A couple of posts ago, I presented six examples of risk hedging/ taking that I would like to take through my three bucket test - risk to pass through, risk to avoid/hedge and risk to exploit.Southwest has always hedged against oil price risk, using futures contracts. Is what they are doing make sense? Given that Southwest's core competence (see, I can speak like a corporate strategist) is running an airline (not forecasting fuel prices), that fuel prices are such a large portion of total costs, and Southwest has done this through high and low oil prices (and are thus not trying to time the oil...
Happy Thanksgiving!
Time to take a break from pontificating and navel gazing. While there is much to worry about and anguish over, there is so much more to be thankful for. Have a wonderful Thanksgivi...
Corporate Hedging: The Down Side
There is a news story in the New York Times today about Asian airlines and the losses that they are facing because of put options that they had sold against oil prices, months ago, that are now coming due as large costs. They sold these puts to offset the costs of buying calls against oil, where were, in turn, designed to hedge against higher oil prices.In these days of risk and uncertainty, I am sure that many companies will be on the lookout for ways to hedge against risk, and they will find plenty of entities willing to tell them how to do it or sell them products or services that provide protection....
Jekyll and Hyde revisited!
Yesterday's Financial Times had this headline: "Citi plans good bank, bad bank structure". In effect, Citi plan to separate all the toxic assets and put them in the bad bank and keep all the money making assets in the good bank. Well, I guess we should carry this to its logical extreme and let every company do this - break up into good and bad parts. Thus, Microsoft can consign Office and Windows to the good part and throw Xbox into the bad part.. The next step would be to have two listings for every company - with investors allowed to trade each part separately (we could call them MSFT-G and...
Dividend Yield and T.Bond rate
The last few weeks have seen their share of the strange and the unusual. Last Wednesday, another milestone was reached. The dividend yield on the S&P 500 exceeded the 10-year treasury bond rate for the first time since 1958; just to add, the dividend yield went up only because stock prices have dropped so much this year. So. what is the significance of this occurrence?a. The Bargain Basement view: If we assume that dividends are stable - and they have been remarkably predictable for the last few decades - investing long term in stocks seems like a no-brainer. The income you get from the dividends...
Good companies in bad businesses
All this talk about a federal bailout of GM and Ford has started me thinking about something that has always bothered me. There are some businesses where even the best companies seem to barely make it and everyone else is under water. The automobile business is a good example. Take Toyota, a company that most analysts would consider to be the star of the sector. The company earned a return on capital that matched its cost of capital last year and that was a good year. If the best company in the sector breaks even in a good year, where is the upside in this business? The airline business, since...
Some thoughts on Las Vegas!
I was in Las Vegas yesterday, staying at the Bellagio. As I walked through the casino floor to get to the convention center, where I was delivering a presentation on valuation, there were three things that struck me about the setting:1. The first is that there is no better example of the ruthless power of the law of large numbers and probabilities than a casino. Think about it. You have hundreds of slot machines programmed to deliver about 90 cents on the dollar, on an expected value basis. No surprise, then, that they do.... The house always wins (at least on the slot machines).2. The second...
Blackstone's Woes: Some thoughts on Private Equity
About a year and a half ago, at the height of private equity's success, I put together a presentation on LBOs that examined what makes an LBO work and, conversely, why many of them were destined to fail. The LBO I looked at was the Harman deal, backed by two big names - Goldman and KKR. Based on my analysis then, I concluded that Harman fit none of the requirements for a good target - it did not have significant debt capacity (nullifying the leverage benefit), it was well managed (eliminating the restructuring need) and did not suffer any serious separation between management and ownership (countering...
