Showing posts from October, 2007

Some Estimates on the Needed Housing Inventory Reduction

UPDATE: Here is an article from BusinessWeek talking about the housing inventory. WSJ Economics Blog refers to Richard Berner of Morgan Stanley who is forecasting the needed decline in housing starts and prices to bring a balance to the industry. Brace for a much deeper housing retrenchment: Builders may have to cut 40% more from single-family housing starts to balance out supply and demand, Morgan Stanley chief economist Richard Berner says. At the same time, real home prices will have to drop by 10% to make housing more affordable. “Neither that construction decline nor its potential effect on economic activity seems to be in any forecast,” he says in a note to clients today. I don't have access to research reports (except some free ones from my discount broker) so I'm not sure what they are saying. But this is the first time I have seen some concrete numbers for the decline that is needed. Already, housing starts have dropped by almost a third over the last year to an an

Doubts about Tribune Deal

Reuters has an article where some analysts are questioning whether the Tribune deal will go through. "The banks require that guaranteed debt be less than 9 times EBITDA as of the last measurement date before closing," Newman said. "The latest data point should bring a sigh of temporary relief to equity holders," he said. However, "we expect questions will persist about Tribune's ability to meet the 9 times covenant requirement." Although this is a requirement that one needs to worry about, the real big threat isn't even mentioned in the article. That being, the FCC approval to continue the waiver for Tribune to own TV stations as well as newspapers in the same market. That decision is likely in mid-December and I suspect the stock will trade near its takeover price when approved (if FCC doesn't agree, the stock price may collapse and the deal needs to be re-structured (possibly have to divest some media holdings)). Gimme Credit analyst Dave N

Thoughts on Housing, Bullish Market Stance, and the Loonie

Am I Ever Going to Stop Talking About Housing? I don't think I'm going to stop talking about housing until... oh... late 2008. On top of it impacting the economy, it also presents potential opportunities. Housing-related sectors are some of the most contrarian sectors out there. Paul Krugman of New York Times recently summarized some key housing charts in his blog entry. The charts easily illustrate the high-level view of what is unfolding. Check out the link to get a quick overview of the unprecedented boom in housing, and the inevitable unprecedented collapse that is unfolding. All the charts that were referenced by Paul Krugman are important but the one that contrarians may want to pay attention to is the one on defaults by mortgage origination year. The key insight, to me, is that securitizations before 1995 were fairly good--even for subprime. But anything after 1995 (or thereabouts) is highly questionable. I am thinking of investing in Ambac (ABK) (I reviewed it yesterd

Investment Evaluation: Ambac (ABK)

Ambac (ABK) Investment Evaluation Initially Written: October 27, 2007 Last Updated: - Oct 27, 2007 I’m just a newbie investor with a contrarian tilt so feel free to e-mail or post comments to correct any mistakes or to improve things. Do not blindly base any decisions on anything I say; I don’t know what the hell I’m doing ;) . Also, since I write over a period of time, some facts and numbers may change from when I first looked them up (this is definitely the case with any market-price info e.g. P/E ratio). Summary Ambac (ABK) is the second largest debt insurance company, after MBIA Inc (MBI). Its business is to insure interest and principal payments on various debt for governments, infrastructure projects, mortgages, and so forth. Generally it doesn't insure the value of the debt, and only insures the payments. This is important because, given the credit problems in the mortgage and the ABS market, ABK will be spared the losses on the value of the debt. Due to credit issues and va

Big Economic Events Next Week

A true value investor doesn't pay much attention to economics (that's what Buffett and others say*) but I'm not one so I pay attention to economics. Next week is shaping out to be a huge week. It might actually be the most important one for the year given the calamity over the last few months. The important ones in my eyes are the following: Oct 31 2:15 PM FOMC policy statement : The market is pricing in a cut. I sold my bonds (TLT) last week and my feeling is that a 0.25% cut is likely. However, due to a bunch of conflicting signals, it is not as clear as many think. WSJ Real Time Economics Blog has a brief overview of the different possibilities. Nov 1 8:30 AM Core PCE Inflation September : Consensus is 0.2% with last month's being 0.1%. I'm in the disinflation camp so I expect inflation to be low. Nov 1 10:00 AM ISM Index Oct : Consensus is no change from last month's 52. ISM index is one of the the most important econmic indicators. I posted a while ago abo

