Valtrend

Undivided Government and the Stock Market

Pete — Sun, 24 Jan 2021 19:36:12 +0000

Somewhat surprisingly after the Georgia senate elections of January 5, 2021, giving the democrats (pretty much) complete control of the government (executive, house and senate), the stock market has performed well. Why?

Here are two of the leading possibilities:

More stimulus/more support for the economy;
Potential better rollout of the COVID-19 vaccines.
Of course, I can think of many potential threats to an advancing stock market, the least of which is not the possibility of increasing interest rates and an already richly valued market.

SEC trying to fix Rating Industry

Pete — Fri, 28 Feb 2020 18:30:31 +0000

Related to last post, the SEC is apparently discussing alternative compensation models for rating agencies. One possible solution to the conflict of interest problem (being paid by the issuer you are rating) is to assign rating agencies randomly to grade corporate bonds and structured products, which would limit issuers’ ability to shop around for better grades.

Competition may not be a good thing in the world of debt ratings

Pete — Thu, 20 Feb 2020 18:14:55 +0000

The incumbents, Moody’s, Fitch and S&P, face relatively new challengers for debt rating business. The companies being rated pay for such a service – a conflict of interest that has always existed. Now, however, new entrants, may be motivated to rate issuances “generously” in an attempt to take/gain market share – which may come back to haunt the industry, including the incumbents.

Goodwill: Precarious in any Merger

Pete — Tue, 12 Mar 2019 21:21:03 +0000

Kraft Heinz recently wrote down its assets by $15.4 billion, including $7.1 billion in goodwill. This was effectively an admission that when the two companies (Kraft and Heinz) merged in 2015, allegedly creating $30.5 billion in goodwill – that number was wildly inflated. At the time, the combined company – with the benefit of hindsight – overestimated the cost savings of combining operations. This is ironic, however, since this is the area the combined company focused on by reducing head count and making factories more efficient. Unfortunately, this cost reduction strategy backfired by failing to keep the company’s brands relevant (and creating the need to write-down the goodwill) in an era where consumers are much more interested in simpler, more natural ingredients.

Mergers ultimately fail for two reasons: Overpayment by the acquirer and/or failure to assimilate/execute the strategy effectively. Kraft Heinz may have failed at both…

Homebuilding Stocks on Rebound

Pete — Sat, 23 Feb 2019 17:14:27 +0000

2018 did not look so good for homebuilding stocks. What a difference a new year can make. The theme of 2018 for these stocks was labor shortages, weakening economic activity and affordability concerns. The theme for 2019, so far, has been declining interest rates – a federal reserve slowing or even stopping interest rate hikes (at least for the time being). Is the bounce “permanent” or only temporary? Time and the fed will determine…

Business Owner Beware: Online Business Valuation Calculators

Pete — Tue, 18 Dec 2018 16:38:30 +0000

I recently had a conversation with a business owner interested in a valuation. She had been playing around with online calculators and told me that one of the calculators told her that her business was worth $300,000. After discussions with her, I told her that I would not arrive at a value anywhere remotely close to $300,000 (but, of course, did not give her a number on the fly). She understood as even she without a deep background in finance thought the online conclusion seemed off.

Moral of the story: you get what you pay for. In this case, the “advice” was worth $0. In fact, I would argue that in the hands of an uninformed business owner, more harm could have been done than good. False and incorrect expectations can lead people, including potential buyers, to make really poor choices with their businesses and investments.

Business valuation is part art and part science. The art/human part is never going away (nor should it). There are just too many facts to consider in any valuation to even think about using an online calculator – especially when the stakes are high.

Tax Cut: From Stock Buybacks to M&A

Pete — Thu, 08 Mar 2018 17:17:45 +0000

Announced M&A deals in 2018 are at their highest point since 2000. All cash offers are leading the way 3:1 over all share offers. Why? Still cheap debt and more cash from income tax cuts. Moreover, in the last 3 months, more than $200 billion in cash buybacks have been announced. The trend is likely to continue for a while…

The New Tax Law and Used Goods

Pete — Wed, 28 Feb 2018 17:11:43 +0000

We may have a booming marketplace in certain industries for used goods with the tax reform bill passed in December. Before the change, larger companies could not immediately deduct the cost of gently used equipment. However now, if one company can deduct immediately, it helps with current year taxes. Thus, we have a catalyst for deals for companies looking to lower tax bills (by buying used goods) and income for companies already with lower tax bills.

Retirement Savings for the Self-Employed: What Savings?

Pete — Tue, 20 Feb 2018 23:50:21 +0000

Savings for retirement is not going so well for the self-employed. Erratic income make it difficult to put a contribution plan to work, unfortunately. Another possible reason is paralysis by analysis. Choices for savings vehicles, assuming the business owner can and wants to invest, include: The traditional IRA, Roth IRA, Sep IRA and Simple IRA- that’s a lot of IRAs. Moreover, don’t forget the solo 401K – all of these options have different rules and regulations and may be best for certain self employed business owners, but not for others.

Relative to the pay-checked worker who has the ability to invest in their company’s 401K plan, life is much more difficult – from a variety of perspectives.

Sarbanes Oxley: Reason for Drop in Public Companies

Pete — Sat, 17 Feb 2018 15:02:02 +0000

It has been estimated that annual compliance costs related to Sarbanes Oxley (SOX) is approximately $2 million for the smallest of public companies and way more for larger companies. That hurts.

It also leads to “up and coming” private companies choosing to get acquired, rather than becoming public through an IPO – or merely remaining private. This, of course, limits investment opportunities for the middle class since potentially exciting public companies do not grow through funding by the general public.

The solution to such an issue is SOX 2.0 – a scaled back version which contains all of the good things about the bill without the highly expensive and bureaucratic nightmare of SOX 1.0.