BCE Court Decision Taking Canada In A New Direction?

Ok, what I am about to say will look biased since I would have profitted from the closing of the BCE deal; but even if I had no economic interest, I would say the same thing.

The BCE court decision, handed down by the Quebec Appeals court, sets a bad precedent in my eyes. If it is upheld, it will take Canada in a new direction, away from established principles of other countries like USA. An opinion piece from Al Hudec, a lawyer at Farris, Vaughan, Wills & Murphy, summarizes the situation and questions the merits of the decision:

On what the court is saying...

In the course of its decision, the Quebec Court of Appeal ruled that the BCE board should have considered the interests, including the reasonable expectations, of the Bell Canada bond holders.

The court held that the BCE special committee's process was fatally flawed because the committee had not made a detailed analysis of the costs and benefits of the leveraged buyout -- not just for shareholders, but for other stakeholders too. In essence, the court found that BCE had not properly taken into consideration the adverse impact of the potential transaction on bond holders.

On how this can adversely impact future transactions...

If the Quebec decision is upheld, and this is indeed the law, then it is hard to imagine the board of a Canadian public company ever approving a share bid structured as a plan of arrangement, absent a concurrent bid for the company's outstanding bonds...

Until this decision, the common view would have been that Canadian law was similar to U.S. law as expressed in the seminal U.S. Revlon case of 1986.

The widely cited Revlon ruling established the basic deal principle that once a company is put in play, boards of public companies have a duty to achieve the highest price for shareholders.

The Quebec court held that this view was mistaken and that in Canada, the directors of a corporation have a more extensive duty.

On how bondholders vary from shareholders...

Unlike common shareholders, who generally do not enjoy the ability to negotiate their terms, debt holders have the ability to negotiate a panoply of rights and remedies to protect their interests. These extensive rights are protected by detailed contracts, known as trust indentures, which set out the reasonable expectations of the parties to the bargain, and a court should not readily extend the rights of bond holders beyond those for which they have bargained.

Sophisticated participants in bond markets have understood, since the multiple ratings downgrades of the leveraged buyout boom of the 1980's, that if they are worried about a rating downgrade as the result of a leveraged buyout, they can protect themselves in the covenants of a trust indenture.

Regardless of what happens to the BCE takeover, this is a bad ruling in my opinion. It will make future takeovers, particularly LBOs, extremely difficult.

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Francis Chou: The Best Bargain-Hunting Value Investor from Canada?

The Globe & Mail's investing magazine insert, Globe Investor, has a feature article profiling the Canadian superinvestor hardly anyone has heard of: Francis Chou of Chou Associates Management. Even many Canadian investors who follow the Canadian markets have never heard of him (and it's not as if we have too many successful investors up here). Those value investors somehow miraculously manage to become successful without drawing much attention (some Hollywood stars should take note ;) ).

The article is titled Is Value Dead? and uses the poor performance of value investing of late to ask some pointed questions about the Chou funds and value investing in general. It's a good read so check it out.

(source: Is Value Dead?, Rob Carrick, Summer 2008 Globe Investor)

Warren Buffett, a giant of value investing, has achieved an almost impossible compound average annual return of 21.1% from 1965 through 2007 with his holding company, Berkshire Hathaway Inc. (compared to 10.3% for the S&P 500 Index). Other masters, such as John Templeton and Charles Brandes, have also prospered using this approach, as have Canadian names like Irwin Michael, Peter Cundill, Bob Tattersall and Francis Chou. Until recently, that is. At some point in the past year or two, value investing stopped working. Example: For the 12 months to Feb. 29, three of Chou’s five funds were down 17% or more, as compared with the previous year. Could this be the death of value?

Francis Chou isn't alone; a lot of other value investors, such as Bill Miller, Edward Lampert, Martin Whitman, and so forth, have been suffering as well. Basically anyone that did not overload on commodities & emerging markets or short financials have been beaten up pretty badly...

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Sears Holdings Hitting Attractive Levels

Sears Holdings (SHLD) is hitting price levels that are quite attractive. I've been looking at Sears (and other retailers) lately. I have mostly looked at Sears from a credit point of view because I'm still thinking that the 7% Notes due 2042 trading on the Pink Sheets under the SBCKP symbol may be worth it (the concern is inflation more so than bankruptcy/default risk).

