Monthly Archives: June 2014

home builder stock update 2014

Are Home Builder Stocks Improving in 2014?

Love them or hate them, home builder stocks are an important part of both the economy, and the stock market.

And while we previously looked at the mysterious case of home builder stocks in 2014, the plot has thickened. So it’s time for an update…

Now here’s what you need to know:

Home builder stocks have under-performed the broader stock market since about 2007. And in particular, home builder stocks have vacillated back and forth for almost more than a year. But…

There are starting to be some signs that homebuilder stocks might be ripe for investing opportunity. Of course you’ll want to do your own due diligence. But some of these charts are starting to show signs of promise.

Notice how the major home building stocks (and indeed, the sector ETF) is starting to form a pattern of higher highs. The volume remains unconvincing, the housing recovery seems elusive (see this chart from Business Insider) and the economy looks anemic. But price is what pays.

So you’ll be wise to glance at these facts…

Home Building Stock Charts June 2014:

The following are the major home building stock charts. These are daily time frames showing the price action over the last year or so. You’ll notice that in the last couple weeks, all of the home building stocks have started to firm up. It’s hard to ignore this prominent example of top down trading.

June 2014 PHM Stock Chart:

PHM Homebuilder reversal

Has PulteGroup turned the corner? Or is this a temporary blip? Click to Enlarge.

June 2014 LEN Stock Chart:

LEN Homebuidlers reversal chart

Is LEN starting to trend higher? Or is this just a blip? (Click to Enlarge).

June 2014 TOL Stock Chart:

TOL Homebuilder correction

Can Toll Brothers turn around in 2014? Click to Enlarge.

June 2014 DHI Stock Chart:

DHI Homebuilders reversal chart

Will DHI continue to move higher in 2014? Click to Enlarge.

June 2014 XHB Stock Chart:

XHB Home builders reversal chart

The Home Builders Sector ETF (XHB) is looking strong going into the second half of 2014. Is this a new trend or another head fake? Click to Enlarge.

So could this be telegraphing an investing opportunity for homebuilder stocks in 2014? (Or is it time to short the rally?)

As you can see, homebuilding stocks are definitely at an interesting point. Whether you’re a housing bull or a big picture bear, you will want to know about this change of character in the price action of housing stocks so you can plan your next move.

And by The Way: If you’re not totally sure where to go from here, you may want to sign up for my free e-book, below. This will show you how to develop a hybrid technical and fundamental approach to improve your stock market decision making. You’ll also get updates each week sharing my favorite investing tips, tools and resources – all free! Why not give it a shot?

Fixing The Game Book Review

fixing the game book review

Read this book review to see if Fixing the Game is for you…

Fixing the Game, by Roger L. Martin, is a book about “Bubbles, Crashes and What Capitalism Can Learn from the NFL.”

And if you don’t know…

Roger Martin is a highly-respected business professor who has published a number of eye-opening and intriguing books about strategic thinking, business innovation and (finally) the stock market.

By the way:

While Fixing The Game is Roger Martin’s most recent book, I’ve read his other books and most of his newspaper opinion columns. So I hope I’m well-positioned to review Fixing the Game and share the findings with you.

Now…

In this book review you can expect to get an overview of Fixing the Game, including the best parts and where the book comes up short. Sound good?

Great. Then let’s see what Fixing the Game is all about…

Why Fixing The Game is Worth Reading:

Fixing the Game is an excellent book that looks at the very foundations of American Capitalism. By carefully looking at the assumptions and ideas our free market system is built on, Fixing the Game draws out some incredible insight that is of extreme use to investors of all shapes and stripes.

More specifically…

Fixing the Game takes a long hard look at the idea of expectations, shareholder value and how they translate to business results. The conclusions are telling.

Martin makes it abundantly clear in Fixing the Game, that the current system is far-too focused on short term results. Near-sighted executive actions are the result of short-dated option compensation. This often give executives enormous rewards for boosting short term value at the expense of long term sustainability.

But I know what you’re thinking…

Executive compensation isn’t a new argument. People have been complaining about this income inequality for years. But Fixing the Game takes the discussion a step further. Martin makes it clear that not only are executives acting in the short-term interest, they are also playing the analyst expectations game very carefully.

