Wednesday, October 31, 2007
There is much from this I wanted to cut out because I found it amazing but it is secured so I will only type the most amazing part in my mind.
"In early September, a senior Moody's executive confirmed this suspicion at a small private dinner sponsored by one of the brokerage firms. He said, 'Moody's would never lower the credit ratings of a financial guarantor, because that would put the guarantors out of business.'"
The AAA portion of the ABX is plummeting. Enron magnitude blowups are very very possible in these insurance companies like Ambac and MBIA regardless of what rating agencies do. They may just be digging their own grave.
On a brighter note a little less than 2 hours and I am officially running my own hedge fund!! A big Texas Aggie whoop to that.
Tuesday, October 30, 2007
Let Steven A. Cohen manage money to pay off the U.S. debt.
The yuan rose the most in two years after China's central bank signaled it will allow the currency to appreciate faster to help narrow a record trade surplus and slow inflation.
As I have said I think the next great Chinese export will be inflation. I think we are at the beginning of next great inflation cycle and of course the Fed in their genius is cutting rates.
With a booming economy and inflation ticking higher, some speculators worry that Riyadh will de-peg its currency from the dollar. And they see such a step as having the effect of re-pricing oil in euros and yen. That’s because if Saudi Arabia de-pegs and does nothing else, it will be sitting on two rapidly depreciating assets: $20,000bn in oil reserves and $800bn in US dollar reserves.
Dating back to the aftermath of the oil crisis of 1973, the US negotiated the original alliance with the Saudis to assure petrodollar recycling. As oil prices have risen this decade, economists including ourselves have argued that the re-investing of oil export revenues into the US by Saudi Arabia and its neighbours has contributed to keeping interest rates low and equity valuations high. Often referred to as the “central banker” of oil, the Kingdom has proven on multiple occasions that it is focused on protecting a buoyant outlook for the global economy, as much to assure itself of a buyer as to preserve its political alliance with the United States. That usually means supplying enough oil to the market and holding spare capacity for use in the event of a disruption. Today, however, given mushrooming dollar reserves and the weakening US economy, it also means that Saudi Arabia must hold off on reserve diversification or doing anything that would initiate an attack on the dollar.
Friday, October 26, 2007
Another stupid one is Merrill as the shorts are also getting squeezed. The CEO is rumored to be on his way out and the stock is up 7%. Is Merrill worth $4.5 billion more today than yesterday because maybe they get a new CEO? O' Neal has done alot of good things at Merrill. Maybe somebody else would not have taken them down the CDO road, I don't know. All I know is Wall Street typically stumbles around like a drunken sailor but the shots of vodka must have been extra strong as Wall St can not seem to have a clue what some of these companies are worth and the stock prices zig and zag on new meaningless information when it comes to really understanding the value of the company.
Thursday, October 25, 2007
Jeremy Grantham posted his latest quarterly letter. I almost did a post on it yesterday noting how bullish he sounded (at least for him). I read it and had one of those deep feelings of something is not right. Something in the world had gotten thrown out of line. Well I pushed it aside and wasn't going to post anything until I read this http://www.thestreet.com/s/jeremy-granthams-losing-his-growl/newsanalysis/investing/10386152.html?puc=_tscana. It starts out with "They say the time to get really nervous is when the last bear turns bullish. Did that just happen?" Jeremy for sure has his bearish points but as a long time reader of his stuff the tone is much different as this article says he has the tone of a "man who is tired."
Wednesday, October 24, 2007
According to John Bogle’s research, only 35% of money managers beat the market in any given year. This number drops to 25% over 10-year periods, 10% for 25 years, and 5% over 50 year periods.
According to John Bogle’s research, managed funds average turnover rate is 110% a year versus a zero turnover from a passively owned index fund. Multiple studies have been done with results showing that low turnover investment strategies perform significantly better over time.
Mohnish Pabrai has been very successful in implementing a rule to avoid switching costs. He talks about it in Chapter 15 of his book The Dhando Investor. His rule states: “ Any stock that you buy cannot be sold at a loss within two to three years of buying it unless you can say with a high degree of certainty that current intrinsic value is less than the current price the market is offering.” Therefore, Mr. Pabrai has held stocks through significant periods of volatility; only selling before two years if he is certain intrinsic value is below the current stock price. If he is unable to assess the intrinsic value with any certainty he simply hangs on until he has a clear view of intrinsic value. His rule help him lower commissions, taxes, and most importantly they help him avoid switching out of businesses before the intrinsic value is recognized in the marketplace.
