What Business is Wall Street in?

[Baoxiaodao]

I bought into Australia as well. If you look at the companies in AU, you will find that the culture is not broken or as broken as US's. And that will make a very big difference. When the political parties using balancing the budget as a weapon to win a election, you know that there are people who are thinking straight. Of course, there are not countries without issues in this world. But I like my chance in AU. Stocks are generally cheap and paying very nice dividends. When not paying dividends because of manifesting of options became new normal on the wall street, companies in AU remind me of the sweet and old, NORMAL days.

 

I like Germany as well because the stocks are even cheaper.

 

 

What Business is Wall Street in ?

作者：markcuban

有 21 人喜欢此条目

another post from last year that i thought was relevant again:

 

What Business is Wall Street In ?

 

May 9th 2010 11:36AM

 

My last two posts were designed to stimulate discussion.  But lets talk the real problem that regulators, public companies, investor/shareholders and traders face.  The problem is that Wall Street doesn’t know what business it is in. Regulators don’t know what the business of Wall Street is. Investor/shareholders don’t know what business Wall Street is in.

 

The only people who know what business Wall Street is in are the traders. They know what business Wall Street is in better than everyone else.  To traders, whether day traders or high frequency or somewhere in between, Wall Street has nothing to do with creating capital for businesses, its original goal. Wall Street is a platform. It’s a platform to be exploited by every technological and intellectual means possible.

 

The best analogy for traders  ? They are hackers. Just as hackers search for and exploit operating system and application shortcomings, traders do the same thing.  A hacker wants to jump in front of your shopping cart and grab your credit card and then sell it.  A high frequency trader wants to jump in front of your trade and then sell that stock to you. A hacker will tell you that they are serving a purpose by identifying the weak links in your system. A trader will tell you they deserve the pennies they are making on the trade because they provide liquidity to the market.

 

I recognize that one is illegal, the other is not. That isn’t the important issue.

 

The important issue is recognizing that Wall Street is no longer what it was designed to be.  Wall Street was designed to be a market to which companies provide securities (stocks/bonds), from which they received capital that would help them start/grow/sell businesses. Investors made their money by recognizing value where others did not, or by simply committing to a company and growing with it as a shareholder, receiving dividends or appreciation in their holdings.  What percentage of the market is driven by investors these days ?

 

I started actively trading stocks in 1992. I traded a lot. Over the years I’ve written quite a bit about the market. I have always thought I had a good handle on the market. Until recently.

 

Over just the past 3 years, the market has changed. It is getting increasingly difficult to just invest in companies you believe in. Discussion in the market place is not about the performance of specific companies and their returns. Discussion is about macro issues that impact all stocks. And those macro issues impact automated trading decisions, which impact any and every stock that is part of any and every index or ETF.  Combine that with the leverage of derivatives tracking companies,  indexes and other packages or the leveraged ETFs, and individual stocks become pawns in a much bigger game than I feel increasingly less  comfortable playing. It is a game fraught with ever increasing risk.

 

The Pimco (who I think are the smartest guys on the Street) guys talk about a new normal as it applies to today’s state of  the world economy. I think just as important is the new normal as it applies to Wall Street.  Wall Street is now a huge mathematical game of chess where individual companies are just pawns.  This is money in the bank for the big players like Goldman, Morgan, etc. Why ? Because the game of chess is far too complicated for 99pct of the institutions out there investing money. So to keep up, they turn to Goldman, Morgan and the like to invent products for them. “You don’t know how to play the housing boom, let us show you”. “You think the housing boom is about to crash, let us show you how to play that”. “You think that PIIGS are in trouble because they can’t print money to pay debt holders, let us create a product to allow you to play that game”  The big houses have the best hackers in the business and they put together the games and sell them to the many, many institutions managing Billions and Billions of dollars.  They are the ultimate Hackers selling their attacks to the highest bidder, regardless of which side they are on. That is a new normal.

 

Again, I’m not passing judgement one or the other.  I’m just recognizing what is going on in the financial world today.