Martin gives countless compelling examples of how management often panders to the analyst community and will do increasingly desperate things to meet the ever-rising bar of expectations. And that’s the real kicker.

Individual investors should pay heed: You need to understand that companies are being judged in short term performance derbies. And as executives meet expectations they continually raise the expectations for next quarter until winning becomes impossible.

So basically…

Wall Street is always jockeying to get ahead of the next earnings report. And as a result stock prices can (and frequently do) disconnect from the underlying economics and operations of the business. If this is a dynamic you don’t understand you will have trouble investing effectively in the stock market.

Roger Martin’s overview of the current market structure and focus on near term earnings has huge ramifications for investors of all sizes. Plain and simple. But that’s not even the best part of Fixing the Game. So more on that in a second.

But first…

If you want to learn more about the specific arguments and ideas posited in Fixing the Game, you might enjoy reading this recent HBR Guest Post by Roger Martin.

Now, let’s move on to the best part of Fixing the Game.

The Best Part of Fixing the Game:

Fixing the Game is rendered even more useful because it takes complex ideas and makes them easy to understand. The best part of Fixing the Game is thus the sports analogies that Martin relies on extensively.

Martin compares the stock market, and the world of publicly traded companies, to the major professional North American sports league. The best analogies are drawn between corporate earnings reports and the NFL season.

Martin compares management earnings guidance to the coach of an NFL team saying “we expect to win our game next week by this many points.” … Doesn’t that sound crazy?

And to take it a step further, imagine if the NFL coach not only said that they expected to win next Sunday, but by how many points they expected to beat the gambling spread in Vegas (or Proline)! Can you imagine?

Well…

That’s basically what CEO’s are saying all the time on every quarterly conference call. When management gives guidance to shareholders they are in effect saying, we see the market expects X, we expect Y and will tell you the result on date Z. (Now get gambling!)

For more information, this Forbes article illustrates why Martin’s sports analogies are so effective. The point is…

When you start to see the dynamics that influence the behaviour of CEOs at large publicly-traded companies you can better anticipate how they’ll interact with the analyst and investor community. Knowing how the earnings game is played is very helpful context. And that’s to say nothing of the ethical implications Martin also touches upon.

But while I really liked Fixing the Game, there’s one part that felt a little bit empty.

What Comes After Fixing the Game?

Fixing the Game is an incredibly important book. It shares a set of ideas that create a compelling case for changing how we think about shareholder value. It re-examines the fundamental foundations of American Capitalism and asks some very interesting questions.

Unfortunately, just exactly how this change will come about is a little bit unclear. Martin covers a lot of ground in this approximately 200 page book. But it feels like the ideas need to spread a lot further and develop a little more before the system will improve. You see…

While Martin clearly wants to improve the way our markets work (and shows a few examples of companies that are doing a good job of it), the book almost ends up serving as a warning to readers – that this is the way it is.

Now to be sure, I’ve found a lot of value in adjusting my thinking this way. But the book left me a little melancholic, since there isn’t an easy way for these ideas to be implemented. I guess that’s a testament to how original the thinking is, right?

So with that in mind, let’s wrap up this book review of Fixing the Game.

Fixing the Game – The Final Word:

As you can probably tell from this book review, I really enjoyed reading Fixing the Game. Even though it was published a few years ago the ideas are still as important as ever (maybe more so). And to be sure…

Fixing the Game is not just an academic textbook. The ideas are applicable and can really help you better understand the investment landscape. For these reasons I encourage you to buy Fixing the Game on Amazon and learn for yourself!

If you still want a little more information though, you can also check out the video book review below to get more information on Fixing the Game, and whether it’s the best business book for you.

Fixing the Game Video Book Review:

The Partnership Book Review

the partnership book review

Read this book review to learn if The Partnership is for you…

The Partnership, by Charles D Ellis is the story of “The Making of Goldman Sachs.”

So if you’ve ever wondered what exactly Goldman Sachs (and investment banks in general) do for the world, you might really enjoy The Partnership. It’s an in-depth look like no other.

In this book review you can expect to learn what The Partnership is all about. I’ll also share the best parts of The Partnership… and, a word of warning on why you might actually want to pass on reading The Partnership. Either way, you’re going to want to read this book review before making a decision about The Partnership.