Sears is a good contrarian retailer to investigate. It's one of the retailers with bearish Street consensus. According to Yahoo Finance, 3 analysts rate it a Hold (a polite way of saying sell) and 4 rate it Underperform (more direct indication of a sell). Analyst median target is $87/share with a low target of $70. The current price is getting close to the $87 target.

I've also been waiting to see if I can consider buying it below book value. Given that some prominent investors, such as William Ackman, have indicated that real estate on Sears' books is understated, buying below or close to book value is almost a home run. Right now Sears is trading around 1.1x book value. Another 10% drop in book value (or 10% additional profit) will hit the 1x ratio.

The big downside is the credit contraction (started by the housing meltdown but likely to spread to credit card usage) and its negative impact on consumers. Sears seems to be one of the weaker deparment stores in terms of brand, shopping appeal, fun factor (yes, some people, especially women, consider shopping fun ;) ), and prices, so it will likely suffer more than some of its competitors. But its balance sheet is strong so it can easily absorb significant deterioration with their customers.

In terms of upside, I think an optimistic upside scenario (ignoring financial engineering with the real estate assets) is a profit margin of around 3%. Right now Sears has around 1.5% profit margin so you are looking at 2x increase in earnings. The TTM P/E is 15.5 and forward P/E is 24.8 so the optimistic case yields a P/E of around 12 (using the forward P/E). Earnings for nearly all retailers are likely below-normal levels so earnings will be higher over a full cycle with economic slowdown along with recovery thereafter.

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Court Rules Against BCE Deal

In a highly surprising move, the Quebec court ruled against the BCE deal arguing that bondholder interests weren't taken into account:

BCE Inc. shares plunged Thursday morning following a shocking Quebec court ruling Wednesday that threatens the company's planned $35-billion sale to a group led by the Ontario Teachers' Pension Plan. But several analysts suggested the company may be able to reach a financial settlement with balky bondholders who oppose the deal – for somewhere between $500-million and $1.3-billion.

As well, the head of the Canada Pension Plan Investment Board expressed concern about the precedent-setting court-ruling and its implications for Canadian capital markets.

I didn't expect the court to rule against the deal, after the lower court ruled in favour of the deal. I think it sets a bad precedent when bondholders without any conditions in their bonds can block shareholder actions. I suspect the ruling will be overturned at the Supreme Court (it it goes there) but it'll be too late and miss the deal deadline (so BCE may not pursue further).

One of the bondholders that sued BCE appeared to leave little hope the takeover could be salvaged after the court ruling Wednesday. "It's hard to imagine how it could be resurrected — the deal appears dead," said Hanif Mamdani, head of corporate bonds at Vancouver-based Phillips, Hager & North Investment Management Ltd.

However, analyst Jonathan Allen at RBC Capital Markets suggested in a note to clients Thursday that BCE might still be able to bring the bondholders on side at a cost of roughly $1.3-billion, financed by slightly reducing the $42.75-a-share offer.

“BCE could settle with bondholders through a tender offer at a price that puts bondholders back to a pre-transaction price ... potentially raising the proceeds through a lower equity price (roughly $1.64/share or a final price of $41.11),” said Mr. Allen, who calculates the face value of the affected BCE bonds at $5.1-billion.

That price would still be better than Wednesday's closing price of $37.12 and well above Mr. Allen's estimate of BCE's net asset value of $30 a share.

He noted, however, that lowering the offer price would require a new shareholder vote, which would likely take about 60 days, pushing potential closing beyond the current June 30 deadline.

The stock is down sharply, to pre-takeover levels. During my initial analysis of this M&A, my guess was a price of $31 if the deal failed and that turned out to be a good guess. As the analyst suggests above, BCE will have to re-negotiate a lower deal or call the whole thing off. Since only around $5 billion of bonds seem to be blocking the deal, BCE can easily buy out the bonds (however, someone should still challenge this in court because it is a terrible precedent IMO).

