Showing posts from January, 2008

BCE Merger Arbitrage Situation Very Attractive

The BCE merger situation is quite attractive right now. You are looking at around 17% return by the end of the 2nd quarter (I'm primarily looking at the Canadian stock price; US$ returns will differ based on currency fluctuations). The downside risk has been significantly reduced. Andrew Willis of The Globe & Mail points out that the stock market is pricing in zero chance of the closure of the deal: BCE shares touched lows of $33.30 yesterday. At that price, the company is changing hands at a price that reflects fundamentals, not the $42.75-a-share that the Teachers' consortium promised in July. It is now possible to play the world's biggest pending takeover with next to no downside. There is still some downside risk since the stock ran up before the merger announcement. I would say the downside is around 5% while the upside is 17%. Analysts figure that based on projected earnings, plus the $3.2-billion of cash coming from the Telesat sale, plus a scheduled divi

The Monoline Circus: Time for the MBIA Act

It's really not funny when one is losing tens of thousands of dollars in an investment, but following the whole monoline industry crisis may end up being the most bizarre experience of my investing career. The latest bizarre act involves MBIA and Bill Ackman, who is trying to develop an "open source" methodology to evaluate how bad the losses will be. Not only are people to analyze the claims but they are to participate in developing better methods to determine how badly off the monolines are. He sent a letter to the insurance regulators and to the SEC (I read it was also sent to Ben Bernanke but not sure). I have no problem with shorts (they improve efficiency and allows the market to price assets better) but it's surprising that the media has given so much airtime to Pershing Square. To make matters worse (in my eyes), MBIA isn't doing anyone any favour by holding a limited conference call , where questions are to be submitted in advance. Instead of asking qu

Do the Rating Agencies Know what They are Doing?

CLARIFICATION: DougM points out that Tom Brown says he or his affiliates have a position in MCO. I assumed it was a long position but this may not necessarily mean a long position. Seriously. Do the rating agencies know what they are doing? I'm not even talking about their past ratings of structured products (that was a disaster but let's ignore that for now). I'm talking about the present. Here is Tom Brown commenting on how ridiculous it is for rating agencies to use "market sentiment" (thanks to for the original mention). In theory, the agencies are supposed to be the disinterested players with the data and sophisticated models, who keep their heads when the markets are going crazy around them. No longer. Now Moody’s says it is taking “market sentiment” into account when it sets ratings on the monoline bond insurers. What’s market sentiment got to do with it? Either the insurers have the ability to pay claims in a worst-case scenario, or t

Thoughts on Ambac and Other Monolines

Maybe I'm making a newbie mistake, with my stubbornly bullish view, but I just don't see the Ambac problems everyone is talking about. Ambac can go to zero but I don't know how one can say that for sure right now. Concern About Government Intervention One of the risks for shareholders is that the insurance regulators may seize control of the insurance company from the holding company. Bill Ackman, and others, have been attempting to get the regulator to do this for a few years now but I don't see this happening any time soon. Ambac will either have to default on its obligations or it has to be fairly certain that losses are far greater than the claims paying ability. So far neither of that has happened. Of course, anything can happen when the government is involved but I'm comfortable with what is happening. The insurance regulators seem to be on good terms with the monolines (at least Wisconsin and New York seem to be) so I see low risk of any adverse action from t

Japan Stock Research Tips

Well, it`s time to revisit Japan. If you need a reason, how about Marc Faber. It looks like Marc Faber shares similar views as me regarding Japan. He seems to be bullish on Japanese small-caps and the Yen (On a side note, this is probably the first time I have seen him suggest shorting emerging markets. He has been a superbull on EM and commodities so this is a major change in my eyes and something to watch out for). I'm just a newbie when it comes to investing and thought I would write up some techniques and methods I'm using when researching Japanese stocks. I will primarily talk about researching stocks listed on Japanese stock exchanges. Some of these stocks may trade in New York or on the Pink Sheets but anyone that is as bullish as I am should probably consider opening up a brokerage account that allows you to buy directly on the Tokyo Stock Exchange (or one of the other exchanges in Japan) for a low commission. What I have done is to open up a Yen-denominated brokerage

Ambac Conference Call & Other Thoughts

Ambac held their 4Q07 conference call on Tuesday and I was reasonably pleased with how Ambac handled the situation. I don't know if I have any insight to anything that was discussed but thought I would add my thoughts. The reason I say I don't have much insight is because nothing major has changed in my eyes. No doubt their risk models and underwriting have been poor but the real question is the actual losses that will materialize. (You can find the conference call transcript from SeekingAlpha . It has a lot of typos but it's free so can't complain :) You can access the audio call from Ambac's site . ) I was going to quote some text but am, instead, just going to touch on the key points (not in any order): Holding Company Liquidity : One of the concerns is that cash flow from the insurance subsidiary will be cut off, resulting in the holding company going bankrupt. Management said they need $90 million for interest payment on debt; have $50 million cash right no

Are swaps the future for hedge fund value managers using concentrated portfolios?