To Watch: Ambac (ABK)

I wasn't around back then but it seems like the current plague infecting financial stocks is similar to the savings & loan crisis. I have read books/articles where investors said that solid banks were being sold off along with the trash. I'm reading John Neff's book on investing and he was saying how Citigroup was literally being given away even though it was a solid company. I feel like the present situation is similar the way the market is treating companies like Merril Lynch (ML) and Countrywide Financial (CFC). Anyway, literally anything related to mortgages, debt, subprime, and the like, are being sold off sharply. The latest sub-sector seems to be debt insurers. These are companies that insure debt--similar to insurance companies. One company that caught my eye is Ambac (ABK), which is a very large debt insurer. (numbers from Yahoo Finance and may be misleading (need to double-check)) Market Cap (intraday)5: 4.47B Trailing P/E (ttm, intraday): 5.82 Forward P/E (fy

Jim Rogers Still Bullish on Agricultural Commodities and Bearish on US$

Jim Rogers appears to be still bullish on commodities. I recall some concern he had about overheating in the commodities markets but he still seems to like them. In this article by IHT , he says he is moving out of the US$ and into the Renminbi. He is also moving into precious metals and away from the US$. This isn't anything new to anyone who has heard him talk. He has maintained that view for many years now. The information I find worth pondering are the following: Agricultural Commodities As with Marc Faber (they are both friends), Jim Rogers seems to like agricultural commodities. Rogers said he remains bullish on commodities because "that's where the big fortunes are going to be made in the world in the next five, or 10 or 15 years. The current bull market is going to last until sometime between 2014 and 2022." Commodity prices have surged as demand for raw materials, especially from China, rose faster than producers were able to increase output. Agricultural pri

Buffett: Best Investment You Can Make

What's the best investment one can make in life? According to Warren Buffet... " The best investment you can make is in yourself ," he said in response to one question from an employee about investment strategy, urging his listeners "to develop your own abilities." That, he added, "will do far more for yourself" than any single stock or other such investment. (source: Buffett Sees Subprime Woes Lingering by Kerry Olsen, October 25, 2007. Associated Press, via Yahoo Finance) This is something I need to start following. I need to develop my skills, especially when it comes to career and love. Both of those are going nowhere and it's about time I started improving myself...

Wellcare Health Plans (WCG) Drops 50% On FBI Raid

Wellcare Health Plans (WCG) is a large managed healthcare provider for the US government Medicaid and Medicare programs. The stock is down around 60% today and that's a lot for a company that was originally valued at around $4 billion. I'm taking a quick look. I don't know much about the medical field so I may pass on this but it's worth checking it out. Ticker: WCG Market cap: $2 billion TTM P/E: 11 Forward P/E: 8 P/Sales: 1.01 P/BV: 7 ROE: 38% Debt/Equity: 0.2 The risk here is that they do all their business with the government, and being on the wrong end with the government will severely hurt their future. This is also the type of business where bad publicity can be lethal. Here is a news article providing some background info.

Subprime Mortgage Debt Investing 101

I ran across an excellent article by Allan Sloan of Fortune (Oct 16 2007) on the workings of a subprime mortgage debt instrument. Anyone contemplating investing in closed-end funds and trusts that hold mortgage debt of any sort should read the article. What I quote below does not do justice to the article. John Mauldin and others have written articles on ABSes, CDOs, and mortgage debt, but this article presents a case study examining the details of why--and how--these things were created. I have to point out that the authors picked one of the worst ones out there so it may not be entirely representative of the securities that are out there. However, as investors looking to capitalize on these security sell-offs, we should consider a bad case like the one studied in this article. This issue, which is backed by ultra-risky second-mortgage loans, contains all the elements that facilitated the housing bubble and bust. It's got speculators searching for quick gains in hot housing marke

