Oil's Effect on Ford

Crude oil prices have nearly been cut in half over the past few months, and while U.S. consumers are happy to spend less at the pump, the precipitous fall could cause Ford (F) problems.

One of the original reasons I decided on an unlevered investment in Ford is the degree to which the company is exposed to both operational and financial leverage. Leverage on top of leverage on top of leverage is not generally a good recipe for long-term success in the markets, though short-term gains from this kind of layering can be breathtaking.

[For those of you who need a review of operational, financial, and option-based investment leverage, my (biased) view is that The Intelligent Option Investor, through its chapter on investment leverage and its appendix on operational and financial leverage, does this in a very readable, thorough, and understandable way.]

Several years ago, Ford management made a strategic decision to increase operational leverage that would allow them to be more competitive in a high oil price environment. I am sure that the huge drop in WTI has some people in Dearborn, Michigan on edge, and I also feel the need to consider how large an impact a prolonged low oil price environment will have on the likelihood of different IOI valuation scenarios for Ford.

Apple's Overseas Havens

Researching something about Delaware business registrations, I just stumbled upon a good article regarding Apple's various overseas subsidiaries. This relates to my recent Morningstar article entitled Apple's Conundrum. Not everyone uses Twitter, so I thought I would post the link here as well.

Interesting article regarding $AAPL tax liabilities related to my recent @morningstarinc article "Apple's Conundrum" http://t.co/rlSWJ487CA
— E. Kobayashi-Solomon (@IOI_Erik) December 16, 2014

A Picture is Worth 1,000 Words: General Electric's Revenue Growth

Source: Company Statements, IOI Analysis

In the heatmap above, the FY2013 revenue for each of GE's Industrial and High-Tech segments (in billions of USD) is shown below the segment name; below FY13 revenues is the 5-year CAGR. Box size represents revenue share; box color represents revenue growth rates.

It is obvious from this heatmap that GE's Oil & Gas segment has provided the most revenue growth over the past five years.

Time Decay and the Parable of the Iceberg Salesman

Source: Wikipedia

The inexorable nature of "time decay"--the quality of options that make them naturally lose value over time--is something that anyone who invests using options must understand and deal with. Option sellers are helped by time decay; option buyers are hurt by it. It is a hard concept to grasp for someone used to investing in stocks, but the following Parable of the Iceberg Salesman should implant it firmly in your mind.

Volatility <> Risk

Asset 1 Volatility = 0.6%
Asset 2 Volatility = 350%

In modern financial theory, volatility is taken to be equivalent to risk. However, I believe it is more helpful to think of volatility as simply "sudden price movement", since this phrase removes some of the emotional connotations implied by "risk" and is actually more accurate in terms of the underlying mathematics.

Case in point: when I was working as the risk manager for a hedge fund, a fund-of-funds came to interview my portfolio manager and to take statistics of our performance...