There is an increased probability of error when looking at stocks when stocks are setting new highs. Mr. Pabrai wrote an excellent article entitled “Buffett Succeeds at Nothing”, explaining how Mr. Buffett plays bridge, and Mr. Munger works on his mental models to fill the time periods of lofty security valuations. One should challenge themselves to delay decisions at least one day, as this is an effective tool to help an investor make sound decision. As Mr. Buffett states “ It is better to do nothing at all than to do something stupid.”My outlet is Yahoo spades....Finally
How often should investors review their investment positions then? Mohnish Pabrai updates his investment ideas once a quarter or whenever there is meaningful news.............This seems so infrequent in an age where data flows quickly through the internet. However, behavioral finance suggests that thirteen months is the optimal time frame to reassess one’s portfolio.
Well written Peter.
Monday, October 22, 2007
This is a great interview with Jean-Marie Eveillard, Bill Gross, and Bob Shearer. Anytime you can get all 3 in an interview together you know you are in for a treat.
Bill Gross is known for bold predictions and he made one here which I haven't heard before and that is that the Fed is close to the end of its rope and will continue cutting and that we will have a severe bear market start somewhere in 2008 when inflation starts moving up to the 4% range. I have had very similar thoughts so not going to discount it.
Either way the interview is worth 25 minutes of your time to watch.
Thursday, October 18, 2007
Next, we look at the real world consequences of this artificial self-destructive focus of inflation ex-inflation:
Cost-of-Living Adjustment Is Smallest Since '03
Payments to Social Security recipients and most federal retirees will increase 2.3 percent in January. It is the smallest cost-of-living adjustment since 2003, reflecting a lower rate of inflation.The adjustment will increase the average monthly Social Security retirement benefit by $24, to $1,079. It is based on the rise in the consumer price index in the third quarter, a figure the Labor Department released yesterday.The increase directly affects the finances of about 50 million people, including more than 31 million Social Security retirees and 11 million people who receive disability or other supplemental income from the Social Security Administration. It is also a significant number to the more than 4 million federal government and military retirees, about 500,000 of whom live in the Washington region.
So despite the enormous rise in energy, food costs, housing expenses, insurance, medical coverage, we see that Social Security is barely budging.
When we said that "Inflation is the cruelest tax," now you know what we mean.
Y'all keep focusing on the core . . .
Everyone is acting like this weak dollar is great for the the American economy. It is to a certain extent and it if it would have happened several years ago the impact we would feel would be alot less but a plunging currency and a rising stock market does not mean all is well if you look with a longer time horizon. In 1921 the German mark was plunging and the German stock market surging. The WSJ on September 9th 1921 said
Early in July paper marks began to show such a tendency toward depreciation that the investing classes in Germany took alarm and there was a mad rush to invest their paper in industrial and other securities before currency dropped further.
Of course the party did not last long. Germany along with Russia, Poland, Austria and Hungry where no longer on the gold standard and pursuing inflationary policies to try and stimulate a struggling economy compared to France and England which had about 25% deflation and the U.S. which saw 11% drop in prices. Eventually this monetary policy caught up with them which led to an almost complete loss of capital in these markets and an almost non existent economy.
Of course the U.S. is nowhere near a post WWI Germany but my point is though a weak dollar can have some short term benefits it is no where near a good long term policy. A plunging currency means there is something wrong in that country as viewed by the rest of world. Time will tell how much unwinding needs to occur and the ramifications for American dominance both economically and militarily.
I have been shaking my head not participating in this rally. Nothing seems to have changed since August and it appears the market is waking up to that fact once again.
Wednesday, October 17, 2007
"A lot of people think that sub-prime loans is where the problems center," [Jarrett Lilien, E-Trade's president] said. "But that's not our problem. Our issue is that the value of high quality loans is underperforming."
From their conference call
“ As a part of our guidance release last month, with respect to securities impairments, we forecasted we could see up to $100 million in the second half of 2007 and an additional 50 to 100 million in 2008 for a total of up to $200 million over six quarters. These impairments were primarily related to two categories within our asset backed securities portfolio which we identified to have the highest risk. Specifically, these were collateralized debt obligations or CDOs, and securities collateralized by second lien mortgages. Since the September guidance release, upon evaluation and refinement of our forecast, we determine that had certain writedowns needed to be taken in the third quarter. Additionally, we decided to accelerate the sale of the highest risk portions of these portfolios, writing down securities rated lower than double A by more than an average of $0.50 on the dollar. By changing the intent and designation to no longer hold these securities to recovery. The combined effect is that we recorded an impairment charge of approximately $197 million in the third quarter”
I have touched on this several times in previous posts. In my opinion, this is going to be a big story over the next five to ten years. It will impact every aspect of the monetary system and economic fundamentals. Inflation runs in mega cycles. This is one is in the pre game warm-up.
