Archive for March, 2013

As at 22nd March 2013

Posted in Uncategorized on 25, March 2013 by nathanbusch


I hope that this helps.

Nathan A. Busch


John Bell, 19th March 2013

Posted in Internet Frauds and SCAMS on 22, March 2013 by nathanbusch

At 0607h, 19th March 2013, I received the following e-mail purportedly sent by our mysterious “John Bell”


Apple Computer (Nasdaq:AAPL)

The once darling of Wall Street, Apple has fallen back to earth. Ticking off a high of near $700 just 6 short months ago, the stock came all the way down to under $425!

That’s a 40% correction folks.

Of course as I was penning this Alert, Apple put on a little rally. Regardless, it is still trading at a PE of 10.

The company has a cash and investment hoard exceeding $137 billion, and will add $42 billion in earnings to that in 2013!

Apple and Exxon flip flop one another for the title of most valuable company on earth!

That cash hoard is important to my trade thesis. According to Howard Ward, chief investment officer at Gamco Investors Inc., the company will outline what it plans to do with that HUGE pile of cash by next month.

He also said that, “We’re going to get an announcement from the company as to how they intend to reallocate some of their cash. They will put a floor under their stock at a higher price than it is today.”

That’s a highly likely outcome in our opinion.

So, why the decline? First, everyone and their mother was long the stock. There were literally no more buyers.

Add to that the negative press lately, mostly centered around Samsung and its competitive smart phone line. We think rumors of Apple’s demise are grossly exaggerated. Apple is an innovator, and to count them out is likely a mistake.

On top of the pending decision on the cash hoard, rumors abound that a new, lower-priced iPhone is in the works, with a complete redesign of the casing using composite materials.

Meanwhile, Apple laptops and desktops continue to sell strongly, and they are just FAR superior products to the competition. No matter where I am in the world, the Apple store is ALWAYS packed…always.

Technically speaking we see chart support at the $425 area, which has already been touched. Apple rallied $11 on Friday as I was penning this alert, which was further confirmation that we may get the bounce I’m anticipating to the $500 area, where a nice gap exists in the chart.

Gaps always get filled, it’s just a matter of when.

Also, we have some nice divergences in key technical indicators. See the chart below. MACD was making higher lows, while the stock was making 52 week lows. This is non-confirmation and a sign that we could be entering a trend change, which in this case would indicate a move back up. Friday’s bounce may be the kickoff to that trend change.

How to Play it

Traders could simply purchase Apple stock around $450. After Fridays small pop you may wish to wait a couple days and see if we get a slight pullback for a bit of a better entry, anticipating a move to $500 in the next couple of months. That’s a gain of roughly 11%, not too shabby.

OR, for more risk-tolerant traders you could look at the May 2013 $475 calls. On Friday those calls closed at $11.05. A move to $500 by expiration on May 17th will put these calls at $25, which would be an increase of approximately 125%, over 10 times the potential gain in the stock.

If the move to $500 happens quickly, volatility will create an even greater premium on these options.

As I’ve said before, options are risky – you have to get not only the direction correct, but also the timing. Buying the stock is a safer move, but at a price hovering around $450 per share, even 10 shares will set you back $4500.

A gain of 11% on that, after commissions will net you roughly $500. Buying 1 option contract will cost you less than one quarter the cost of 10 shares of stock, yet stands to net you close to 3x the return if we’re right. It’s your choice.

If you don’t understand options, or if you can’t watch a screen all day to be able to catch the quick moves you should just trade the common stock!


To summarize… We anticipate that Apple could trade up to $500 per share sometime between now and mid-May. There is a gap in the chart at $500, which is why we set our initial target at that price.

The stock could go higher, and depending on how it looks if/when we hit our initial target, I will update and reevaluate.

Good luck!

John Bell


As a preliminary matter, I am starting to have very serious concerns about our mysterious “John Bell”, if the above quoted e-mail was actually sent by him. Historically, “John Bell” has sent his e-mails out in the 0400 hour range; this was sent at 0600h. Also, typically, he usually has hyperventilating e-mails leading up to the big announcement of his “magic stock pick”. In this case, we were met by a distinct lack of fanfare: the parade marches through town without the band and nobody notices.

Also, it is an anomaly for “John Bell” to be making pronouncements of such mainstream companies as AAPL. He could not possibly move the market sufficiently with his meager group of victims to actually make any money banging the drum for an S&P 100 company.