As far as I'm concerned, the deal is dead. The time frame is too short to do anything and given the liquidity problems at the banks, they will try to avoid re-negotiating the loans. This ruling probably saves the banks since successful completion of the deal likely meant billions in mark-to-market losses for the bankers. This is a failed risk arbitrage but I'll hold as I outlined before taking a position.

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Moody's Computer Bug Leads To AAA Ratings for CPDOs

News keep getting worse on the credit front, with Moody's being accused of assigning and maintaining AAA rating on CPDOs even after the discovery of computer errors. I vaguely touched on CPDOs in a prior post where I was arguing that mark-to-market losses don't necessarily mean anything. In any case, Financial Times is accusing Moody's of rigging their rating of CPDOs after discovering a computer bug in their rating model (story from Bloomberg).

Moody's Investors Service said it's conducting ``a thorough review'' of whether a computer error was responsible for assigning Aaa ratings to debt securities that later fell in value.

Some senior staff at Moody's were aware in early 2007 that constant proportion debt obligations, funds that used borrowed money to bet on credit-default swaps, should have been ranked four levels lower, the Financial Times said, citing internal Moody's documents. Moody's altered some assumptions to avoid having to assign lower grades after it corrected the error, the paper said.

The allegations raise questions about internal controls at credit ratings firms as they face scrutiny from lawmakers and regulators for assigning their top grades to securities derived from loans to people with poor credit.

The interesting thing is that S&P also gave AAA ratings initially, while DBRS and Fitch didn't, so the computer error really isn't as serious as it seems. It wasn't as if Moody's was placing a rating way out of line with the competition. However it does raise questions about quality control and tarnishes the reputation of the firm. There will also be accusations of cover-up, with the government likely investigating the matter well after the fact (as usual). They are already investing the rating agencies, bond insuers, brokers, and others, due to the subprime implosion but they will probably spend more resources now. None of the allegations have been proven.

It's a serious accusation and, needless to say, Moody's stock is down around 14%. It simply erased the run-up in the stock price over the last week or so, and Moody's stock didn't hit any all-time lows or anything.

In terms of market impact, it's likely to be minor (except for select areas such as the monoline bond insurers or other rating-sensitive businesses). My understanding is most of the CPDOs were sold in Europe and they were liquidated in the last few months (with big losses for investors).

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Bloomberg Article on CDS...Plus I think Buffett Is Wrong

I ran across a very good article on CDS, with some neat insight (such as how it is in the interest of CDS dealers to keep the market opaque; or how primitive the pricing system is (I'm actually shocked to see how lame it is.)) If you have time to kill (it's kind of long) and are interested in what was happening in the credit markets while Bear Stearns was imploding, I recomend reading the article. Here is a taste of it:

(source: Hedge Funds in Swaps Face Peril With Rising Junk Bond Defaults By David Evans, May 20, 2008. Bloomberg.com)

The banks played the role of dealers in the CDO market as well, and the breakdown in that market holds lessons for what could go wrong with CDSs. The CDO market zoomed to $500 billion in sales in 2006, up fivefold from 2001...

By the middle of 2007, mortgage defaults in the U.S. began reaching record highs each month. Banks and other companies realized they were holding hundreds of billions in toxic debt. By August 2007, no one would buy CDOs. That newly devised debt market dried up in a matter of months.

In the past year, banks have written off $323 billion from debt, mostly from investments they created.

Now, if corporate defaults increase, as Moody's predicts, another market recently invented by banks -- credit-default swaps -- could come unstuck. Arturo Cifuentes, managing director of R.W. Pressprich & Co., a New York firm that trades derivatives, says he expects a rash of counterparty failures resulting in losses and lawsuits.

``There's a high probability that many people who bought swap protection will wind up in court trying to get their payouts,'' he says. ``If things are collapsing left and right, people will use any trick they can.''

The article talks about the potential for a collapse in the CDS market due to the looming increase in corporate defaults. Corporate defaults have been extremely low in the last few years and that's one reason a lot of private equity takeovers were easily done (often via the use of junk bonds). In addition, several companies issued bonds and used the proceeds to buy back stock (this actually isn't a bad idea if you have low leverage and interest rates are low but it's still probably best for companies to buy back stock using their internal cash flow).