 

It’s rare for companies to go public these days. Just as rare for secondary offerings.  The only thing that keeps me in the market is that most of the stocks (not all) pay dividends or some other sort of cash payout. For the first time in my life, I bought outside the United States.  I bought Australia in a big way because it is becoming increasingly hard to find new domestic investments that are not influenced by the “hackers” and the games being played on a macro level. It’s hard to believe, but evaluating countries as an investment is now easier than evaluating companies . Even with all the unrest in Europe. Or maybe because of it.

 

So back to the original question. What business is Wall Street in ?

 

Its primary business is no longer creating capital for business. Creating capital for business has to be less than 1pct of the volume on Wall Street in any given period. (I would be curious if anyone out there knows what percentage of transactions actually return money to a company for any reason). It wouldn’t shock me that even in this environment that more money flows from companies to the market in the form of buybacks (which i think are always a mistake), then flows into companies in the form of equity.

 

My 2 cents is that it is important for this country to push Wall Street back to the business of creating capital for business.  Whether its through a use of taxes on trades, or changing the capital gains tax structure so that there is no capital gains tax on any shares of stock (private or public company) held for 5 years or more, and no tax on dividends paid to shareholders who have held stock in the company for more than 5 years.  However we need to do it, we need to get the smart money on Wall Street back to thinking about ways to use their capital to help start and grow companies. That is what will create jobs. That is where we will find the next big thing that will accelerate the world economy.  It won’t come from traders trying to hack the financial system for a few pennies per trade.

 

And solutions won’t come from bureaucrats trying to prevent the traders from hacking the system. The only certainty when bureaucrats step in is that the law of unintended consequences will smack us all in the head and the trader/hackers will find new ways to exploit the system that makes them big money and even more money for the big institutions that develop products for the other institutions that are desperate to play the game.

 

Regulators have got to start to recognize that traders are not investors and vice versa and treat them differently. Different regulations. Different tax structure.  Different oversight. Individual investors and the funds that just invest in stocks and bonds are not going to crash the market.  Big traders who are always leveraging up and maximizing the number of trades/hacks they make will always put the system at risk.  We need to recognize that they do not serve much of a purpose other than to add substantial risk to the global economy.  That their stated value add of liquidity does not compensate the US and World Economy nearly enough for the risk of collapse they introduce into the system.

 

Wall Street as a whole needs to be in the business of creating capital for companies and selling shares to investors who believe they are shareholders.  The Government needs to create incentives for this business and extract compensation from the traders/hackers for the systemic failure level of risk they introduce.

 

There will be another crash, because there are too many players looking for the trillion dollar score. They can’t all win, yet how many do you think wouldn’t risk everything, even what is not theirs, for that remote chance to score big ? Put another way, there is zero moral hazard attached to any trade. So why wouldn’t traders take the biggest risk possible ?

 

Update at 10pm 5.9.10

 

One more consideration. If there are traders of any kind that are unregulated or unmonitored, and trade for their own account, how do we know how big they are and how much of a threat they pose to the system, individually and in aggregate ?. For any High Frequency or big leverage derivative folks out there- is it possible there could be firms that have billions at risk with questionable ability to make a margin call or fulfill their side of the trade  if things went against them ?  Could there be hidden AIGs that few people know about  or a bunch of AIG like situations ,which in aggregate fail and put the system at risk ? I have no idea. Just asking the question.

 

Update 8-9-2011

 

As a follow up from a comment, I found it interesting that Australia treats professional traders very differently than individual investors that invest in shares of companies.  Traders pay regular income tax on their gains, investors pay capital gains and if held more than a year can even get a discount on the capital gains rate. Something that would make a ton of sense in the USA as well

[Packer16]

Great article.  Any candidate that would make these types of proposals would go a long way to dealing with the deficit and the wall street free lunch issue.

