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The Growth and Value Managers and Investors Conundrum

The great conundrum for traditional asset managers (of which I am one) is how to explain irrational market movements. Most long only longer term managers seek either growth or value or a combination of both. However we are now in a market where those traditional investment themes are being obfuscated by hedge fund managers and short term momentum traders.

Take what happened to Ospraie Management, LLC as an example. The Ospraie Fund which had $2.8 billion last the beginning of August lost a reported 26.7% of its value during that month in the wake of a “substantial sell-off” in energy, mining and resource equity stocks. There is no doubt in my mind that Ospraie was leveraged and controlled far greater than $2.8 billion of equities. Now they are liquidating and closing up the fund. Ospraie is not alone.

All that a hedge fund manager will do in these circumstances is close the fund because they will not earn their performance fee which typically is 20% of the funds profits. Many of these managers will open up a new fund with a similar investment format in a few years thus wiping out the performance deficit and start from a zero performance benchmark. A prima facie example is John Meriwether who after blowing up Long Term Capital in 1998 started JWM Partners in 1999 and has lost a sizeable percentage of its assets this year.  

So who suffers? In the short run it is the value and growth investors who see their investments being whipsawed without rational explanation. When your stock falls 10% in one day is it really worth 10% less or is a leveraged liquidation taking place without concern for price? What do you do?

Perhaps you should follow the advice of two of the best investors of our time, Berkshire Hathaway’s (BRK/A, BRK/B) Warren Buffett and Charlie Munger.  They are less concerned about short term movements and can see the forest for the trees. They will stick to their value oriented approach with the full knowledge that the markets and their investments will not rise each and every year. They know that there are some down years and some periods of time when irrational behavior will grip the markets.  Shares of BRK/A are down over 15% this year. Buffett and Munger don’t have to worry about performance fees. They will stick around and survive. In fact, they are on the prowl for good investments right now. Ask yourself this question – would you fire Buffett and Munger right now knowing that they are off about 15% in 2008?

If the answer is yes then I suggest that you do not invest in the securities markets.  If the answer is no then you have made the conscious decision, and in my opinion the correct one, to focus on the long term benefits of active growth and value investing.



Posted By Scott Rothbort at September 3, 2008

Cashed Out Of Buffalo WIld WIngs
I sold out the remaining portion of my Buffalo Wild Wings (BWLD). The stock rallied to my price target and it was prudent to take some very nice profits on the name. My bullish thesis for BWLB has not changed for the longer term. I would consider repurchasing BWLD if the stock fell to the high 20s/low 30s. 

Posted By Scott Rothbort at September 8, 2008

Some Possible Buyers For Lehman and Not Just The Usual Suspects

Here is what I am hearing from my broker sources:

Bank of America (BAC) will pay between $2 and $3 for Lehman (LEH) this weekend if and only if Neuberger Berman is kept in the deal.

John Thain of Merrill Lynch (MER) told a group of his brokers that all the toxic stuff was out the door and he can live with what they currently own.

HSBC has not been in the hunt for LEH. They have always coveted MER. LEH now seems to look toward Europe (having told South Korea no thanks) while MER likes to go east to places like Singapore. Hong Kong on a relative basis is not far away

If you want to have fun, here are some companies that could buy LEH for cash: AAPL (AAPL) with $20 billion of cash and no debt and produces over $1 billion per quarter; Google (GOOG) with $13 billion of cash and no debt and generates about $500 - $750 million per quarter; and last but not least, Exxon Mobil (XOM) which has nearly $40 billion of cash versus debt of just over $7 billion.

Heck XOM can create an SPV of $20 billion and buy LEH and just be patient and wait. Worse come to worse, XOM does the little guy a favor who can’t afford their home because of rising energy prices. Boy what a political windfall that would be! Instead of putting a tax on the energy companies which is not popular with about half the electorate, have the energy firms buy LEH and thus save the taxpayer from owning more mortgages and real estate as a result of backing up LEH through Treasury and Fed (hence taxpayer) support. In essence the windfall profit on the energies is averted by passing the mortgage debt right to those companies and bypassing the taxpayer. Then again, is there anyone in the government who would have this type of creativity? Doubtful. However to our law makers and regulators, I am always available for consultation.  I even have a toll free number.

At the time of this Blog entry Scott Rothbort, his family and or clients of LakeView Asset Management, LLC were long shares and/or options of AAPL, GOOG and MER --- although positions can change at any time.



Posted By Scott Rothbort at September 12, 2008

Who Will Dow Jones Select To Replace AIG in the Dow Jones Industrial Average Index?

Come hell or high water, American International Group (AIG) will have to be exorcized from the Dow Jones Industrial Index (DJIA). This leaves News Corp (NWS) which owns Dow Jones to insert a new company into the grand old index.