I still think that there is no way anyone is going to regulate OTC markets--especially if some of the players are unregulated parties such as hedge funds. I think the best thing would be for the government to ban regulated banks (commercial banks, investment banks, etc) from dealing with unregulated entities (such as hedge funds, foreign funds run from anonymous tax havens, etc). It will be very painful for JP Morgan, Citigroup, et al, to give up their lucrative involvment in the shadow world (shadow world refers to the unregulated world) but it would avoid any detrimental impact on the rest of the economy. You'll end up with parallel banks that are isolated from each other. If something blows up in the shadow world, well, that's capitalism ;) I think it's dangerous for a "normal" bank that has access to the Federal Reserve to load up on these unregulated derivatives. To make matters worse, these players are taking bank deposits and using them in unregulated business with very little knowledge of the true risk.

Having said all that, some people in the investing world don't think there will be much of a problem with the CDS market. You can add Buffett and Munger to that list. The most surprising thing I heard from Buffett and Munger in this year's annual meeting is their sanguine views on the CDS market:

(source: 2008 Berkshire Hathaway Shareholder's Meeting Notes. Transcribed by Peter Boodell; courtesy Reflections on Value Investing)

(WB = Warren Buffett; CB = Charlie Munger (yes, some newbies might not know who Warren and Charlie are ;) )

WB: I think there is no question that corporate default rate will rise. That has been included in price in writing this insurance. Will CDS market lead to chaos? Probably not, but if bear had failed you would have had chaotic conditions. A CDS is a payment by one party to another. When someone loses money on a loan, they’ve lost real money, but there is not a swap of dollars immediately when loan goes bad. In CDS, there is an exchange of cash. Whether counterparties fail -- I don’t think it will happen. We’ve had enormous collateral payments from one firm to another in this recent crisis. Fairfax Financial made $1bil in CDS. This means another guy lost $1bil. They have been most volatile of instruments – and it really hasn’t created a problem in system. If Fed must step in, I don’t think it will be due to CDS. It may cause big losses, but will be matched by big gains by others. There is a problem of an overnight disruption in the system (bear, nuke bomb) – where discontinuity and collateral postings inadequate. At that time, large CDS exposure could exacerbate chaos to considerable degree.

CM: Could we have mess in CDS? Yes, but stupidity not as bad as sweeping bums off skid row to give them houses. There is an issue of insuring against outcome of losing money on $100mil bond issue, when you have $3bil of contracts on $100m bond issue – there are incentives to manipulate the smaller loss to make big collection on the larger position. It used to be illegal to buy life insurance on people you didn’t know, with big payoffs in event of their death. Why did we want enormous bets to be made in unregulated markets? We have a major nutcase bunch of regulators and proprietors in this field.

Similar to what Buffett and Munger mentioned, I also think the final losses won't be too bad because derivatives are a zero-sum game. But if there are counterparty losses then it won't be zero-sum and can result in wealth destruction. My problem isn't so much that I fear losses. Some people are scared of derivatives because of the losses but I am not, given that they are a zero-sum game. My concern is that they can bring down a "normal" bank such as JP Morgan (#1 bank with derivatives exposure) or Citigroup or Merrill Lynch. Losing those banks--if it happens--will cause massive damage to the financial system. Overall, I actually think derivatives are a financial innovation and are good for the economy in the long run.

As a side note, I wonder if Buffett is starting to turn positive on derivatives now that he is embracing them a lot more. Buffett seemed to be almost vehemently against them a few years ago but now is using them quite a bit (including writing sizeable put options on some stock indices).

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CFIG Cut to Junk by Moody's

Moody's cut CFIG to junk and believes it doesn't have enough capital:

The bond insurance arm of CIFG Holding Ltd was slashed to junk status by Moody's Investors Service on Tuesday, due to concern about its capital position...

Moody's downgraded the insurance financial strength ratings of bond insurer CIFG Guaranty, CIFG Europe and CIFG Assurance North America, Inc to "Ba2," two levels below investment grade, from "A1," the fifth highest, and kept the ratings under review with uncertain direction.

