Thursday, November 15, 2007 3 comments ++[ CLICK TO COMMENT ]++

Articles and Thoughts on Bond Insurers

If you are not familiar with the current situation regarding bond insurers and want a quick article that summarizes the present situation, check out this overview by bloomberg.com. I think this news article pretty much sums up the Street's view.

Reggie Middleton in his blog presents the bearish case for the bond insurers (LOL dig his humourous diagrams). He uses Bill Ackman's presentation to make his points on why MBIA is going to zero. He calculates that a 104 bps (basis points) change in CDO spread wil wipe out MBIA's capital. I'm not really sure how he calculates that so I can't really comment much.

One thing to realize about going into these monolines is that you are going up against Bill Ackman of Pershing Square. I don't know much about him but he seems to be a value investor with a good track record (something like 27% annual return for many years). Bill seems like a smart investor and I have to think about where he is wrong and why. All I know is that he has been bearish on companies like MBIA for over 5 years and was wrong all this time, until this year of course...

David Dreman also warns people to stay away from monolines (he labels CDOs toxic waste). I highly respect Dreman (he is one of the top contrarian investors ever) but his strategy involves holding hundreads of high quality stocks so I am not entirely sure his comments apply to focus investors...

On the bullish side we have Martin Whitman, who, as of last published report, is long Radian (a AA-rated insurer), MBIA (sizeable stake), and Ambac. He took his position early this year and it remains to be seen what he thinks of them given what has happened in the last few months. I'm eagerly awaiting his annual mutual fund report (likely released in January) to see what he thinks. Unfortunately I may take a position before that.

One other thought that is running through my head is why Bill Miller, who I highly respect, said homebuilders, mortgage lenders, etc are worth buying. One thing that one needs to figure out is how bad the housing situation will end up being. If it can get much worse, as some bears claim, one should steer clear of a lot of these housing-related stocks. But why does Bill Miller still like them? Someone who is smart and skilled like him must clearly understand the nature of the situation. So does he think that things should flatten out at some point?

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3 Response to Articles and Thoughts on Bond Insurers

synchro
November 15, 2007 at 11:54 PM

I used to have a lot of respect for famed value investors such as Martin Whitman, David Dreman and Bill Miller. But their stock picking this year is frankly dreadful, and their thought process on the housing bubble is perplexing. Each of them had picks that turns out to be disasters. Whitman has his Ambac, Dreman has his Novastar, and Miller has his homebuilders and Countrywide. I think there's a certain level of arrogance involved -- their past success made them overly confident.

November 16, 2007 at 10:20 AM

What you are saying is true Synchro. But these are some of the best investors around. I will give the benefit of the doubt to them. A couple of off-years won't make me ignore them, especially if you are an intermediate term or long term investor.

I think what happened to some of them is that they fell into value traps. Some of these investors are close to pure value investors and hence look at things from the bottom up. If you did that, you may have seen companies at amazing valuations (low P/Es, high ROE, good sales growth, etc) while the macroeconomic issues, such as housing, were falling apart. This is why sometimes putting more weight on macro or industry-wide issues avoids these traps. Remember, Buffett's USG and WMT haven't gone anywhere either.

As for Bill Miller, I'm one of those who highly respects him. Not only does he have a good track record, he is a contrarian (rare for a large fund manager) who is one of the most skilled investors around. He is one of the few who is capable of analyzing technology stocks from a value investor's point of view. His calls on Amazon a few years ago, or Dell and AOL in the mid-90's puts him in my book of the best...

Anyway, I think these guys fell into value traps... for those of us on the sidelines, we know what the trap is and just need to navigate through it...

Neanderthal
November 20, 2007 at 6:02 PM

I think that it is reasonable for someone like Bill Miller, Arnie Schneider to be wrong initially on the big picture and only focus on the valuations(this is still a very low probability event). It is highly unlikely that after such stocks took a major tumble from where they bought in at that they don't go back to do further analysis of the macro situation. With the number of times these guys being right, it does not come from blindly looking at valuations alone.

In anycase, the smoke should clear in a year or so as the last of the subprimes from 2006 resets on 2008. By that time, the stock should go much higher.

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