Further, “John Bell” has demonstrated very erratic methods of analysis for any of his “magic stock picks”. In December of 2010, he was touting the benefits and strengths of the “margin of error” method identified and described by Seth Klarman; then he went through a fundamentals phase including the work of Joel Greenblatt on the “magic formula investing”; then he careened between technical trading and momentum analysis. He has now returned to technical analysis in attempting to explain why AAPL will gain 10% in the next few months. Let me be perfectly clear: technical analysis is nothing more than pure gibberish that can be roughly translated as “how to lose a lot of money very quickly.” Technical analysis is based upon the hypothesis that the market exhibits long-term correlations in the price movements. A multitude of studies have been published, and it is quite simple for an individual to verify this, that demonstrate the markets are correlated only over very short time periods, on the order of 15 seconds or less. No rigorous studies exists that would suggest technical analysis is usable for anything other than making the stock brokers rich.

As I have stated before, perhaps our mysterious “John Bell” would be far better off, and the SEC would not be on his tail, if he turned his considerable talents to identifying a successful investment strategy and applied that strategy religiously over the next ten years or so.

I hope that this helps.

Nathan A. Busch

Mechanical Investing, Part I

Posted in Investing on 15, March 2013 by nathanbusch

From time to time on this web log, I have hinted at the possibility of using mechanical screens to build a profitable portfolio. Of course, the natural response is that one should have a deep understanding of both the company and the sector of the market in which that company exists to make appropriate and proper investment decisions. However, what if all the advice given by the investment advisors and financial planners is completely bogus. What if it is possible to screen the universe of public companies for certain attributes and simply buy the best of the companies passing that screen. What if it was possible to be successful doing so without even knowing what these companies do or sell. Let us take a pilgrimage for a while with the goal of finding a better way to invest.

Several mechanical techniques for identifying good companies depend upon the calculation of the Return on Invested Capital (hereinafter denoted as “ROIC”). The normal formulation of ROIC is as follows:



EBIT* is a modified Earnings Before Interest and Taxes, and

TIC is the Total tangible Invested Capital.

Of particular interest at this juncture is the total tangible invested capital. This quantity is occasionally defined to be:



NWC is the Net Working Capital, and

NFA is the Net Fixed Assets.

In The Little Book that Beats the Market, Joel Greenblatt used a floor function to obtain the Net Working Capital based upon the total current assets, the excess cash, and the amount of non-interest bearing payables. The problem is that Mr. Greenblatt was relatively opaque about how to obtain a value for the non-interest bearing payables and was an obscurantist with respect to the excess capital. To explore the derivation of the value of the net working capital, consider that Mr. Greenblatt used the following formulation:

NWC = MAX[0, TCA – EC – NIBP],


TCA is the Total Current Assets,

EC is the Excess Cash, and

NIBP is the Non-Interest Bearing Payables.

If your source for market information provides a value for the non-interest bearing payables for the 10,000 or so available companies in the market then you are in reasonably good shape: that is, if they provide the correct number. Mr. Greenblatt alludes to the possibility that the non-interest bearing payables could be obtained as the difference between the total current liabilities and the interest bearing payables. This may be written as:



TCL is the total current liabilities, and

IBP is the interest bearing payables.

It turns out that the interest bearing payables almost certainly show up on the EDGAR filings of the company and are designated as either the short-term debt or the current long-term debt due and owing. We define the interest bearing payables as the sum of the short-term debt and the long-term debt currently due and owing. It is common accounting practice to define the total current assets and the total current liabilities as follows:

TCA = (C + STInv) + (AR + Inv + OCA), and

TCL = (AP + STD + OCL),


C is the total amount of cash held by the company,

STInv is the amount of Short-Term Investments held by the company,

AR is the accounts receivable,

Inv is the inventory belonging to the company,

OCA is the “Other Current Assets” belonging to the company.


AP is the accounts payable,

STD is the short-term debt or current long-term debt due and owing,

OCL is the “Other Current Liabilities” of the company.

Fortunately, all of these last eight quantities are available in either the 10Q or 10K filed with the Securities and Exchange Commission and these quantities may, almost certainly, be available in the commerical market databases.

Now, we return to obtaining the value for the non-interest bearing payables. Following the aforementioned formulation, we may write that:



NIBP = (AP + OCL).

The import of this last step in the derivation is not to be overlooked. It is one of the two principle means by which a mechanical screen, which uses the ROIC, can differentiate between a management team that is being prudent and efficient with management of the cash flow of the company and a management team that needs some improvement in this area.

We now turn our attention to obtaining a formulation for the excess cash of the company. It has bee suggested that the excess cash should be the difference between the cash and cash equivalents and the working cash of the company. That is, the excess cash may be defined to be:

EC = (C + STInv) – WC,


WC is the working cash of the company.