Why I Liked Reading The Partnership:

The Partnership caught my eye because it was on sale in the book store. I picked it up without thinking because it was 50% off. But I’m glad I gave The Partnership a chance.

The reason is:

The Partnership taught me a ton about Goldman Sachs, both as a firm and in the context of the investment banking industry. Understanding how these major players act, think and grow has been very helpful to my working knowledge of American Capitalism. And it’s definitely rounded out my investment decision-making process.

Beyond that:

The Partnership is an incredibly in-depth review of the history of Goldman Sachs. And by the time your’e done reading the book you have an exhaustive picture of how influential Goldman has been over the last 150 years, right from the founder to the current CEO.

And while there are some amazing biographical anecdotes in The Partnership, the book goes much farther than that. You see…

In addition to exploring the characteristics of the companies’ operations and the different managers and partners, The Partnership also revealed some neat facts I didn’t know about Goldman Sachs. To be honest, the Goldman Sachs described in the book is at stark odds with what you hear in the media today.

For example…

Goldman is old! They started out in 1869. And ever since then they’ve been slowly and methodically growing their market share, operations and business units.

Goldman was the white knight. They took an active role defending clients from hostile takeovers and merger bids. They were one of the only banks doing this. It really helped them build a clients-first reputation of trust.

Goldman was more teamwork focused than most of the other major investment banks. Bonuses were based on the success of the team more than just the individual. (I wonder if this is still the case today.)

Goldman was a private partnership for a long time. Going IPO was a big deal for them, but they had to do it in order to compete with the other investment services.

Now…

To be fair, The Partnership is not entirely pro-Goldman Sachs. But in the days of Vampire-Squid headlines, it is nice to get some historical perspective on how things got to be the way they were.

After all, Goldman wasn’t always a huge international operation with billions of dollars in annual income. But the growth story of they achieved this is pretty remarkable.

And while the rising power of Goldman Sachs makes for a powerful and engaging narrative, it wasn’t even my favorite part. Let me explain.

The Best Part of The Partnership:

While The Partnership provided a ton of historical facts, opinions and insight into the growth of Goldman Sachs, I think the most interesting part was the people. The major players in the history of Goldman Sachs have been incredibly successful individuals. And it’s eye opening to read about.

The Partnership did a wonderful job depicting life as a banker, and what it takes to be successful. Amazing how dedicated and professional these bankers were for most of the 20th century.

Almost everyone who has worked in the C-suite at Goldman Sachs has gone on to do amazing things. Hank Paulson is only the most recent example. So…

I really liked how much time The Partnership dedicated to giving a well-rounded overview of some of the most successful business men of the 20th century. At times I really felt like I was learning from some of the smartest minds out there, as The Partnership provides a step by step walk through of their decision making and strategic planning.

So notwithstanding the information on Goldman Sachs, The Partnership provides some valuable real-world business education for anyone interested in capital allocation and investment management.

But I should be clear. Even though I liked the book, I don’t think The Partnership is for everyone.

Why You Might Not Want to Read The Partnership:

While I really enjoyed The Partnership, if you aren’t that interested in investment banking, or corporate biographies in general, then you might get tired of this book. The truth is…

Since the book is so incredibly detailed, it’s also a little bit long. I think it comes in at just over 700 pages and the blocks of text are pretty dense. It took me a little while to get through this one, and while I enjoyed the book you should know it’s not a quick read.

In fact, The Partnership is sort of like a bunch of stories, biographies and anecdotes tied into one. Again, I liked this holistic view of Goldman Sachs. But if you’re more curious than serious I would recommend you pass on reading The Partnership. It’s just not for everyone.

So let’s wrap up this book review…

The Partnership Book Review – The Final Word:

The Partnership is an excellent book. The depth of research and care that went into writing it are apparent. And because of this dedicated effort by the author, the book is the best resource on Goldman Sachs I’ve ever seen. For anyone who is interested in working at Goldman, working with Goldman or just learning more about their culture I recommend you buy The Partnership on Amazon.

The Partnership is a thorough read. And when you’re done you’ll know more about GS than almost anyone else out there. But if you’re only passively interested this might not be the best book for you. Try Alpha Masters of Market Wizards instead. For a little more information I encourage you to read the book review below.