The rating cuts "reflect the high likelihood that, absent material developments, the firm will fail minimum regulatory capital requirements," due to losses stemming from its debt and exposure to subprime mortgages, Moody's said.

CFIG is a small monoline insurer owned by Banque Federale des Banques Populaires and Caisse Nationale des Caisses d'Epargne. It was downgraded earlier this year to A1 (Moody's), AA- (Fitch) and A+ (S&P). I haven't followed CFIG closely but it looks like Moody's is saying that CFIG will fail regulatory capital requirements, which is quite serious.

The good news: less competition for Ambac... the bad news: Ambac or MBIA could be following the path of CFIG into oblivion if things get really bad (particularly if HELOC and CES deteriorates)...

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Random Articles for the Week; Plus Some Investment Thoughts

Here are some items that I find interesting, along with some thoughts running through my head:

1. Jean-Marie Eveillard First Eagle Conference Call
   
2. The Economist article on the financial crisis: Paradise Lost
   
3. Would you average down into this stock?
   
4. Junk bonds vs Stocks - still trying to figure out when junk bonds are better
   

Jean-Marie Eveillard Conference Call

Thanks to Fat Pitch Financials for referring me to the First Eagle conference call for their mutual fund owners (audio link on their site doesn't seem to work me but here is the text transcript). I never heard of Jean-Marie Eveillard until a couple of years ago (goes to show how much of a newbie I am) but I have started to like him a lot more than other commonly referenced superinvestors. He is a value investor with a different perspective on many things. He also tends to be more international than many others.

I recommend reading the conference call transcript if you are a newbie to investing, if you want some international ideas, or if you are looking at investing in Japan. If you have read some of my past posts on him or if you have heard some of his interviews on Bloomberg or something, there isn't anything new per se. It's a good, quick, read. Here is an excerpt to whet your appetite:

John Arnhold: “You’ve mentioned that First Eagle’s value style is a combination of Graham and Buffett. Can you provide an example of a new position that you would consider a Graham-type company and an example of a Buffett-type company?”

Jean-Marie Eveillard: Today, the Ben Graham-type companies, in other words, the deep value stocks, are not available, really, in the U.S. or in Europe. They’re only available in Japan. And then, the great majority of those deep value stocks are small stocks. In view of the size of our funds today, as you know, we are looking more so into buying medium caps or large caps. At the same time, we have been doing some work and we already own a few, have owned sometimes for years, a few small deep value stocks in Japan and we’re in the process of doing some additional work on more.

I mean there are stocks in Japan where net cash, cash and sometimes portfolio securities, net of all financial liabilities, net cash is in excess of market cap, which means that you pay less than nothing for the business. Now, as Marty Whitman likes to say, “There is always something that can go wrong.” In that case, if the company were to suffer a string of losses for the next five years, then of course five years from now the cash would have disappeared as a result of the losses.

In terms of a Buffett-type company, at the beginning of this year, we started looking at what had been then and what remains an extremely depressed sector, of course, is the financial sector. We were not interested in the banks and the brokerage firms which remain “black boxes” and also there are still major issues with them. But, we figured out that the financial sector was not homogeneous and that beyond the banks and the brokerage firms, you also had the insurance companies and money management firms and situations a little bit unique like American Express.

If you are a Benjamin Graham fan, Japan is a paradise for you. Half the companies in Japan are trading below book value. Not only that, as Jim Grant alluded to, you have world-class companies trading below book. My impression is that even when American companies were depressed and in a similar state back in the 1940's, they were nowhere near as good as the some of these Japanese companies. Unfortunately, most of these are small-caps and language is a barrier (hard to find English information). In addition, Japanese companies are not shareholder-friendly and unlocking the value could be harder than trying to convince George Bush there are no weapons of mass destruction in Iraq ;)

Paradise Lost?

This week's The Economist, titled Barbarians at the Vault, deals with the credit crisis engulfing the financial institutions. If you are a professional in the field, you might want to pick up the magazine since there are quite a few articles on the topic (all are available online as well). Paradise Lost is an excellent article detailing what happened and how things got totally out of control. If you haven't been following the financial sector closely, you might want to read the linked article. It'll bring you up to speed on how capitalism in America almost had a heart attack...maybe it did.