After all, it was China's cheap laborers who turned the country into the world's factory. By one estimate, China's manufacturing unit labor cost was just 4% of that of the U.S. in 2005. Now, as the mainland economy powers ahead — GDP growth jumped by 11.9% in the second quarter — real wages of urban workers have been soaring at double-digit rates, rising 18% in the first half of this year alone, according to the government.
Other big trends I have been playing.
For now, Chinese officials seem to recognize that high economic growth almost always leads to higher inflation rates — and that they can live with that as long as people don't revolt. At the end of September, China's central bank predicted consumer price rises would accelerate from an average 4.6% rate this year to 5% in 2008. Higher food costs continue to be a worry. As Chinese grow richer, they are eating more meat, which pushes up demand for grains such as soy and corn, says Jing Ulrich, head of China equities at JP Morgan in Hong Kong. Although Ulrich expects food prices to stabilize by year's end as the pork supply recovers, she says inflationary pressures resulting from rising meat consumption, the country's shrinking farmland and water shortages will persist.
and the evidence is already starting to show.
In May, the price of Chinese products imported by the U.S. registered a 0.1% year-on-year increase, the first such gain since the U.S. Department of Labor began tracking Chinese import prices in 2005. Prices have climbed by at least 0.3% each month since then.
Your next question comes from Mike Mayo - Deutsche Bank.
Mike Mayo - Deutsche Bank
Chuck said this was the year of no excuses. You guys say the results are disappointing. So what are the repercussions at the level of the Office of the Chairman? When I look at results, and feel free to educate me, but the business line mishaps are not just investment banking. There are some other areas. There are some risk management issues. Expense management, no matter how you look at it, year-over-year, year-to-date, linked-quarter, you add back the charges, reducing some for comp, you still have negative operating leverage.
Then management. It was a year ago when Tom Maheras, Michael Klein were moved to head the Investment Bank and now that has kind of changed a little bit. Also, Dave Bushnell, Head of Risk Management, was promoted three weeks before the preannouncement. I was not sure what was going on with that.
But the bottom line here is almost all the investors that I talk with feel like there needs to be more significant changes in terms of management. So that is the data I am looking at. What are you looking at, or what is the board looking at that they feel more comfortable?
I think I would repeat a large part of what I said to Ron. It sounds to me like a very similar question. If you look at our results this quarter, no one can be happy with the results in our fixed income business or with the results that relate to that. But I think if you are able to look at the other parts of our business, if you look at the strategic plan that we are executing on, I think any fair-minded person would say that strategic plan is working. The benefits that we saw in the fourth quarter and then more in the first quarter and then more in the second quarter are showing through in the third quarter in the businesses that haven't been impacted severely by the fixed income dislocations.
So if you look at parts of securities and banking, and we called those out; if you look at our international business; if you look at our GTS business; if you look at our wealth management business; if you look at our various businesses, the trend line of growth that we have sustained now for several orders is continuing. It is clear that the fixed income dislocation hurt us, and hurt us in a very significant way in those businesses. But I think I certainly have confidence in our strategic plan. I think that it is showing through. I personally expect that it will continue to show through in the future. I think those are the factors that people are looking at.
Mike Mayo - Deutsche Bank
Well, one of your main targets for this year was to grow revenues faster than expenses and that is not going to pan out. This could be the third year in a row where that doesn't pan out. That was clearly a very important factor. Also at the corporate level, the risk management you said it was on the extreme areas of where you thought it should be. How do you think about that?
Well, you ask two questions there. Obviously, we want revenues to grow faster than expenses. It is true in many of our businesses. As I said, we had a very severe dislocation in revenues in our Markets & Banking business, one that I am not sure any fair-minded person would see a way to lower expenses rapidly enough to offset that in a five-week period. In the rest of our business, I think we are actually making very considerable progress in that.
In terms of risk management, obviously, we wish that our risk management models had predicted what had happened here. In fairness, they included it, but only at the wide margins of what we thought was possible. I am not sure we were alone in that difficulty. But the facts are the facts. Our job is to sustain our strategic plan is we go forward, and that is what we're going to do.