The Partnership Video Book Review:

The Big Short Book Review

the big short book review

Read this book review to see if The Big Short is for you…

The Big Short, by Michael Lewis, is a look “Inside the Doomsday Machine.”

So if you ever wondered why the global economy melted down in 2008, The Big Short is exactly the book you’ve been looking for. And as you probably know…

Michael Lewis is an incredibly talented financial journalist and author. So his recount of how the financial crisis of 2008 unfolded is absolutely fascinating. He has an impressive knack for turning complex stories into compelling narratives. And The Big Short is no different.

So in this book review, I’ll share a summary of The Big Short, including both my favorite parts, and where the book came up short. Sound good?

Let’s get into it then…

Why The Big Short is a Great Read:

The Big Short is an entertaining, illuminating and educational look at the activities of Wall Street leading up to the financial crisis of 2008. And since almost everyone you know has been influenced in some way by this most contemporary stock market crash, The Big Short makes for really interesting reading.

More specifically…

The Big Short starts by giving some background information and explaining how credit default swaps (CDS) came to be created. While innocent enough at first, these CDS derivative products were quickly abused by investors, bankers and deal-makers all over the globe.

The book makes a strong case for how these products of financial engineering were in large part responsible for the mortgage crisis of 2007-2010. From there…

The Big Short goes on to look at some of the key players who predicted the mortgage crisis. Now-famous names like Meredith Whitney were on the fringes of the financial community. And The Big Short does an amazing job illustrating the challenge of butting heads with the status quo.

Along the same lines:

The Big Short does a fantastic job highlighting the international complacency that marked the credit-frothed years of the early 2000s. Going against the grain wasn’t easy when so many people were making so much money with it. And The Big Short does an exemplary job showing how otherwise responsible investors were willing to do away with due diligence and blindly trust the rating agencies.

The Big Short has a lot of set-up, and when the crisis hits things unwind quickly. Along the way The Big Short shows a couple speculator blow-ups, including some of the biggest trading losses in history. It’s hard not to smile as these aggressive traders get their comeuppance.

So now that you have a basic idea of what The Big Short covers, let me share the best part with you…

My Favorite Part of the Big Short:

The Big Short really does a phenomenal job recounting the entirety of the 2008 financial crisis. But one of the things it really does best is help illustrate the true complexity of mortgage-backed-securities and the surrounding derivatives.

The Big Short makes it clear…

Most people didn’t really have an iota of an idea of what they were buying, when they were investing in all of these mortgage-backed securities. The folk-lore, common-sense time-tested wisdom that “houses are sources of equity that will never go down” got pushed to the brink using insane math that was beyond the understanding of most investors and ratings agencies (before snapping back hard).

It’s hard to believe.

But it happened!

And The Big Short makes a compelling case for what occurs when investors get in over their head and start buying stuff they don’t truly understand. It also reminds us that arguments based on “this time is different” don’t usually work.

It’s these “take home” lessons that really contributed to my enjoyment while reading The Big Short. But I should warn you…

One Word of Warning About The Big Short:

The Big Short does a good job breaking down the derivatives market, as well as the process of securitization. Michael Lewis is as capable as anyone in terms of making this exotic and arcane stuff understandable.

But I should probably mention…

Even with the expert guidance of Lewis, The Big Short is still a little bit confusing at times. And if you don’t have any prior experience with financial terminology it might be a little bit much to bite off. While I found the book relatively straightforward I had a few friends who were somewhat overwhelmed with all of the acronyms, terms and lingo.

So while Lewis does as good a job as anyone at helping you see the truth, it’s still a lot to handle if you don’t have any kind of financial vocabulary. Make sense?

Now let’s wrap up this Big Short book review…

The Big Short – The Final Word:

The Big Short is probably the best retelling of the 2008 financial crisis, and what caused our markets to go bust. For that reason alone,  I think it’s worth buying The Big Short on Amazon.

And beyond the history lesson, The Big Short does an effective job helping readers take away key points from this stock market crash to help you protect yourself in the future.

If you’re still looking for more information on The Big Short, I encourage you to watch the video book review below…

The Big Short Video Book Review: