The Financial Analysis Guy

Living in Las Vegas and being part of the Vegas real estate market has been quite an experience.  I came here in 2005, right at the freaking top of the market.  We bought a house the right way, though.  We bought a house that needed tons of work and are just fine with our mortgage.

However, I work for a group that has a company that is a local homebuilder.  Much of the company’s income over the last decade came from closing new houses in the vibrant Vegas real estate market. 

If anyone wanted to see what the bottom of a real estate market looks like, they should have been with me on Saturday.  We are doing what a lot of homebuilder’s are doing and are “mothballing” a community.  Essentially, putting it on hold until the market comes back.  Why are we doing this? 

Well, we purchased the land and improved the lots and our basis is WAY too high where house prices are right now.  The math doesn’t work anymore.  It will someday, hence, we are pressing the pause button on one of our communities here in the Vegas real estate market.  Like so many other homebuilding companies.

So, there we were on Saturday selling model home furniture for pennies on the dollar to whoever was lucky enough to see our bandit signs or see our wonderful Craigslist ad.  Our top of the line furniture and home furnishings were being thrifted away since we are losing the models to the bank and everything has to go in order to press the pause button on the community. 

One after another, folks were coming in and buying our stuff super cheap.  They then would ask the question what is going on with the community.  Could the Vegas real estate market be that bad?  Could you really be doing this?  The people loved the houses and several folks asked how they could buy one.  If only it were real…

The Vegas real estate market, like pretty much all other local markets, is in shambles.  My wife who is a professional organizer by trade and resells on eBay and Craigslist (check out all her posts on the Vegas Craigslist - general; furniture; and books) helped out that day.  She came home, fell to the floor and started crying.  I assured her it would be OK and that what we were doing was absolutely essential to staying alive to see the other side of this horrible mess.

There she was, the love of my life, now experiencing first hand what I have been dealing with for over two years now as a Vegas real estate participant.  I am a land investor and financial analyst for our company and simply don’t know where all this will end. 

In any event, if you want to know what it is like to see the bottom of the real estate market, go visit a new home community in your area.  If they are still open and selling houses, they are the few.  If they are like us, they are doing things that will make most of us cry.  They are doing things that never crossed the mind just a few years earlier.  My how times change…

This is a wonderful post by our good friends over at GenXFinance.  I highly recommend reading it.

JPMorgan Chase Buys Bear Stearns for $2 per Share and the Fed Cuts the Discount Rate

Jeremy hits on a few topics in this post and it is all good information.

1. The idea of JPMorgan buying Bear Stearns absolutely crushes some Wall Street historians.  These companies are bitter rivals, regardless of what they say, just like all the other investment banks on the Street.  Then put into place the fact they are buying them for $2 per share!  You’ve gotta be kidding me.  In Jeremy’s post, it states they were at $150 per share just last year.  Welcome to the world of recession folks.  Absolutely amazing.
2. The FED cutting the discount window rate to 3.25% from 3.50% is just so typical from our good friend Uncle Ben Bernanke.  The economy is shot and bleeding on the side of the road and he is trying to figure out where to go on vacation next year.  Again, way late and now it is merely a slap in the face.  He needs to go to 1% on the Federal Funds Rate and 1.5% on the Discount Window rate.  COME ON already.  We are on the eve of financial armageddon and he and our “good friend” President Bush are still claiming the economy is strong.  Where is the leadership???
3. The S&P 500 is down 12% this year, but if you are heavily invested in good, growth companies with excellent earnings potential and not a ton of earnings history (like I am), you are down 40%.  Seriously, I have a large position in Crocs (symbol: CROX) and smaller positions in Google (symbol: GOOG), Goldman Sachs (symbol: GS) and Apple Computer (symbol: AAPL).  I am ready to go all Zed and the Spider to anyone at the FED who does not help this market since it is headed down further.  Seriously…

Jeremy has timely stuff and great material.  I love to read him and several others out there.  Don’t forget to check out my blogroll to see who else I read on regular basis.

Since I hang out in Vegas where my job and family are, I tend to wake up to the opening bell on CNBC around 6:30am PST.  When I woke up this morning, I was giddy with the idea of Ben Bernanke and the Fed coming to the proverbial “rescue” of the credit markets.  I was beside myself actually.