Mike Mayo - Deutsche Bank
As it relates to risk management, the promotion, or maybe it's not a promotion. I am not sure what it was. The addition to responsibilities of the risk management head three weeks before the preannouncement?
I am not sure of your question, Mike, but it was a promotion for David. David has taken on a broader set of responsibilities. Again, I don't see risk management as a guarantor of results in the kind of market dislocations that we have had this quarter, so I don't see that as a connection at all.
Mike Mayo - Deutsche Bank
I mean, reasonable people can disagree. If you don't like the Office of the Chairman or the way it is being run, you just sell your stock. But my question is, I saw Robert Rubin quoted in the press saying that your job should be safe for four years from now. Did the board kind of reaffirm your CEO status for the next several years? To what degree was your job title reinforced?
I don't think it would be appropriate for me to comment on what Bob said or about what the board might be thinking in that regard.
Mike Mayo - Deutsche Bank
But you did say the board feels comfortable with the levels of changes that have been made. So should we assume that the changes are done?
Again, Mike, I think it just wouldn't be appropriate for me to comment further on that subject.
Tuesday, October 16, 2007
In March, less than a year after the issue was sold, GSAMP began defaulting on its obligations. By the end of September, 18% of the loans had defaulted, according to Deutsche Bank.
As a result, the X tranche, both B tranches, and the four bottom M tranches have been wiped out, and M-3 is being chewed up like a frame house with termites. At this point, there's no way to know whether any of the A tranches will ultimately be impaired.
When you start getting up into the A tranches you have quite a few mortgage insurers who will be in alot of pain. i.e. MBI
What is there to take away from our course in Junk Mortgages 101? Two things. First, you have to pay at least some attention to all those "risk factors" that issuers forever warn you about - especially when you're dealing with a whole new thing like junk mortgages issued en masse instead of by specialists.
Second, when you rely on the underwriter and the rating agencies to do all your homework for you, you don't have safety. You have only the illusion of safety.
This goes for equity investments obviously as well. It is one reason I don't like reading sell side research. Besides all of the psychology issues of anchoring on projections it tends to make you lazy even subconsciously.
Monday, October 15, 2007
At an invitation-only Toronto dinner Thursday for about 140 prominent investors, billionaire investor Warren Buffett said he expects the Canadian dollar to continue rising beyond the parity it recently reached with the U.S. dollar.
Buffett, who has made substantial resource investments this decade, after a history of avoiding them, is now interested in the Alberta oil sands.
Buffett said it was "very unsettling" that Brazil now is helping prop up the U.S. dollar with its purchases of U.S. government securities. "Brazil is a country whose own currency has gone to nil five times in the past century," he noted.
Weak data = Fed ease, stocks rally
Consensus data = lower volatility, stocks rally
Strong data = economy strengthening, stocks rally
Bank loses $4 billion = bad news out of the way, stocks rally
Oil spikes = great for energy companies, stocks rally
Oil drops = great for consumers, stocks rally
Dollar plunges = great for multinational companies, stocks rally
Dollar spikes = lower inflation, stocks rally
Inflation drops = improves earnings quality, stocks rally
Inflation spikes = improves earnings quality, stocks rally
“Poor Grenville runs a fund, one of a group of funds, and he is in charge of $100 million or so.
. . . I asked Charley why Grenville was suddenly Poor Grenville.
‘Poor Grenville,’ said Charley, ‘has gotten caught with twenty-five million in cash. It’s a disaster. How would you like to have twenty-five million in cash with the Buy Signals you’ve just seen? Come to lunch. Poor Grenville has to lose his cash, right away.’
I know it sounds little funny that having $25 million in cash is a disaster. It sounds just as funny to me as the phrase ‘lose cash.’ When it isn’t your cash in the first place and all you are doing is taking the cash – somebody else’s – and buying stocks with it. But professional money managers love to say, ‘We lost five million in cash this afternoon,’ meaning they bought stocks with it. I guess it sounds professional.
. . . As to why Poor Grenville’s $25 million in cash was a major disaster that is more comprehensible. Grenville should have all $100 million fully invested if the market is coming off the floor; his fund is ‘performance-oriented,’ trying for big capital gains. If Poor Grenville has $25 million in cash he guessed dead wrong at the bottom of the market, and in one career you don’t get too many chances like that. Poor Grenville had gotten himself all ready for a big drop in October and now in January the market turned around and ran away without him. He has to make it up in a hurry.”
