( I had written this blog on 26th Sept 2008 - I could have bought long on Android:) )
As the debate of bailout hangs in balance, there were forward looking business milestones with release of Android and Oracle’s Storage Server Hardware. They are important milestones as both of them are collaborative effort and also both of these highlight that new elements of business needs to evolve. I am sure these are no indicators of improvement in economy but definitely they announce “The show must go on”.
Cornered- Class (Corner Office) – New Term.
I am reading lot about Corner Office and I couldn’t understand why the offices of CEO, COO were termed as Corner Office (definitely they were not once cornered in the office), now I know it’s because the offices in which they prefer to sit is at the corner and they have windows on two or more walls facing outside office building, but the irony is what they see from window is a spectators view of the outside world and what they miss to see is the inside of the building where real-action lies. So hopefully this corner-office term gets merged into open-door else CEO, CFO offices will remain cornered from reality at times.
Google – The Genie
The release of Android SDK and the simultaneous launch of first smart phones based on Android by T-Mobile comes as a wonderful news. I am not concerned about its comparison with i-phone, as such comparison are inevitable and its good for business. What I am excited about is an excellent mix of Google’s Business model. This SDK release was part of an open source handset model. Google has always stood unique in its business model, the unique aspect of this business model is they market without looking to market. They have a brand without any branding. They sell an idea without making us feel we are buying, in a sense they are trying to make us adept to their product in a natural way. But with this release they proved that they are an excellent collaborator, they can work along with several organizations in shaping business patterns. This is a new aspect of their business model where they infused innovation to the market by collaboration. I was trying to analyse what makes them to succeed and the economics lectures of this week helped me to see what they are doing. They are creating economy of scope as they know they have brilliant minds and they are using these brilliant set of people to perform tasks of software development in more areas. Where they don’t have scale like in this scenario they can’t manufacture mobile so they collaborated and create the economy of scale as the entry into the market is difficult because of high input. Though what is store in future for android is difficult to speculate but Apple will find it tough for ensuring its economy of scale and economy of scope doesn’t get wrong with this new competition. I guess Exadata Storage Server and Oracle-HP Database Machine is a step towards ensuring economy of scope as well for both of these companies by trying to bring in a new product to market with their existing strength.
Classroom course
The action in classroom is now getting complex as at one hand we have to appear for quiz on what we learnt and on other hand we need to ensure we are on track with the future learning. I guess this is what needs to be maintained in real-business scenario of not getting off-track from past at the same time ensuring that future is not derailed. We learnt why monopoly economy is inefficient and why perfect competition is so perfect but I guess we are always between both of these extremes. In accounting every chapter is followed with superb case discussion, I need to be honest to admit that I am not reading the cases regularly but I have started to feel what I am missing out. The case reflects the theory in true sense.
Quizzing Time ahead
What will be structure of “bail-out”? Though this is the quiz which everyone is trying to answer around the globe, unfortunately what is instore for our accounts and stats quiz next week is is all on us when we appear at the appointed time. I have not done well in the previous quizzes and thus there is a pattern of non-performance. Lets see what is in store next, till then enjoy your week with open eyes and open minds as when everything is closed we can only open our vision and thoughts.
Friday, May 21, 2010
Thursday, May 20, 2010
This is reproduced from an article which I wrote for Rotman's student magazine in Sept 2009.
Anatomy of Colossal failure
Lehman Brothers Bankruptcy
- Sanjeev Sharma
Lehman Brothers, the fourth-largest U.S. investment bank, succumbed to the sub-prime mortgage crisis which led to the biggest bankruptcy filing in history on this day (15th September 2008) exactly one year ago. The 158-year-old firm, which survived the railroad bankruptcies of the 1800s, the Great Depression in the 1930s and the collapse of Long-Term Capital Management a decade ago, could not survive sub-prime mortgage crisis. This incident is one of those inflection points, which will stand out as a lighthouse in oceans of financial crises. Rather than analyzing the financial, structural or political reasons for this failure, on which three books are already published (with doubtless more to come), I will try to focus on some salient learning points to help us grow into fiscally responsible managers, instead of limiting ourselves to being what we may provisionally call “Pigeonhole Experts”.
"...senior management also have the responsibility of creating a corporate environment that actively cultivates legitimate, logical opposition to inefficiencies and risks posed by maintaining the status quo."
A “Social Guardian” hat On Senior Management’s Head
An institution with total assets of $639 billion – more than the gross domestic product of Argentina – had gone up in smoke. Though this might seem abrupt and sudden demise of a Wall Street icon, the reality is there is no smoke without a fire. The senior management often terms early signs of failure as false-alarm. The advantage of being as big as Lehman or GM is that you often survive your mistakes. However, Lehman’s demise surely is a salutary warning to all believe that big organizations are invincible. Lehman’s fall generated a massive tremor in the global economy and countries like Latvia, Lithuania, Iceland and Hungary were caught in a frightening downward spiral which caused political unrest in these countries. Thus, managers of big organizations should understand that they are also the torch bearers for value creation. If they falter, they induce darkness all around. That’s why I believe, senior management in big organizations like GE, GM and Citigroup often have to act and think as “Social Guardians” in the global economy. Thus future managers should be made cognizant of the consequences their decisions have on society.
No to “Yes Boss” Culture
Lawrence G. McDonald, author of A Colossal Failure of Common Sense: The Inside Story of the Collapse of Lehman Brothers notes that the senior management around Lehman CEO used the corporate equivalent of brass knuckles on the staff, moving people into jobs and regions that they weren’t suited for in order to weaken and intimidate them. This kind of militaristic attitude discourages analytic thought-processes and cultivates in its stead herds of sycophants, which, like parasites, infect the core of any organization as they did in the case of Lehman Brothers. Thus, senior management also have the responsibility of creating a corporate environment that actively cultivates legitimate, logical opposition to inefficiencies and risks posed by maintaining the status quo. This is a tough process; however it is also especially crucial in the finance industry which is especially prone to the “Black Swan” syndrome (i.e. the devastating consequences of unpredictable and unexpected risks).
