Can Turtles Fly?

Not too surprising to anyone following the situation but Bloomberg has a story about an experimental division of Moody's that generates ratings based on CDS (credit default swaps). According to those CDS-derived ratings, Ambac and MBIA should be rated junk. Moody's Investors Service has created a new unit that surprises even its own director. The team from Moody's Analytics, which operates separately from Moody's ratings division, uses credit-default swap prices as an alternative system of grading debt. These so-called implied ratings often differ significantly from Moody's official grades. The implied ratings frequently show that swap traders think debt is in more danger of defaulting than Moody's credit ratings signify. And here's the kicker: The swaps traders are usually right... The credit quality of bond insurers, which have been at the center of the subprime storm, differ dramatically. The official ratings of these companies say the insurers are in gr...

While the US economy seems to be stuttering along at slightly less than 1% GDP growth, the Canadian economy contracted in the first quarter, missing economic forecasts. The Globe and Mail reports : Canada's economy contracted in the first quarter of the year, the first time in five years that the country's output shrank outright. Real gross domestic product declined a harsh 0.3 per cent at an annualized rate, exposing an economy far weaker than economists' projections of 0.5 per cent growth in the first three months of the year. Canada's contraction stands in stark contrast to the 0.9 per cent expansion registered for the first quarter in the United States, where recession fears weigh heavily. The major weakness is from auto manufacturing, which is a large component of the economy. Stripping out the auto portion, the economy expanded marginally. Major cutbacks in manufacturing activity, especially in the auto sector, were behind much of the poor performance, Statistics ...

A stock I'm thinking of investing in, Sears Holdings (SHLD), posted an unexpectedly large loss . Consensus (Bloomberg) expectations of $0.15 were missed and the actual results were a loss of -$0.53. The stock was only down around 3.6% for the day so most of the negative news had been expected somewhat. