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A Little Known Way To Blow $1 Billion

Obamacare Website Trainwreck

Shocking data released Thursday by a highly regarded Bloomberg government analyst put the Obamacare website rollout cost at over $1 billion. This represents a $600 million increase over the price tag usually associated with the Affordable Care Act, according to the Government Accountability Office. 

Unfortunately, the bad news does not end here. Due to the multitude of kinks and glitches so far encountered and the anticipated overload of problems yet to be exposed, the website costs will continue to escalate.

Bloomberg’s Peter Gosselin offered, “Given the seriousness of the IT problems and the fact that most of the contracts are on a cost-plus basis, the companies almost certainly are in line for another burst of spending aimed at quickly making repairs.”

Just yet another sign that the US Government has completely broken down.  How can anyone spend $500 Million (with cost estimated to balloon to $1 Billion) on a website that doesn’t even work is beyond me. 

As someone who has build a number of fairly complex websites I cannot understand how the website they have built can cost anywhere close to that much money. They could have outsourced it to India or Russia or they could have found a few college kids who would have built them a killer application for as little as $10 Million. I guarantee you that.  The cost that they are paying is astronomical and just shows how broken down the system is.

It is just another symptom of complete mismanagement and fraud that is the US Government. They borrow money they do not have and repay it with money printed out of thin air, they wage wars against cave dwellers with AK-47 by shooting at them with Million dollar missiles,  they spent $1 Billion on a website that should only cost $10 Million and they goose the economy with cheap credit at the expense of a future collapse. How is any of this going to end well?

 It will not. 

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Here Is A Quick Way To Destroy Confidence

Bloomberg Writes: Is JPMorgan Getting a Bad Deal?

 bailout investwithalex

In resolve a handful of state and federal investigations, JPMorgan Chase (JPM) has tentatively agreed to pay $13 billion—more, as my colleague Nick Summers points out, “than the combined salaries of every athlete in every major U.S. professional sport, with enough left over to buy every American a stadium hot dog.” Thirteen billion is also equal to 61 percent of the bank’s profit for 2012, so it’s a significant sum. But does that make it a “shakedown,” as some have suggested?

But there’s no getting away from the fact that the Obama Administration has taken a great deal of criticism over the lack of accountability pertaining to the financial crisis and for not punishing those who had a role in bringing the economy near collapse.

Read The Rest Of The Article Here

I am no fan of big banks nor the bailout of said banks in 2008. In fact, I was a big proponent then, as I am now, that those banks should have failed. Yes, it would have caused a lot of economic pain, but we would have been on the way to a real economic recovery now.  Instead, they have created even a bigger moral hazard.

With that said, I am troubled by this settlement. The US Government is now going after the those who were  willing to step in and backstop the economic collapse by taking over failed financial institutions on request from the US Government. It’s like begging your neighbor for money to buy food (because you are starving) only to slap him with a lawsuit a few years later for lending you that money.  Not only is it unfair, it is downright idiotic as it brings even more risk into the financial system.

Listen, I understand that there was a lot of back room dealings and billions of dollars changing hands that we do not know about. Yet, one thing is clear. If this is to happen again, good luck finding anyone willing to step in. Yes, I am talking to you US Government.  

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Stock Market Update, October 25th, 2013

daily chart Oct 25, 2013

Summary: Continue to maintain a LONG/HOLD position

In the last couple of updates I have mentioned that the market will bounce to the 15,300-15,500 on the DOW in order to close all the gaps and to satisfy all of my requirements. Well, we are here, what’s next?

This is where the picture gets a little bit fuzzy.  According to my mathematical work there is no doubt that we are at the inflection point with two possible outcomes.

  1. September 2013 top was indeed the top and the bear market down leg will resume shortly.
  2. The final top (a little bit higher or lower than September 2013 top) will be set in March of 2014. Thereafter the market will roll over and begin its bear phase.