These are some short but succinct learning points from a post-mortem of the Lehman Brothers corpse. While the world is still going through the trillion dollar chemotherapy treatment of bailouts, it is important to understand that a side-effect of this treatment would itself create a long-term disease with more Lehman-like casualties unless we change our business behaviour towards real innovation rather than fake speculation, and drive consumer spending with real needs rather than insatiable greed. I propose we observe 15th September as a “Leaders Learning Day” – as nothing could be more compelling than learning from historical failure as that of Lehman Brothers.
Anatomy of Colossal failure
Lehman Brothers Bankruptcy
- Sanjeev Sharma
Lehman Brothers, the fourth-largest U.S. investment bank, succumbed to the sub-prime mortgage crisis which led to the biggest bankruptcy filing in history on this day (15th September 2008) exactly one year ago. The 158-year-old firm, which survived the railroad bankruptcies of the 1800s, the Great Depression in the 1930s and the collapse of Long-Term Capital Management a decade ago, could not survive sub-prime mortgage crisis. This incident is one of those inflection points, which will stand out as a lighthouse in oceans of financial crises. Rather than analyzing the financial, structural or political reasons for this failure, on which three books are already published (with doubtless more to come), I will try to focus on some salient learning points to help us grow into fiscally responsible managers, instead of limiting ourselves to being what we may provisionally call “Pigeonhole Experts”.
"...senior management also have the responsibility of creating a corporate environment that actively cultivates legitimate, logical opposition to inefficiencies and risks posed by maintaining the status quo."
A “Social Guardian” hat On Senior Management’s Head
An institution with total assets of $639 billion – more than the gross domestic product of Argentina – had gone up in smoke. Though this might seem abrupt and sudden demise of a Wall Street icon, the reality is there is no smoke without a fire. The senior management often terms early signs of failure as false-alarm. The advantage of being as big as Lehman or GM is that you often survive your mistakes. However, Lehman’s demise surely is a salutary warning to all believe that big organizations are invincible. Lehman’s fall generated a massive tremor in the global economy and countries like Latvia, Lithuania, Iceland and Hungary were caught in a frightening downward spiral which caused political unrest in these countries. Thus, managers of big organizations should understand that they are also the torch bearers for value creation. If they falter, they induce darkness all around. That’s why I believe, senior management in big organizations like GE, GM and Citigroup often have to act and think as “Social Guardians” in the global economy. Thus future managers should be made cognizant of the consequences their decisions have on society.
No to “Yes Boss” Culture
Lawrence G. McDonald, author of A Colossal Failure of Common Sense: The Inside Story of the Collapse of Lehman Brothers notes that the senior management around Lehman CEO used the corporate equivalent of brass knuckles on the staff, moving people into jobs and regions that they weren’t suited for in order to weaken and intimidate them. This kind of militaristic attitude discourages analytic thought-processes and cultivates in its stead herds of sycophants, which, like parasites, infect the core of any organization as they did in the case of Lehman Brothers. Thus, senior management also have the responsibility of creating a corporate environment that actively cultivates legitimate, logical opposition to inefficiencies and risks posed by maintaining the status quo. This is a tough process; however it is also especially crucial in the finance industry which is especially prone to the “Black Swan” syndrome (i.e. the devastating consequences of unpredictable and unexpected risks).
These are some short but succinct learning points from a post-mortem of the Lehman Brothers corpse. While the world is still going through the trillion dollar chemotherapy treatment of bailouts, it is important to understand that a side-effect of this treatment would itself create a long-term disease with more Lehman-like casualties unless we change our business behaviour towards real innovation rather than fake speculation, and drive consumer spending with real needs rather than insatiable greed. I propose we observe 15th September as a “Leaders Learning Day” – as nothing could be more compelling than learning from historical failure as that of Lehman Brothers.
Wednesday, December 31, 2008
Human Capital in Materialistic debt
Yada Jeevam, Sukham Jivet.
Rinam kritvam, ghritam pibet.
This Sanskrit saying about materialistic mentality refers to the belief of obtaining and sustaining material pleasure by all means, even if that amounts to leveraging debt. Though, the saying is century’s old, its relevance in the material word holds true till-date. This relevance was exploited by the market-movers to plough the land with crops of “easy” money by spraying pesticide of “loan”. Now, it’s well evident, this pesticide has poisoned not only the very same “market-movers” (Investment Bankers, Car Finance Companies) but also has affected “credit-famine” across the globe which is casting shades of gloom to the New Year celebrations. Lot of analysis and action has gone through about this whole episode resulting in bail-out (AIG insurance) and ball-out (Lehman Brothers). However, I am trying to do an independent analysis on the whole scenario with a perspective of a student, who was always confused with the business models based on figures, which was based on too much of optimism, something I can draw parallel to “figures” of “models” in entertainment business, the real figure is always covered under the curtain of “make-up” but we hardly see real-figures. I want to analyse the various aspects of this economy and want to possibly un-cover some aspects of this “make-up”. There were various actors which were acting in unison and I am going to analyse each of these actors, surprisingly I and most of you were not an audience but participant in this whole drama knowingly or unknowingly.
Ownership – Confusion overruled Confidence
The market economy has bestowed ownership status to general public, but I am concerned about the way this ownership status has developed. I wouldn’t delve much in history, as the year 2008 provides sufficient defining data for this.
