Money Masters Moves to Janjig.com

For those who have not received the message, Vahan Janjigian has moved the Money Masters blog to a new location: janjig.com. To make certain that you continue to receive Vahan's alerts, please be sure to put info@janjig.com and vahan@janjig.com into your contact list. Thank you.

Fooling You With Headlines

Beware of headlines. They are written to grab your attention, not to tell the truth. A few years ago I came across this one: "Holiday Sales Lowest in 30 Years." I found this impossible to believe. Were Americans really spending less money on presents than they did in the 1970s? Turns out the answer was no. It was only the growth in holiday sales that was the lowest in 30 years. Telling the truth, however, would not grab a lot of readers.

Today I came across another one of these lying headlines: "U.S. Minimum Wage is Low by Global Standards." Really? That sounds like a bit of a stretch. After all, we have all heard about exploited workers in China, the most populous nation in the world. And what about all those people in India and Africa who get by on very little? Is it really possible that the minimum wage in the U.S. is low by global standards?

Of course not. It turns out that the U.S. minimum wage is low only by the standards of the member countries of the Organization of Economic Cooperation and Development (OECD). It's no surprise that China is not a member of the OECD. Neither is India nor any of the countries in Africa. The OECD is basically a group of the world's richest nations.

I'm not suggesting that the U.S. should be proud that its minimum wage falls only in the 38th percentile of this list of relatively wealthy nations, but that's a far cry from what the headline claims. But then again, telling the truth in a headline--"U.S. Minimum Wage is High by Global Standards" or even "U.S. Minimum Wage Not So Hot by Rich-Nation Standards"--probably wouldn't generate much interest.

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Unusual Heinz Acquisition May Have Reaped $2 Million in Illegal Profits

Warren Buffett is in the news again; this time with plans to acquire H.J. Heinz Company, maker of Heinz ketchup as well as a number of other well-known food products. This acquisition, however, is unlike many of Buffett's past purchases. This time Buffett's Berkshire Hathaway is not going it alone. In acquiring Heinz, Berkshire is teaming up with 3G Capital. Berkshire and 3G will each put in $4 billion in cash. Berkshire will put in another $8 billion for 9% preferred stock. The remainder of the deal will be finance with debt, bringing the total value (including Heinz's existing debt) to $28 billion.

The preferred stock portion of the deal is typical Berkshire. The company often uses this security to give it a generous and stable return. However, the fact that Berkshire is not going it alone suggests that Buffett was more interested in establishing a relationship with 3G than he was in acquiring the target itself. Buffett was even quoted as saying that "Heinz will be 3G's baby," implying that Berkshire will take a hands-off approach to managing Heinz.

While Heinz has great brand names and the kind of "mote" Buffett loves, the company's balance sheet is not as healthy as one might expect. For example, it has $5 billion of debt. It also has $4.6 billion of goodwill and other intangible assets and only $2.9 billion of total equity. In other words, tangible book value is negative. Frankly, it is difficult to argue that Berkshire and 3G are getting a bargain. In fact, Heinz shareholders, who must vote to approve the deal, should be thanking their lucky stars that this offer came through.

Apparently, Heinz, Berkshire, and 3G all took great pains to keep the deal secret. They used a code word for Heinz and their executives refrained from meeting with one another in Pittsburgh where Heinz's headquarters are located. However, that did not prevent word from leaking out. The SEC noticed a surge in the purchase of out-of-the money call options on Heinz shortly before the deal was announced. The trade, which appears to have been executed out of Switzerland, reaped a profit of close to $2 million. The SEC has sued to freeze that Zurich account, which appears to belong to a client of Goldman Sachs. When all is said and done, the insider trading angle of the Heinz acquisition may be more interesting than the acquisition itself.

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Money is Flowing Into Stock ETFs But Not Into Stocks

I had an opportunity yesterday to speak with Lauren Simonetti at Fox Business. Unfortunately, the link to the video is not yet available, but one of the things we discussed was the current rally in the market and if this is a good time to get into stocks. I pointed out that individual investors typically have a bad record when it comes to market timing. They tend to pour money into stocks after the market has already rallied and they tend to wait until the market plunges before pulling their money out.

Here's a graph published by the Investment Company Institute (ICI) that depicts this behavior nicely for mutual funds. For example, investors kept pouring money into equity mutual funds from 2000 to 2002 as stocks were falling, but they started pulling money out after the bottom was reached. They put money back in from 2003 to 2007, but much of the money came back after much of the rally was already over. The financial crisis of 2008 caused stocks to plunge, but investors kept pulling money out even after the bottom was reached. The 2008 sell-off was so scary that investors stayed out of stocks even as markets rallied in 2009. Even though stocks went higher, the extreme level of volatility continued through the end of 2011, causing investors to keep pulling even more of their money out. Things settled down quite a bit in 2012 and the market rallied by double digits. The lower volatility and the double-digit gain seem to have enticed investors back into the market.

Money is now flowing into equities at a record pace. This activity will probably push stocks higher, but probably only for the short run. If the past is any guide, investors are probably late to the party and most of the rally is likely over.

There are a couple of things, however, that are different this time around. In the past, investors liked to buy individual stocks. They are not doing that as much this time. Instead, they are going into funds, especially exchange traded funds (ETFs). What's more, they are avoiding the actively managed funds in favor of those that are passively managed. It appears that they have doubts about the value of active management. All they want is equity exposure, which they can get at low management fees using ETFs that track indexes.

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Tonight's Talk to AAII New York City Chapter

I will be addressing the New York City chapter of the American Association of Individual Investors (AAII) this evening at 6:15 pm. If you are in the City and have nothing better to do, stop by. Be aware, however, that AAII charges $30 at the door. The event takes place at the Community Center of St. John Baptiste Church, 184 E. 76th Street. Click here for more information.

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The Poor Can Gets Kicked Again

Here we go again. It really is quite amazing how many times our government can kick a can. The markets rallied today after word leaked out that President Obama was going to suggest that Congress agree on a small package of spending cuts and tax increases in order to delay the automatic spending cuts that will go into effect with the sequester. When he came out to speak, the president said he still prefers a grand bargain, but if one cannot be reached very soon, a smaller agreement should be reached that would buy time by delaying the sequester for a few more months. In other words, let's kick the can down the road.....again.

This is largely why investors have grown so bullish on stocks. They have learned that our politicians are incapable of making hard decisions; but they are very good at buying more time. And each time they delay an important decision, investors push stocks higher. I'm really getting worried that this is setting us up for a hard fall. I thought this would be a particularly good time to rerun the above cartoon I asked my friend Mark Stivers to draw back in 2009.

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