– The Money Game, by Adam Smith
Ken Cohen of Lehman Brothers says that the volume of new loans to finance property deals has fallen by half since May and June when credit was widely available. In turn, this has led to a sharp fall in the issuance of commercial mortgage-backed securities (CMBSs), the products that consist of repackaged loans which helped propel the structured-finance market before it seized up.
Commercial property is no longer the bargain it seemed a few years ago, when rental yields were well above those on government bonds. But it will probably take a recession, in America and elsewhere, for the recent wobbles to turn into an outright crash.
Sunday, October 14, 2007
Much of the economic news in the past few months has focused on the housing industry and, according to CNBC’s survey, an overwhelming 90% of American home owners expect their home process [prices?] to stay the same or increase over the next 12 months by an average of 3.9%. And, nearly 80% of Americans said they don’t increase their spending based on gains in the price of either their homes or stock portfolios.
Who in the world was in that survey? From calculated risk:
Meanwhile, in other news, most Americans eat healthy, exercise regularly, 'all the women are strong, all the men are good looking, and all the children are above average'. (from Garrison Keillor) emphasis added
Thursday, October 11, 2007
My 2-cents: If I haven't said it once on TV, I've said it way too many times -- and today's action in the stock market underscores it better than most: There simply is no conviction in this market. For weeks I've been hearing examples of companies that have either reported or warned of dismal results, or disclosed something fairly unsettling, only to watch their stocks fly higher. This has been a "buy today, ask questions tomorrow" market. The most astounding thing I heard came from Larry Kudlow a week or two ago, when he was trying to say that a Dow of 14,000 meant there would be no recession. "Larry," I said (and I'm paraphrasing based on my memory of the moment), "all the a Dow of 14,000 shows is that stocks went higher. There are stocks and economies and sometimes they go in opposite directions." Predicting whether the economy will slip into a recession is a fool's game, but to say the market's rise was predicting one won't happen is foolhardy. If you didn't know better you might think that now more than ever the market is really driven by computer programs that are steeped more in the minutia of technical variations than a reflection of reality.
The Original Post
What am I doing wrong?
Okay, I'm tired of beating around the bush. I'm a beautiful (spectacularly beautiful) 25 year old girl. I'm articulate and classy. I'm not from New York. I'm looking to get married to a guy who makes at least half a million a year. I know how that sounds, but keep in mind that a million a year is middle class in New York City, so I don't think I'm overreaching at all.
Are there any guys who make 500K or more on this board? Any wives? Could you send me some tips? I dated a business man who makes average around 200 - 250. But that's where I seem to hit a roadblock. 250,000 won't get me to central park west. I know a woman in my yoga class who was married to an investment banker and lives in Tribeca, and she's not as pretty as I am, nor is she a great genius. So what is she doing right? How do I get to her level?
Here are my questions specifically:
- Where do you single rich men hang out? Give me specifics- bars,restaurants, gyms
-What are you looking for in a mate? Be honest guys, you won't hurt my feelings-Is there an age range I should be targeting (I'm 25)?
- Why are some of the women living lavish lifestyles on the upper east side so plain? I've seen really 'plain jane' boring types who have nothing to offer married to incredibly wealthy guys. I've seen drop dead gorgeous girls in singles bars in the east village. What's the story there?
- Jobs I should look out for? Everyone knows
- lawyer, investment banker, doctor. How much do those guys really make? And where do they hang out? Where do the hedge fund guys hang out?- How you decide marriage vs. just a girlfriend? I am looking for MARRIAGE ONLY Please hold your insults
- I'm putting myself out there in an honest way. Most beautiful women are superficial; at least I'm being up front about it. I wouldn't be searching for these kind of guys if I wasn't able to match them
- in looks, culture, sophistication, and keeping a nice home and hearth.
it's NOT ok to contact this poster with services or other commercial interests
I read your posting with great interest and have thought meaningfully about your dilemma. I offer the following analysis of your predicament. Firstly, I'm not wasting your time, I qualify as a guy who fits your bill; that is I make more than $500K per year. That said here's how I see it.
Your offer, from the prospective of a guy like me, is plain and simple a crappy business deal. Here's why. Cutting through all the B.S., what you suggest is a simple trade: you bring your looks to the party and I bring my money. Fine, simple. But here's the rub, your looks will fade and my money will likely continue into perpetuity...in fact, it is very likely that my income increases but it is an absolute certainty that you won't be getting any more beautiful!
