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Showing posts from March, 2008

CIFG Asks Fitch To Cease Rating Its Financial Guarantors; Ambac Presentation

CIFG is the latest party to ask Fitch to end the rating of its insurance subsidiaries. CIFG Holding Ltd said on Monday it asked Fitch Ratings to withdraw ratings for its CIFG Guaranty bond insurance unit and two affiliates, citing a lack of confidence in the credit agency's approach. The request to withdraw insurer financial strength ratings for CIFG Guaranty, CIFG Assurance North America Inc and CIFG Europe was disclosed hours after Fitch cut CIFG's ratings for a second time this month, amid worries about its capital position and exposure to U.S. subprime mortgage debt. CIFG said it believed Fitch "is not in a good position to accurately determine the appropriate capital requirements for CIFG's insured portfolio"... The other major credit rating agencies, Standard & Poor's and Moody's Investors Service, have also taken away CIFG's "triple-A" credit ratings. MBIA asked Fitch to stop rating it about a month ago so the problems faced

Inadvertently Investing In Criminal Enterprises

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Have you ever wondered if there was a possibility that you might invest in some criminal organization? Without knowing it, that is? Well, one of the Japanese companies I was following, Suruga (TSE: 1880), was recently outed as a business that thrived on corruption. Who knows what the final outcome will be but the CEO, who is also the majority owner of the company, just threw away his company. Crime does indeed not pay! I was looking at the chart of Suruga and couldn't figure out why the stock dropped so much. (source: Tokyo Stock Exchange) There were a few days where the stock didn't trade a few weeks ago. Being in Canada, it's hard to know what was happening but I finally found some news from Google. As a side note, news is one of the problems with investing in foreign stocks (although I will note that a small-cap like Suruga wouldn't generate much news even if it were Canadian.) It looks like Suruga's explosive growth over the last few years was due to the use o

Worth Increasing US$ and Yen Exposure

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Over the last year I have been wrong--big time--regarding the US$. I paid for my incorrect decision by losing around 10% of my portfolio last year due to the US$ decline against the Canadian dollar. However, I am maintaining my mildly bullish view of the US$. The US$ will likely fall while its economy weakenes and the Federal Reserve cuts rates, but I believe it has declined sufficiently against the Canadian dollar. My feeling is that the US$ will mostly fall against the strong Asian currencies and the Yen. I am also strongly bullish on the Japanese Yen. The Yen has increased quite a bit in the last few months but I believe it has further to go (but this can take years). I am planning to increase my exposure to the US$ and Yen. Ideally, I would like to hold 50% of my portfolio in Yen-denominated assets (such as Japanese stocks). The Japanese stock market has been selling off like crazy so I'm not sure if I should just convert some money to Yen and wait, or to plunge headfirst while

Another Bubble Pops: Hedge Funds

Almost every economic boom results in the rise of certain financial assets to celebrity status. In the late 90's, the dot-com bubble resulted in IPOs (initial public offerings) being all the rage. Recently, the real estate bubble led to a boom in certain derivatives, with disastrous results in ABS of RMBS (asset back securities of residential mortgage backed securities) and CDO of ABS of RMBS (CDO stands for collateralized debt obligation). But this write-up isn't about any of them. Instead, this is about the rise and fall of hedge funds. Hedge funds--the given label being as foggy and mysterious as the funds themselves--have been around for more than 50 years. Two of the most famous investors of all time, Benjamin Graham and Warren Buffett, ran hedge funds many decades ago. They are nothing new and are not going to completely dissapear. The question, instead, is whether they have grown too big--often on promises of unsustainably high returns--and will shrink. I fall into the

Monolines: Historical CDS Chart

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I am not too knowledgeable about the CDS (credit default swap) market and I feel that it is too illiquid and irrational at times. However, it is worth looking to see how the players in the CDS market perceive risk. Thanks to the author of the Accrued Interest blog , I was able to obtain the CDS charts for selected monolines and Berkshire Hathaway (as a side note, Accrued Interest is one of the best bond market blogs I have run across. There are good posts that explain the details of difficult-to-understand concepts.) I wil be showing Berkshire Hathaway CDS spreads as a benchmark; while the monoline insurer spreads are my main interest. For those not familiar, a credit default swap is a derivative contract which allows the buyer of the CDS to swap an underlying credit instrument (say a bond of some company) when the company defaults. Essentially, the buyer of a CDS contract receives protection against default of a bond (or some other credit). In some sense, it is a very crude form of bo