As I have mentioned many times before, my mathematical work is clearly showing that the bull is ending and the 2-3 year Bear market is just beginning.  I would call the exact date, but there is just too much interference right now.  Unless a severe down leg starts over the next 2 weeks, we will have to wait until March of 2014 for the Bear to start. Until that happens a lot of ups and downs without so much as going anywhere.  The rest of my analysis remains the same.

Over the next few weeks we will find out if the if the bear market has already started or will start in March of 2014. Should the market break below 14,600 over the next two weeks, the probability is high that we have already started the bear market leg into the final 2016 bottom.  The market is certainly going back into the 14,800 as it left a huge gap there, but a firm break below 14,600 will give us a confirmation that the bear is back.

At the same time we cannot yet ignore the technical picture with the market being near an all time high. As such, I continue to advise you to maintain a LONG/HOLD position while waiting for the confirmation that the bear market has indeed started.  

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How To Determine The Intrinsic Value Of Any Company (Part 3)

valuation2-investwithalex

Further Notes & Valuation Explanation

Based on the calculation above there are 2 important dynamic areas that require our further attention and explanation.  They are an integral part of the calculation and just a small adjustment can have a significant impact on the overall Intrinsic Value outcome. These variables are…

1. Estimated Future Growth Rate:  Determines the future growth rate of the company over the next 10 years. It is an impossibly difficult number to get right. We can look at the historic growth of the company and use that number OR we can use the existing (last few quarters) growth rate OR we can use our future projected growth rate based on our understanding of the fundamental factors, the economy, company products and so forth.

Whatever your decision might be, understand that you are somewhat guessing here. The future is fuzzy. In 10 years the company might be collapsing with negative growth rates or it might be growing at an

+40% rate due to new product introduction. I often find it helpful to concentrate on the historic/average growth rate and then reduce it by a few percentage points to reduce Intrinsic Value output.  This give me a little bit more margin of safety and a little bit more room if I have made a mistake. 

2. Average P/E Rate:  Very similar situation to the Estimated Future Growth Rate discussed above. While we can look at the average P/E  ratio of the company over the last 10 years and perpetuate it over the next 10 years, in reality we have no idea what that ratio will be in 10 years.  In Microsoft’s example above we have estimated that the P/E ratio will be at P/E= 15 in 10 years.

Yet, no analyst can say that with 100% certainty.  Once again, the company might stumble over the next 10 years and find itself with a P/E Ratio of 5 OR it might surge its growth and find itself with a P/E Ratio of 35. Of course, that greatly impacts the Intrinsic value calculation and any perceived Margin of Safety that you have.  As discussed in the previous point you are better off using historic/average P/E Ratio and then reducing it by a few points to give yourself some extra margin of safety.

It is often helpful to play around with different inputs for these variables based on your research. It will give you a range of Intrinsic Values (Best Case, Average, Worst Case) type of scenarios that can give you a better understanding of what the company is really worth.

For example, in Microsoft’s case you can have a range of ($45.15 I  $54.82 I $59.28) based on playing around with a few numbers.  These prices can act as markers for future developments.  If the company is performing better than your original research has indicated, a higher range IV is appropriate. If worse,  the lower one.  In either case, you are at least aware that the Intrinsic Value is not an exact number, but a constantly changing one.

Once again, the formula above is a highly simplified version of a standard Intrinsic Value calculation.  It can be made a lot more complicated for the purposes of being more precise. Plus, there are multiple ways to calculate the Intrinsic Value.  Whatever the situation is I want you to understand that an Intrinsic Value number cannot be determined with exact precision.  It is your best guess based on the past and the research that you have done.  

Finally, some of the most important variables in the Intrinsic Value calculation rely on the future performance. While the future can be estimated, any such estimate is rarely accurate. As such, you must have a clear understanding that you are making predictions based on unknown future developments that might or might not be anywhere close to what you have originally estimated. 

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How To Determine The Intrinsic Value Of Any Company (Part 2)

That is why I argue that most investors out there do not need a complex “discounted cash flow Intrinsic Value calculation”.  Yes it will give you a more precise answer, but a much easier valuation technique can give you the same answer within 5 minutes. Here is what you have to do.