The graph above depicts the story of declining capital which precipitated fall in confidence of the so called owner (investor). An article in the “economist” states that the global capital market has lost $30 trillion (30,000,000,000,000), i.e. reduced to half (though Times of india states the figure at $40 trillion). This loss has not only affected the direct-investors but all those whose pension funds returns were dependent on the market, thus in effect pinching the ones who saved for their rainy-days, but the irony is the umbrella had holes all-over. The most dreaded aspect of this loss is that the “loss” amount has vaporized. Now, who is responsible for this? There is lot of blame on CEO’s, market regulators but nobody seriously speaks about the role of individual investors, whose appetite of easy money fuelled numerous illogical financial products and the media which in all ways behaved like “bull” in bull-market(when market is up, media provides thumbs-up to the market) and as a “bear” in a bearish-market (media swipes the market-behaviour with hard hitting comments). I am going to analyse more about these two segments.
At Good Times – “Scam seems Strategy”
Lehman or Meryl Lynch were trying to cash on, the appetite of general public for easy credit, also at the same-time creating value for their investors. Now, why the investors or the regulators or the media didn’t question their actions, which when looked in hindsight seems to be highly fraudulent. Why every fraud seems to be an intelligent move until the system breaks? Though, a lot has been discussed about the role of the management team, but didn’t the same Lehman management team work for increasing the value from $113 million to $4.2 billion in Sept 2007. Now, let’s see why investors and regulators didn’t probably step-in.
There was a growing hype that earning money is not a science or art it’s actually a craft to stitch together available information. Media, analysts were providing the stimulus to this hype. Becoming rich became an obsession, as the media around the world put the story of “rags to riches” (I still remember media highlighted a driver of an renowned IT organisation becoming a millionaire, on account of his stock-holdings of the company, coincidentally my many friends are employees of that organisation and definitely they can be millionaire in ways not through easy cashing in stock but through their hard-work), such stories induced greed of easy money-makers to market. However, the insights of media, intelligence of its analysis and its ability to forecast, were null and void when the growth journey met with road-blocks. Their power and their value to society is unquestionable but some-how the Sanjeev-Pooja’s “model-figure” theory suggests that media has become theatre of entertainment playing on the models based on the figures rather than analysing the data in its information-centre. I have observed my friends sitting in-front of business channels throughout the day and still getting the price wrong. So, I will analyse the so called “analysts” and try to break the myth that ordinary investors, sometimes believe that they can out-perform market on such information, instead they use lot of quantitative tools, yet there are factors which go unnoticed or simply the market is irrational to rational thoughts.
Analysts Role – What they do? How they do? - Breaking Myth of a “Magic-Money-Mystery”
The ordinary investors at times do tremendous due-diligence to navigate through all corners of information before they embark on the voyage of “wealth-creation”. However, my understanding (from sample of my friends) suggests that apart from the judgemental reviews of “Buy”, “Hold” and “Sell” by the analysts, little they could differentiate and hence far few they could fathom the market-magic or the research reports. Analysts use several tools to calculate the implicit price in a very basic manner they try to estimate the revenues for the future (what they call as earning estimate or revenue guidance), then they use prevailing discount rate for determine present value of those future revenue projections. We know, given rate of interest “r”, if we invest ‘P’ amount then in n years, the amount will be FV = . This, is the basic logic used for calculating implicit price, as a company would need to invest a particular sum of money for earning a projected sum of revenue. Therefore, this is more of a back-calculation i.e. the present value of all the future guidance amount and also the possible discount cash flows (FV), are determined by the following formula ( .
This value is divided by the total outstanding stocks in the market and that gives them initial estimate of the possible price of the stock. However, the value of “r” is a very subjective value, as every analysts uses their own expected rate of interest for the risk of investing in a particular stock. Let’s not get into detail, it just to demonstrate that what analysts uses, is lot of estimation regarding the expected growth in future and the associated risk. They are also human and hence they err. However, the ordinary investor is always glued to their analysis. Also, to give benefit of doubt to analysts, I would say that their projections can’t beat market owing to common-information effect.
The interactive chart in yahoo finance is a quick and dirty way to understand the trend corresponding to the stock’s pricing in response to analysts views and other events. I analyzed on two stocks, GM and Oracle. I selected GM because this represents an industry which is going through tremendous downturns and Oracle, because it was one of those few companies which reported better than expected earnings during this frugal fiscal year.
The figure below depicts the analyst’s projection and the Oracle share prices for the year 2007 and 2008. In the graph below, you can note the gray spots are analysts’ projections on those days. Irrespective of the recommendation (Buy/Sell/hold), one fact is vividly evident that they couldn’t predict anything near peaks. In fact they missed peaks and droughts by a very wide margin. Though, definitely they can’ control market behaviour but this clearly states that market behaviour is not comprehendible by analytical logic.
Rinam kritvam, ghritam pibet.
This Sanskrit saying about materialistic mentality refers to the belief of obtaining and sustaining material pleasure by all means, even if that amounts to leveraging debt. Though, the saying is century’s old, its relevance in the material word holds true till-date. This relevance was exploited by the market-movers to plough the land with crops of “easy” money by spraying pesticide of “loan”. Now, it’s well evident, this pesticide has poisoned not only the very same “market-movers” (Investment Bankers, Car Finance Companies) but also has affected “credit-famine” across the globe which is casting shades of gloom to the New Year celebrations. Lot of analysis and action has gone through about this whole episode resulting in bail-out (AIG insurance) and ball-out (Lehman Brothers). However, I am trying to do an independent analysis on the whole scenario with a perspective of a student, who was always confused with the business models based on figures, which was based on too much of optimism, something I can draw parallel to “figures” of “models” in entertainment business, the real figure is always covered under the curtain of “make-up” but we hardly see real-figures. I want to analyse the various aspects of this economy and want to possibly un-cover some aspects of this “make-up”. There were various actors which were acting in unison and I am going to analyse each of these actors, surprisingly I and most of you were not an audience but participant in this whole drama knowingly or unknowingly.