Fairfax Injects $350 million Into Struggling AbitibiBowater

The main contrarian forestry industry stock I'm following is AbitibiBowater (ABH). If you are looking at the forestry industry, you can either go for forestry companies that produce wood products or paper products. I decided to avoid the wood companies due to the housing uncertainty. ABH is a leading paper company which I haven't posted much about lately because I'm waiting to see if the company can stabilize its operations. Abitibi and Bowater merged a few months ago to create the largest paper forestry company. On top of horrible fundamentals (weakening paper demand, increased costs due to C$ increase, overcapacity in the industry), ABH has high leverage. Lately there have been some concern about ABH's ability to re-finance its debt. There was one big positive move recently, which occurred when Fairfax, run by Prem Watsa, a value investor, decided to pump $350m into the company : According to the terms outlined in the news release, Fairfax is buying the five-year

The Downside of Being an OPMI: The Bear Stearns Case

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Bear Stearns provides a good illustration on the shortcomings of being an OPMI (outside passive minority investor). The fact that Bear Stearns is being "saved" is probably good for the markets but the same cannot be said for the shareholders. Who knows what the facts are in this case but here is what has transpired. Bear Stearns, one of the top 5 independent investment banks, collapsed under the most murky of circumstances in many decades. It has a book value of $84/share but was offered a price of $2/share by JP Morgan Chase & Co. The deal disallowed the board of directors or other key employees from soliciting other bids (this apprently didn't stop James Cayne, one of the biggest holders and current chairperson, from soliciting others). Imagine if you were a shareholder. What seems like take-under deal was signed by the board of directors (who are supposed to represent the shareholders) at the last minute. Most shareholders would have taken a loss of around 90% so i

Adding Seiko to Watch List; Removing Others

I was searching the Japanese stock market (which still keeps dropping) for well-known brands and came across Seiko (TSE: 8050). I'm sure many of you have heard of Seiko, the Japanese watch company. The Japanese market continues to sell off and valuations keep getting cheaper and cheaper. The Japanese Yen has been strengthening and this is going to hurt exporters. Over the last few years Japan has relied on exports so their economy will take a hit. However, my feeling is that the lower valuations will compensate for any weakening of the economy. Seiko is one of the dominant players in the watch industry. I don't know anything about watches (I'm not into them at all) so it's not clear if Seiko has a competitive advantage in the marketplace. Apart from the super-luxury brands, it doesn't seem like there is a huge brand loyalty at the low-end to mid-end area. Furthermore, with all the fake watches floating around, the watchmakers will face a continuing threat. Neverthe

How Good Is Your Current Investment Knowledge?

No, this is a different kind of knowledge. Paul Krugman has a quite humourous post on his blog about acronymns that have been floating around in the investment world lately: So, OFHEO got out of line with PCE, leading to a plunge in CDOs backed by RMBS, at least according to ABX. CRE looks similar, according to CMBX, and ABI suggests bad stuff ahead. Meanwhile, both the TED spread and A2P2 are flashing red, not to mention ABCP and ARS, which have just gone away. (Nobody even remembers MLEC.) HELOCs are being cut. Can TAF and TSLF save the day? (source: Paul Krugman, The Conscience of a Liberal blog, March 19, 2008) So how well did you understand all that? If you knew the terms, you are probably a bad investor ;) It probably means that you made bad investment decisions and ended up being in the middle of the biggest financial crisis to hit Wall Street in over 25 years. I know all the terms except ABI and A2P2. If I didn't make my disastrous investment in Ambac, I probably would

BCE Deal Closing Delayed

One of the risks with risk arbitrage is the possiblity of deals taking longer than expected. I don't have a lot of money invested in the BCE deal and I can wait, but it was delayed yet again . It looks like the deal will now close by June 30th. Given the calamity in the debt market, the delay may be a good thing.