Financial Analysis Guy is a long-term investor…no kidding
I am a very long term guy, very Warren Buffett-like, when it comes to investing.  I am a land investor in Vegas and I know that if my investment doubles in 3 years, I earn roughly 25% IRR (Internal Rate of Return) - not bad.  If it doubles in 2 years, I am a very happy 36% IRR.  Which is about as good as you can get with a large sum of cash invested in a passive investment - regardless of what the infomercials or phone-jockey’s that call you at 7:00 am at home will tell you.

Now, since the Oracle of Omaha has increased his book value in Berkshire Hathaway by 23% compounded annually over his management life, I know this is the mark that everyone is shooting for.  Most “professionals” in the business will say they earn way beyond this, but they are lying or at the very least misrepresenting.  Some years they earn way beyond this, but some years they are down 30%.  So, over time, their compounded annual return will probably be something like 10%.

Since I am a long term guy, I know that my portfolio being down 25% year to date is not that big of deal - kind of like The ‘Stones (Detroit Pistons if you are new to this blog) being down be 25 points at halftime.  Chauncey and the guys would like to be ahead by 25, but realize it is only halftime and A LOT can happen before the game is over.  Just like my investing, come talk to me this time next year to see who is smiling.  So long as Benjamin Bernanke (Uncle Ben as many like to call him) continues to loosen credit (jargon for lowering the Federal Reserve Funds Target Rate), I know that equities will rise over time.  This is a fact, not a theory. 

Fed and Uncle Ben
The other tool Bernanke and the Fed Committee can use is injecting funds into the credit market by buying “stuff” from the major banks.  They call this injecting liquidity through the purchase of debt instruments…YUCK!  What the heck does that mean?!?

Well, the credit crisis is here because the Wall Street guys and gals (not the Financial Analysis Guy) can not get enough funds (cash flow) in the house after they have lent it out.  They need to sell their debt on the secondary markets after they create it through the lending, in order to free up funds to keep the lending machine (mortgage creation and other commercial paper) cranking.  As of recent memory, they bundled these individual mortgages into CDO’s (Collateralized Debt Obligations) maybe to the tune of 10,000 or so and sell them to investment houses (Private Equity; Hedge Funds; Pension Funds; Endowments; etc.) - pieces at a time.  As long as the underlying obligations don’t default in mass quantities, these are great investments to supplement their investment portfolios…whoops, again, a whole other topic…

If no one is buying these CDO’s, then lenders can not lend more money.  If lenders don’t lend money, then business shuts down and people start selling whatever they can sell (regardless of how good the investment is)  just to raise cash.  This is the equivelent of everyone heading for the exits at the same time in a crowded theater - mass panic!  Since no one is lending and everyone is selling - hence, the fabled CREDIT CRUNCH. 

The FED to the Rescue
The Federal Reserve Bank has decided to buy these collateralized debt obligations to the tune of $200 Billion (yes, with a “B”) over the next 30 days.  This is a HUGE thing to the markets.  Now, there is liquidity being injected.  Now, the other buyers have a feeling that there is hope.  Where there is hope, there is better times ahead.

The Federal Reserve is basically saying to everyone, we got your back.  Just like The Wolf in Pulp Fiction - they are coming “DI-rectly” - classic movie.  If the Fed is buying, so should everyone else.  If that happens, you will begin to feel like the world isn’t actually coming to an end (25% decline in just 2 months!!!).  If the world is not coming to an end, then even The Lemmings of Wall Street (another Graham/Buffett thing) will decide to come back to equities. 

I love waking up to seeing the market up 4,850,938,408,230,480 points…or something like that…makes me giddy since I have a lot of equities in my portfolio.

I love watching CNBC in the morning before I head to work.  I think it is great to see all the talking heads (also another FANTASTIC band) not only think they know what to do and what is going to happen next, but even more ridiculous, try to convince you the watcher that they are right.

I am all for good journalism and want to hear the facts, but these folks oftentimes miss the mark.  I love CNBC, but if you are looking for great financial analysis and clean reporting of the news, take Bloomberg television for a spin.