Ownership – Confusion overruled Confidence
The market economy has bestowed ownership status to general public, but I am concerned about the way this ownership status has developed. I wouldn’t delve much in history, as the year 2008 provides sufficient defining data for this.
The graph above depicts the story of declining capital which precipitated fall in confidence of the so called owner (investor). An article in the “economist” states that the global capital market has lost $30 trillion (30,000,000,000,000), i.e. reduced to half (though Times of india states the figure at $40 trillion). This loss has not only affected the direct-investors but all those whose pension funds returns were dependent on the market, thus in effect pinching the ones who saved for their rainy-days, but the irony is the umbrella had holes all-over. The most dreaded aspect of this loss is that the “loss” amount has vaporized. Now, who is responsible for this? There is lot of blame on CEO’s, market regulators but nobody seriously speaks about the role of individual investors, whose appetite of easy money fuelled numerous illogical financial products and the media which in all ways behaved like “bull” in bull-market(when market is up, media provides thumbs-up to the market) and as a “bear” in a bearish-market (media swipes the market-behaviour with hard hitting comments). I am going to analyse more about these two segments.
At Good Times – “Scam seems Strategy”
Lehman or Meryl Lynch were trying to cash on, the appetite of general public for easy credit, also at the same-time creating value for their investors. Now, why the investors or the regulators or the media didn’t question their actions, which when looked in hindsight seems to be highly fraudulent. Why every fraud seems to be an intelligent move until the system breaks? Though, a lot has been discussed about the role of the management team, but didn’t the same Lehman management team work for increasing the value from $113 million to $4.2 billion in Sept 2007. Now, let’s see why investors and regulators didn’t probably step-in.
There was a growing hype that earning money is not a science or art it’s actually a craft to stitch together available information. Media, analysts were providing the stimulus to this hype. Becoming rich became an obsession, as the media around the world put the story of “rags to riches” (I still remember media highlighted a driver of an renowned IT organisation becoming a millionaire, on account of his stock-holdings of the company, coincidentally my many friends are employees of that organisation and definitely they can be millionaire in ways not through easy cashing in stock but through their hard-work), such stories induced greed of easy money-makers to market. However, the insights of media, intelligence of its analysis and its ability to forecast, were null and void when the growth journey met with road-blocks. Their power and their value to society is unquestionable but some-how the Sanjeev-Pooja’s “model-figure” theory suggests that media has become theatre of entertainment playing on the models based on the figures rather than analysing the data in its information-centre. I have observed my friends sitting in-front of business channels throughout the day and still getting the price wrong. So, I will analyse the so called “analysts” and try to break the myth that ordinary investors, sometimes believe that they can out-perform market on such information, instead they use lot of quantitative tools, yet there are factors which go unnoticed or simply the market is irrational to rational thoughts.
Analysts Role – What they do? How they do? - Breaking Myth of a “Magic-Money-Mystery”
The ordinary investors at times do tremendous due-diligence to navigate through all corners of information before they embark on the voyage of “wealth-creation”. However, my understanding (from sample of my friends) suggests that apart from the judgemental reviews of “Buy”, “Hold” and “Sell” by the analysts, little they could differentiate and hence far few they could fathom the market-magic or the research reports. Analysts use several tools to calculate the implicit price in a very basic manner they try to estimate the revenues for the future (what they call as earning estimate or revenue guidance), then they use prevailing discount rate for determine present value of those future revenue projections. We know, given rate of interest “r”, if we invest ‘P’ amount then in n years, the amount will be FV = . This, is the basic logic used for calculating implicit price, as a company would need to invest a particular sum of money for earning a projected sum of revenue. Therefore, this is more of a back-calculation i.e. the present value of all the future guidance amount and also the possible discount cash flows (FV), are determined by the following formula ( .
This value is divided by the total outstanding stocks in the market and that gives them initial estimate of the possible price of the stock. However, the value of “r” is a very subjective value, as every analysts uses their own expected rate of interest for the risk of investing in a particular stock. Let’s not get into detail, it just to demonstrate that what analysts uses, is lot of estimation regarding the expected growth in future and the associated risk. They are also human and hence they err. However, the ordinary investor is always glued to their analysis. Also, to give benefit of doubt to analysts, I would say that their projections can’t beat market owing to common-information effect.
The interactive chart in yahoo finance is a quick and dirty way to understand the trend corresponding to the stock’s pricing in response to analysts views and other events. I analyzed on two stocks, GM and Oracle. I selected GM because this represents an industry which is going through tremendous downturns and Oracle, because it was one of those few companies which reported better than expected earnings during this frugal fiscal year.
The figure below depicts the analyst’s projection and the Oracle share prices for the year 2007 and 2008. In the graph below, you can note the gray spots are analysts’ projections on those days. Irrespective of the recommendation (Buy/Sell/hold), one fact is vividly evident that they couldn’t predict anything near peaks. In fact they missed peaks and droughts by a very wide margin. Though, definitely they can’ control market behaviour but this clearly states that market behaviour is not comprehendible by analytical logic.
Oracle – Back to Basics – Trading at Jan 2007 levels. (You can ignore the details and instead move to take-away part)
(News From reuter, graph above)
12th Jan 2007
The stock price had started to descend from its recent peak of $17.82 on 9th June 07
Analyst downgraded the stock from outperform to perform when stock was trading at $17.5
The declining trend which had begun on 10th June just continued. Hence, The stock prices descend had begun before the analyst projection. Market realized the stock had reached its recent peak. However, the stock continued to slide till Feb 27, 07 until there were reports on Oracle buying Hyperion.
These suggest market moves irrespective of analysts’ projections. The move is more due to the recent events.
The stock price had started to descend from its recent peak of $17.82 on 9th June 07
Analyst downgraded the stock from outperform to perform when stock was trading at $17.5
The declining trend which had begun on 10th June just continued. Hence, The stock prices descend had begun before the analyst projection. Market realized the stock had reached its recent peak. However, the stock continued to slide till Feb 27, 07 until there were reports on Oracle buying Hyperion.