If the crisis were simply about the creditworthiness of underlying assets, that question would be simpler to answer. The problem has been as much about confidence as about money. Modern financial systems contain a mass of amplifiers that multiply the impact of both losses and gains, creating huge uncertainty...

One [amplifier] is the use of derivatives to create exposures to assets without actually having to own them. For example, those infamous collateralised debt obligations (CDOs) contained synthetic exposures to subprime-asset-backed securities worth a whopping $75 billion. The value of loans being written does not set a ceiling on the amount of losses they can generate. The boss of one big investment bank says he would like to see much more certainty around the clearing and settlement of credit-default swaps, a market with an insanely large notional value of $62 trillion: “The number of outstanding claims greatly exceeds the number of bonds. It's very murky at the moment.”

A second amplifier is the application of fair-value accounting, which requires many institutions to mark the value of assets to current market prices. That price can overshoot both on the way up and on the way down, particularly when buyers are thin on the ground and sellers are distressed. When downward price movements can themselves trigger the need to unwind investments, further depressing prices, they soon become self-reinforcing.

A third amplifier is counterparty risk, the effect of one institution getting into trouble on those it deals with. The decision by the Fed to offer emergency liquidity to Bear Stearns and to facilitate its acquisition by JPMorgan Chase had less to do with the size of Bear's balance-sheet than with its central role in markets for credit-default and interest-rate swaps...

The biggest amplifier of all, though, is excessive leverage. According to Koos Timmermans, the chief risk officer at ING, a big Dutch institution, three types of leverage helped propel the boom and have now accentuated the bust. First, many banks and other financial institutions loaded up on debt in order to increase their returns on equity when asset prices were rising (see chart 1)...Second, financial institutions were exposed to product leverage via complex instruments, such as CDOs, which needed only a slight deterioration in the value of underlying assets for losses to escalate rapidly. And third, they overindulged in liquidity leverage, using structured investment vehicles (SIVs) or relying too much on wholesale markets to exploit the difference between borrowing cheap short-term money and investing in higher-yielding long-term assets.

Anyone thinking of investing any of the financials need to keep the following chart in mind:

(source: The Economist)

The Wall Street banks are heavily leveraged! If you are thinking of investing in them, you need to seperate out these highly leveraged banks from the conventional lowly-leveraged bank you find on your street corner. Similarly, not that many would contemplate investing in these super-high-risk creatures, but monoline insuers also have something resembling massive leverage (since they are insurance companies they are kind of different but, nevertheless, small changes in expected losses on their insurance policies can wipe out the company). On a side note, although the leverage seems to have increased recently for some of the financials, it is not necessarily because they took on more risk; instead, it is likely because their shareholder's equity is getting wiped out and hence the leverage ratio increases.

Would You Invest in This?

Would You Invest in This? Is this going bankrupt?

(source: Yahoo! Finance)

Too bad that's a stock that I actually own--a big chunk of my portfolio as well :( This ugly-looking chart is for, none other than, Ambac. Did I catch a falling knife? I'm still not sure if I should average down into this. I don't have enough money and I would still like to diversify my portfolio more by investing in a retailer or a Japanese stock so I won't do anything for the time being. I think if Martin Whitman or Legg Mason (not sure if it's Bill Miller or someone else on his team) didn't have a positive view on the monolines, I probably would consider this a mistake and not think about averaging down.

Junk Bonds vs Stocks

One idea that I have been researching lately is junk bonds. It's still not clear to me what is a good yield for the bond. This isn't a big idea for me (in the end I might do nothing) but it's something that I'm investigating. Bonds are poor investments in taxable accounts, not to mention the fact that stocks can beat them easily due to compounding of reinvested earnings, so it isn't something I would use as a primary holding. I am primarily looking at it strategically as a contrarian opportunity.

I have been looking at how Warren Buffett, Martin Whitman, Jean-Marie Eveillard, Mohnish Pabri, among others, have invested in junk bonds. Junk bonds were very attractive back around 2002 and many of these investors invested in them. Eveillard, Pabri, and Buffett bought Level 3 Communications. Buffett bought Amazon and Nextel bonds at that time as well. Martin Whitman has always been a big buyer of junk bonds given that he is a distressed investing specilist (in the early 2000's, he bought K-mart bonds).

