If ever there was a week in the equity markets which was emblematic of Ben's Graham's famous remark about Mr. Market, the past week was it. The first two days saw waves of selling as the continuing plunge of the price of oil and Russia's central bank surprise rate hike of 6% (to nearly 17%) brought all kinds of fear from every place imaginable. On Wednesday, the Fed's policy statement and Janet Yellen's press conference where she essentially said 'We'll See' about interest rate hikes gave lift off to equities, which have subsequently rallied nearly 800 points during the last three days. Yellen pretty much said the middle of 2015 is the earliest the governing body would think about raising interest rates, and it would be totally dependent on economic data centering around inflation, employment, and growth. This really should not be a surprise and the current Federal Reserve Board's long stated policy has been easy does it, but certainly, for a market scared about the ramifications of the commodity downdraft, it definitely calmed a few frayed nerves as the year ends. Let's not even mention how it helped people's portfolio values, why would anyone be concerned about that (yeah, right)?
Over the last few weeks, an interesting situation occurred with a holding of ours which has agreed to be bought out. Last Monday, we woke up and discovered the company granted a ten day extension with its largest customer, which currently makes up about 33% of the revenues. Well, investors immediately believed the company had lost this customer, and naturally, the stock got sold off very hard to the price where it was at before it agreed to be bought.
In a merger agreement, there is typically a 'material adverse' clause which allows the buyer to cancel the purchase if there is some kind of event which would materially harm the business of the entity which is being acquired. In this case, the loss of 30% of a company's revenues would have to be considered material. In any event, the existing customer had been doing business with this holding for over ten years, so chances were good this was just a delay. In fact, the same thing happened a few years ago and the large customer remained with our holding. Sooooo, we woke up Wednesday morning to find out the customer remained satisfied and signed the extension, and yup, the stock price recovered nicely (yay good guys). Anyway, the point of this anecdote is to show readers we are still in a rip your face off first and ask questions later mentality, where all news is considered bad until proven otherwise. Makes for an interesting investing environment, but you have to be very careful and think circumstances out very carefully.
Elsewhere in the market, Veriphone reported a nice quarter on Monday and the stock bounced pretty well. Nike Inc (NYSE:NKE) also beat its numbers on Thursday but investors were not crazy about the guidance for 2015. Oil rallied back a bit after the first two days of the week, but the large integrated oil companies have really had a strong rally after the last few weeks drubbings.
Bill Ackman released his latest video and thinking on his Herbalife LTD (NYSE:HLF) short. The lesson for investors to think about is last year, Mr. Ackman had sub par performance because of his problems with Herbalife and the J.C. Penny's situation. In 2014, he has returned well over 30% for the year with his success in Allergan and the Herbalife short, among others. The point is no matter how great an investor is, and Ackman has a fabulous track record for well over a decade, there are years when you will have so so performance.
The whole mess with the hacking of Sony (NYSE:SNE) and pulling of the movie, 'The Interview,' again reminds us the importance of the security industry, especially related to software, mobile devices, or retail. Every time the market sells off, this particular segment of the market will probably continue to see great interest.
Finally, it was interesting to listen to the President's comments about Keystone yesterday and how he believed the only country which would benefit from the pipeline would be Canada. When you consider the real potential the country currently has to work with our North American neighbors of Canada and Mexico to secure our energy future for decades, the lack of a long term perspective regarding this issue is negligent, almost bordering on criminal. It is just par for the course as it has been this way for a very long time. Ho Ho Ho!!!!
Disclaimer: 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.