These suggest market moves irrespective of analysts’ projections. The move is more due to the recent events.
Mid – March 07
The stock prices was ascending from its recent low of 16.29 and it reached its high for the recent period to 18.57
Analyst upgraded the stock to "Buy", on the day, when stock was trading at $18.85
The stock continued to hover around this value, in fact it continued to increase
Here, when stock had started its ascend the analyst report upgraded it to buy. Now, the interesting aspect is that during this period the more prominent trend is the NASDAQ trend and also the news that Oracle reports earning in line with expectations.
Nov 14th 2007
The stock prices reflects the trend of the NASDAQ and it is oscillating around $19-$22, with its recent low of 19.44
Anayst Upgraded to Buy, the stock price declined immediately, reflecting NASDAQ trend and then started an upward trend.
Here again, the buy was not given at the lowest price but when the price started to increase, though the price of stock after a brief decrease after the analysts call. However, the trend seems to reflect the NASDAQ trend. But, at its high there was no recommendation to sell. Also, this was the time when the Bea buyout issue was at its peak. Also, the increase from Nov was also reflection of some of the positive guidance from Oracle on its earnings. Therefore, analyst contribution is questionable to the market outperformance. The stock price on Oct 10 2007 reached to peak of around $22.9, this was a day after Oracle acquired Logic Apps, while when Oracle bought the stocks was valued at 20.11 on Jan 16th. Let’s see the percentage change on stocks on these two days :
On the news – Dec 19,
Oracle issues Q3 guidance in line with expectations and the stock moves upward, while when the results were released stocks plummeted. The reason was that the sales growth for new license was 16%, while in its projection it had estimated the range to lie in between 15-25%. Though its on lower end. Its interesting Market was optimistic for higher end sales growth.
Mar 08
The stock price was down to $19.43 and it was oscillating from its peak of Dec
Downgrade to hold from buy
Share buy-back news almost always increases the share price. In two years of 07 and 08, inspite of obvious economic downturn Oracle shares reached its high of 23.52 in August 08 and then it followed the falling trend and within 4 months it has decreased to value as low below Jan 07 17.22. Leaving aside any financial analysis, the behaviour does gives certain hints how market responds. The interesting observation is there was no evident analysis recommending sell to the Oracle stock. This to me seems those analysts are conservative towards companies which don’t have any wrong news or which are better in the market might be conservative in bearish market.
The stock price was down to $19.43 and it was oscillating from its peak of Dec
Downgrade to hold from buy
Share buy-back news almost always increases the share price. In two years of 07 and 08, inspite of obvious economic downturn Oracle shares reached its high of 23.52 in August 08 and then it followed the falling trend and within 4 months it has decreased to value as low below Jan 07 17.22. Leaving aside any financial analysis, the behaviour does gives certain hints how market responds. The interesting observation is there was no evident analysis recommending sell to the Oracle stock. This to me seems those analysts are conservative towards companies which don’t have any wrong news or which are better in the market might be conservative in bearish market.
Deciphering Trends in two stocks for two years
Comments (News from Reuter, see the graph above – You can safely ignore this piece of details and move ahead to read take-away)
Jan 3 2007
Analyst advised investors to sell the stocks, but the stock still continued to increase. This was definitely a confusing suggestion.
Feb 9 2007
GM restates its financial position, but still the stock prices seem to rise. The reason was the financial restatement was to address understated prior income, hence expectation of an increased income.
Feb 18th
March onwardsGM stock suffered from the news of its accounting updates. The updates was a communication regarding error in hedging related issues, the existing financial statements needs to be ignored. It delayed filing of its financial report.
March 29th – April 2007
(stock oscillates between 30 – 36) almost 10 to 20%GM CEO, doesn’t rule out plans for layoffs and closure of European business.GM suspends work at two plants in US after disagreement with workers union (UAW). Stock price still hovering around $30-32. Till Mid-March GM stocks were performing better than Dow Jones Index, however numerous accounting issues casted some aspersions and descend of stock price followed.June – July 2007Agreement reached with worker union (but details not disclosed) and announcement made to make engine plant operational in China by August 2007, this led to its share prices moving in upward region of 30 to 36 btwn early june and early july, these positive news followed with increasing returns on GM stocks than dow jones. However, soon after decline followed.
July 10 – August
Wage related strike in GM’s Koran unit. GM acquires 50% stake in diesel engine manufacturer in Italy. Soon after there was termination of joint agreement with a partner dealing with truck and buses in Japanese market. This news was preceded with falling stock prices, though still returns were higher than Dow Jones Index.
Sept - Nov
Same UAW strike issues but still the share price of GM follows an interesting pattern with respect to Dow Jones, as dow jones increases the GM stocks also shows a upside more than Dow jones, as it decrease stock prices of GM also shows relation with that (beta values), these news doesn’t seem to effect much till Nov 2007, as it seems a regular roller-coaster as per dow jones and underlying economy (assuming dow jones related to underlying economy).After Nov 2007GM China, Australia recalls vehicles almost (7K from China, 20K from Australia, 207,500). This was the period when the decelerator was on its high and GM stocks plummeted a lot irrespective of the Dow Jones movement. Several restructuring announcements and the market couldn’t take that as these announcements were leading to loss of job, closing of plants, foreclosing future plans leading to bankruptcy news. The stock prices which was down by more than 200% of its value in Jan 07. The interesting aspect is analyst couldn’t say their version on the stock in a concrete manner, as most of the analysis was to hold the stock and final they had the will to downgrade to sell at a price of around $5. The interesting aspect is their recommendation to sell originally started at Jan 07 at a price of $30.24. Can you imagine he stock has depreciated so much but still over a gradual time there was no attempt to analyse each of these mid-events. Though, stock market was reacting it was in a very conservative manner until doubts over its survival. This is a clear situation where alarm should have been raised earlier rather than waiting this to happen. There were accounting issues, worker issues, why didn’t mechanism couldn’t feel anything wrong. If we don’t have such mechanism we should build those rather than speculating we should be investigating. Market needs media which is accountable to its efficiency not to just leverage its news-making capability due to its inefficiency.
