Showing posts from April, 2008

Quick Thought On Ambac: Losses Shifting to HELOCs and CESes

Looked deeper into the Ambac results and, although the losses are dissapointing and large, what is happening is not as surprising as it may seem. This isn't any consolation for any shareholder but here is how I see things. What is happening is that losses are "shifting" to HELOCs and CESes (for those not familiar, HELOC stands for home equity line of credit (basically people withdraw money by pledging their house); and CES stands for closed-end second lien (a mortgage backed by a subordinated claim on the house). This is not to say that CDOs aren't taking losses but the "surprisingly" large losses are showing up in HELOCs and CESes. This actually shouldn't be a surprise but given the magnitude of the numbers involved, it will shock anyone. Even some of the shorts are surprised by the large losses being posted. There are essentially two areas that can bankrupt the monolines: CDO-squareds and HELOCs/CESes. Depending on the insurance underwriting quality,

The Next Wilbur Ross?

"It's a little like a brick coming through your window..." -- Marshall Morton, Media General CEO, on Phil Falcone's Move (source: April 2008 BusinessWeek) When it comes to vulture investors, Wilbur Ross is arguably one of the best of all time. Well, this BusinessWeek article makes me think that Phil Falcone of Harbinger Capital Partners is going to be the next Wilbur Ross. The article makes for a good casul read (thanks to DaveinHackensack for the original mention in a message board post.) Here is an excerpt: (source: The Midas of Misery , by Emily Thornton. April 24, 2008. BusinessWeek) Falcone is a Midas of Misery. With $19 billion—nearly 760 times the grubstake he started out with seven years ago—he is snapping up troubled assets in bankruptcy, shorting distressed bonds, and using huge stock positions to agitate for change at underperforming companies. His holdings read like a who's who of market castoffs: media companies, utilities, and steelma

Ambac Management Doesn't Believe AAA Rating Under Threat

I haven't had enough time to analyze Ambac's earnings call (or even listen to it fully). I'll try to go through them by this weekend (although I still have to do my taxes (I'm in Canada) so I'm not sure when I'll get to it. In the meantime, I ran across a very good, and lengthy (30min), interview with Michael Callen, Ambac CEO, conducted by Bloomberg. Anything from management is likely to be sugarcoated, but, nevertheless, it sheds some light on the current state. You can also find the write-up summarizing some of the interview here (if the video in the first link doesn't work, go to this page and click on the link in the top-right section). To sum up, a big issue at the top of every shareholder's list is the AAA rating. Management rolled the dice with massive dilution in the hopes of maintaining the rating so the consequences are huge. Management doesn't believe its AAA rating is under threat (S&P and Moody's also reaffirmed their views ye

Something New From The Auction Rate Security Crisis: Student Loans That Pay Almost Nothing

We have all heard about "municipals" (which can include quasi-government entities) pay extremely high interest rates on their auction rate securities due to the collapse of the ARS (auction rate security) market. Well, now we have the truly bizarre opposite scenario of student loans that pay close to zero percent interest (on somewhat risky loans). Bloomberg has a good story on one of the side-effects of the collapse of the ARS market. (source: Auction-Bond Flops Stick Student-Loan Holders With 0% , By Michael B. Marois and Jeremy R. Cooke. April 25, 2008. Bloomberg) More than $9 billion of auction- rate bonds sold by student-loan agencies in U.S. states from Pennsylvania to Utah have trapped investors in debt that's not paying interest... The bonds pay nothing because of a formula designed to ensure that borrowers don't pay more interest on their debt than they receive from their student-loan clients. The mechanism kicked in as rates climbed above 10 percent since F

Bill Miller 1Q 2008 Commentary

Legg Mason released Bill Miller's first quarter 2008 commentary for his mutual fund shareholders and, in line with what he has been saying over the last few months, he thinks the worst of the credit crisis may be over. The big wild card, according to him, is commodities. If commodities rise much further, they can wreck the world economy; but if they decline, they will provide relief to the markets. He suggests that the Federal Reserve should avoid further rate cuts (his view is that further rate cuts won't help with the credit problems.) (source: Bill Miller April 2008 Commentary - April 23, 2008. Legg Mason) For investors who are trend followers, or theme driven, or who primarily build portfolios around forecasts, or who employ momentum strategies, price is dispositive. When they do badly, it is because prices moved in a direction different from what they thought. For value investors, price is one thing, and value is another. When prices move against us, it usually means tha