 

Packer

 

[Guest Hester]

I bought into Australia as well. If you look at the companies in AU, you will find that the culture is not broken or as broken as US's. And that will make a very big difference. When the political parties using balancing the budget as a weapon to win a election, you know that there are people who are thinking straight. Of course, there are not countries without issues in this world. But I like my chance in AU. Stocks are generally cheap and paying very nice dividends. When not paying dividends because of manifesting of options became new normal on the wall street, companies in AU remind me of the sweet and old, NORMAL days.

 

I would honestly take the other side of that cheerfully. If there is one country in the world to short I think it's Australia. The Chinese construction bubble will eventually bust, and nobody will be effected more than Australia. The % of their economy that consists of exporting building materials to China is huge. This has imparted a boom on most other areas of the economy, currently the housing market is in a bubble for example, see Jeremy Grantham's views on the subject.

 

If that wasn't bad enough, banks and lenders are easing standards at a very fast rate. Westpac, for example, recently changed it's treatment of savings that it requires borrowers to have, making 12 months of continous rent payments equal to savings. We should know by now how inflated housing prices and low lending standards works out in the long run.

 

As for stocks being cheap, I disagree. Most stocks are expensive, and stocks are usually more expensive in Australia generally because there is a lot of investment capital in the country chasing few public companies. Some may appear cheap on the historically high and inflated margins they are getting from the commodities booms, but that will end, and the dividends will stop. Once China stops building empty cities Australia will crumble.

 

With that being said I agree with you on the politics, I really like Julia Gillard, but that doesn't make for good investing

[ubuy2wron]

I have always thought he was a an idiot a rich one mind you, this blog has changed my opinion, thanks.

[Myth465]

Great article.  Any candidate that would make these types of proposals would go a long way to dealing with the deficit and the wall street free lunch issue.

 

Packer

 

[Baoxiaodao]

I bought into Australia as well. If you look at the companies in AU, you will find that the culture is not broken or as broken as US's. And that will make a very big difference. When the political parties using balancing the budget as a weapon to win a election, you know that there are people who are thinking straight. Of course, there are not countries without issues in this world. But I like my chance in AU. Stocks are generally cheap and paying very nice dividends. When not paying dividends because of manifesting of options became new normal on the wall street, companies in AU remind me of the sweet and old, NORMAL days.

 

I would honestly take the other side of that cheerfully. If there is one country in the world to short I think it's Australia. The Chinese construction bubble will eventually bust, and nobody will be effected more than Australia. The % of their economy that consists of exporting building materials to China is huge. This has imparted a boom on most other areas of the economy, currently the housing market is in a bubble for example, see Jeremy Grantham's views on the subject.

 

If that wasn't bad enough, banks and lenders are easing standards at a very fast rate. Westpac, for example, recently changed it's treatment of savings that it requires borrowers to have, making 12 months of continous rent payments equal to savings. We should know by now how inflated housing prices and low lending standards works out in the long run.

 

As for stocks being cheap, I disagree. Most stocks are expensive, and stocks are usually more expensive in Australia generally because there is a lot of investment capital in the country chasing few public companies. Some may appear cheap on the historically high and inflated margins they are getting from the commodities booms, but that will end, and the dividends will stop. Once China stops building empty cities Australia will crumble.

 

With that being said I agree with you on the politics, I really like Julia Gillard, but that doesn't make for good investing

 

Hester, it is hard to argue that AU has many problems, and which country doesn't. I totally agree with you. Sometimes I just want to look at things from a different perspective, especially when I have a first-hand experience on the small and micro caps there. We will see how this develops.

 

As to valuation, I think AU stocks are cheap, especially when most companies are paying a decent dividend. I will just give one example here. Have you looked at a company in AU called 1300 Smiles(ONT.ax)? You should check it out. What I wrote last year:

 

“As I said, I have researched many companies worldwide and I know ONT is a special one after reading the AR for 5 mins. Here are a few facts that you guys would want to know.

 

 

 

Use google map to look at the HQ. And you would not believe your eyes. It is located in the old 2-story building and the ground floor was leased out. Last year ONT earned 4.3 million on 22 million revenue, you must be wondering how come the margin is so high.