GM has pension liablities of around $8 billion on an annual basis, it was trying to fight with these issues. Its again an example how unionism comes in way of business function, but this is because after so many revolutions also we haven't evolved a mechanism for worker-welfare.
Take away from above two analysis:
Relying on any amount of analysis in stock market is as risky as the market itself. The market has taken a shape where projections have become speculation and speculation has become gambling. However, there are some events which as an investor you should be aware of and I am sure this is already established hypothesis:
· Any accounting restatement causes the stock to climb or decline for a short period (GM is perfect example).
· More than meeting present earning guidance, the stock price is affected by the future projections, so be aware of stocks on the result-day.
· The upside of any sensational news (Oracle buying BEA) is enchased following the first day of the news, when the actual event happens by then the market would have factored in the value of news and not major upside.
· The price of the stock is as correct as its current price, so any financial planning on basis of stock is as full-proof as on the day you sold it.
· To determine peak and drought is the trickiest part, no analysts have done so far so don’t try to over-stretch as being Warren Buffet is a statistical exception not the rule of the market, so be prudent.
· Most of the stocks are linked to the general trend of their representative index. (the URL)
· Also, you can see the trend of the stock with respect to its indices through a Beta value. I will publish the URL’s where these values for Canadian, US and Indian markets are published.
· Some general tips – Be aware of the P/E value of the stock, if it becomes unusually high just remember it’s becoming over-priced. Though, be careful. I would also try to post the web-sites where these charts are easily accessible and comparable.
Relying on any amount of analysis in stock market is as risky as the market itself. The market has taken a shape where projections have become speculation and speculation has become gambling. However, there are some events which as an investor you should be aware of and I am sure this is already established hypothesis:
· Any accounting restatement causes the stock to climb or decline for a short period (GM is perfect example).
· More than meeting present earning guidance, the stock price is affected by the future projections, so be aware of stocks on the result-day.
· The upside of any sensational news (Oracle buying BEA) is enchased following the first day of the news, when the actual event happens by then the market would have factored in the value of news and not major upside.
· The price of the stock is as correct as its current price, so any financial planning on basis of stock is as full-proof as on the day you sold it.
· To determine peak and drought is the trickiest part, no analysts have done so far so don’t try to over-stretch as being Warren Buffet is a statistical exception not the rule of the market, so be prudent.
· Most of the stocks are linked to the general trend of their representative index. (the URL)
· Also, you can see the trend of the stock with respect to its indices through a Beta value. I will publish the URL’s where these values for Canadian, US and Indian markets are published.
· Some general tips – Be aware of the P/E value of the stock, if it becomes unusually high just remember it’s becoming over-priced. Though, be careful. I would also try to post the web-sites where these charts are easily accessible and comparable.
Tuesday, December 30, 2008
The "Real" V/S the "Reel" - identity crisis
Investors – Gullible not Guilty
GM completed 100 years in 2007, companies mature and gain strength as they grow older unlike human who looses vigour and strength in old age. However, the current crisis at century old organisations like GM suggests that age brings in complacency of experience and dejection to innovate. GM’s Annual report for 2007, the year when they incurred around $38 billion loss, appears to reassure the ordinary investor that future is bright as the preamble title “GM planning for 100 years ahead”, however today GM is on a death-bed on ventilator just few months after (its market cap 10% of its value in 2007). But how does, the ordinary investor understand the real issues, how he can distinguish the real face of the leadership, as abovethe image displays, the one from the annual report of 2007 and the other I searched from net in which he is in pensive mood. That’s what the model-figure theory suggests, that the figures don’t speak the truth it’s just the mask over the real-information. Thus, the leadership at times act as a “model” for the organisation, but the real CEO is disturbed, might be market dynamics makes him to make-up.
Do I have a solution? yes and no. Yes, because I understand the problem, no because from centuries lot of economist, philosophers including Socrates tried but failed. However, I will definitely reiterate some of the aspects.
Analysing "I" - the customer, the owner
As long as "I", within us is not secured we will fall into traps (something similar which Madoff seems to have done) as depicted above. So, here I discuss, why its difficult to define the most closest of persons "I"
Human – A soul, always attached to body
Though, the above line seems spiritual but this is a fact that we can’t deny. The market forces tend to play on this. That’s the truth which we can’t shy away from. This crisis is testimony to the belief that moral and spiritual values are needed as a civilized society. The “Politician”, the “investment banker”, the “CEO”, the “Home-Loan borrower” the “Car-Loan Borrower”, the “media-moughal”, the “media-man”, the “money over job”, the “show-off-circus in parties”, the “false-ego” and “pumped-proud” , who are these , have you not seen some of these faces, yes we have and believe it or not I and you represent this segment. Though, there might be argument as that we were forced into this and for most of us had no option, but whatever be the reason, this crisis has shown how combined sense of immoral ambitions can lead to catastrophic-crisis.