I know I'm on the opposite trade from Bill Ackman when it comes to the monolines (grr, I wish he would cover his position and take his 90% profit. I know MBIA probably screwed him over before but personal vendettas can be deadly), but he is considered to be a savvy investor who is supposedly a value investor so I pay attention to him. I noticed Bill Ackman's strategy of using swaps in parallel to his stock purchases/sales (thanks to Todd Sullivan's Value Plays for the mention). In this example, Pershing Square is taking a long position in the stock of Borders Group (BGP) (i.e. buying the stock), while also entering into bullish swap positions that will yield a profit if BGP's stock price rises. Bill Ackman is basically leveraging himself without buying more stock. He is also using CDS (credit default swap) alongside his short positions in MBIA and Ambac. Swaps such as CDS are one of the fastest growing part of the derivatives world. If you are a value investor who

Morningstar Conversation: Martin Whitman and Jean-Marie Eveillard

Thanks to for mentioning this Morningstar Advisor conversation piece between Martin Whitman and Jean-Marie Eveilla rd. For those not familiar, they are highly successful value investors who run the Third Avenue Value Fund (Whitman) and the First Eagle Fund (Eveillard). It`s an entertaining read, with a humourous Martin Whitman. Here are some things I found insightful: (MW=Martin Whitman; JME=Jean-Marie Eveillard) MW: ...We buy and hold long term. Markets go down, we take advantage. We sort of operate under the implicit assumption that if we don't know more about the situation than the market, we wouldn't be there. They operate under the assumption that the market is sending me messages; the market knows more than any individual. It's just the opposite... JME: That's right. I think it's Seth Klarman who said, "The biggest edge that value investors have is their long-term orientation," which I think jives as well with Ben Graham saying, &q

Ambac Posts First Loss Since Going Public

Hate to say it but I didn't listen to the 4Q earnings conference call in full. I don't have time right now but I'll go through the transcript on my subway ride home tonight. One of the best features from is their free transcripts. Check out Ambac's transcript here . You can read news articles all over the web to get the scoop on what happened in the conference call. Ambac basically posted their first loss since they went public more than 10 years ago. It is also a weird situation, which I'm sure threw people like Cramer off, in that the loss is higher than the share price (this happened without causing bankruptcy because the book value is much higher and the loss isn't a cash loss). As crazy as this may sound, Ambac actually posted negative revenue for 2008 (minus $4.18 billion). Fortune had a somewhat humourous take on this, pointing out that this makes Ambac the smallest big company on the Fortune 1000 list. The Fortune 1000 is sorted by rev

Wild Day

Wild day and not sure what to say... A lot of stuff happening all over the world... Most of Asia has been clobbered over the last two days. Some markets, like Hong Kong, Japan, and India are down quite a bit (Indian market supposedly hit circuit breakers and trading was halted for one hour)... Europe isn't doing so well either... commodities are also down. The key commodity to watch is Dr. Copper. Copper corrections are thought to be a good indicator of economic weakness... Having said all that, the US market is stabilizing and showing strength. Not sure if these gains will hold in the afternoon... The Federal Reserve rate emergency cut, which takes at least 6 months to work its way through the economy, won't save equity prices if the underlying economy is indeed weak. However, it will mitigate the economic slowdown and should help consumers, particularly the stretched homeowner whose ARM is resetting. I think this is what is giving some push to the financials. Bank of America

Talk About a Sea of Red

Americans taking the day off will be welcomed with a sea of red across all the major stock markets of the world... Practically everything is red. Check it out (source is Wall Street Journal Markets Data Center --a very good overview of all things financial): (note that some of the markets were closed so some numbers are from Friday; coincidentally, my former home country, Sri Lanka is the only one green in the pics below ;) Trust me, nothing good is happening in that country :( ). Major World Markets Selling Started Off in Asia... Infected Europe... And Clobbered the Americas... Commodities were also down but the US markets were closed so US commodity prices aren't available. One of my calls was for the Japanese Yen to strengthen and it looks like it is happening. There is also a possibility of US$ strengthening if the sell off continues. The performance of US markets tomorrow will set the mood for all the other markets. One of the big events tomorrow is the Bank of America confere

The Most Important Conference Call in Ambac's History

Ambac will hold the most important conference call in its history tomorrow. When I made the investment in Ambac a few weeks ago, I never thought it will lose its coveted AAA rating. I never thought it will be the first AAA to be downgraded (always thought FGIC would be the first). It's all surreal given that Ambac was named monoline of the year as recently as a few months ago. Anyway, things haven't unfolded quite the way any Ambac shareholder was expecting and we need to deal with what we have. There will be a lot of things happening but key items to watch during the conference call include the future strategy of the firm, management change thoughts, and the $1.1 billion loss that was pre-announced. Run-off? The main decision that Ambac will have to make is whether to go into run-off or to operate as a AA-rated insurer. It doesn't necessarily have to make this decision right now but management needs to lean one way or another. Shareholders don't need anymore ambigu

