Warren Buffet is famously quoted as saying, "If you have been playing poker for half an hour and you still don't know who the patsy is, you're the patsy". Today, we got a glimpse of Buffett playing poker with Bank of America, and at least from my perspective, it seems clear who the patsy in this game is... it is either Bank of America's stockholders or the rest of us who attribute mystical properties (and uncommon ethics) to the Oracle from Omaha...So, let's recap what happened. It has been a rough few months for Bank of America stock, prior to today. The stock price had halved between November...
Trapped Cash: Measurement and Consequences
It is an open secret that US companies have accumulated huge cash balances over the last two years. In fact, there were a few mentions that Apple's cash balance of $76 billion gave it more cash than the US treasury a few weeks ago, and I did a post on a while back on whether Apple had too much cash. While this "sitting on cash story" is an interesting one, there is a sub-story that we need to pay attention to and that may affect how we value companies. Not all of cash balances are equally benign. In fact, a significant portion of the cash balance, at some companies, may be "trapped" and thus not...
Momentum versus Contrarian: Two Reads of the ERP
I am not much of a market timer but there is one number I do track on a consistent basis: the equity risk premium. I follow it for two reasons. First, it is a key input in estimating the cost of equity, when valuing individual companies. Second, it offers a window into the market mood, rising during market crises. For the ERP to play this role, it has to be forward looking and dynamic. The. conventional approach of looking at the past won't accomplish this. You can however use the current level of the index, with expected cashflows, to back out an expected return on stocks. (Think of it as an...
Chill, dude! It is not the ratings downgrade.. It is how you react to it!
Sorry about the title, but I am in Southern California, in surfer terriotory! I guess that the debt ceiling debate was not the end game it was made out to be. In spite (or perhaps because) of the fact that the debt ceiling was raised by Congress, S&P decided to downgrade the sovereign rating for the US from AAA to AA+. As the headlines trumpet the news and the airwaves are filled with self-styled experts telling us how this will change the world as we know it, it is useful to step back and ask a few questions about yesterday's momentous events:1. Was there "information" in yesterday's...