Marc Faber Interview with Bloomberg

You can find a Bloomberg video interview with Marc Faber here (approx 32 min). Marc Faber for those not familiar is a superbear who is famous for his generally bearish views. I don't see anything new in the interview (compared to his prior views), with Marc warning about the US$ and still being bullish on commodities (although he says there will be corrections, like the 50% drop in nickel in the last few months). Most of the interview is about Marc's negative view of central banks. I don't necessarily share his views of central bank interventions. Marc Faber also thinks the bubbles in China and India may collapse between now and the Olympics in China next year. However, he makes it clear that the Chinese markets can go up 2x from here even though they are in a bubble. He recommends cash and says people should hold some gold. He retains his contrarian bullishness for the US$, although he thinks it will weaken compared to gold. The bigger, longer-term, theory of his is that

Sold: 20 yr US Treasury bond ETF (TLT)

I sold my iShares 20 year US Treasury bond ETF (TLT) today. I don't know what to make of this investment. Overall it was a dissapointment (it was a loss) but I learned some valuable lessons (currency fluctuations; don't invest based on the economy). The return was positive in US$ but negative in Canadian dollars (my local currency and what really counts). The original thesis for investing turned out to be only partially correct. I invested in TLT because I thought that bond yields will decline due to a slowing economy and a stock market correction. I was targetting a 20% return based on a 1% drop in the yield (duration of the bond is roughly 20 years and each 1% change in yield results in roughly 20% change in price). I also thought that the Federal Reserve will start cutting rates in mid-2007 and there will be capital flight into the bonds. Well it never really turned out as I anticipated. The stock market never really corrected and the economy never slowed to the degree I tho

Should Central Banks Target Asset Prices?

WSJ Economics Blog has posed a thought about whether central banks should target asset prices? Right now most central banks try to influence inflation and employment, but not asset prices. The question being raised is whether asset prices, the two being suggested are stock prices and real estate prices, should be targetted as well. Economists have over the years established considerable theoretical justification for stabilizing consumer prices — it reduces “menu costs” (the effort of frequently updating prices), it helps consumers and businesses distinguish between relative price changes (which signal whether to reallocate resources) and inflation (which does not), and it helps smooth the business cycle because when inflation is high it also tends to be volatile, requiring more frequent, and aggressive, responses by monetary policy. The theoretical justification for doing the same with asset prices is less developed. A bubble does distort the allocation of capital, but when does a ris

WSJ Interview with Sam Zell

Sam Zell did an interview with WSJ on the weekend. I'll quote things I found worthwhile. Mr. Zell says, while insisting that he's told everyone he didn't try to deliberately pick a market top so much as weigh the offer against what his own instincts told him was the right price. "Somebody made an offer that was wide by a significant margin of my own valuation. So I'm looking in the mirror, and any day you don't sell, you buy, and I wasn't willing to buy at the price they were willing to pay, so I sold it." Interesting way of looking at a selling price: if you won't buy something at a certain price, it may be worth selling. "An adequate description of me would certainly be a professional opportunist," he smiles, "I've always had my own perceptions of value, and I've always been willing to go forward and risk my own capital on whatever basis I believed. And on many of those occasions, it was really lonely. You turn around and

Potential Loss of Interest Payments on ABS Securities

One of the huge risks with any ABS investment is the potential loss of interest payments. It's one thing to take some capital loss but if you lose the interest payment then it's just a piece of paper. Here is a good article by Vikas Bajaj of New York Times talking about the potential for the cut-off of interest payments on CDOs. The article gives a good overview of the risks that haven't materialized yet. For all the pain in the mortgage market, investors who hold bonds backed by risky home loans have continued to receive their monthly interest payments — until now. Collateralized debt obligations — made up of bonds backed by thousands of subprime home loans — are starting to shut off cash payments to investors in lower-rated bonds as credit-rating agencies downgrade the securities they own, according to analysts and industry executives. Cutting off the cash flow, which is governed by rules and mathematical formulas that vary by security, is expected to accelerate in the m