Human – social contagion
The car, the home, the holiday trip, isn’t based on our want but derived from our wish to be at par with society. This is a contagious disease which spreads from one body to another and then becomes an epidemic driven by card or cash. The loans acted as a carrier agent to this epidemic, it had no national or religion barrier it spread unabated. I know, it’s difficult to attain immunity to this disease, and slowly need became greed, as can be seen from the fact people bought multiple houses, multiple cars travelled in planes when trains were cheaper. The market while portraying “Customers, is the King”, slowly took control of the kingdom as customer got enticed into their marketing models to believe in those figures and became “Slaves to Market”. I know many of my friends, who are slave to new movies, slave to new cars/bikes, slaves to costly parties. However, the market-makers didn’t understand their kingdom as well, as they couldn’t for-see a civil war. The tools (Providing easy loans and creating financial product out of that) they used to rule the kingdom were not adequately designed, as they belied all economic logic. Of all, the simple logic that by funding your customers you can’t continue to finance yourself till perpetuity, as market can’t sustain financially weak customer. So, these actions of the market-movers financially weakened the customers and once customers realized this, as every weakness creates panic this was no different and this panic just created havoc. The only immunity to this kind of spiral-force of social-contagious is building a wall of moral values that can’t be destroyed so easily. Also, let’s stop blaming the system, the politicians as it’s our behaviour which has made this system workable and as long as we behave in such self-driven manner, we can’t force the system or politician to be society-driven.
Learn “Values” – Not just “Valuation”
Our system of education has made us to perform financial valuation of a project, monetary valuation of a job, face-valuation of a partner but some-how it has escaped to reinforce the values of a human. Let’s sit back and realize that we aren’t just a geometry of figure and shape, which can be tuned in gym but more than that we are a galaxy of ideas, which can be polished only by moral and ethical learning’s. Let’s invest some-time to understand the moral aspect of our being and then I am sure the entire gamut of knowledge will work in tandem for society’s well-being.
Become Owner’s - not traders
The market-economy provides each one of us an opportunity to be owners. Let’s behave like owners and not misbehave like traders. Let’s understand the basic philosophy of market-economy. In this aspect let’s remove all our thoughts of smartness to earn easy-money but more-so learn to balance risk with reward. Also, rather than earning wealth let’s focus on creating wealth. Today or tomorrow, the wealth creation will come back to us in terms of reward and reforms. However, my friends will argue that all this will go in politician’s bank, but I can say this is a self-prophecy theory that we want to continue to justify what we are doing.
The CEO’s and the market as a whole needs to define the value they want to create. Every business owes a duty towards society of generating profits in real-sense. The society, need to understand that quarterly results are check-points not the destination. This understanding will prevent manipulation of quarterly results and will also induce management’s thinking towards creating positive value. Today, management spends time and energy on showing (manipulating) income, if as a whole we mature the management will be able to do justice to their expertise and experience of driving business to next levels. For eg, car companies need to innovate engine with alternate fuel or better need to create a transportation system, which is free of pollution. That may include provision of creating an effective transportation system, as car-selling can’t go infinitely. Also, the investment should be targeted to creation of cheap transportation alternative in remote places like Africa etc. Now, the question who will invest in this, investors need to be smart enough to understand the value creation of such moves rather than value destruction by marketing-moves of providing loans. Such investment can never fail as they would today or tomorrow will create imperishable values which generations can benefit from.
The world is still stagnant in majority areas of Asia and Africa, the earth-quakes still sends tremor shocks to the spine of world, the terrorist still create unholy-spirit at holy-places, the world still needs schools to educate so many. When, the world is still so much unexplored, let’s invest in something which will create a sustainable value to the world rather than investing in a model whose figure will distort as soon as the make-up clears of. Let’s mould the world and not distort it.
Fight for acquittal not a bail
All the measures announced of providing dollars to the sick segment is defined as “bail”, that means still the case will linger on. As a society we will be in prison of such distress again and again, as long as we don’t rectify the root-cause. The evidence is straight in our face, the example of Madoff who siphoned off $50 billion not by force but by idea which was based on the same simple belief “Getting Rich is as easy as pressing button”, thus as long as we don’t take corrective steps individually, system will never be full-proof. The debate will go on about “V” (We) or “U” (You) shape depression but currently to me it seems a “I” (I) shaped. Not only by shape, but also by its meaning, until “I” within is defined properly, we will continue to slide down, any step until then will just be a stop-over to the next downward slide. Also, this shape demonstrates that it is a tough-track to go up and easy one to slide-down, but once scaled up to the roof, its more stable than any of “U” or “V” model.
This requires us to come out of “Prisoners Dilemma”, this dilemma basically prevents the first-mover to consider a step for better outcome for everyone rather than it forces the first-mover to take a step which is zero-sum game for all. However, we all need to come out of this dilemma. It is an interesting dilemma, would suggest you to just look through Wikipedia for this.
I am also currently in debt and hence, I would end this unusually long blog with a Sanskrit Shlok:
Runa rogadhi daridryam ye chanye hyapamruthyuve,Bhaya klesa manasthapa nasyanthu mama sarvadha
This means, always destroy debts, diseases, poverty, Untimely death, fear, sufferings and mental turmoil. Doesn’t this in effect translate our action-item for business?
Moving ahead, permitting time, I will try to analyse more details of the stock-market as I want to contribute my bit towards creation of a humanly market and not a bullish or bearish market.
I will summarise my all observation in the following lines.
everything as scarce as oil can be cheap,
human-virtues can never dip low,
the car-paint, house-distemper will lose shine
strength of hope will forever-glow,
crops of cash will damp in flood of fraud
Confidence of conscience will ever-grow,
Well of fortune, lake of luck will dry
will of mind, will ever-flow
Though, the above line seems spiritual but this is a fact that we can’t deny. The market forces tend to play on this. That’s the truth which we can’t shy away from. This crisis is testimony to the belief that moral and spiritual values are needed as a civilized society. The “Politician”, the “investment banker”, the “CEO”, the “Home-Loan borrower” the “Car-Loan Borrower”, the “media-moughal”, the “media-man”, the “money over job”, the “show-off-circus in parties”, the “false-ego” and “pumped-proud” , who are these , have you not seen some of these faces, yes we have and believe it or not I and you represent this segment. Though, there might be argument as that we were forced into this and for most of us had no option, but whatever be the reason, this crisis has shown how combined sense of immoral ambitions can lead to catastrophic-crisis.