So, in economic terms you are a depreciating asset and I am an earning asset. Not only are you a depreciating asset, your depreciation accelerates! Let me explain, you're 25 now and will likely stay pretty hot for the next 5 years, but less so each year. Then the fade begins in earnest. By 35 stick a fork in you!
So in Wall Street terms, we would call you a trading position, not a buy and hold...hence the rub...marriage. It doesn't make good business sense to "buy you" (which is what you're asking) so I'd rather lease. In case you think I'm being cruel, I would say the following. If my money were to go away, so would you, so when your beauty fades I need an out. It's as simple as that. So a deal that makes sense is dating, not marriage.
Separately, I was taught early in my career about efficient markets. So, I wonder why a girl as "articulate, classy and spectacularly beautiful"as you has been unable to find your sugar daddy. I find it hard to believe that if you are as gorgeous as you say you are that the $500K hasn't found you, if not only for a tryout.
By the way, you could always find a way to make your own money and then we wouldn't need to have this difficult conversation.
With all that said, I must say you're going about it the right way. Classic "pump and dump."I hope this is helpful, and if you want to enter into some sort of lease, let me know.
One which I have talked about several times on this blog is China import prices. In May (I think that was the month) import prices switched from declining coming from China to rising. The September number % increase declined from August but it was still positive (if I remember correctly like .4% vs like .6%). The exact numbers are not important, I just glanced to see if the trend continued.
Secondly the trade deficit shrunk again because of surging exports (i.e. weak dollar) but also because of declining imports which shows continuing weakness in the economy.
Two very interesting data points in a normally very boring number.
Wednesday, October 10, 2007
Interesting list of books. Always looking at lists of books. Wish I had more time to read.
Couple of links talking about the potential of homebuilder bankruptcies and a few quotes below that. Homes selling for $.64 on the dollar....
If fall-off is any indication, Beazer and Standard Pacific are the most likely homebuilders to file for bankruptcy. While shares in most of the larger companies in the sector are off about 40% over the last year, shares in these two firms are down closer to 80%.
If you look at the 2000 bubble (This housing thing is just another bubble, nothing new or different) the S&P was down something like 55% and the NASDAQ like 85%. (Not going back and checking these numbers just from my memory so may vary) Anyway an average of 40% is another indicator we may not have found a floor just yet.
``I ran the numbers and the condos sold for between 68 cents and 74 cents on the dollar based on the original asking prices,'' Moran said.
Try to buy stocks at a 50% discount. Is 68% discount enough to buy actual real estate???
Fifty-two percent of builders said they cut prices in August, compared with 19 percent in September 2005, the builders group said. The typical incentive was worth about $5,000 and the median price reduction was about 5 percent, said Stephen Melman, director of economic services for the builders association.
Interesting article about the distortions in the market that seemed to be created by quant funds. This type of stuff allows me to make a living.
Below is the meat of the article.
At a recent New York conference, investor Jim Chanos noted a couple of anomalies that, in all likelihood, are a direct function of quant trading. They highlight a disconnect between stocks and their underlying fundamentals that only a computer could love.
It turns out there are two -- and for all I know, more -- closed-end mutual funds that own mundane large-cap S&P-oriented stocks: the Cornerstone Total Return Fund and the Cornerstone Strategic Value Fund. Inexplicably, these funds trade at premiums of better than 50% to net asset value. At one point this year, they traded at premiums far higher.
The connection to the quant universe is that Renaissance Technologies, among the biggest quant hedge funds and certainly a very successful one, is the fourth-largest shareholder in both Cornerstone funds.
Monday, October 8, 2007
1) Apparently what started the market turmoil in August was a large hedge fund getting massive redemption's in July. They traded primarily through Merrill (I think that is the one Britt said) and Merrill prop desk got caught creating massive losses. Top brass as Merrill said they were not going to lose money this way and said enough is enough and decided to shut down the entire desk. Starting in the beginning of August they started massively unwinding their positions. Most of the other big prop desks on Wall Street held very similar positions and were caught with Merrill's unwinding and this caused huge reverberations throughout the markets leading to the crazy action in mid August.
2) Emerging markets are not in bubble territory including China. I was sort of shocked by this one. Unfortunately it was not a long discussion but the numbers put forth to me was that China had a PE in the high 20s / low 30s which is high but by no means bubblish....yet. I had previously heard higher numbers.
3) The market is shifting towards favoring growth after years of favoring value. One reason you are seeing the value guys struggle this year.