ABX Chart

I have been thinking hard about the Canadian ABS trust that I mentioned in my prior post. I'm one of these people who likes to think a lot and I hope this isn't a case of thinking too much for my own good . It just looks like the ABS market is such an attractive proposition right now. It' scary and very risky but it also looks like a unique opportunity. The main thesis for investing in these beaten-down ABS securities is the expectation of a rebound in the ABS prices. Check out the price declines of various home equity (HE) ABS indices (Thanks to MattWright at the forum for providing a link to markit's ABS charts ): (source: The price has been dropping since default rates started increasing back in July. The real question is how much further these things will drop. Even without knowing anything about the details of the underlying ABS instruments, I personally think that the prices have dropped too much. I can see assets rated BBB or lower dro

To Watch: Some Canadian Opportunities... Priszm Income Fund and ABCP-embroiled Trusts

Here are some ideas running my head. As usual they are contrarian and one of them is very risky (it's only risky because I don't understand it; if I did, then it wouldn't be risky :) ). Priszm Income Fund Priszm Income Fund (TSX: QSR.UN) runs 400+ market-leading fast food restaurants, such as KFC, Taco Bell, and so on, in Canada. It licenses the brands from US-based Yum! Brands (YUM). It has been struggling lately due to a bunch of issues. The stock is off 50% in the last year and looks attractive. I haven't done much homework but this looks like an amazing opportunity if you believe the economy will slow in Canada (starting with a US slowdown). I have been looking for some good companies that will do ok if the economy slows and this fits that profile. Although I think this gets classified as consumer discretionary, I don't think consumers will cut back that much given that fast food is low-end and many people depend on it. If anyone is interested in this company,

Timely Look at Gold: Still High Correlation to Broad Markets

(UPDATE near the end) I tend to follow the gold market on and off, although I'm not really a goldbug and not really sold on its long-term merits. I sold off my only gold holding for no gain shortly after buying it and have missed the gold rally completely. For what it's worth, the gold holding that I sold (and incidentally led to me missing the gold rally), Harmony (HMY), is not doing so well it seems. The stock is back near the levels I bought it at, while the gold market is rallying sharply. I still don't think I made a mistake in selling because my thesis for investing in gold did not materialize as you will see below (i.e. gold is still tracking the broad markets, albeit with a higher beta, so it can still collapse with the broad markets). I think it's timely to look at the gold market right now for a few reasons. The broad markets have rallied sharply in the last couple of months, since the credit crisis. Practically everything has gone up but perhaps the biggest i

Homebuilders... Plus Buffett's Comment on Them...

(UPDATE: One point unrelated to this post was when Warren Buffett was asked what his best investment of all time was. He remarked it was probably GEICO, the insurance company with the likable green lizard mascot. Based on my little understanding of Buffett and his history, I would have put that near the top of his best investments list as well. Interestingly, Benjamin Graham also made more money on GEICO in an earlier era than with anything else.) Wild week in the markets but anyway, some notes on homebuilders. Warren Buffett Comments on Homebuilders The new business television network in the US, Fox Business, snatched an exclusive interview with Warren Buffett. Thanks to Reflections on Value Investing for the heads up and providing some useful links. You can find excerpts of the interview here (search for Buffett near the bottom). There is some partial transcription at Wall$treetFighter , which mentions some stuff not in the video. I thought it was interesting to hear Warren Buffett

Tribune Under Discussion at the FCC

(Update: Here is a detailed article by New York Times on what the FCC is doing) I haven't posted much lately since I didn't find anything worth posting. The markets are selling off, with big time weakness in financials, and I wonder if this is the start of a big correction or not. Oil prices are hitting highs and at some point they should start impacting the economy. Anyway, it looks like Tribune (TRB) is under discussion at the FCC . Commission Chairman Kevin Martin, a Republican, this week said he wants to resolve by December whether to ease restrictions on how many media properties a company can own in a single market... But FCC Commissioner Michael Copps, a Democrat, on Thursday said Chairman Martin "has indicated he won't grant any waivers pending a vote on major revisions of the commission's media ownership rules," the paper said. ""To say we have to change the media ownership rules so we can get the Tribune deal done does not strike me as .