A Whiff of Deflation Wafts Over Commodities

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(source: stockcharts.com) One of the biggest one day corrections in CRB history... Still too early. We have been here before. Corrections like this are nothing new. The comodity complex is simply back to where it was two months ago.. But is this the beginning of the end of the commodity bull market? Short-term T-bill rate is below the Japanese short-term rate . Yikes! Anyone doubt the forces of deflation? Stay tuned...

Bloomberg Interview with Jean-Marie Eveillard

Here is a Bloomberg interview with Jean-Marie Eveillard. The interview is not too insightful except for some of his stock picks so you can skip this one if you wish. As is generally the case, when commentators say they like a stock, you need to be careful with price. It's often not clear if the commentator likes the stock at the current price or if they just like the company in general. Some quick notes: Visa/MasterCard vs American Express: He says that the business models of Visa and Mastercard are more uncertain than Amex. I disagree with that. Yes, Amex is more diversified in having a credit card issuing operation (whereas Visa and MC generally just process transactions). But Visa and MC are like tollbooths in that they collect a fee for every transaction. Jean-Marie Eveillard thinks that the fees may go down but I don't think that's a problem. The untapped market is so huge (CC pentration in many developing countries is low) and Visa/MC have such a large barrier to

Monoline Insurer Legal Battle: SCA vs Merrill Lynch

I think there may be some solid lawsuits that monoline insurers may launch against mortgage bond issuers accusing them of fraud (I don't know if they will win and it will take many years--monolines' fate will have been settled long before). However, there will be some legal challenges by some in an attempt to win something without any ethics on their side. That is, a lawsuit trying to weasle your way out of your obligations on some technicality. I personally don't view this as ethically sound since you are simply using the letter of the law. However, that's how the legal system works so these cases are to be expected. The first attempt by a monoline insuer to avoid paying damages is SCA. SCA is trying to void its CDS-type insurance contracts that it underwrote for Merrill Lynch. Today, Merrill Lynch sued SCA in court. Here is some background from Bloomberg : Hamilton, Bermuda-based SCA, stripped of its AAA bond insurer ratings this year by the three major ratings com

How Badly Is Sears Holdings Performing?

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There have been quite a lot of press in the last year about Sears Holdings' problems. Shareholders, especially that bought shares within the last 2 years, likely aren't a happy bunch. But how badly has it actually been performing relative to the competition? (source: Yahoo! Finance) The above 2 year chart plots Sears against some of its competitors such as Macy's, JC Penney, Home Depot, and Target. The S&P Retail Index (^RLX) is also shown on the graph. As you can tell, Sears Holdings has largely been following the broader retail trend. This does not excuse Sears' performance, for great companies stand out from the competition, but it does mean that it isn't doing any worse than the rest. Practically all the retailers (except possibly the ones catering to lower-income shoppers like Wal-mart (WMT)) have been doing poorly given the weakening US economy. The pattern will be different from longer periods of time (SHLD actually does better) but my point here is to fi

The US Dollar...

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(source: The Economist) No doubt George Washington is crying over the fate of the US$... So Are Foreigners... But... The fate of the US$ has always looked grim during crises is it different this time? The fate of the US$ is likely destined to have a poor outcome... for the basic reason that developed countries have a harder time growing than developing ones. It is likely (just a guess) that the US$ will weaken against whichever country grows its economy in the future (such as China or Russia, or who knows which one). The following chart from the Federal Reserve shows how the US$ has done exceptionally well over the last few decades but I don't think it will repeat that performance... (source: Federal Reserve Bank of St. Louis)

What's Wrong With Investment Banks?

