How To Make A Pamper Cake

My next post will be on my performance in the first quarter and will fit a new habit that I will. Each month, I'll take a few lines to dissect my performance and look to see if my asset allocation always say to my goals.

For now, I want to talk quickly of Google Analytics. This tool Google is a wonder in web traffic management. By adding in the core code of the site a couple of lines provided by Google, I get the statistics of visits ever. For example, since QuébecBourse mentioned my blog, daily traffic has increased by about 50%.

Even better than just knowing what level of traffic, I know its provenance. Thus, 2010:

• 50% of visitors come from Google search
• 16% of through traffic (eg by their favorites)
• 15% from a link on QuébecBourse
• 10% from a link on financial newspaper of a "y"
• 5% from a link on Entrepreneur Fellow

Before going further, I would like to thank these three gentlemen for bloggers put a link to my blog on their site (usually through the list of Blogger). Your three sites also have a link on my blog.

The next thing I wanted you could do with more of a blow. If you believe that your visit is anonymous on the web, think again! Without you even knowing it, many websites retrieve information about its users (like mine) to improve its presentation, compatibility and more. For example, I know:

• 35% of visitors use Internet Explorer 7
• 11% use IE 8
• 11% use IE 6 or older
• 15% use Mozilla Firefox 3.5
• another 15% use Firefox version
• 6% use Safari
• 5% use Chrome

Your browser is not the only thing I can find. In fact, I can also learn about the language of your keyboard, your ISP (Videotron is the most popular), your operating system (Windows = 90%), your screen resolution and your location (country - region and sometimes city).

course, these data remain confidential. That is to say that I am not able to pass their data to see if users are using IE6 Paris site or if the keyboard is French.

This information was not very useful for a blog. At most, the geographic distribution and counting the number of visit is interesting, but I have no use of other information. Large websites by cons in great need. Take src.ca (site of Radio-Canada). Knowing what is the main browser visits and the operating system or even the version of Java, the developer company's web service will be able to build a website more suitable. For example, If he finds that 0.01% of visits are under Linux platform and the new tool to be inserted on the website (eg video area) is not compatible with Linux, so small to satisfy customers is not worth thousands of dollars to invest to become compatible.

With a bunch of powerful tool, we can understand now why Google is a giant web.

Eating Red Meat Testosterone

statistics visit the U.S. banking system

I was not sure what to write this week as some analysis of companies are waiting for further results. Among other things, an analysis of Research In Motion expects the publication of results on Wednesday. So I've write an article I did for my investment club in the U.S. banking system. This article was written 20 days ago. I'll write some red patches or updates to data.

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Canada-US Differences
System banking market is very tight and highly regulated. The six largest Canadian banks (known as the Big6 which includes the Royal Bank, Bank of Montreal, Scotiabank, CIBC, TD and National Bank) account for over 90% of the local financial market. Considering that Desjardins holds 5% market share in Canada, the 60 other financial institutions in Canada share the little remaining 5%.

Partly this explains the strict regulation of the financial system in Canada. If one institution has the Big6 to fail, the entire Canadian economy who might fall.

the U.S. side, the situation is very different. There are over 8,000 U.S. banks and most banks are only present in a local five-state American. The four largest U.S. banks (Bank of America, Citigroup, JP Morgan and Wells Fargo) now own 40% of the U.S. banking market after numerous acquisitions of banks in default. For example, Wells Fargo has increased from 4% to 10% after its acquisition of Wachovia.

Even if the 4 largest U.S. banks may weaken the economy in the event of a bankruptcy, the situation is less critical than in Canada. It is between each other which explains the presence of reduced regulation. Note however that the crisis of recent years is partly due to the lack of rules in the United States (and the situation is about to be revisited with new rules that require the administration wants Obama) .

How to evaluate a bank
evaluate a financial institution is really different from other companies. This stems from the fact that other deposits that are considered a debt to the bank. A bank therefore has a very high debt. Here, I'll just quickly explain the 2 methods used by U.S. analysts: The book value and earnings power.

Depending on how the book value, we take the tangible book value of the shares of the company and is multiplied by 1.75 (according to the historical value). For a company in trouble (like Citigroup) analysts instead use a multiple of 1 to 1.20.

For method of power benefits, it is forecasting earnings per share in the next fiscal year (in our case 2011) and is multiplied by 10 (historical). Here
values that gives for the 4 largest U.S. banks.


Note that the "Price Current" is dated March 8. Today, their prices are respectively 4.31 to 17.90 - 45.02 to 31.22.

We see from the chart that the evaluation by book value suggests a large underestimation of Citigroup. However, for profits, this underestimation seems less important.
The best business bank in the U.S. is, in my view, Wells Fargo. However, the two methods of assessment, it is both very expensive at this time. I see evidence here that this is one of the banks the strongest in the American system: people are willing to pay a premium.

What to do?
To run this little test on other major banks, I believe the U.S. bank is generally good price (depending on consensus). Take a position on an ETF would be advantageous only if one thinks that analysts underestimate the future earnings.