Now to the point, I was watching a very nice, VERY good looking young lady who was guest anchoring for the day on The Call for my man Dylan Ratigan who said something that really wet the whistle and made my morning.  She said something like the following to one of her guests,

“I know we have seen a huge run-up in commodity prices recently and over the last year, but don’t we have to look at commodities in a totally different light.  I mean, you simply can’t look at them like you used to and really, everything has changed.”

AND, get this, her guest host has the cojones (Spanish…look it up) to claim the unthinkable, “Yes, you are right.  We have a new paradigm to view these and there is no end in sight to where the prices could go.  The global demand story is real and it is here to stay.  Demand is driving commodities like never before.”

I really do think we need rewind buttons in life.  She could not be serious and I am writing this off as a hoax.  As the Financial Analysis Guy, I am now hereby pronouncing this as one of the top 5 dumbest things said on financial television. 

In the spirit of simplifying things as much as possible when it comes to analysis, let’s follow the physicals.  Has the global population doubled in the last year?  Have we reduced crop output by 50% yield in the last year?  Have the number of people eating corn, wheat, soybeans, etc doubled (and in some cases tripled in the last year)?  The answer to all of these are of course no.  True, demand has increased while supply has dropped, but not to the extent we have seen in pricing.

The last time I heard this statement was when I entered the Las Vegas Real Estate market in 2005.  “It is different this time,” they said.  “The supply and demand curve has changed forever with a new paradigm.”  I also heard this very same statement in 2000 and 2001 about technology.  We all know how both of those ended.

I have been through a number of cycles in my lifetime and a number of bubbles.  The commodities markets, and there are 14 of them that trade, are not in a 2000-2001 “tech-like” bubble.  They are, however, way overvalued.  Don’t look any further than the 12 month chart on GLD (the common Gold ETF) to see unsustaining gains. 

As the great Guy Adami states on Fast Money, Gold takes the stairs up and the elevator down.  Which means, you better be tracking it very closely to see when the traders start dumping their long positions.  When they all head for the exits at the same time, is when you see HUGE declines.  Track the other commodities against gold and you will see similar movements over the last 12 months.  100-300% gains are not sustainable - regardless of what beer goggles you are wearing when talking about them. 

Never, and I mean NEVER, think that the old way of looking at financial analysis has changed drastically with a new “paradigm”.  It never happens that way - it takes years, sometimes decades for things like that to shift, not months.  The law of “reversion to the mean” is not a theory.  It is a law.  Expect to see annual gains of 12-15% in anything that is tied to sound financial analysis - and that is only for the very best financial vehicles.  Just ask the smartest man in any room, Warren Buffett, what he thinks about the type of gains seen in commodities. 

Unsustainable, and please, if you have seen large gains in your portfolio due to a commodity position, be reasonable so as not to get caught looking for the exit the same time as everyone else.  Take some profits and come to Vegas to buy me a Guinnness at the world famous English pub, The Crown And Anchor…one of the very best pubs in Vegas, but that is for another time.

Here at the FinancialAnalysisGuy website, Warren Buffett will be the subject of my posts over and over again.  I have this saying I use for my father that is fitting for Buffett too.  “Every year I get older, my father gets smarter and smarter.”

Just like every other man in his teens and twenties, I knew everything and my Dad was a relic.  He wasn’t the smartest guy and he showed it over and over again - at least that is what I thought at the time.  Then, at some point, I started gathering experience and going through in life what he went through.  I realized, at some point, that just about everything he told me early in life was true. 

When I entered my thirties, it was readily apparent he was MUCH smarter than what I game him credit.  And every year since, it seems he gets smarter and smarter.  I love that guy and he truly is the most important mentor in my life.

Then there is Warren Buffett.  I suppose he is a ton like my father.  Down to Earth; folksy; easy-going; a simpleton really.  But when you get down to it, a very complex individual when it comes to his feelings and how he views the world.  Just like my Dad, Warren Buffett seems to get smarter and smarter as years pass.

In the latest Forbes article on the World’s Richest Man, Buffett is catching the press again by surpassing his good friend Bill Gates and the ever-ominous Carlos Slim.  This is to his company’s, Berkshire Hathaway, surging stock price (even though he gives some of it away every year!!!) 

How amazing is the Oracle of Omaha?  Seriously, even when he is wrong on his analysis and investment, he is barely wrong and there is always a silver lining.  He does things differently than most in the business and he catches a lot of flack from the establishment because of it.  He does not like the stock market and despises the 2 and 20 crowd of compensation (2% annual fees and 20% of the profit). 

