Archive for November 23rd, 2010

GM’s “skimpy” first day bump …

November 23, 2010

First, I’m not a big fan of the GM bailout. 

That view seems contrarian the week after the big IPO.

My reasoning: Remember the Iacocca-led Chrysler bailout.  It was hailed as saving the company.  Well, it saved it from death, but the company never did catch real traction. Even Mercedes couldn’t make it work … and it ended up getting bailed out again.

My take: any company can look good for awhile if you wipe out its shareholders and secured debt holders.

But eventually, the structural factors kick back in (e.g. the UAW albatross) and the rocks start popping through the water again..

Just watch.

Now, about the IPO …

Sean McAlinden of the Center for Automotive Research told NPR that investors may want to ask the new GM: “By the way, the last set of shareholders and bondholders you had, you totally screwed them. So why should I trust you now on nine months’ worth of results?”

Bottom line, the net effect of the bailout and IPO is the transfer of ownership from GM’s old investor base (millions of widows, orphans, and retirees), to a bunch of bailed out banks and sovereign funds…  many of whom whom probably flipped their shares in the first day trading.

The good news is that the new transient owners didn’t make as much flip money as they might have expected.

Here are the facts:

In their first day of trading Thursday, GM shares opened at $35, two dollars above the price investors paid for them in the company’s initial public offering Wednesday.

In trading, they climbed to as high as $35.99 before closing at $34.19.

The first-day price gain of 3.6% over the IPO price was far below the 9.7% average for the previous 10 largest U.S. IPOs, according to Thomson Reuters, which tracks new issues. And the small gain came as the overall stock market rose broadly.

The skimpy price rise appeared to have reflected the U.S. Treasury’s push to boost the IPO price of the shares this week from an initial range of $26 to $29 a share to $32 to $33 a share, and the decision to increase the size of the sale from 365 million shares to 478 million, with an option to sell as many as 550 million.

WSJ, Wall Street Payday for a New GM, Nov.19, 2010. 
http://online.wsj.com/article/SB10001424052748704104104575623061936893220.html?mod=WSJ_hp_LEFTWhatsNewsCollection

If true, I say kudos to the Treasury Dept on this on.

I’ve always scratched my head over big first day IPO pops. 

To me, they always seemed to reflect mis-pricing of issues and a big opportunity loss to the company issuing the stock.  Rather then the companies capturing the full value of the IPO, the flippers get rich.

In this case, the company got pretty much full value.  I think that’s a good thing.

One more rub: I heard that the Treasury’s shares are locked up for 6 months.

My bet: GM will be trading in the high teens, low 20s next May … oops.

Posted in GM bailout & IPO | Leave a Comment »

Burt Malkiel is still walking randomly …

November 23, 2010

Prof. Burton Malkiel has always been one of my heroes. 

He was the prof in my very first lecture in college.  I’d never heard of him since I’d just fallen off the pumpkin truck, but even I knew the guy was something special.

Four years later he was a “reader” on my college thesis.  He gave me an “A”, then wrote an article debunking my thesis.  That’s OK. If I’m going to get trashed, I want somebody of his stature doing the trashing.

Many people have heard of Prof. Malkiel because of his book “A Random Walk Down Wall Street”.  His central idea: if you try to time the market and beat the pros, you’re nuttier than a fruitcake.

Some consider Prof. Malkiel’s corrollary principles like ‘buy & hold’ and ‘portfolio balancing’ to be passe.

In a WSJ op-ed, he argues that they’re still alive and well, and can make you prosperous.

Here are some highlights …

In the wake of the recent financial crisis, many investors believe that the traditional methods of portfolio management don’t work anymore.

They think that “buying and holding” is outdated, and that success depends on skillful timing.

Diversification no longer works, they argue, because all asset classes move up and down together, especially when stock markets fall. In other words, diversification fails us just when we need it most.

And they suggest that low-cost, passively managed portfolios are no longer useful, that today’s difficult investment environment requires active management.

I don’t agree with any of these arguments. The timeless investment maxims of the past remain valid. Indeed, their benefits may be even greater today than ever before.

While no one can time the market, timeless techniques can help:

  • “Dollar-cost averaging,” putting the same amount of money into the market at regular intervals, implies investing some money when stocks are high, but also ensures some buying at market bottoms. More shares are bought when prices are low, thus lowering average costs.
  • The other useful technique is “rebalancing,” keeping the portfolio asset allocation consistent with the investor’s risk tolerance. Rebalancing involves selling some of the asset class whose share is above the desired allocation and putting the money into the other asset class. .
  • Diversification has not lost its effectiveness. Over the past several years, when stocks went down, bonds went up, preserving the value of the portfolio. And while stock markets around the world have tended to rise and fall together, there were huge differences in regional returns.
  • Also, low-cost passive (index-fund) investing remains an excellent strategy . The evidence is clear. Low-cost index funds regularly outperform two-thirds of actively managed funds, and the one-third of actively managed funds that outperform changes from period to period.

If you ignore the pundits who say that old maxims don’t work and you follow the time-tested techniques espoused here, you are likely to do just fine, even during the toughest of times.

WSJ, ‘Buy and Hold’ Is Still a Winner, Nov 18, 2010
http://online.wsj.com/article/SB10001424052748703848204575608623469465624.html?mod=WSJ_newsreel_opinion

Posted in Investing | Leave a Comment »

Consumers baffled by zero

November 23, 2010

TakeAway: The human brain has difficulty interpreting the number 0 according to new research.

This difficulty can lead to irrational decisions when it comes to choosing a credit cards with 0% interest rates.

Retailers offering credit cards will be happy to take advantage of this.

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Excerpted from Wall Street Journal, “When 1% is more appealing than 0%,” by Mary Pilon, November 17, 2010

As retailers ramp up their holiday sales pitches, they may be playing off some surprising and counterintuitive ways our brains interpret numbers.

For example: what’s more confusing: A credit card with a 1% interest rate or a card with a 0% interest rate?

Even though 0% is better, we might be lured toward the 1% card … When it comes to advertising “zero,” consumers get baffled. …

… The “principle of diminishing sensitivity” makes the perceived difference between two quantities decrease as both increase by the same amount. He offers up the example that the difference between 10 and 20 is perceived as larger than the difference between 110 and 120, even though in both cases, the numbers are still only 10 apart.

Enter the number zero.

“Zero is a special value that prevents consumers from using relative comparisons when making decisions.” Because zero makes us lose our reference point when we compare it to other values. …

Let’s say you’re offered a credit card with a 25% interest rate. Then, say you’re offered a credit card with a 1% interest rate. You may think, according to the theory, “Wow, that’s 25 times as high of an interest rate!” The gap seems huge.

But then, let’s say you’re offered a credit card with a 25% interest rate and another interest rate of 0%. The zero makes us lose our bearings when it comes to determining the gap between the two, even though we know that the 0% is less than the 1% and even further away from 25%.

According to research cited in the paper, when no reference point was cited, 49% of survey participants chose a card with a 0% interest rate, while 73% chose a card with a 1% interest rate even though that rate is clearly less advantageous in the long run. …

Edit by DMG

 

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Full Article
http://blogs.wsj.com/economics/2010/11/17/when-1-is-more-appealing-than-0/

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Posted in Mktg - Consumer Behavior | Leave a Comment »