Of course my preference and one which I have publically recommended is to expand the DJIA to 100 stocks from its historical basket of 30 stocks. If Wrigley field can host night games for the Cub then the DJIA can join the modern times and expand to at least 100 stocks.

So, let’s speculate, which stock should and which will join the INDU in AIG place (assuming the old 30 stock membership). Looking at the S&P 500 (SPX), the company with the largest capitalization that is not included in the DJIA is Apple (AAPL). I doubt that NWS would put APPL into the DJIA which already has Microsoft (MSFT), IBM (IBM) and Hewlett Packard (HPQ). Logically one could argue that a financial would be the replacement for AIG. However, Bank of America (BAC) was added in February of 2008.

Here is a novel thought - add Berkshire Hathaway (BRK/A, BRK/B or BRK collectively). Realize that I am really pushing the concept of creativity at Dow Jones with this blog’s suggestions. BRK has nearly $200 billion in market capitalization.  That is not exactly as much as Exxon Mobil’s (XOM) near $400 billion market cap but it is also no small potatoes. BRK has a large insurance component which makes for a nice offset to the loss of AIG. There is no investor alive (or maybe even dead) who would not welcome BRK (along with Warren Buffett and Charlie Munger) to the index. Perhaps if Dow Jones insists on keeping 30 stocks in the index, the BRK addition would inject some vitality to the index, although APPL would be a sexier stock for the DJIA.

 At the time of this Blog entry Scott Rothbort, his family and or clients of LakeView Asset Management, LLC was long shares of AAPL --- although positions can change at any time.



Posted By Scott Rothbort at September 16, 2008

One More Note To Dow Jones on the Dow Jones Industrial Average

Something I left out in my prior blog post:

Change the index to capitalization weighted from price weighted.  Unlike 100 or more years ago we now have calculators and computers which make cap weighting much easier. 



Posted By Scott Rothbort at September 17, 2008

Darden Restaurnats versus Dine Equity

A few thoughts on Darden Restaurants (DRI) quarterly earnings which was released last night. Of all my restaurant picks and holdings, DRI is the only fixer upper in the portfolio. I thought that the quarter was OK and frankly I was braced for worse when the company lowered guidance a few weeks ago. The Rare acquisition is still being absorbed and integrated and the steakhouse business is the weakest in the casual dining sector which is a drag on DRI.

In the casual dining sector of the industry the two best companies which also have the two best managers are Clarence Otis of DRI and Julia Stewart of Dine Equity (DIN). DIN was formed by the acquisition of Applebee’s by IHOP a few months ago. Both of these companies are in the process of integrating acquisitions. Of the two, I consider DRI to be in better financial condition. Stewart has her hands full with the recent departure of CFO, Thomas Conforti.

Last night DRI’s Otis mentioned on Jim Cramer’s Mad Money show on CNBC that he was seeing some traffic flow from the closing of lesser chains such as Bennigan’s. So while I see both DRI and DIN as value and fixer upper plays, DRI offers the better opportunity.

The company guided to an implied EPS range of $2.74 to $2.88 with the midrange of $2.81 2 cents higher than analysts’ estimates of $2.79. All of these EPS figures are assuming elevated levels of commodity prices which are not likely to hold.

For more on restaurant ideas you can subscribe to the LakeView Restaurant and Food Chain Report

At the time of this Blog entry Scott Rothbort, his family and or clients of LakeView Asset Management, LLC was long shares of DRI --- although positions can change at any time.

 

 



Posted By Scott Rothbort at September 17, 2008

Kraft Added to Dow Jones Industrial Average

Dow Jones added Kraft as a replacement to AIG (AIG) in the Dow Jones Industrial Average (DJIA). Dow Jones, a News Corp (NWS)  owned company blew the opportunity once again to restructure the DJIA. My suggestion to Dow Jones have been to change to a market capitalization weighted index from a price weighted index and to expand the index to at least 100 stocks. 

As far as KFT goes, it is a quality company with a nice dividend yield but it carries too much long term debt for my liking. KFT is a part of the food chain which is vital to the economy and is one of the stocks that we follow as part of the LakeView Restaurant and Food Chain Long/Short Strategy and Newsletter 



Posted By Scott Rothbort at September 18, 2008

Exposing the Soft White Underbelly of the Hedge Fund Industry

I have thought for a while that the hedge fund business model was breaking down. In fact I turned down an offer to raise capital in a hedge fund format a few weeks ago. This summer it appears that the soft white underbelly of hedge funds is being exposed as the four legs of hedge funds are being kicked out right from under the industry:

·         Leverage – hedge funds need leverage to generate excess alpha and non-correlated returns. Leverage is being removed from the system like never before for hedge funds

·         Manipulative Short Selling – short selling is a good thing. Manipulative short selling is illegal and against the interest of shareholders. That is now going to be enforced and put to an end. Next we will have the reinstatement of the up-tick rule. It worked for 70 years but failed us in the last year.