 

 

 

The pay for all directors and executives are the lowest I have seen after reading 200+ annual reports in Austrilia companies. With 6 years of profit growth, last year top management and directors as a whole were paid less than 300,000. That is less than 50K per person!! Can you guys pinpoint any company with simliar profitability paying so little to its MD and majority owner?

 

 

 

1300 has also 0 stock options while unprofitable companies giving millions of options to insiders. How many percent of companies listing in Australia do not issues options?

 

 

 

When I look at companies, I look at what management does instead of what they say. If MD wants to pump the share price by misinforming investors, why he never sold a single share? Why would he not have a better office? Why would he just issue a lot of options to himself, since any option plan will be passed for sure. Why would he pay a lot more to himself? And why on the earth MD is still spending half a day treating patients after becoming a mulit-millionaire?”

 

 

A note, ONT went public in 2004, increased dividend almost every year, and the stock price went from 0.8 to 3.3 today. It is paying 15c dividend on a run rate basis. And it will probably earn 27 cents this year. You may argue this is not cheap. Well, for an investor with a reasonable expectation on risk-adjusted return, I do not know if you can find a better one for me.

 

I do not own this one because at this price, because it still does not meet my hurdles.

[Guest Hester]

Baoxiaodao,

 

I have no doubt you can find a few, definitely a few microcaps, in Australia or anywhere that are cheap. But they are the exception. Many companies are paying good dividends because their profit margins are at all time highs. A security's value lies completely in the future, and I doubt that Australia can keep this level of resource exports, housing prices, and consumer spending for very long.

 

If you are invested in many Australian stocks, I urge you to look at Jim Chanos's arguments on Chinese real estate, you can find many good interviews and speeches on Youtube. If the situation plays out even a fraction of how he thinks it will, it will have big consequences for the Australian economy, and stocks. Australia has been minting money shipping building materials and iron ore and coal to China. If that stops the whole economy will contract hard in my opinion.

[Baoxiaodao]

Baoxiaodao,

 

I have no doubt you can find a few, definitely a few microcaps, in Australia or anywhere that are cheap. But they are the exception. Many companies are paying good dividends because their profit margins are at all time highs. A security's value lies completely in the future, and I doubt that Australia can keep this level of resource exports, housing prices, and consumer spending for very long.

 

If you are invested in many Australian stocks, I urge you to look at Jim Chanos's arguments on Chinese real estate, you can find many good interviews and speeches on Youtube. If the situation plays out even a fraction of how he thinks it will, it will have big consequences for the Australian economy, and stocks. Australia has been minting money shipping building materials and iron ore and coal to China. If that stops the whole economy will contract hard in my opinion.

 

Hester, I wonder how you arrive to your conclusions here. Do you have data to support your arguments here? I just want to hear different opinions, no offense. And I was wondering why you claim I can only find a few stocks. Did you do the same work like me reading through annual reports of every company?

 

Jim Chanos is a great investor. I have seen his presentation a while ago and agreed with everything he said. However, he missed something inherent in the Chinese culture and other elements. I have posted my thoughts on China here. Hopefully it can give you a different perspective looking at China.

[Guest Hester]

Hester, I wonder how you arrive to your conclusions here. Do you have data to support your arguments here? I just want to hear different opinions, no offense. And I was wondering why you claim I can only find a few stocks. Did you do the same work like me reading through annual reports of every company?

 

Jim Chanos is a great investor. I have seen his presentation a while ago and agreed with everything he said. However, he missed something inherent in the Chinese culture and other elements. I have posted my thoughts on China here. Hopefully it can give you a different perspective looking at China.

 

I don't really have a market valuation or Shiller p/e type data on Australian stocks, my experience is like yours, I've looked at plenty of Australian stocks, and thought they were expensive generally when one adjusted for the cyclical fluff in many company's earnings. The fact that your best example of a cheap Australian stock is a dentistry company at 12 times earnings, proves my point. In the US there are world class multinational companyies trading at or near that valuation, from retail (WMT, TGT) to tech (AAPL, HPQ, DELL, CISCO) to healthcare related (JNJ, Medtronic, etc...)