Human – social contagion
The car, the home, the holiday trip, isn’t based on our want but derived from our wish to be at par with society. This is a contagious disease which spreads from one body to another and then becomes an epidemic driven by card or cash. The loans acted as a carrier agent to this epidemic, it had no national or religion barrier it spread unabated. I know, it’s difficult to attain immunity to this disease, and slowly need became greed, as can be seen from the fact people bought multiple houses, multiple cars travelled in planes when trains were cheaper. The market while portraying “Customers, is the King”, slowly took control of the kingdom as customer got enticed into their marketing models to believe in those figures and became “Slaves to Market”. I know many of my friends, who are slave to new movies, slave to new cars/bikes, slaves to costly parties. However, the market-makers didn’t understand their kingdom as well, as they couldn’t for-see a civil war. The tools (Providing easy loans and creating financial product out of that) they used to rule the kingdom were not adequately designed, as they belied all economic logic. Of all, the simple logic that by funding your customers you can’t continue to finance yourself till perpetuity, as market can’t sustain financially weak customer. So, these actions of the market-movers financially weakened the customers and once customers realized this, as every weakness creates panic this was no different and this panic just created havoc. The only immunity to this kind of spiral-force of social-contagious is building a wall of moral values that can’t be destroyed so easily. Also, let’s stop blaming the system, the politicians as it’s our behaviour which has made this system workable and as long as we behave in such self-driven manner, we can’t force the system or politician to be society-driven.
Learn “Values” – Not just “Valuation”
Our system of education has made us to perform financial valuation of a project, monetary valuation of a job, face-valuation of a partner but some-how it has escaped to reinforce the values of a human. Let’s sit back and realize that we aren’t just a geometry of figure and shape, which can be tuned in gym but more than that we are a galaxy of ideas, which can be polished only by moral and ethical learning’s. Let’s invest some-time to understand the moral aspect of our being and then I am sure the entire gamut of knowledge will work in tandem for society’s well-being.
Become Owner’s - not traders
The market-economy provides each one of us an opportunity to be owners. Let’s behave like owners and not misbehave like traders. Let’s understand the basic philosophy of market-economy. In this aspect let’s remove all our thoughts of smartness to earn easy-money but more-so learn to balance risk with reward. Also, rather than earning wealth let’s focus on creating wealth. Today or tomorrow, the wealth creation will come back to us in terms of reward and reforms. However, my friends will argue that all this will go in politician’s bank, but I can say this is a self-prophecy theory that we want to continue to justify what we are doing.
The CEO’s and the market as a whole needs to define the value they want to create. Every business owes a duty towards society of generating profits in real-sense. The society, need to understand that quarterly results are check-points not the destination. This understanding will prevent manipulation of quarterly results and will also induce management’s thinking towards creating positive value. Today, management spends time and energy on showing (manipulating) income, if as a whole we mature the management will be able to do justice to their expertise and experience of driving business to next levels. For eg, car companies need to innovate engine with alternate fuel or better need to create a transportation system, which is free of pollution. That may include provision of creating an effective transportation system, as car-selling can’t go infinitely. Also, the investment should be targeted to creation of cheap transportation alternative in remote places like Africa etc. Now, the question who will invest in this, investors need to be smart enough to understand the value creation of such moves rather than value destruction by marketing-moves of providing loans. Such investment can never fail as they would today or tomorrow will create imperishable values which generations can benefit from.
The world is still stagnant in majority areas of Asia and Africa, the earth-quakes still sends tremor shocks to the spine of world, the terrorist still create unholy-spirit at holy-places, the world still needs schools to educate so many. When, the world is still so much unexplored, let’s invest in something which will create a sustainable value to the world rather than investing in a model whose figure will distort as soon as the make-up clears of. Let’s mould the world and not distort it.
Fight for acquittal not a bail
All the measures announced of providing dollars to the sick segment is defined as “bail”, that means still the case will linger on. As a society we will be in prison of such distress again and again, as long as we don’t rectify the root-cause. The evidence is straight in our face, the example of Madoff who siphoned off $50 billion not by force but by idea which was based on the same simple belief “Getting Rich is as easy as pressing button”, thus as long as we don’t take corrective steps individually, system will never be full-proof. The debate will go on about “V” (We) or “U” (You) shape depression but currently to me it seems a “I” (I) shaped. Not only by shape, but also by its meaning, until “I” within is defined properly, we will continue to slide down, any step until then will just be a stop-over to the next downward slide. Also, this shape demonstrates that it is a tough-track to go up and easy one to slide-down, but once scaled up to the roof, its more stable than any of “U” or “V” model.
This requires us to come out of “Prisoners Dilemma”, this dilemma basically prevents the first-mover to consider a step for better outcome for everyone rather than it forces the first-mover to take a step which is zero-sum game for all. However, we all need to come out of this dilemma. It is an interesting dilemma, would suggest you to just look through Wikipedia for this.
I am also currently in debt and hence, I would end this unusually long blog with a Sanskrit Shlok:
Runa rogadhi daridryam ye chanye hyapamruthyuve,Bhaya klesa manasthapa nasyanthu mama sarvadha
This means, always destroy debts, diseases, poverty, Untimely death, fear, sufferings and mental turmoil. Doesn’t this in effect translate our action-item for business?
Moving ahead, permitting time, I will try to analyse more details of the stock-market as I want to contribute my bit towards creation of a humanly market and not a bullish or bearish market.
I will summarise my all observation in the following lines.
everything as scarce as oil can be cheap,
human-virtues can never dip low,
the car-paint, house-distemper will lose shine
strength of hope will forever-glow,
crops of cash will damp in flood of fraud
Confidence of conscience will ever-grow,
Well of fortune, lake of luck will dry
will of mind, will ever-flow
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