Coins and plant, isolated on white background

First, let’s take a look at Microsoft Inc and estimate its Intrinsic Value.

We need the following inputs easily available from any financial website (Ex: Yahoo Finance)

  1. Stock Market Price: $33.75 (Oct 23, 2013)
  2. Current EPS (Earnings Per Share): $2.58
  3. Estimated Future Growth Rate:  10.8%
  4. Weighted Average Cost Of Capital (WACC): 7 to 8%
  5. Average P/E (Price/Earning) Ratio To Use:  15

STEP#1:  Figuring out EPS in 10 years.

  • Formula:  (Annual EPS x Estimated Growth rate^10)
  • Microsoft:  $2.58 x  10.8%^10 = $7.19

Explanation:  If Microsoft continues to grow its EPS at 10.8% over the next 10 years,  in 2023 its earnings per share will be equal to $7.19

STEP #2:  Figuring out stock value at year 10

  • Formula (EPS at year 10 x Average P/E Ratio)
  • Microsoft:  $7.19 x 15 = $107.85

Explanation: This means that if EPS and Average P/E ratio hold, the price of Microsoft stock will be $107.85 in the year 2023.

STEP #3:  Discounting future value to determine today’s Intrinsic Value

  • Formula (Future Stock Value/ WACC^10)
  • Microsoft $107.85/(1.07^10)=$107.85/1.9671=$54.82

Explanation: That means the stocks Intrinsic Value today should be is $54.82. With the stock price being $33.75 today, it appears that Microsoft is selling at about 38% discount to its Intrinsic Value.

The Weighted Average Cost Of Capital (WACC) used in the calculation above was 7%. In simple terms WACC is the average combined cost of debt and equity. It is not a particularly hard calculation, but it does require some work.  I do not believe that you need to do this calculation.  

Instead, there are two other ways to think of WACC.  You can think of it as ROI % required by you for this investment or as the average stock market return over the last 50 years. To simplify things even further I tend to use 7-8% WACC at this time, unless there are company specific issues that lead me to either increase or decrease the cost of capital.   

To be continued…..

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Warning: Another Hedge Fund Manager With A Perfect Track Record Is Predicting A Market Crash

CNBC Writes: Scary! This bearish call points to 40% market drop

 market crash investiwthalex

The stock market is trading at unsustainable levels that could eventually lead to a major sell-off, with a possible 40 percent drop in stock prices, hedge fund executive Mark Spitznagel told CNBC Wednesday.

“The simple answer, the mom and pop answer, I think, is just to step aside,” said Spitznagel, founder of Universa Investments and an associate of “Black Swan” pioneer Nassim Taleb.

Spitznagel, incidentally, has some Street cred when it comes to predicting downturns: He called it in 2000 and 2008 and made one of the biggest profits on Wall Street during the 2008 financial crisis, while many other investors were losing money.

Appearing on “Closing Bell,” Spitznagel suggested the Federal Reserve, which last month reaffirmed its policies on bond purchases and record-low interest rates, is basically propping up stocks and otherwise distorting the market.

“It’s a market that is sort of set up, I think, for a major crash, a major sell-off,” said Spitznagel. “I would argue all the major tops we’ve seen in the market over the last 100 years look very much like it does today.”

“The ultimate causes of crashes is the distorted environment we’re in,” he continued. 

In turn, Spitznagel recommends retail investors step aside and wait for opportunities to come.

Watch The Video Here 

I agree with his analysis 100%. The only thing I would add is my mathematical timing work. There will be a 40% decline but it will happen over the next 2-3 years and not in a crash type of an environment. It will be very similar to the 2000-2003 move.  Further, my work indicates that this decline will really get going after March of 2014.  