Another Disastrous Quarter For Ambac

Ambac reported its first quarter results and it was a disaster no doubt. It's a lot worse than what I, or the market, was expecting and the stock is down another 30% today. The really bad news is another $1 billion in actual expected losses. I'll summarize the key points from the 1Q management presentation below (the conference call is at 11AM EST.) I'll post more from the presentation later so if you are interested in Ambac check back later. Ambac's presentation is very detailed and finally presents some loss curves of some of their transactions. GAAP 1Q loss: $1.66 billion (this is the amount that includes mark-to-market) Essentially zero new business RMBS impairment: $1.046 billion CDO impairment: $0.9404 billion Investment agreement business loss: $95 million (last thing I need to hear is a loss in some side business :( ) Most of the direct RMBS losses coming from, not surprisingly, CES (competitors like MBIA will probably post massive losses on HELOCs as well) See

Good Example of Contrarian Stock Performance

One of the key points I learned from reading the excellent contrarian investing book by David Dreman, Contrarian Investment Strategies in the Next Generation , is that out-of-favour stocks do exceptionally well during bear markets compared to favoured stocks. The expectations are so low for beaten-down stocks that mild positives can cause them to rally. We have a really good example of this unfolding before our eyes. This may come surprising to many but one of the best peforming industries right now is homebuilders! The industry is up around 15% year to date while most of the market is slightly positive to negative. There is so much negativity around them yet they are rallying in the face of bearish news. Check out the analysis by Bespoke Investment Group (courtesy SeekingAlpha): (source: Bespoke Investment Group ; courtesy ) Who knows if this rally will last but the point is that out of favour stocks can do well in the face of negative news. A newbie investor or some

Barrons Jim Rogers Interview

Barrons conducted an interview with Jim Rogers last week and if you are a fan of Jim Rogers, check out the interview. It's a very good interview so even if you are not a Jim Rogers fan, you may find it interesting. Here are some excerpts along with my thoughts: (source: Light-Years Ahead of the Crowd: Interview With James B. Rogers , By LAWRENCE C. STRAUSS, MONDAY, APRIL 14, 2008. Barron's.) Barron's: Why not live in China? Jim Rogers: The pollution is so horrible and, at least in the cities where we wanted to live, we just couldn't bring ourselves to move there. Singapore is a terrific place. They don't speak as much Chinese here as we would like, but they speak plenty of it. Out of the top 10 most polluted cities in the world, China has 3 or 4 of them (depends on definition of pollution.) Not that I am anywhere near Jim Rogers in terms of wealth or ability to move, but I would never move to a totalitarian country like Singapore. Jim Rogers is basically sacrific

Bond Insurer Earnings Calls On Tap

Starting this week, the monoline bond insurers will be releasing their 1st quarter earnings. Ambac is the first one to report on Wednesday. Here is an Associated Press article summarizing the industry in the 1st quarter: (source: Market Spotlight: Bond insurers see altered landscape , By Stephen Bernard. Monday April 21, 2008. Associated Press) Assured Guaranty and Financial Security Assurance are among those writing the most new business, said Richard Tortora, president of Capital Markets Advisors, which provides bond advisory services for municipalities in the Northeast. Both were among the smallest players before ratings agencies started worrying about the sector's financial strength. The two insurers have been cashing in on their newfound strength, with their premiums in some cases more than doubling, Tortora said, as their trading value in the secondary markets has enabled them to charge more... As a result, both Ambac and MBIA are expected to post first-quarter losses. Analy

When Is It Worth Investing in High Yield Bonds?

A question for my readers... Does it make sense to invest in extremely long-term high yield bonds rather than stocks? Let's assume risk, and other qualities are similar between the stock and the bond (since this is junk bond, it is almost like a stock anyway). I'm just wondering about yield on a bond versus stock. For instance, would it ever make sense to invest in a 35 year bond with a yield of 13%? Investing in bonds is generally a bad idea because bonds pay fixed coupons whereas the returns from stocks increase over time. For example, a stock with a 3% dividend yield with a 10% growth in dividends per year will result in a dividend of 10.3% (on the original cost basis) in 14 years. The biggest enemy of long-term bonds is inflation but junk bonds have a relatively high yield so they are somewhat compensated. So does it ever make sense to invest in long-term junk bonds? I'm not sure how to answer this question based on superinvestors' actions. Warren Buffett likes conv