I do not see the point to take a position in Wells Fargo (too expensive). If you want to expose the U.S. financial system, it must be out of the bank (and go into the brokerage, banking or insurance) or play on Citigroup. (Those who looked at the composition of my portfolio saw options on Citigroup. I took this position because I believe that U.S. analysts have underestimated the ability of the bank to get out of the crisis. However, this is a risky and for this reason that my position is small.)

Citigroup is the only title the conclusion of book value and income are not similar. Taking the 1.75 X as its industry peers, we should have a price of $ 7.27 while earnings show $ 3.80 instead. In the long term, the two will converge either to an increase in profits (in the event of a successful reorganization of the company) either by a decline in book value (the company has failed and destroyed shareholder value). But I think the risk here would be too big for the club.

The logical conclusion is to look elsewhere than in the U.S. banking.

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How To Regain The Kidney Function

Temporary investments: a cancer returns

I have great difficulty grasping the interest of some leaders to keep an important part of their company stock in temporary investments. From a purely theoretical, a short-term investment is a way to grow a temporary surplus cash. In more practical level, this bit also serve as a buffer in industries where cash flows are not regular. For example, in the aviation industry, it can take a big time lag between inflows and outflows. In such cases, a higher cash and short-term help to avoid falling into the red (some industries can not allow themselves to an account in the red even temporarily).

Before going further, I think it is proper to say here that this is not an automatic temporary investments than saying elevated = mismanagement. Each case is unique and we must look at several points. First, what industry the company operates? The industrial sector need much lower than the financial sector for example. Then, what is the financial position to own the company? If a large payment of long-term debt matures in 6 months, it is likely that the company earns money (invested in short-term investments) for the payment. Finally, what are the plans for future investment the company? Although management intends to purchase a competitor in the next 12 months and they want to pay 100% cash, accumulating reserves is normal. So, normally, are only temporary investments for future needs (thus, it is a TEMPORARY position ...). The only situation where we could keep more common is if the industry requires such a cushion. To that end, look at the difference between sector in this table:

You here the distribution of the S & P 500 according to their industry. The first column is the average weight of short-term investments compared to total assets, while the second tells us the percentage of companies with such investments. The last column shows the calculation of the first, but only for companies with investments short term in their balance sheet.

Clearly, some industries have greater investment and that is normal. However, if a public utility (Utilities) were 35% of its assets in short-term investments, it could pose serious questions.

Why is it so important?
What this makes temporary investments are so high? And first, that contains the post invesitssements short term?

The answer to this last question can also be a factor detracting. In some cases, this item includes investments in the capital stock of a company (when the company holds less than 20% of capital) which is available for sale. Therefore the notes to financial statements are important: they allow us to determine what assets in short-term investment. In addition to actions, this asset class also includes debt in the short term (maturing in less than 12 months) and investment bank (known as GC). In most cases, this asset class contains either GC or treasury bills or both.

The situation is that I criticize a company that has many short-term investments and they are almost exclusively GC and treasury bills. I do not want to take the example of MTY (discussed in the previous post), but what I will describe here is exactly the same thing for this company. Consider a fictitious company with the following figures:

• Total assets of $ 100M.
• $ 20M in short-term investments consist of GICs and treasury bills, whose yield is 1%.
• Net income of $ 15.2 million including $ 200 K from investment returns in the short term.
• For goods of the problem, consider a tax rate of 0%.

So what is the return on assets (ROA)? 15.2% (or 15.2 million / 100M). This means that for every dollar in assets, the company posted a profit of 15.2 cents.

Note however that the company has achieved a return of 1% on its temporary investments. To see its negative impact, withdraw the asset (by paying a special dividend or share repurchase). The new situation is:

• Total assets of $ 80M
• No short-term investment.
• A benefit of $ 15M (200K were removed from temporary investments).

What is the new ROA? 18.75% (or 15M / 80M). Return on assets increased from 3.55% in eliminating short-term investments. A small percentage does not move you?? Therefore calculate the returns on equity (ROE), assuming that the company had $ 30 million of liabilities in the two situations.

Initially, there is a ROE of 21.71% (15.2 M / 70M). Without investment in the short term, it has a ROE of 30% (15M / 50M).

The conclusion?
Some companies must keep a certain position in short-term investment for contractual reasons (bank, customer, ...) or simply for economic reasons (eg the aviation industry). By cons, several leaders retain profits Business investment in the short term by saying that one day could be an interesting project area and we have the money. Gold, meanwhile, the profitability of the company found it reduced because of GIC ... is not very very profitable.

On this point, I am writing here word for word the contents of an article written by Jensen in 1986 on the agency problems (the conflict of interest) between the leaders of a company and its shareholders:

The Problem Is How to Motivate managers to disgorge The Cash Rather Than Investing it at below-the cost of capital or wasting it on organization inefficiencies. In

other words, to avoid the destruction of shareholder value, we must find a way to motivate managers to take the money out of the business instead of investing in a yield less than the cost of capital. When 20% of the company is invested in investments that offer 1% yield, clearly there is value destruction.

In short-term investment, a company should keep only the minimum necessary for the normal conduct of its business. Considering the agency relationship highlighted by Jensen, a significant amount of temporary investment increases the risk of the management team squander the money. If management is unable to invest this money in profitable business activities, that the money be returned to shareholders.