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Greenspan The Oracle

Bloomberg Writes: Greenspan Says Stocks Are ‘Relatively Low’ and Headed Upward

 greenspan-investwithalex

Former Federal Reserve Chairman Alan Greenspan said the stock market has room to rise from record levels.

“In a sense, we are actually at relatively low stock prices,” Greenspan, who guided the central bank for more than 18 years, said in an interview with Sara Eisen on Bloomberg Television today. “So-called equity premiums are still at a very high level, and that means that the momentum of the market is still ultimately up.”

Greenspan said the stock market is “just barely above 2007” and the average annual increase in stock prices “throughout the postwar period” is 7 percent, which leaves room for a rise.

Read The Rest Of The Article Here

I am not sure why anyone even listens to this guy anymore.  Greenspan only has one gear. To lower the interest rates and to flood the market with cheap credit. Let’s take a look at just some of his accomplishments.

  • 1998 Asian Bubble/Crisis
  • 2000 Tech/Stock Bubble and Crash
  • 2006 Real Estate Bubble/Collapse
  • 2007 Financial Collapse
  • Current Developments

Do I blame Greenspan for all of that? Absolutely. That’s what happens when you flood the market with cheap credit. You start a perpetual cycle of bubbles and crashes. The money has to flow somewhere and when it does, it creates a bubble. That bubble eventually pops and wrecks havoc on the entire economy. That leads Greenspan or Bernanke to flood the market with even more money/credit until it recovers and creates another bubble. So on and so forth until the whole thing blows up.

Greenspan has always claimed that you cannot sport bubbles. I disrespectfully disagree, but him claiming that stocks are cheap is nothing short of adding insult to injury. Anyone listening to Greenspan in this matter is likely to see their money vanish.

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How To Determine Intrinsic Value Of Any Company (Part 1)

How To Determine Intrinsic Value Of Any Company In 5-10 Minutes
No Harvard MBA Is Required

intrinsic value investwithalex

In the last chapter we took a closer look at how the margin of safety works and what kind of things we should look for in order to make a proper value investment. As previously discussed, one of the most important things to know when figuring out the true margin of safety is the Intrinsic Value (IV) of any given company.

Wikipedia defines Intrinsic Value as the actual value of a company or stock determined through fundamental analysis without reference to its market value. It is also frequently called fundamental value. It is ordinarily calculated by summing the future income generated by the asset, and discounting it to the present value.

Now, there is something very important you must understand.  Determining the IV of any company is arbitrary at best. It could be a highly complex process involving hundreds of excel sheets and data points or it could be a fairly easy process involving a few easy to understand middle school algebra calculations. At the end of the day, neither approach will give you an exact IV of any company. 

Why? Because we are dealing with the unknown. What we are doing when we are determining an IV of any company is taking various existing data points and projecting them well into the future.  In fact, most models call for at least a  5 year discounted cash flow projection to value a company.  The problem is, the future is unknown and in the fast paced business world everything can change on the dime. Making your original IV calculation obsolete.

New products, new technologies, new competition, economic booms and busts, political developments, regulations, etc….. and the list never ends.  How can we make an accurate IV calculation when so many different “unknown” factors can impact your model.  Well, we cannot. 

We can make our best estimates, but we can never achieve a 100% proper IV valuation for any given company. Give 10 different analyst a company to value and they are likely to come up with 10 different answers. Most likely within +/- 20% of each other.  The point I am driving at is this. There is no possible way to achieve perfection when it comes to IV calculation. We are dealing with too many unknowns and future developments. All we can do is estimate.

Let me give you a quick example. Why did Investment Banks who were involved in the Facebook IPO (initial public offering) valued the company at $38 a share?  Did these Investment Banks have a bunch of complex and secret valuation algorithms valuing Facebook before the IPO.  It’s probable, but not likely. You see,  whatever number any such valuation yields would technically be garbage because the future of Facebook is unclear. It is a fast growing tech company, but without a clear path. Everyone is making assumptions. No one knows if Facebook will grow at 20% per annum over the next 10 years or make a series of mistakes that will put it on the path previously walked by MySpace.