Dumb Mergers

(Illustrated by Kevin Kallaugher for The Economist ) I can't help but crack up laughing at that excellent cartoon by Kevin Kallaugher of The Economist . I mean, who came up with the dumb idea to merge two struggling airlines? Didn't we go through that phase in the 90's and it ended up with poor results for shareholders (not to mention taxpayers and travelers)? It almost seems like the airlines always end up merging at the worst possible moment: right before an economic slowdown that can seriously wreck their balance sheets. How many want to bet that these two airlines are going to be worse off in 5 years than now? The stock market certainly isn't betting on good news. The stocks of both companies dropped when the deal was announced earlier this week. Maybe this has to do with the fact that management isn't promising any major cost cutting, other than some operational synergies (even that is questionable given that Northwest and Delta use different airplanes, with on

Merrill Lynch Write-down Foreshadows Bond Insurer Mark-to-market Losses & Any Fair Value Accounting Fans Still Left?

Merrill Lynch released its first quarter earnings today and the stock is trading up. The news probably wasn't as bad as some were expecting. Merrill Lynch is cutting 10,000 workers so its not good news for workers in the industry but if housing doens't deteriorate much further (I don't think it will) then we are likely past most of the big write-downs. Do note that successful investors have different views on how much worse the situation can get in housing. The main purpose of this post is to point out the markdowns that Merrill Lynch took due to the monoline insurer hedges: Merrill's results reflected $1.5 billion in write-downs on CDOs, bringing the total over the past nine months to more than $18 billion on those securities alone. The bank also took a $925 million write-down on leveraged loans and a $3 billion loss on hedges with bond insurers. Merrill Lynch's $3 billion loss due to the monolines may indicate further deteriorating for the monolines. It gives som

How Can You Tell A Growth Investor From A Value Investor?

This is partly tongue-in-cheek so don't take it too seriously (in some sense, there is no such thing as growth or value investing--it's related)... What sort comment would you expect to hear only from a growth investor? Here is an example of a post by someone on the MarketWatch message response to a story on Merrill Lynch : MER's loss is in the billions and down only 1.8% today, but NOK qtr profit rises 25% and is down 11%. I wonder if it is to late for NOK to get into the subprime market? I hate to criticize fellow investors because I'm just a newbie who makes questionable decisions as well, but this one is way too obvious. Clearly, the poster doesn't understand the notion of market expectations . Typically I hear comments like this from momentum investors or growth investors. Some investors are actually surprised when a stock drops even though profits rise substantially. The problem, which is endemic in growth investing, is that rosy scenarios may be priced into t

A View Into Merrill Lynch's CDO Risk Mitigation Via the Bond Insurers

Anyone following the bond insuers, or having the misfortune of being a shareholder of one of them, is probably aware that XL Capital is trying to cancel its insurance contract with Merrill Lynch. Thanks to Naked Capitalism for a post about a Merrill Lynch story from the Wall Street Journal shedding some light on why XL feels it was screwed. I don't know what the fair use limit on quoting news stories is but I'm going to quote the whole section dealing with the bond insurers. (source: Merrill Upped Ante as Boom In Mortgage Bonds Fizzled , By SUSAN PULLIAM, SERENA NG and RANDALL SMITH, April 16, 2008; Page A1. The Wall Street Journal) As the CDO business slid, Merrill's top managers embarked on a new plan, referred to as the "mitigation strategy." The aim was to find ways to hedge exposure through deals with bond insurers. This would reduce the size of write-downs Merrill would otherwise have to take. Through August, Merrill insured $3.1 billion of CDOs against lo

Random Articles For The Week; Plus My Thought on Outer Space

Here are some articles I ran across that you may find interesting... one on how misleading CDS impacting the underlying bonds... a reference to an article about the best hedge-fund manager of all time... The Economist's round-up of IMF GDP projections... and a rambling post about my views on space exploration... Frankenstein's Monster: The Impact of CDS on Bonds I hate to beat a dead horse to death but I won't give up until everyone understands how misleading some of the CDS (credit default swaps) and their indexes are. Here is a snippent from an article from Bloomberg summing up the situation: Some credit-default indexes have morphed into what Wachovia Corp. analysts led by Glenn Schultz call ``Frankenstein's monster'' because they now often drive prices in the so-called cash bond market, rather than the other way around. Fearing a repeat of losses, banks are refusing to support new indexes that would allow investors to wager on everything from auto loans to E

