Brokerages should emphasize the importance of internal checks and controls over & over again
A typing error by a clerk at the Tel Aviv Stock Exchange caused one of Israel's largest investment firms to lose nearly 100 percent of its market value on Sunday
2-3 days back NASDAQ closed trading for 3 hours
a Chinese brokerage firm error shot the whole market up by 5%
The weakest link can sometimes ...punch you in the face & HARD too
Strange are the ways of Warren Buffett.....hoping for an underperformance that too for 5 years ...
Indians would say satheya gaya ...NOT REALLY !
This past year, Warren Buffett made a rare foray into tech investing, with a substantial purchase of IBM shares.
He explains .....
This discussion of repurchases offers me the chance to address the irrational reaction of many investors to changes in stock prices.
When Berkshire buys stock in a company that is repurchasing shares, we hope for two events: First, we have the normal hope that earnings of the business will increase at a good clip for a long time to come;
and second, we also hope that the stock underperforms in the market for a long time as well.
Let’s use IBM as an example. As all business observers know, CEOs Lou Gerstner and Sam Palmisano did a superb job in moving IBM from near-bankruptcy twenty years ago to its prominence today.
Their operational accomplishments were truly extraordinary. But their financial management was equally brilliant, particularly in recent years as the company’s financial flexibility improved. Indeed, I can think of no major company that has had better financial management, a skill that has materially increased the gains enjoyed by IBM shareholders. The company has used debt wisely, made value-adding acquisitions almost exclusively for cash and aggressively repurchased its own stock.
Today, IBM has 1.16 billion shares outstanding, of which we own about 63.9 million or 5.5%. Naturally, what happens to the company’s earnings over the next five years is of enormous importance to us.
Beyond that, the company will likely spend $50 billion or so in those years to repurchase shares.
Our quiz for the day: What should a long-term shareholder, such as Berkshire, cheer for during that period?
I won’t keep you in suspense. We should wish for IBM’s stock price to languish throughout the five years.
Let’s do the math. If IBM’s stock price averages, say, $200 during the period, the company will acquire 250 million shares for its $50 billion. There would consequently be 910 million shares outstanding, and we would own about 7% of the company. If the stock conversely sells for an average of $300 during the five-year period, IBM will acquire only 167 million shares. That would leave about 990 million shares outstanding after five years, of which we would own 6.5%.
If IBM were to earn, say, $20 billion in the fifth year, our share of those earnings would be a full $100 million greater under the “disappointing” scenario of a lower stock price than they would have been at the higher price. At some later point our shares would be worth perhaps $1 1⁄ 2 billion more than if the “high-price” repurchase scenario had taken place
The logic is simple: If you are going to be a net buyer of stocks in the future, either directly with your own money or indirectly (through your ownership of a company that is repurchasing shares), you are hurt when stocks rise.
You benefit when stocks swoon. Emotions, however, too often complicate the matter: Most people, including those who will be net buyers in the future, take comfort in seeing stock prices advance. These shareholders resemble a commuter who rejoices after the price of gas increases, simply because his tank contains a day’s supply.
Charlie and I don’t expect to win many of you over to our way of thinking – we’ve observed enough human behavior to know the futility of that – but we do want you to be aware of our personal calculus.
And here a confession is in order: In my early days I, too, rejoiced when the market rose. In the end, the success of our IBM investment will be determined primarily by its future earnings.
But an important secondary factor will be how many shares the company purchases with the substantial sums it is likely to devote to this activity. And if repurchases ever reduce the IBM shares outstanding to 63.9 million, I will abandon my famed frugality and give Berkshire employees a paid holiday.
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ps : this post isnt original, rightly so, as i am using what Warren said to highlight a long term strategy but incisive & highly educative , so reproduced for its educative value !
Today is the defining day in Eurozone as they say....Greeks who now are openly protesting against the austerity measures are going to elections to elect a government which matches their aspirations.
We have all been hearing of a word Austerity ...which would mean fiscal discipline through controls on excessive spends but also puts a question mark on the life of common people. Their earnings, jobs, pensions get slashed, their way of life is hit, fine, but does this all bring about the improvement in the basic state of the economy. The answer is NO !
The nations got access to cheap funding on joining Eurozone...now its payback time..and they like the typical Cricket in "Cricket & the ant " story haven't prepared themselves for the winters....they were just too busy partying !
Now the ant doesn't want to share its reserves with the cricket...unless the cricket agrees to severe austerity measures. It had been warning the cricket all along that harsh winters are approaching.
Naturally the cricket is upset. It still wants the dole but without austerity.
In my view, what would austerity achieve ....practically nothing....it would lead to harsh cuts but would it increase business, result in growth, motivate people to do more...more importantly would it enable the affected countries to be able to repay their debts...a big NO !
It possibly would make them sink deeper.
The solution to the current situation is investing in growth of those affected countries, restore their self pride, give them the tools to stand on their feet and finally enable them to pay their debts.
Here the argument will be ...what happens to the agreed & settled deals...renegotiating them will break the Eurozone discipline ...yes it would but in the current eurozone so many other and much larger countries are affected.
The panacea to all this is growth. The zone has to usher itself into a place of growth , not for prosperity or anything but just to repay its debts to begin with and then for the overall growth & maintenance of their lifestyles.
The dubious credit for this wake up call goes to Greece but changes have been afoot in other countries to in France, in Italy and sooner or later through the power of ballot the people in the other countries will respond too.
