It was inexplicable to me then and I was encouraged to see the "scandal" hit the media a few years later... and then a few years later... and with the prosperity of Wall Street and thus the strength of the NYC tax base, maybe ten years later when the tech boom busted... and now again.

It remains inexplicable.

Wednesday, April 06, 2011

Painfully forgetting a personal investing rule

Over the years I have often followed the Peter Lynch adage of buying stocks that sell products or have a concept that you or your family really like, especially if they are not already saturating their markets. It worked this past year with Lululemon, J. Crew, Quiksilver(as a trade), and Netflix, over past years with some notable names like Apple and Costco. This year I really blew one.

In early January after that first big late December snowfall, I had to admit that my 15 year old Timberland boots had been done in by time. At the main Manhattan Timberland store on lower Broadway I bought a new pair of Timberland boots that felt good even in the store and also noticed a wide array of more upscale products that our foreign visitors were buying consistently as I anguished over what size and style of traditional boot that I would get.

After a few days of wearing the boots, my wife realized that it was time for her to replace her almost vintage LL Beans. She asked me if they were on sale, as is her wont. I responded, "No, they are not and they're worth every penny." They felt great for walking, solidly waterproof, and not bad looking on me if I may say so myself.

At the time I did take a glance at Timberland stock and it was at $27 and was up from the high teens in the summer. My thought was that it looks like others may have already noticed what I had just experienced. Today the stock is at $43, up over 50% since my purchase. I can't believe that I missed it. I saw it, experienced it, and just looked at price on the stock, was it a value, rather than the approach I took to buying the boots, not on sale, who cares, I like them.

Postscript: while the foreign buyers were a hint, what I could not have known is that Timberland products have gone viral in urban China and are as hot as Newports in Eastern Europe.