2008 Predictions

Predictions for the coming year are all the rage in financial journalism, especially among the more populist publications: BusinessWeek and Fortune. It seems the more intelligent people (read: The Deal, The Economist) understand flaws in seeking exactness and are much more cautious when asked about what the future will hold. Many journalists are publishing their stories of the year and their predictions for 2008. One would be wise to just gloss over these for the most part and ask one important question: how much of this year's 'credit crunch' is actually a crisis and how much of it is actually a return to historical risk premiums and reasonable mortgage lending standards--such as as actually proving income and not falling into the pits of esoteric neg-am loans. In theory, home values don't fall nationwide, but then in theory, financial journalists and economic 'experts' are the real experts.

Happy Investing,
Faro Research

Fallen Spinoff Tracker

Company Name	Ticker	Spin Date	Price	Current
Opnext	OPXT	2/14/2007	$15.00	$8.11
Babcock & Brown Air LTD	FLY	9/26/2007	$23.00	$19.35
Quest Energy Partners	QELP	11/8/2007	$18.00	$15.15
Encore Energy Partners	ENP	9/11/2007	$21.00	$19.26
Cal Dive International	DVR	12/13/2006	$13.00	$12.74
MF Global Ltd.	MF	7/18/2007	$30.00	$29.78

Virtues of Basic * Cash Flow Analysis

Since John Burr Williams' Theory of Investment Value in the 1930's clarified the idea of firm value, a discounted cash flow (DCF) analysis has been a pillar in finance theory and practice. Though simplicity is touted by using simple multiples, this does not eliminate the implied DCF of a financial asset. The value of any asset is the present value of all future cash generated.This raises some basic questions: when will I get my cash? How much will it be? How likely is it that I'll get it? What discount rate should I use for my estimate? Though this is far from science, and the model for analysis changes depending on the type of business (e.g., banks, manufacturers, et al.) in question, this forces one to question the future growth and profitability assumptions implied in an asset's price. Below are some key points to any simply DCF analysis:

Cost of Capital: risk-free rate + risk premium, or, opportunity cost of capital

Cash Flow Forecasting Period: long enough for the company’s top-line growth rate to be less than or equal to that of the economy.

Free Cash Flow: Operating Cash Flow – Capital Expenditures



*should be very basic and conservative