Of course, high yield spreads were higher in 2002 so junk bonds are not as appealing now. If we look at some select recent junk bond purchases, we see Buffett buying TXU with around 12% yield (I am trying to find out the maturity on these bonds and if anyone has any idea leave a comment). Given Buffett's insider knowledge of TXU, he probably treats this as a super-low-risk almost-cash holding. Some of Martin Whitman's latest investments have been the MBIA surplus notes (around 15% yield) and Standard Pacific (around 20% yield). Whitman considers MBIA surplus notes as almost-cash with low risk (but potentially illiquid). I'm wondering if a bond with around 13% to 15% yield is worth it?

The bond that I'm looking at (assuming it still pays interest) is the Sears Roebuck Accept Corp 7% Note 07/15/2042. It was delisted and is trading on the Pink Sheets OTC grey market under the ticker symbol SBCKP. It is thinly traded and has a yield of around 13% to 15%. I'm wondering if this is worth it; or whether Sears Holdings stock is better. The problem I have with this (assuming I can buy it for a reasonable price) is its long maturity. I think if it were due in the 2020's, I would be ok with it (inflation risk is a big concern for such a long-dated bond).

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Looks Like William Ackman Is Reducing His Monoline Short Positions

One of the key things required for the monoline insurers to improve is for the short-sellers to close their positions. This won't avoid losses (that's all up to fundamentals) but it will stabilize the equity price. Furthermore, it will increase confidence by customers. Yes, stock prices impact some customers since this is a confidence industry (who wants to pay insurance premiums to a company that is plastered all over the newspaper and may not pay out?).

Prem Watsa of Fairfax, who seems like he was heavily short the monolines, closed out his shorts (CDS holdings) late last year. The big, public, short-seller is Wiliam Ackman of Pershing Square and it looks like he scaled back some of his Ambac short positions. Todd Sullivan of valueplays picked up on Pershing's 13-F filing and it seems that he has scaled out of his put options on Ambac, and lowered some of his put option holdings in MBIA. I suspect Ackman is still heavily short via CDS and he probably won't unwind that any time soon.

In the meantime, Third Avenue (note that this is the company and not necessarily the fund that Martin Whitman runs) seems to be increasing its monoline insurer holdings. Assuming this info isn't out of date (it won't capture what was sold/bought since the filing), they have increased their position in MBIA, Ambac, and Triad (amazing that they have confidence in Triad, a company that Jim Grant presciently predicted was one of the mortgage insurers living on thin ice.) Interestingly they reduced their position in MGIC. I'm not sure why they dumped MGIC, while loading up on TGIC. It's interesting to see all the tactical moves in and out of the various distressed names.

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Jaclyn Proceeding with Reverse-Forward Split

Jaclyn announced that it is proceeding with the reverse-forward stock split in order to delist from the AMEX:

Jaclyn, Inc., a Delaware corporation (the "Company"), held a special meeting of stockholders on May 7, 2008. At the special meeting, a majority of outstanding shares of the Company's common stock, $1.00 par value per share, adopted and approved amendments to the Company's certificate of incorporation to effect a reverse stock split of the Company's issued and outstanding shares of common stock at a ratio of 1-for-250, followed immediately by a 250-for-1 forward stock split of the shares of common stock.

Nothing has happened to my shares but I hope it goes through successfully. I'm in Canada and I hope there isn't some complication with foreign holders. I also bought under two different accounts at two different brokerages (my regular investment account and my RRSP (similar to 401k/IRA in USA)) and I hope my shares get tendered (if it does fail, it would clearly be a case of too much greed on my part :) ).

Jaclyn is a good example illustrating how small companies don't release information in a timely manner and can disadvantage passive public investors. Their shareholder meeting occurred on May 7th but the filed this release with the SEC on May 12th. If this were a large company, information would have been filed more quickly. None of this mattered much in this case but it does show how information flow is limited with smaller companies.

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