As such, everyone can make estimates in order to derive the IV, but in reality no one truly knows. Anyone who claims they can properly determine the IV value of Facebook is simply lying. What ends up happening in a situation like this is investment bankers basically figure out what “the market” is willing to pay and set their IPO price based on that.  

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Warning: USD Is About To Kick Ass

CNBC Writes: De-crowning the dollar, and the ‘collapse’ ahead

 3D chrome Dollar symbol

The gradual erosion of the U.S. dollar’s status as the world’s reserve currency has been greatly hastened of late. This is due not only to the perpetual gridlock in D.C., but also our government’s inability to articulate a strategy to deal with the $126 trillion of unfunded liabilities.

Our addictions to debt and cheap money have finally caused our major international creditors to call for an end to dollar hegemony and to push for a “de-Americanized” world.

China, the largest U.S. creditor with $1.28 trillion in Treasury bonds, recently put out a commentary through the state-run Xinhua news agency stating that, “Such alarming days when the destinies of others are in the hands of a hypocritical nation have to be terminated.”

In addition, Japan (our second largest creditor holding $1.14 trillion of U.S. debt) put out a statement through its Finance Minister last week saying, “The U.S. must avoid a situation where it cannot pay, and its triple-A ranking plunges all of a sudden.”

Read The Rest Of The Article Here

I disrespectfully disagree with CNBC once again (no surprise there) for a couple of reasons.   

1.  As of  right now there is no alternative to the US Dollar to even attempt any kind of a shift. Chinese Yuan is not a freely traded currency yet and if anything it is still decades away from any sort of an attempt. Plus, China is in the midst of its own Economic Bubble that is surely to blow up soon.  Euro? Not a chance. Europe is a basket case and a one common sense politician away from breaking up.  Bottom line is, there is no currency out there to replace the USD. Yes, the US has its a share of problems, but so does everyone else.

2. USD Collapse?  What collapse?  Listen, we have to make a distinction between Credit Outstanding (which is a huge problem in the US) and the Actual Currency Dollars available. The former is a lot less than Credit Outstanding. That means the demand for USD needed to repay these huge balances will go up substantially over the next decade, pushing the dollar ever higher.

That is one of the reasons I am so bullish on the USD.  While it remains everyone’s favorite target, the USD fundamentals and technicals are looking very good. I would anticipate the USD to appreciate substantially over the next few years. 

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How China Lost Faith In The US Government

Bloomberg Writes: Foreigners Sold U.S. Assets as China Reduces Treasuries

 debt holders investwithalex

Foreign investors were net sellers of U.S. long-term portfolio assets in August as China reduced its holdings of Treasuries to a six-month low.

The net long-term portfolio investment outflow was $8.9 billion after a revised $31 billion inflow in July, the Treasury Department said in a statement today in Washington. Net sales of U.S. equities by official holders abroad were a record $3.1 billion, and China lowered its holdings of U.S. government debt for the second time in three months, the department said.

Today’s report showed China remained the biggest foreign owner of U.S. Treasuries in August even as its holdings dropped $11.2 billion to $1.27 trillion.

Read The Rest Of The Article Here

In my previous posts I have argued that the biggest impact of the US Government shutdown will not be any sort of a default, but a shaken confidence of foreign investors.

No one in their right mind, not the Chinese nor the Japanese, would trust the fiscal future of their nations to a government that acts like little children fighting over a toy.

As predicted, we are now beginning to see the consequences associated with shutting down the US Government with China cutting their US Treasuries buying.  While this outflow doesn’t make a trend, just yet, it is certainly something to watch over the next couple of years. I guarantee you that China and Japan both are discussing the issue at the highest levels. Their confidence has been shaken and they can no longer trust the US Government to the extent that they have in the past.  

The result? Very simple. Lower demand for the US Treasury, higher interest rates, slower growth,  a substantial decline in economic activity, much lower financial markets, a decline in real estate and auto sales. Not a good picture.  

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