What amazes me the most about the guy is his nerve.  One of his favorite quotes that he lifted from the late-great Benjamin Graham, the Godfather of Financial Analysis, is to “be fearful when others are greedy, and be greedy when others are fearful.”  This is the man’s secret to success.  Even more so than successful stock picking and financial analysis. 

(Also, as a sidebar, if you have not read Benjamin Graham’s book, The Intelligent Investor, the absolute Bible for financial analysis and investing, I would suggest doing this ASAP.)

I can tell you from my own experience that to be able to check all emotions at the door and invest based on sound math and financial judgment is 90% of the battle.  Emotions play such a huge roll and this guy has mastered them.

I can’t wait to visit all the different ways this man does his financial analysis.  He is the master and I will hit on all his subjects over time.   I can’t wait…

“They are the same, right?  I mean, finance is finance and doing analysis is the same regardless of what you are doing it for.  Right?”  Something that I am sure most people believe is the case.  Well, that is partially true, but not 100%.  Let me explain.

Making Better Decisions

Corporate and personal financial analysis are the same when it comes to what they will do for the person using the information - to help make better decisions.  That is the essential purpose of doing financial analysis.   That is it.  People make decisions every day using their own financial analysis, but of course not everything can be boiled down to understanding the financials.

Some people in the financial analysis/investment industry believe that the act is actually the cure.  It is not and don’t let anyone try to tell you differently.  We must keep in mind that doing proper financial analysis is a way to support decision making in all walks of life - corporate/business AND personal.

Corporate Financial Analysis

I will address this in several other posts, but in general, corporate financial analysis is there to support the business operations - regardless of the size of the business.   Ask any CEO (or any other business owner) how their business makes money and they will talk about their operations, growth, logistics, customers, brand, etc.  Sound financial management and analysis is almost always never mentioned.  However, all will admit it is essential in the “measurement” of those items.  It is also essential in the efficient management of those core competencies when making strategic decisions. 

Measurement and decision making are core to what financial managers do in the business world.  It is by far not that simplistic, but, in general, it is essentially what we do.  There are countless tools to assist in this artwork that the corporate financial manager performs.  We will address these in various other entries.

Personal Financial Analysis

Yup.  Most of us do this every day in one way or another.  Whether we are simply trying to balance our budgets and trying to make decisions about household expenditures or when we are deciding on types of investments for our family units - we are analyzing the numbers.  Numbers are boring compared to the emotional side of these decisions, no doubt, but we all know they are essential.  

Remember, at the beginning of this commentary, I said you were partially right on that they were same.  Well here it is - personal financial analysis has two main goals: measurement and improved decision making.  That’s right - the very same goals as corporate financial analysis.  Looking at the numbers in our every day lives is essential to see how we are doing and how we will be doing after making today’s decisions.

The key differences lie in the depth of analysis and emotions.  In business, you NEVER want emotions part of the decision making process or clouding up the measurement of operations.  Unfortunately, emotion always creeps into the equation and makes it a little more complicated.  In our personal lives, emotion is at the forefront of everything we do.  The numbers tell only part of the story and sometimes we move in complete opposite direction of what the numbers tell us to do - simply because emotion gets in the way.  And that, my friends, can be a very good thing for your family and friends.

In any event, the numbers are always a factor.  You must understand them and respect them, but never let them completely dictate your decision making.  Also, one must be wary not to let the numbers dominate your analysis of past performance. 

This question seems to be at every single person’s forefront of discussion.  Whether or not we are presently in a recession or are we heading for one.  There are so many indicators that show us that we are not in a recession presently, so how can anyone be asking if we are in a recession.  AND, more importantly, why do we care?   Well, lets break this down into some real simple analysis. 

Indicators

Many of the widely used indicators used by the Federal Reserve Board and Chairman Ben Bernanke (and everyone else for that matter) are backward looking.  This is very important to folks who want to turn the TV channel everytime someone brings this topic up.  These folks are using data that have happened in months or even quarters passed.  How can anyone possibly say we are in a recession just by looking at data from the past?  They can’t.

All anyone can do is prognosticate and try to predict what is happening today by trying to predict the future indicators.  Not a very good way of doing it.  However, these folks are doing their best with what they have.