I ran across an excellent opinion piece in Fortune that talked about the problems with investment banks (on a side note, there is also an interview with Paul Krugman , an economist, who thinks the housing mess can get much worse). Written by Shawn Tully, the article, titled The end of Wall Street as we know it , points out three root problems at Wall Street firms. Everyone should consider the three issues that I quote below before investing in any investment banks. I think the article is very good at identifying why investment banks are often better at enriching employees than shareholders. The three big weaknesses of Wall Street are deeply embedded in its culture. First, firms rely far too heavily on trading as opposed to solid, reliable fee-based businesses favored by big commercial banks. As we'll see, one type of Wall Street trading is consistently lucrative. The rub is that firms always blow it on the risky trading. Second, firms embrace leverage levels so dangerous that

Yen Carry-trade Continues to Unwind

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The Yen carry-trade is continuing to unwind as the US markets weaken. The Yen is up around 10% for the year against the US$ (the chart shown below is Yen against a basket). (source: stockcharts.com) Many investors, including me, have been expecting the Yen carry-trade to unwind for a while now. If the US markets correct much further, I actually think the US$ may stabilize or start to rally. It seems unlikely but there has often been big capital flight into US$-denominated assets during crises in the past. The strengthening Yen will present an interesting situation for Japan. For the last decade or more, Japan has relied heavily on exports. This is why the JCB was always tried to manipulate their currency downwards. If the Yen strengthens, Japanese exports will get hit and the economy can't depend on exports to the same degree as they have in the past. It remains to be seen how well Japan adjusts to the stronger Yen (assuming the Yen does strengthen permanently). Their government is

JP Morgan Chase Acquires Bear Stearns

JP Morgan Chase & Co just announced that it is acquiring Bear Stearns in a stock swap deal. It values Bear Stearns at $2/share (around $270 million) and the Federal Reserve is providing up to $30 billion in funding for some of Bear's less liquid assets. Given that the shares closed at $30/share on Friday (for a market cap of $3.5 billion), it's pretty much a total loss for Bear Stearns investors. Its most recent book value (back in November I believe) was around $80/share. I have only been investing for a few years but I have never seen a company vaporize so quickly. The situation with Bear Stearns just goes to show how opaque and complicated financial businesses, especially investment banks, are. Supposedly $16 billion in liquid cash evaported from Bear Stearns' balance sheet within a week. The JP Morgan Chase takeover, which was facilitated by the central bank, avoids any counterparty risk that would have arose if Bear Stearns collapsed on its own. Overall this is

Added to Watch List: Kenneth Cole Productions (KCP)

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I need to diversify my investments a bit and have been looking at the other big beaten-up sector in the US markets last year: consumer discretionary. Lately I have been looking for a good food products, clothing, or retail business. Sears Holdings (SHLD) is one option that I'm looking at. Another new one I'm considering is Kenneth Cole Productions (KCP). Kenneth Cole Productions is a small cap company that designs and sells shoes and apparel targetted at the fashionable middle-class. Like most clothing or shoe companies, it is down about 50% from its peak in the past year. The company has been on a downtrend for the last few years, with weak sales and earnings. There are a lot of other companies with similar characteristics so it's hard to say if this company is uniquely attractive. Ticker: KCP Market cap: appox $300 million P/E: 44.80 (depressed) Forward P/E: 16.59 P/S: 0.59 P/B: 1.24 ROE: 2.84% (depressed) Debt/Equity: no debt The chart below, courtesy Morningstar, shows

Value vs Glamour

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Being contrarian generally means buying out of favour assets. Often, contrarians and value investors are indistinguishable and they follow the same strategies. Does buying out of favour stocks work well over time? David Dreman has shown in his books that low valuation stocks, as measured by P/E, P/B, P/S, or dividend yield, outperform high valuation stocks. John Neff has also remarked that his highly successful strategy of the 70's and 80's is best considered as a low P/E investing strategy. If you want to see how out of favour stocks can do better than the popular ones, consider the following example from the Brandes Institute , run by the value investing firm, Brandes. In their article entitled Value vs Glamour: The Challenge of Expectations they present the following example of 5 largest popular stocks from the 1st decile vs 5 largest unpopular ones from the 10th decile: source: Value vs Glamour: The Challenge of Expectations , Brandes Institute The 5 stocks in the top de