Warren Buffett Fortune Interview

Thanks to magalengo's forum post at for the original mention of the following Fortune article on Warren Buffet. It's a quick read and it provides Buffett's thinking on the current crisis. Here are some excerpts of what I find interesting: (source: What Warren thinks... , By Nicholas Varchaver, April 11, 2008. Fortune) ...I would like to tell you about one thing going on recently. It may have some meaning to you if you're still being taught efficient-market theory, which was standard procedure 25 years ago. But we've had a recent illustration of why the theory is misguided. In the past seven or eight or nine weeks, Berkshire has built up a position in auction-rate securities [bonds whose interest rates are periodically reset at auction; for more, see box on page 74] of about $4 billion... Here's one from yesterday. We bid on this particular issue - this happens to be Citizens Insurance, which is a creature of the state of Florida. It was set up to

FGIC Planning To Start New Bond Insurer

It's quite speculative at this point but FGIC is planning to start a new bond insurer : The company, parent of struggling bond insurer Financial Guaranty Insurance Co., said it's started talking with potential investors about strategic alternatives, including launching a new business that would focus on the global municipal bond market. This new company would also assume FGIC's existing muni bond and international infrastructure business, it added. Starting a new bond insurer--it's actually more like spinning off the muni bond business--is consistent with what FGIC has indicated in the past. The main strategy being pursued by FGIC is to split its muni bond business from the structured product business. Its FSA bond insurance unit lost its AAA rating so "spinning off" the muni bond business would make sense. FGIC is one of the top 3 bond insuers so it has extensive expertise and infrastructure to write municipal bond insurance. Without the AAA rating, all these

Jim Rogers Barron's Interview via SeekingAlpha

Barrons conducted an interview with Jim Rogers , and since I don't have access to it, I'm going with a summary from SeekingAlpha . It doesn't seem like anything new. According to Eli Hoffman's summary, Jim Rogers is bullish on the Chinese renminbi, which you can go long through the CNY exchange-traded note, commodities like nickel, and Boeing (BA). He is short Citigroup, Fannie Mae, Brokers/Dealers, and homebuilders. Supposedly he has exited the emerging markets for the time being. I was heavily influenced by Jim Rogers a few years ago (actually I was really influenced by Marc Faber, but both of them share similar views.) I never really utilized his suggestions to maximum effect but I probably woudln't have invested in gold and oil stocks if it weren't for that influence. Lately, however, I don't really share the same opinion as Jim Rogers (or Marc Faber). I just don't feel comfortable with commodities. I feel like they have run up too much and resemble

The Downside to Value Investing

Let me present some of my impressions relating to the downside of being a value investor. I personally don't consider myself a value investor, but am heavily influenced by it; I consider myself a contrarian with a value tilt. Now, the definition of a value investor varies greatly but one common characteristic I find in value investors is their avoidance of macroeconomics. This is the cause of the major downside to value investing. Pure value investors do not pay much attention to macroeconomics because you can never predict the future--which is precisely what most of macroeconomics deals with. Who really knows if things are going to be much worse now than before? We are just pretending to be soothsayers, are we not? The macro picture still enters the investment decision of value investors but usually with a lower emphasis. Warren Buffett, for example, doesn't care what the Federal Reserve does or what the future expectation of GDP growth in China is, but he reads a lot of indus

Martin Whitman Roundtable Discussion at Syracuse University

Thanks to for the original citation of a roundtable discussion with Martin Whitman at Syracuse University . Martin Whitman, who generally speaks his mind (sort of like Charlie Munger) :), gives his thoughts on the current environment. If you have been following him lately, most of his comments repeat what he hsa been saying lately. I do find him insightful and reinforces some of my thinking. So check it out if you have some time. I was also searching the Syracuse University website (Martin Whitman sponsors the university) for older material and came up with the 2006 Whitman Day talk . I find this 2006 talk a lot more interesting. I think you can learn a bit more about Martin Whitman's thinking from this talk. I'm still a newbie trying to figure out what investing style suits me and whether I'm cut out for investing. I haven't paid much attention to Martin Whitman in the past (in fact, I remember posting on some message board a few years ago that I didn

Is Iceland the Present-day Thailand?