 

I read some of your minibook on "Chinese Culture" and honestly couldn't find anything that refuted or even contradicted Chanos's arguments. He's not saying that the Chinese economy is going to blow up, just that the housing and construction industries will. I have no doubt there are many virtues in Chinese culture (as there are many evils), but this is a non-sequitor and doesn't change the fact that there are empty cities being built, or that there is a 5 foot by 5 foot office space for every man woman and child in the country currently. The problem for Australia is that even if this amount of space is adequate for the Chinese population, building will surely slow and probably eventually halt. There doesn't neeed to be a China housing bust or even recession, just a slowing of building and industries that import commodities. Yet, many stocks are being valued off of record high earnings from this record China building. This is a money spiget that the entire economy depends on and it will adjust the earnings and dividends of the companies you are buying to lower levels.

 

Anyways those are my thoughts and we can probably leave them there.

[Baoxiaodao]

Hester, I wonder how you arrive to your conclusions here. Do you have data to support your arguments here? I just want to hear different opinions, no offense. And I was wondering why you claim I can only find a few stocks. Did you do the same work like me reading through annual reports of every company?

 

Jim Chanos is a great investor. I have seen his presentation a while ago and agreed with everything he said. However, he missed something inherent in the Chinese culture and other elements. I have posted my thoughts on China here. Hopefully it can give you a different perspective looking at China.

 

I don't really have a market valuation or Shiller p/e type data on Australian stocks, my experience is like yours, I've looked at plenty of Australian stocks, and thought they were expensive generally when one adjusted for the cyclical fluff in many company's earnings. The fact that your best example of a cheap Australian stock is a dentistry company at 12 times earnings, proves my point. In the US there are world class multinational companyies trading at or near that valuation, from retail (WMT, TGT) to tech (AAPL, HPQ, DELL, CISCO) to healthcare related (JNJ, Medtronic, etc...)

 

I read some of your minibook on "Chinese Culture" and honestly couldn't find anything that refuted or even contradicted Chanos's arguments. He's not saying that the Chinese economy is going to blow up, just that the housing and construction industries will. I have no doubt there are many virtues in Chinese culture (as there are many evils), but this is a non-sequitor and doesn't change the fact that there are empty cities being built, or that there is a 5 foot by 5 foot office space for every man woman and child in the country currently. The problem for Australia is that even if this amount of space is adequate for the Chinese population, building will surely slow and probably eventually halt. There doesn't neeed to be a China housing bust or even recession, just a slowing of building and industries that import commodities. Yet, many stocks are being valued off of record high earnings from this record China building. This is a money spiget that the entire economy depends on and it will adjust the earnings and dividends of the companies you are buying to lower levels.

 

Anyways those are my thoughts and we can probably leave them there.

 

Hester, I welcome arguments. As long as we make them with merits. There is one thing I forgot to mention. I do not look at companies with a market cap over 500 million and businesses I cannot possibly understand, for example, mining. That is probably why our conclusions are sharply different in the first place. Maybe my phrasing should be Australia small stocks are cheap. However, you are comparing oranges to apples when you compare small caps VS mega caps. They have totally different growth profiles.

 

As to my little collection of thoughts, I have to say I never claimed to be an expert on China issues. I am a Chinese, and I happened to be a value investor. So I looked at China through a pair of glasses colored with "value investor". I did not mean to argue with anyone else neither. It simply serves the purpose to tell people there are other things to consider about China.

 

 

[Guest Hester]

Perhaps we are comparing apples to oranges. As you probably know resource/mining are huge industry in Australia, so not looking at them will give a warped view of the entire stock market. But if you can fill a portfolio with 10 or 20 of the types of stocks like the example you gave, at 12 times earnings or whatever, provided the earnings are not at a cyclical high, you will do fine over the long run. With that being said your original point was more broad, and you were saying to buy Australia, so you can see how I would disagree with that and not finding 10 cheap microcaps, which I think can probably be done in most countries.