Bear Stearns Collapses

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Bear Stearns, one of the largest Wall Street investment banks, is on the verge of collapse and had to borrow money from the Federal Reserve today. Since Bear Stearns can't borrow directly from the Federal Reserve (it's outside of the Federal Reserve system of banks), its borrowing was done through J.P. Morgan Chase & Co. The key problem is, courtesy of WSJ MarketBeat blog , is a withdrawl of funds by customers: Mr. Molinaro notes that both he and Mr. Schwartz said earlier in the week that liquidity issues were not a problem at the beginning of the week, but “I would would say on Thursday we experienced pretty broad cash outflows from a number of different sources,” including prime brokerage and repo, and also saw “mark-to-market calls on open derivatives contracts. It was from a lot of places and there was a lot of concern in the market, and we had a significant level of outflows.” The main problem at Bear Stearns is one of liquidity. It looks like their customers have cea

Ambac Chairperson's Letter

Ambac released a letter from the CEO talking about their situation. It is a typical public relations letter with very little substance. The only noteworthy point in the letter (at least to me) is their strategy of staying in the structured finance business. Ambac’s business has been and will continue to encompass more than U.S public finance. Diversity of our business strengthens Ambac, as acknowledged by the rating agencies. In the U.S. we will continue to insure student loans, utility issues and certain other structured finance issues that meet our enhanced risk parameters. Outside the U.S., Ambac will continue to insure securities funding hospitals, roads, schools, public transportation and so forth. In contrast, unless I am misunderstanding MBIA, it looks like MBIA wants to wind down its structured finance business and concentrate on municipal bond business. MBIA is also trying to split over the next 5 years, whereas no word of any split from Ambac. My guess is that Ambac gave

US Government Hearing Over Municipal Bond Rating

The American Congress will be holding hearings on rating of municipal bonds. The issue being discussed is whether municipalities, which includes public-private partnerships, quasi-government entities, and so forth, should be rated using the same scale as corporate debt. Presently, the munis are rated on the sovereign (national government) debt scale. Those who are not familiar with the bond ratings right now (I suppose this would be casual investors because debt investors would clearly know the differences and what they mean) may be confused with having multiple scales. The municipalities are of the view that they are paying too much since they are being under-rated. It's not clear to me if the government is seeking one scale to rate everything or if they just want to rate municipalities on the corporate scale, excluding national governments. The question if one scale is adopted is, of course, whether municipalities are under-rated or whether corporations are over-rated. Does a

Battle Between Fitch and MBIA Heating Up

Wow, Fitch won't just go away quietly. The battle between MBIA and Fitch is getting heated by the minute. Here are some headlines from MarketWatch.com : 1 minute ago - Fitch calls MBIA info destruction request 'disingenuous' - by Wallace Witkowski 11 minutes ago - Fitch asks if MBIA seeking equal S&P, Moody's concessions - MarketWatch 14 minutes ago - Fitch: MBIA requested destruction of key portfolio info - MarketWatch 16 minutes ago - Fitch willing to waive rating fee for MBIA - MarketWatch 22 minutes ago - Fitch sees conflict in MBIA partial rating withdraw request - MarketWatch 23 minutes ago - Fitch 'considering' MBIA request to withdraw IFS ratings - MarketWatch Fitch is calling MBIA's bluff (the excuse that the fees are too high) and says it will waive its fee... Fitch also seems to suggest that there is a conspiracy between MBIA and the other two big rating agencies. As an Ambac shareholder, I personally feel that Fitch isn'

Ambac's Swan Song...plus MBIA Thoughts

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Well, Ambac just gave away 2/3 of its company. Last week was probably the worst feeling for me as an investor. It's one thing to take investment losses because of poor business decisions or market price fluctuations. But it's another when management does something that one feels is not sufficient. Ambac, one of my biggest holdings, just gave away 2/3 of the company with a huge stock issuance at a very low stock price. Ambac completed its $1.5 billion capital raising plan outlined earlier this week. The deal is horrendous for shareholders but it satisfies Moody's and S&P--for now. Ambac Financial Group, Inc. today announced that it has priced its $1.155 billion public offering of 171,111,111 shares of common stock...at $6.75 per share and has granted the underwriters a 30-day option to purchase up to an additional 25,666,667 shares of common stock to cover over-allotments, if any. In addition, Ambac announced that it has concurrently priced its $250 million public offer