Eurozone in its current shape is flawed , but the flaws cant be remedied over night. There should be slow progress towards that , a progress which ensures growth and dignity !
The current crises should be used to effect & elicit discipline, to build some semblance of an eco-political union, a basic pre-requisite for a common currency.
But whatever, i am a votary for an approach where the solution shouldnt be worse than the disease itself !!
Let the show begin !!!
The Baltic Dry Index, fell to 974 (20th straight fall session) down 49% from its peak last year and slumping 43% in the last month only.
This indicator is the daily average of prices to ship raw bulk materials and doesn't allow / build in any speculation, and coupled with Power & Coal rates , a far better indicator of the health of the world economy than Oil prices. Oil prices can easily be influenced by geo-political factors.
A scan on potential factors causing the fall, reveal an entire range of factors ...from economic at one end to supply side issues at the other. The following possible reasons emerge -
- Chinese demand for iron-ore cargoes is slowing - elevated inventories, reduced steel production & weakest expansion of economy in 2.5 years in the last quarter
- Delayed infra projects & restricted finance ...China trying to slow the heat of the economy
- Sluggishness in view of approaching Chinese New Year holidays (Jan 22 – Jan 28 )
- Developed economies esp. Europe not growing - decline in imports, low demand for coal
- Worsening glut of vessels on faster deliveries of new ships.- Vessel delivery went up 12% compared to 8 rise in Trade (Maersk)
- Weather / rain related disruptions of export shipments from Australia, Brazil (Iron Ore), Colombia and Indonesia (coal)
Charter rates dropped for all four vessel types within the gauge, led by capesizes.
Capesizes – $7.793 a day, 76% down from last month’s high of $32,889 ( 40% of global fleet of commodity carriers ) Panamaxes - the largest ships to navigate the Panama Canal, dropped to a 33-mth low of $9,257. Supramax - fell to $9,695 a day, the lowest level since Feb. 6, 2009. Handysizes - the smallest ships in the index, retreated to $7,581.
Capesize rents on some routes fell below operating costs, estimated at $7,437 a day excluding fuel. The rate to hire a capesize for a round trip in the Pacific Ocean slid 9.2 percent to $5,336 a day, and the equivalent cost in the Atlantic declined 15 percent to $6,795.
Future Expectations - Growing ship supply, which is outpacing commodity demand, is set to cap dry bulk freight rate gains in the coming months, projected the BDI will remain "very low" at between 1,000 and 1,500 points for 2012. Next year will remain another challenging year for the industry
Flip side - "A decline in the BDI normally indicates a similar decrease in commodity prices. As a result, we should expect exporters to enjoy lower raw material costs, and should help the beleaguered industry.
Reliability - Recently its reliability has been called to question. When it surged to a record high in '08 the S&P 500 actually began to decline about six months before the BDI, making it a lagging indicator of the stock market. It did, however, signal that the global economy was in deep trouble as it tanked 94 per cent in 2008. The BDI also rebounded slightly before the stock market rising nearly 250 per cent before stocks finally bottomed out on March 9, 2009.
Since then, though, the BDI has meandered at levels about 80 per cent below its pre-crisis peak, providing few glimpses into the state of the economy. One theory is that shipping prices are suffering not through a lack of trade, but through a glut of large ships.
In other words, the Baltic Dry Index is flashing red – but no one really knows what that means, and fewer people seem to care.
Maybe our troubles are so big that this is one indicator we know will flash red while we focus on the fiscal health of Europe , Chinese slow down, worry wether US is recovering and the budgets wouldn't be struck in the congress or where is the next Friday , the 13th Downgrade coming and hitting...our plates are indeed quite FULL !!!!
Credits - various sources chiefly Economic times, Reuters, Bangkok Post, The Business Times, The Globe & Mail, Canada, Graph Credits - BIG
A quick note on a developing situation which could be the next Economic threat - The Strait Of Hormuz
The importance of the Strait is that its the lifeline of Seaborne oil trade with 35% shipments and 20% of the total traded oil going through it. The economies of large oil producing countries of the region depend on it for their livelihood.
If the strait gets blocked for some reason, it will have large implications on the price of oil and related effect on the world economy still under heavy stress in most regions.
The apparent back ground is the power equation between Israel & Iran....one a small but technologically advanced country and another a large oil player now at crossroads with US and some European powers.
At this point shadow boxing is going on between the US and Iran ....and any grave provocation can ignite it.
US has put effective sanctions against Iran , choking it and Iran has threatened to block the strait to retaliate. If not our oil , then no one ships oil. If it does, it will mean a certain retaliation from the US making it messy with firing on/from all sides as Iran will involve Israel into the picture and that can be bad for everyone.
Minor achievements like downing of a top end US drone by Iran may have given them some bragging points but then how were they able to achieve it...possibly with some outside help of an interested country ...that must be giving them some sense of security and backing when under fire ....so there must be some other players coaching the unseeded Shadow boxer ..;))
Looks like people are waiting for Iran to fire the first shot and then blame it but the rescue of an Iranian Naval boat and its kidnapped crew may provide some elbow room for diplomacy...looks far fetched.
Though diplomacy should be the key to engage but then for some strategic reasons that isnt being deployed as yet ..hope its put to good use.
If the stand off erupts, Long Oil & Gold will be a great no brainer short term trade !
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Rule No.1: Never lose money.
Rule No.2: Never forget rule No.1.
