If you have been following my blog postings, you are probably aware that I have an obsession with equity risk premiums (ERP), and have done an annual survey paper on the topic  every year since 2008 (with the 2013 update here). I also post a monthly update for the ERP for the S&P 500 at the start of the month on my website. As a consequence, my attention was drawn to a post by Fernando Duarte and Carlo Rosa, economists at the Fed in New York, on the topic.

They argue that equity risk premiums are at historic highs, primarily because the US treasury rates are low, and note that these high equity risk premiums are a precursor to good stock returns in the future. I don’t disagree with their authors that equity risk premiums are high, relative to history and that the low risk free rate is in large part responsible these large premiums, but I am less sanguine about using the ERP as a market timing device, especially at this time in history.

As has been the case for much of the last two years, the Apple earnings report on April 24, 2013 was a media event, previewed endlessly on investment sites, covered heavily by the media and tweeted about by both Apple fans and foes. While I try to stay away from the hype around earnings reports, this is a good occasion to revisit my earlier posts on Apple, and especially the one I made at the start of this year on its valuation.

The Signal amidst the Noise

Paraphrasing Winston Churchill, gold is a "riddle, wrapped up in a mystery inside an enigma", at least as far as I am concerned. I don't understand what moves the gold price and I have never held gold in my portfolio. That does not mean, however, that I am not fascinated by the price of gold and immune from its movements. That was brought home last week, when the price of gold dropped by 9% on April 15, 2013, the biggest one day drop in thirty years. Not only did the prices of other precious metals (silver dropped 12%) and industrial metals drop, but stock prices took a tumble as well. While the attention has focused on the price drop in recent days, gold has had a good run over the last decade.

The US equity markets are on a roll. Today, the S&P 500 hit an all time high, just weeks after the Dow also broke its record. While it has been less than five years since the crisis of 2008 and the epic collapse of equities in the last quarter of that year, the returns earned by those who stayed the course, even relative to pre-crisis price levels, is a testimonial to the dangers of staying out of equity markets for extended periods.  

As with every other market surge, this one has brought with it the usual questions: Have stocks gone up too far, too fast? Are we due for a correction? Should we stay in the market or take profits? I could cop out and use the excuse that I am not a market timer, but that would be a lie. All investor are market timers, with the differences being one of degree. So, the honest truth is that I have a view about markets but that it does not dominate my investment decision process.

Since it is so easy to be swayed by story telling, when talking about equity markets, I try to bring the same tools to assessing markets that I do for individual stocks. The intrinsic value of equities, in the aggregate, is determined by four variables:

I do not personally know Marty Lipton, nor have I met him. Based on what I have read about him and by him (he is a prolific writer), he strikes me as an extremely competent lawyer and he is certainly a good friend and champion of New York University (the institution that I teach at), chairing the board of the trustees for the university. I have never, though, thought of him as a champion of long term shareholders in publicly traded companies, which is the role he plays in a recent article by Andrew Sorkin in the New York Times.

It looks like I just I cannot stay away from the Apple story, with Tim Cook making a splash (or a belly flop) with his speech in New York yesterday and David Einhorn's proposal coming in for scrutiny from investors and the press. This article in the New York Times DealBook does a pretty good job of summing up the proposal and its underlying thesis, and I was surprised to see my name mentioned, with Mr.

Let’s say that you are interested in selling your house and hire a realtor, and that the realtor comes back with what she says is the “best” offer for the house, forgetting to mention that she is the buyer. I would assume that you would be screaming about conflict of interests from the rooftops, right? Now, let’s change the story a little bit. Assume that you are the CEO of a publicly traded company that has been targeted by a group, interested in buying the company. Your fiduciary responsibility to your stockholders, if you decide to sell, is to try to deliver the “highest price” that you can get from the potential buyers. But what if you are also heading the buyout group that is trying to buy the company? The conflict of interest you face would be untenable, since you would, as the lead buyer, want to pay the lowest price. That is, of course, the problem in any management buyout and the issue has risen to the surface with the announcement by Michael Dell, CEO of Dell, that he would like to take the company back private for $13.65/share; that would translate into a $24 billion bid for the company, with about $15 billion coming from debt. Dell will be augmenting his 14% stake in the company by investing more of his wealth but he will joined as an equity investor by Silver Lake, a private equity firm. 

This was originally posted on 2/8/12

If you are an Apple stockholder, yesterday was an eventful day. First, you had David Einhorn becoming more “activist” with his Apple holdings, moving from being just bullish on the stock to pushing for change. Second, Einhorn also unveiled his plan for Apple: the company should give its stockholders preferred shares in the company, with a 4% dividend yield. In pushing for the change, he is quoted as saying that doing so will “unlock billions of dollars in value".

There will be NO value created.. none.. 
Before I look at the trade off on and the alternatives to the preferred stock issue, let me dispense with the one part of his claim that cannot hold. Issuing preferred stock will not add value to the company, not one cent. Before I get accused of being a “theorist” or “academic” (which I now know are code words for much worse insults), let me explain my rationale:

The bottom has clearly fallen out for Apple's stock price. After last week's earnings report, the stock that had already dropped 30% from its high of $705 set in September to $500/share, dropped another 15% to finish at $440/share. The company that could do no wrong a few months ago now is viewed as incapable of doing anything right. Has the stock fallen too much or is this just the beginning of a longer term drop in value? Is it time to buy, time to sell or time to sit on your hands?

For the last two decades, I have dedicated the first two weeks of each new year to a ritual. I obtain/collect/download data on all publicly traded companies listed globally, using a variety of data sources, and then analyze and present the data, aggregated at a number of different levels: by country, by region (US, Europe, Emerging Markets, Japan, Australia & Canada) and by industry. I report on measures of operations (profit margins, turnover ratios, working capital), measures of leverage (debt ratios), measures of risk (beta, standard deviation, equity risk premiums, country risk premiums) and pricing measures (earnings multiples, book value multiples, revenue multiples). I just completed my 2013 update and you can find it by clicking here.