The working cash of the company is not to be confused with the net working capital of the company. The working cash is defined to be the difference between the liabilities of the company, which relate to the general operation of the company, and the assets of the company. In other contexts, the working cash of the company may be used to describe how far the company is inside of the door of the bankruptcy court. This quantity has been defined as follows:

WC = MAX[0, (AP + OCL) – (AR + Inv + OCA)].

Of greater import, this quantity is positive only when the current liabilities, without the short-term debt, exceed the current assets. It is possible that companies may exist with a non-zero amount of working cash but still be quite viable companies as investment opportunities. At this time, we are in a position of expanding the formulation for the net working capital given above to obtain a working version for this quantity. Specifically, we may write that:

NWC = (C + STInv) + (AR + Inv + OCA) – [(C + STInv) – WC] – (AP + OCL),


NWC = (AR + Inv + OCA) – (AP + OCL) – WC.

This form for the net working capital is quite close to the form typically used in standard accounting practices. Two differences are immediately apparent. The above form does not include the short-term debt but does include the working cash.

To complete the derivation of the total tangible invested capital, we may write the net fixed asset value as follows:



TA is the Total Assets of the company,

TCA is the Total Current Assets of the company, and,

TIG is the total amount of intangible assets and goodwill declared by the company.

We may obtain the earnings yield, {1/E}, and the return on invested capital, ROIC, as follows:

{1/E} = EBIT* / EV,



Whilst deriving the form for the net working capital, we observed that the short-term debt was removed. Also, it is essential to recognize that the taxes due and payable for the most recent fiscal quarter for a compay must be excluded from the current liabilities. To observe the effect of these two quantities on the computed earnings yield and return on invested capital, we conducted a study in which these two quantities were either separately included or excluded from the net working capital or both were included or excluded. The results are given in the following table.

Table 1: The effect of either including the short-term debt and taxes payable in the formulation for the net working capital. The fundamental data used to compute the values contained in this table are for PWER as at 31st December 2010.
Quantity   no STD&Tax with STD with Tax with STD&Tax
{1/E}   28.55% 27.05% 28.55% 27.05%
{ROIC}   127.2% 168.8% 234.3% 429.9%

It is immediately obfious that including the taxes payable in the net working capital, most likely as a “other current liability”, has the effect of dramatically raising the value of the return on invested capital.

Let us consider two identical companies with somewhat different tax structures. Say Company A owes taxes as at the end of the fourth quarter of 2010 in the amount of 51.8695 and Company B owes 103.739. Also assume that both companies include the taxes payable as an “other current liability.” The values obtained are as follows:

Table 2: The earnings yield as a function of the taxes payable for two otherwise identical companies. Company A owes taxes in the amount of 51.8695 and Company B owes taxes in the amount of 103.739. Assume that both companies include the taxes payable as an “other current liability.” The fundamental data used to compute the values contained in this table are for PWER as at 31st December 2010.
Quantity   Company A Company B
{1/E}   28.55% 28.55%
{ROIC}   164.84% 234.31%

What we see is that by including the taxes payable in the category of “other current liabilities”, the company that is not tax efficient obtains a higher return on invested capital. Given that the mechanical screening techniques gives a one to the highest return invested capital, the best ranking, then, would go to the company that was least efficient with managing their taxes.

Let us now consider the same two companies in a scenario for which the savings on taxes by Company A was contributed to the cash holding of the company. Table 3 contains the corresponding earnings yield and return on invested capital.

Table 3: The earnings yield as a function of the taxes payable for two otherwise identical companies. Company A owes taxes in the amount of 51.8695 and Company B owes taxes in the amount of 103.739. Assume that both companies include the taxes payable as an “other current liability.” Further, assume that Company A is able to contribute 51.8695 to its cash holdings. The fundamental data used to compute the values contained in this table are for PWER as at 31st December 2010.
Quantity   Company A Company B
{1/E}   30.09% 28.55%
{ROIC}   164.84% 234.31%

The result is that the earnings yield of Company A is slightly improved, but perhaps not enough to offset the superior rank of Company B with respect to the return on invested capital.

Let us examine a scenario in which Company A invested the net tax savings in new capital assets to generate a proportionately higher income in the next fiscal quarter. We know that if neither the short-term debt nor the taxes payable are included as current liabilities when computing the net working capital, the return on invested capital is 127.15%. Thus, investment of taxes saved into new fixed assets should increase the revenue by an amount equal to 1.2715 times the amount of saved taxes. For purposes of this analysis, we ignore the taxes on the additional revenue. The results are given in Table 4.

