As the above quote indicates, remaining cool while the rest of society trembles in trepidation is not only admirable, it has the potential for being lucrative. You saw a real life example of this quote in the investment world at the start of the week, it seemed the overwhelming sentiment was we would be in for a rough time because the universe had to make room for the new star on the block, Alibaba (NYSE:BABA). It had its IPO Friday. Others were nervous about what the Federal Reserve Board would do and Janet Yellen would say at her press conference after the announcement. Yellen proved remarkably consistent as the overriding theme still remains employment levels are the far bigger concern, rather than inflation. With no change in language regarding the time frame between finishing quantitative easing and potentially raising interest rates (maintained at considerable- or forever, whichever you find more appropriate), any thought of a non investor friendly Fed should go right out the window for the foreseeable future.
The phew of relief proved noticeable as the market proceeded to have a big day on Thursday, followed by a nice pop at the opening on Friday. Gee, could it have been the circus was in town? Nope, but the show that is Alibaba proved plenty entertaining, and profitable too. You see, the chosen few who received allocations to the IPO were treated to a 38% lift in the shares. They priced at $68 and closed at $93.89, for those of you interested in the specifics. BABA is now worth nearly $250 billion, and is one of the largest companies in the world by market value, earned or not. Interestingly enough, Yahoo ran up some before the IPO, but finished down a buck at the close. Having previously mentioned the Yahoo!'s (NASDAQ:YHOO), you might find Barron's comments regarding its potential strategy, shall we say, familiar.
Across the pond, the Scots decided they liked their fellow Brits after all and to not leave the United Kingdom, at least for now. Apparently, all across Europe the mood to divorce your parents is catching on. Catalonia wants to have a vote on detaching from Spain. There are also noticeable rumblings that Flanders may be intent on separating from the Netherlands as well. It seems the nanny state is not working so nicely, or not nicely enough, depending on your perspective.
In specific company news, Adobe Systems Incorporated (NASDAQ:ADBE) and Oracle Corporation (NYSE:ORCL) reported results which were below expectations. Larry Ellison decided he needed a break, so he stepped down as CEO, although he will continue as head dictator in the universe. In all seriousness, Mr. Ellison has built a powerful company and made plenty of shareholders very happy for a number of decades, let alone years. Cracker Barrel (NASDAQ:CBRL) posted a surprising number but guided soft for the rest of the year. The blow up of the week was Rite Aid's (NYSE:RAD) major miss, which also predicted substandard results for a while. Retail remains a very volatile area in any number of ways, which is also why there is opportunity. Good luck on that one.
Elsewhere in the business world, the NFL remains in the headlines with the repeated character issues of its players (if that is what you want to call them- other words might be more applicable). Certainly helping to cause this situation are the massive contracts the NFL has across the media spectrum. In sum, the league splits nearly $7 billion a year amongst them various teams, over $200 million per team each year. As an observer, do you really think owners care about the price of hot dogs for fans? Really. I don't think so either.
The issue is part of a problem which exists in almost every part of society, and that is compensating groups in amounts which are inconsistent with incentives, or well in excess of their production. In the corporate world, the typically management team is paid salaries, bonuses, stock options, and restricted stock units. Often times, the potential total compensation sums are staggering to the average working person. Much of it is based on operational performance of the business, and then, to a lesser extent, on how the stock fares. In the best managed companies, operations based pay takes the greatest percentage of the total amount awarded. There are a variety of metrics which are used to analyze operations, and a broad criteria is usually best. One such standard is Earnings Per Share (EPS), and it is used frequently in the investment world to help determine price to earnings ratios. EPS can be manipulated by creative management teams using a variety of accounting techniques which are considered, at best, low quality. At worst, they are illegal. These are typically related to some kind of compensation award, which again goes back to incentives. Charlie Munger has long spoken about the importance of incentives and now you know one reason why.
Next week, we are back at it and I suspect you will see some window dressing as those that have won during the quarter get bid up. Those which have not, which are typically the majority, remain unloved or disposed of. One way or another, I am sure you will be paying attention and you know I will. Thank you for reading the blog this week.
Disclosure: Y H & C Investments, Yale Bock, and the family of Yale Bock own positions in securities mentioned in the blog post. Investing in stocks can lead to the complete loss of your capital. As always, on any company mentioned here, past performance is not a guarantee of future returns. Investing involves risk of losses on invested capital. One should research any investment and make sure it is suitable with your objectives, risk tolerance, risk profile liquidity considerations, tax situation, and anything else pertinent to your financial situation. Also, the CFA credential in no way implies investment returns will be superior for any charter holder.