4) As I thought there are huge opportunities in the debt market for those who have cash. I have not really been that bummed not buying aggressively with the market going down. I did not figure a 10% correction (for all of like 1 hour) was that much to get excited about. I also lamented at not having access to millions of dollars to be able to buy debt because I thought that was where the huge contrarian play was and where things where really out of whack.
5) Since the Fed was founded in 1913 the dollar has lost 92% of its purchasing power. This will probably happen in 10 to 20 years causing the Dow to rise to 36,000 all things equal. Previous big commodity booms / panics saw the Dow to gold ratio to be 1:1 in 1980 and 1932. (Gold at $100 per ounce and the Dow at 1000) Gold could rise to $1400 currently to achieve that same 1 to 1 ratio.
6) Examined long term charts of small caps, the S&P 500, and the NASDAQ examining where the bubbles was and wasn't. The small cap graph shows barely a blip down wall the S&P 500 was declining and the NASDAQ was imploding. The small caps are not pretty expensive. As everyone should know at this point the value is in large caps.
7) Talked about Jeremy Grantham and how furious he must be at the Fed's actions. Britt has not talked to Jeremy since that rate cut.
8) Talked alot about investor psychology and how poor humans are equipped at investing. Harry Markowitz, the founder of portfolio theory, and really the founding father of modern finance illustrates this. When constructing a portfolio for his retirement after making all kinds of breakthroughs decided to just split 50% in bonds and 50% in stocks because he could not bear the thought of being more in stocks and seeing the market go down or less in stocks and see the market go up. Psychologically he essentially admitted he could not follow what he came up with.
I may add one or two if it comes to me over the next few days but a few snippets I thoughts I would share.
Sunday, October 7, 2007
This is a link that describes the success of the rights offering.
Email 1 detailing analysis Aug 23
Leviit entered into a merger agreement with BFC Financial Corporation (BFF) last January where LEV shareholders would get 2.27 shares of BFF for every 1 share of LEV. Well LEV bounced along following BFF price for months until last week BFF called off the merger. Well LEV stock goes from 10ish to about $2.30 now over the last several weeks. Well BFF still owns 100% of LEV B shares (obviously don't trade) and I think 11% of the A shares that do trade. So they still have a big stake.
Well LEV balance sheet is horrible. They have do something soon or they will have to declare bankruptcy. So they are offering a $200 million right offering. Here is EV as it stands.-
Market Cap 46.4
B Shares 2.8
BXG Investment 83.9
Adjusted EV 557.8
They own 31% of BXG which is publicly traded and that 31% would be worth $83.9 million at today's prices. They probably would have to sell such a huge stake a discount but that ball parks it.
Well below is the land portion of the balance sheet.
Land and land development costs 527.0
Construction Costs 149.1
Capitalized Interest 63.4
Other Costs 36.7
Inventory of Real Estate 776.2
Assets held for sale 71.4
Liabilities related to Assets for Sales -48.8
All this is mostly in Florida, South Carolina, and Tennessee. Obviously a large portion of this has risk of impairment but the Florida land is good high quality land. Not swampish land like JOE has. When things someday turn around this land has alot of value to it. I am sure they overpaid as they bought it in the peak of the bubble and they had an impairment charge of like $60 million last quarter.
Anyway I wonder if the rights offering would greatly alter the capital structure in such a way that would greatly increase the intrinsic value of the company. Obviously the dilution would be mind boggling but you are essentially transferring a whopping $200 million from debt holders to equity holders. This makes the chance of bankruptcy essentially disappear in the next year or two. So let's say the chance of bankruptcy is currently 50% (have no idea just throwing a number out there) making the equity a zero. X bankruptcy intrinsic value would be call it $4.60 getting to the $2.30 price today. (50% * 0 + $4.60 * 50% = $2.30) (Illustrative purposes only) So you transfer debt to the equity holders eliminating any chance of bankruptcy in the short term and all of a sudden the 50% chance of bankruptcy disappears and the shares should go to $4.60. I don't know but just something to think about.
Email 2 - Aug 26
Hey. Well I have spent quite a bit of time on LEV and I think I am a pass for now. I did a liquidation analysis using various assumptions and came to the end of it and looked at what I came up with and it was within 2.1% of where the equity value would be post right offerings. I could not believe it came out that close. .