Table 4: The earnings yield as a function of the taxes payable for two otherwise identical companies. Assume that Company A is increases its tangible working capital by 51.8695 for the next fiscal quarter. The fundamental data used to compute the values contained in this table are for PWER as at 31st December 2010.
Quantity   Company A Company B
PPE   115.195 63.325
Revenue   1904.779 1047.1
{1/E}   113.44% 28.55%
{ROIC}   411.23% 234.31%

In this simple analysis, it becomes clear that by managing the tax burden efficiently, Company A stands to see an earnings yield, all other things held the same, in the next quarter of 113.44% as compared with the earnings yield of Company B. Of greater import, Company A will be able to provide the investors with a return on invested capital in the next quarter of 411.23%, all other things held fixed, as compared with the 234.31% for Company B. By including the taxes payable in the other current liabilities, Company A obtains an inferior ranking in the mechanical screen as compared with Company B, even though Company A was more tax efficient and was able to realise a considerable increase in revenue in the ensuing quarter by investing the saved taxes.

To compare two otherwise identical companies, it is essential to exclude the current tax liability from the computations for the net working capital of the company. Since short-term debt would be handled in the same manner in computing the net working capital as was the current taxes payable, it is also essential to exclude the short-term debt. The logic behind this is as follows: consider two otherwise identical companies; Company A maintains a very low level of short-term debt, whilst Company B is not so prudent. Even though Company A carries a lower short-term debt, it will be ranked inferior to Company B if that short-term debt is included in the calculation of the net working capital. However, Company B will, most likely, suffer from two possible maladies: a portion of any revenue generated by the company will be used unproductively to pay interest and principle on the short-term debt; and, Company B is at a higher risk of defaulting on the debt and, therefore, drive shareholder value down.

When confronted with a choice between two otherwise identical companies, the prudent investor will drive down his risk of exposure to a default by choosing that company that properly manages its long- and short-term debt and operates in a tax efficient manner.

It is, therefore, possible to use a mechanical screen for efficient use of capital resources by management. Management that operates the company efficiently will seek tax efficient alternatives amongst various possible trajectories and will use only an optimum amount of short-term debt. By excluding both the short-term debt and the current taxes payable from the computation of the net working capital, the mechanical screen can separate the management of lesser quality from the superior management team.

I hope that this helps.

As at 8th March 2013

Posted in Investing on 12, March 2013 by nathanbusch


I hope that this helps.

Nathan A. Busch

This Just Might Work, Part I.

Posted in Investing on 8, March 2013 by nathanbusch

As part of a portfolio, it just might work to equally weight the companies found in Table 1. If this part of the portfolio fails, we will investigate to determine whether any signals were available on the date of purchase that might have allowed for a premonish as to potential failure. The same is also true for the success of this portfolio.

Table 1: The following companies were selected based upon data available as at 1st March 2012. A portfolio was started by equally weighting each of the companies in this list based upon the price as at 7th March 2013. Prices for each month thereafter are given as at the 7th of the month or the nearest trading day. This is a real-money portfolio.
Co.   Mar Apr May Jun Jul Aug Sep Oct
PDLI   6.95              
CPIX   4.52              
FLWS   4.71              
STRZA   4.77              
BA   79.08              
ACAT   41.02              
HFC   58.16              
DECK   48.70              
SPMD   4.21              
TTWO   15.43              
LECO   56.10              
CRUS   22.47              
LF   8.60              
CHRW   57.23              
BLC   9.27              
CVRR   29.84              
COH   49.93              
INTX   10.57              
CXS   13.34              
ITW   62.61              
CVI   61.01              
NVDA   12.79              
BAH   12.59              
MGLN   53.26              
VCI   28.33              
GTN   4.45              
PETS   13.56              
SAI   12.05              
Average   26.934              

However, I suspect that it might be better to weight according to the exponential of the relative beta values.

I hope that this helps.

Nathan A. Busch


Posted in Observations during Life on 1, March 2013 by nathanbusch


the lilac was carried on a warm june breeze

through the west window of the room beyond which was the water

now to her face

to the wooden floor of an old dining room she did fall

now to her stomach

now to her chest

now to her face

rolled did she trailing blood to avoid another

now to her back another blow fell

for an hour or more it went on

she is old now and perhaps she has forgotten

he remembers that it did not happen

I remember that yesterday the lilac was carried on the warm june breeze

Nathan A. Busch