There is a saying that I can use to help sum up this prognostication effort, “You don’t know you are in a recession until it is over.”  This is the best way to sum up the effort of trying to determine if we are in a recession.

Why do we care?

That is the real question.  But really the best question to be answered is “How does it affect me?”  The truth of the matter is that a recession affects all of us - in one way or another.  It just affects us in very different ways.  “How?” you ask.  Great question…

If you are working at government institution or a quasi-government institution (e.g. a larger US corporation) you are most likely not too affected.  Your income will not suffer too much so long as you don’t get downsized or “rightsized”.   Recessions typically mean prices come down on commodities such as gas and food, so that helps you out a little as well.  The main pain you will feel is in your 401k or other investment vehicles that are tied to anything equity related.  Stocks and other equities always get killed in recessions - especially if they are tied to higher growth.

And that is really the key.  Anything tied to higher growth gets crushed in recessionary times.  The definition of a recession is 2 consecutive quarters of negative GDP (Gross Domestic Product) growth - simple as that.  Not flat, not slightly better…negative.  Also, the GDP indicators are backward looking.  The indicators usually don’t stay negative very long, so when they are officially telling us we saw declining growth, it usually means we are already starting to pull out of it.

Conclusion

We normal folks care about recessions only in the manner it affects us personally at the time.  Some it affects more than others, but we usually don’t care much about the general economy.  We care about how it affects if we can go out to eat this month or how much it costs to fill up the gas tank.  Don’t worry too much about what the guys on the TV say.  Seriously, they know as much as you know about the answer to this question.  Matter of fact, you probably know more since you are on the battlefield.  If you see people pulling back on spending (not as many folks at your favorite restaurant during dinner time or smaller crowds on Saturday at your favorite retailer), then we are probably seeing some indications of slower growth. 

My name is Chuck and I am the Financial Analysis Guy.  Wanna know a little more about me?  Read this lovely little quip. 

I know a ton about financial analysis and real estate investing.  I live in Las Vegas where the real estate market is a little down right now.  You think?  Seriously, I could not think of a worse place (or worse profession) to be doing business right now if you are a real estate guy in Vegas (other than Detroit and that is where I came from).  I am doomed!

I wanted to start this up to tackle the complex and often hated topic of financial analysis.  Since I work for a small private equity/investment firm here in Vegas that specializes in real estate, it will also focus a bunch on this as well. 

I like to keep things simple, but I will from time to time use obscure references to movies, TV shows, MAD TV, SNL, Colbert, and several other pop culture “thingies”.   I will stray from the boring financial analysis and Vegas real estate market to hit some personal stuff as well.  But, always, I will try to keep it simple, short and sweet. 

Personal Finance
I will hit this pretty hard and use several other bloggers out there that are excellent.  I read these folks every day and it is worth every minute I assure you.  Trent at the The Simple Dollar is flat out fantastic.  Sometimes a little long winded, but who cares when he writes about the most amazing stuff.  J.D. at Get Rich Slowly is also very good.  Both are professional writers, which I am not.  They are much more refined and clean, which is why I read them to get better at this.

Vegas Real Estate
I am a real estate investor and broker in Las Vegas.  I specialize in raw land and entitlements and you will get your fill of the Vegas real estate market right here.  I will dazzle you with reports, MLS figures, and several other fun tidbits if you are interested in knowing more about our market.  I encourage all Las Vegas real estate pro’s to comment and contact me to guest blog.  I want more Vegas real estate content on this site all the time. 

Investing Whales
Warren Buffett, Carl Icahn, Donald Trump, Kirk Kerkorian, and many more or the big-time fella’s will be quoted and watched here.  I love em all and they are my financial hero’s.   

Simplicity and Fun
Financial investment and analysis is difficult and can be as boring as watching Pulp Fiction for the 52nd time with my drinking buddies.   Yes, I do like to throw em down with friends and am not ashamed of it. 

If you have read this post, my first post, you are one of the lucky ones (that most likely has a lot of time on their hands).  Which CAN mean that you have attained the ultimate goal - financial freedom.  This goal means you can what you want, when you want, and have your bills covered with passive income.  Now that’s nice.  But it also could mean, you just have too much time on your hands…