Montpelier Re Thought: Reinsurance Pricing Likely Weak

A few weeks ago, the Wall Street Journal supposedly (I don't have access to it) speculated that Berkshire Hathaway's stock was down because reinsurance pricing was weak (here is a link to the CNBC reference to the article ). It blames "a soft market in one of (Berkshire's) core businesses -- reinsurance." Writer Liam Pleven says prices are "weakening quickly" on property-catastrophe reinsurance policies as they come up for their annual renewals around this time of year. Marsh & McLennan's reinsurance-brokerage unit reports an average decline of 9 percent for January 1 renewals... A shift away from reinsurance, says the Journal, could hurt Berkshire's profits this year, although "it might not have to payout as much if a big storm does hit this year." Although Montpelier Re (MRH), one of my holdings, is not quite the same as Berkshire Hathaway or Marsh & McLennan, the pricing trends are likely the same. MRH will likely see

Merger Arbitrage Blowing Up

Felix Salmon of Portfolio magazine comments about some blow-ups in the merger arbitrage world. He wonders whether Sam Heyman, who runs a merger-arbitrage hedge fund, has lost $1 billion with his bet on the Sallie Mae takeover by Chris Flowers. That deal fell apart and is the poster child of a failed merger. It's working its way through the courts so who knows what will happen in the end but, whatever the ultimate outcome, the merger arbitrage investors likely lost money. I looked at the Sallie Mae merger but didn't want anything to do with mortgage, finance, housing, or other related companies at the time (Sallie Mae is in education finance). I went with the Tribune risk arbitrage instead. On top of hedge funds not disclosing details, it's difficult to say how much a merger arbitrage fund actually loses. The sophisticated funds will likely hedge their strategies. Who knows if Heyman shorted some financial stocks or some index to hedge their risk? What's working against

Still Not Sure I Made A Mistake With Ambac

One of the toughest things to figure out in one's life is whether they are living in denial. This was the case with love for me; now I wonder if my investing mind is messed up or not. I still don't know if I'm in denial or if my original views are correct. It's still not clear that I made a mistake. Check out this Barron's article on MBIA to see why I am still sticking with my views (for the most part). The article's views run parallel to what Martin Whitman was saying in his fourth quarter commentary, and my original investment thesis. The run-off value just seems so high compared to the stock price (to gauge run-off, I'm looking at book value (and for more optimistic scenario, adjusted book value)). If MBIA can actually maintain its AAA rating, their revenue will be very high compared to claims. Ambac, now that they've lost their critical AAA rating, will have lower revenue so it isn't as rosy but the liquidation value still looks really high (a

Dumbest Comment of the Year: Cramer Wants to Nationalize the Monolines

This is getting bizarre. I know shareholders like myself have been clobbered, not to mention those who have owned the companies for longer. But the dumbest thing to come out is Jim Cramer's recent suggestion that the government should nationalize the bond insurers. ( here is an article on it and here is a video ) These companies, Cramer warned, could go "belly up" in weeks, if not days. If that happens, he predicts, the banks could quickly run out of capital, and the Dow could plunge as much as 2,000 points. Cramer said the crisis could be avoided if the federal government steps in and purchases the four failing insurers and then pays out 50 cents on the dollar to the banks for the failed loans. Under the current scenario, he points out, the banks get nothing and the whole economy suffers if the insurers fail. With Cramer's plan, a single $250 billion injection could cure the entire problem and establish a bottom for the financial stocks. If this step is taken

Fitch Downgrades Ambac to AA

Well, what I thought never would happen, finally happened. Fitch downgraded Ambac to AA. Credit rating agency Fitch Ratings downgraded bond insurer Ambac Financial Group Inc. to "AA" from "AAA" on Friday, which could force the company to stop writing new insurance... The rating also remains on negative credit watch for a further downgrade. Fitch also adjusted the ratings on 137,990 municipal bonds and 114 non-municipal issues as needed (higher of the underlying rating or Ambac├Ęs new AA rating). I invested in Ambac with the expectation that it will retain its AAA rating. However, that is not what happened and I'm forced to consider the situation as it has unfolded. Losing the AAA rating is a big disappointment to me given that one of my reasons for investing in Ambac was with the thought that it would retain its rating while others were downgraded. This is going to get complicated (I hope Ambac fleshes out some strategy in the conference call on Tuesday) b

I Agree with Evercore Asset Management: Ambac Should Forget About the AAA Rating

Given the massive drop in the share price of Ambac, I don't think issuing shares is viable anymore. One of Ambac's shareholders, Evercore Asset Management, is urging management to avoid purusing the AAA rating at all costs (here is their full press release (thanks to Housing Wire for the mention)). Evercore has supposedly been urging Ambac to give up its capital infusion strategies for several months. So this is not a last-minute opinion. For me, it is a last minute opinion. I only came to this conclusion after seeing the share price drop today. I think raising $1 billion to $2 billion is acceptable to me when the market cap is around $2 billion. Given that Ambac is only worth $633 million right now, you will basically give away the company in order to maintain the rating. This is clearly not maximizing shareholder interests. I'll quote some of the points that I find useful from Evercore's press release: We are long-term oriented, contrarian investors, with a typ