·         Performance Fees – many funds are closing up because the managers won’t earn performance fees. This resulted in massive liquidations which are still continuing

·         Lack of Transparency – The SEC took the first step in requiring hedge funds to report short positions over certain limits. Mutual Funds have to file reports with the SEC and provide shareholders with a quarterly report which is part of the SEC filing. The wall of transparency will be brought down.

So what will happen? Eventually we will see assets flow back to more traditional forms of investment – managed accounts, mutual funds and self directed investments.



Posted By Scott Rothbort at September 19, 2008

Anomalous Market Conditions

The S&P 500 (SPX) has fallen 17.79% on a price basis and 17.45% on a simple arithmetic basis of all the trading days this year (183 total days). It is interesting that the returns for the individual days of the week are incredibly biased with aggregate returns by day as follows for the year:

MON               -10.55%

TUE                   +5.84%

WED                  -7.23%

THUR               +3.93%

FRI                    -9.44%

 

Simply put if you were in the markets Tuesday through Thursday you would be up on the year. Conversely if you were short Friday to Monday you would also be up.

How does this stack up historically?

Since 1950 the days of the week played out as follows on average:

MON                -0.070%

TUE                 +0.032%

WED                +0.088%

THUR               +0.039%

FRI                  +0.073%

 

This of course begs the question – what is going on? Here is a possible explanation. A great deal of negative news particularly in the financial sector has come over the weekend. As a result, there is a pervasive fear to be invested over the weekend. Then come Mondays, a lack of good news has also sparked selling. In good times we will get large M&A deals over the weekend so there was always speculation of deals on Fridays and a desire not to be caught short over the weekend. However, the times are bad and not good right now.

These anomalous conditions will cease once the market turmoil has subsided. A return to the mean or normality will occur. However when this will play out right now is subject to more uncertainty than conventional wisdom.



Posted By Scott Rothbort at September 23, 2008

What Will Goldman Sachs Do WIth $10 Billion? - How About Buy a Bank

What will Goldman Sachs (GS) do with the nearly $10 billion that it plans to raise from a secondary offering and a preferred offering to Berkshire Hathaway (BRK/A, BRK/B)? Certainly GS will use some of the proceeds to bolster its capital. However, now that GS is organized as a bank holding company it will seek to attract deposits. Unfortunately GS does not have a large retail brokerage business or a bank branch system which can drive bank deposits. Thus, I believe that GS will buy a bank. Not a real large bank but of sufficient size to give GS a running start. I also think that GS will start in its own backyard in the New York region. Here are some potential candidates for GS in no particular order:

New York Community Bancorp (NYB) – market cap $5.8 billion

Hudson City Bancorp (HCBK) – market cap $9.65 billion

M & T Bank (MTB) – market cap $9.3 billion

Valley National Bancorp (VLY) – market cap $2.9 billion

 

I am sure that there are other potential banks as my list was one I compiled in my mind driving to the office. If I had to take a guess, given the price tags and distribution of the branch system, NYCB would be my top choice.

At the time of this Blog entry Scott Rothbort, his family and or clients of LakeView Asset Management, LLC was long shares of GS --- although positions can change at any time.



Posted By Scott Rothbort at September 24, 2008

Scott Rothbort

About Me :

SCOTT ROTHBORT

THE FINANCE PROFESSOR

 

Scott Rothbort has over 20 years of experience in the financial services industry. In 2002, Rothbort founded LakeView Asset Management, LLC, a registered investment advisor based in Millburn, N.J., which offers customized individually managed separate accounts, including proprietary long/short strategies to its high net worth clientele. He also is the founder and manager of the social networking educational website TheFinanceProfessor.com and a frequent contributor the TheStreet.com where he also writes a weekly article as The Finance Professor

Immediately prior to that, Rothbort worked at Merrill Lynch for 10 years, where he was instrumental in building the global equity derivative business and managed the global equity swap business from its inception. Rothbort previously held international assignments in Tokyo, Hong Kong and London while working for Morgan Stanley and County NatWest Securities.

Rothbort holds an MBA in finance and international business from the Stern School of Business of New York University and a BS in economics and accounting from the Wharton School of Business of the University of Pennsylvania. He is a Term Professor of Finance and the Chief Market Strategist for the Stillman School of Business of Seton Hall University.

For more information about Scott Rothbort and LakeView Asset Management, LLC, visit the company's Web site at www.lakeviewasset.com.

 


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