The 1997 Asian Flu (aka Asian Financial Crisis) started with the devaluation of the Thai Baht ( Here is a July 3, 1997 article from The New York Times mentioning the gamble of the Thai central bank. Obviously the gamble totally backfired, although it is debatable what other strategies would have worked). Well, Iceland is going through a severe crisis (manufactured or not) right now. The chart below from the Financial Times illustrates why Iceland is faltering: (source: Cool under fire: Iceland takes the fight back to finance , David Ibison, Published: April 8 2008. Financial Times) Although the Iceland situation has little in similarity to the Thailand problems back in 1997, I wonder if this is a precursor of further problems in other emerging markets...

Largest US Municipal Bankruptcy Looms... Jefferson County

Joe Mysak of Bloomberg thinks that the largest municipal bankruptcy is almost imminent. If it happens, Jefferson Country in Alabama will overtake Orange County as the largest municipal bankruptcy in US history. (source: Largest U.S. Municipal Bankruptcy Looms in Alabama , Joe Mysak, April 11, 2008. They're talking more about Chapter 9 municipal bankruptcy in Jefferson County, Alabama, the home of the largest city in the state, Birmingham. Who can blame them? The county is now being whipsawed by an ill-thought-out debt policy and the collapse of the bond insurers... The bankruptcy will be the biggest in the municipal market's history by virtue of the county's debt load, according to the News. Jefferson County has $3.2 billion in sewer debt; Orange County lost $1.6 billion in its investment pool. Well, chaulk another one up to the derivatives monster. Like other unfriendly derivatives monsters elsewhere, this one hasn't been too kind to the victim. No doub

Ambac 1Q08 earnings call on Wed Mar 23

Ambac Financial Group, Inc. (NYSE:ABK) (Ambac) announced that it will host a conference call for investors on April 23 at 11 a.m. Eastern to discuss first quarter 2008 earnings which are scheduled to be released at 6 a.m. that morning. The dial in number for the call is 877-407-0782 (U.S.) and 201-689-8567 (outside the U.S.). Participants may submit questions in advance of the call by sending an email to Last time Ambac had their conference call, all hell broke loose (actually it was their advanced earnings announcement but the conf call didn't exactly calm down anyone)... hopefully things will be better this time around ;) The key things to watch: New loss reserves: I'm sure there will be some additional reserves taken for losses but as long as it is very small (I'm thinking less than $200m) it would satisfy me. HELOC and CES performance: In addition to the CDO-squareds, the other potentially lethal problem is HELOCs and CESes. The problem is th

Japan's Real Estate Correction

I have been following the Japanese real estate market closely and Bloomberg had a good recap of the present situation. To sum up, Japanese real estate is going through a big correction as can be seen from the chart below. Unlike the US, I feel that the Japan market has the potential to rise (but potential does not necessarily translate into reality.) The chart plots the TOPIX (a broad stock market index) against a real estate index and the TSE REIT index. You can see that the real estate indexes ran up quite a bit in the last two years. Although I find Japanese real estate worth investigating, one of the looming risks is their shrinking population. Given that Japan has literally no immigration (it's run like a "fascist" state in a minor sense), the declining population will exert a downward pressure on real estate. This means that the attractive real estate is in the cities. I would stay away from the countryside at all costs. (source: Akira Mori's Real Estate Riches

What Will Ambac Do When It Runs Out of Space?

Here is evidence of the legal system run amok... (source: Bank of America 2008 Smid Cap Conference presentation , Ambac) What will Ambac do when it runs out of space? Smaller font? Does anyone even read these things? While I'm at it, can everyone stop trying to protect public PDF files? It accomplishes nothing for the reader and makes it difficult to extract slides from presentations. If it is confidential then go ahead; but for public presentations?

What Will Stabilize the US$

One of the reasons the US$ must decline is because of the huge trade deficit. As long as the trade deficit is large, the US$ will be under pressure (as it has been for the last few years). I have always felt that the trade deficit was unsustainable and bound to shrink when the US economy slowed down. It looks like it is finally happening. The following chart, courtesy Calculated Risk , seems to indicate that the US current account deficit has been flat for the last one and a half years: (source: Calculated Risk) The trade deficit excluding petroleum products has been rising sharply over the last year. The imports will continue to decline as the US economy slows. I have been bearish--and been wrong--on oil for over an year. I maintain my view that oil will start showing weakness once the economic slowdown is underway. Petroleum deficit will also likely stop growing once the US$ stabilizes somewhat. A lot of the run-up in oil prices during the last 6 months is due to the US$ decline. T