I also looked at what it would be trading at post rights offering and compared it to comps excluding the high and low outlier. After the rights offering it would be trading at .5X book at today's price. The average is .87X trailing book which means it has like 60% upside to get to mean. In my mind assuming this rights offering gets done (I am not so sure it really does) it solves their short term liquidity issues and the stock should trade more along the lines with their peers.
I then started some kind of dcf but stopped realizing all this does not really matter. Yes valuation is important and it has got to be cheap but what matters is what management is trying to do in all of this and being on the right side of that equation. I started digging through the proxies of all the related entities and these guys are more inbred than a pack of dogs on an abandoned island. I worked on a flow chart showing all their various investments (directors, officers etc.) and how it all related and overlapped. Good grief, complicated. My original thought was that management might be trying to steal this company through the rights offering. BFC (BFF) bought them out, the housing market continued down worse than expected, they realized they were paying to much for it (though it was all in shares) and announce that they cancel the merger agreement and the stock collapses, come in with a rights offering with oversubscription rights and steal the company much cheaper. I would want to be apart of that and be long it benefiting from managements intentions but I don't think that is the case anymore. If you look at the economic interest the CEO Alan Levan and the Vice Chairman John Abdo have most of their economic interest in BFF. Combine they own stock worth $73k of LEV but $28 million of BFF. So they want to BFF to survive and do well. (They also receive bigger salaries and bonuses from BFF than LEV) So what do they get sticking with the merger agreement? A company on the verge of bankruptcy in need of a major capital infusion of which BFF does not have (BFF is just a holding company). Well BFF investment in BankAtlantic Bancorp is much bigger than its investment in Levitt (and worth alot more). Well thinking about it my guess is considering all the inbreeding that BankAtlantic has lent quite a bit of money to Levitt. If Levitt goes bankrupt they may be writing off some major loans. What better way for Levan and Abdo to protect their bigger investment than getting suckers to give fresh equity money in a rights offering that goes straight to pay off loans owed to Bank Atlantic? The other thing is this rights offering is only for the Class A shares which means that BFF essentially keeps their controlling interest whether they put up more capital or not. The B shares represent 47% of the vote and will not be diluted at all with the rights offering. Anyway what I am thinking now is that they will talk a good game with this rights offering collect some money with the few suckers who do it which my guess is will be well below the $200 million. Use that money and pay off BankAtlantic and then declare bankruptcy. If for some reason they are able to get 200 million they just used tons of other peoples money to shore up their balance sheet, keep voting control, and increase the value of their holdings all in one swoop. There is alot of speculation in all that but it seems reasonable after spending most of my time on all this trying to understand what is in the minds of management.
Thursday, October 4, 2007
Many of you have probably seen this but I thought it was interesting enough to post. It has been a question I have been asking myself recently. As a side note, David Rosenberg has been a bear for a long time on the economy. One of the very few economist out there who is willing to be bearish. Last time I heard him speak, a few months ago, you do not leave the room feeling all cozy. Talking to him he is a nice guy though.
I will be leaving for Austin and then driving to College Station to help Britt, CIO of the Texas Teacher Retirement Fund, to give a presentation on Warren Buffett and value investing. May not be back on the blog until the end of the weekend so have a good rest of the week.
Qatar and Vietnam diversifying from dollars in a big way.
My visual picture of all this is a small leak in a big dam that as the pressure builds the leak gets bigger and bigger until the dam finally bursts killing everyone downstream. Don't underestimate how long the leak can last though or overestimate once the dam breaks how fast the catastrophic affects are felt.
Tuesday, October 2, 2007
In actuality though the lack of productivity may be beneficial. I have launched a crusade to unlearn everything that I learned at my prior job. That is slight exaggeration of course because I learned quite a bit about debt and investing within the capital structure but the investing tidbits I picked up are horrific and very counterproductive to long term investing success. I knew it while I was there and know it even more now. So trying to reprogram my mind back to where it was before the job. One of things I have been doing (working out well since I have not been able to do much lately anyway) is watch some lectures from the Colombia MBA program that specialize in value investing. This program is amazing and the only reason I have ever considered getting an MBA. Anyway they can be found here. http://valueinvestingresource.blogspot.com/2007/09/lectures-from-columbia-universitys.html
They are a true class, about 1.5 hr long with such greats as Christopher Browne and Andrew Weiss giving lectures. Anyway there is so much to glean from these lectures and I highly recommend them. I hope to finish all of them over the next week or so.
By the way of the two Andrew Weiss lectures the 2007 one is much better. The 2006 is a repeat of the 2007 lecture without going in as much detail and has some audio problems.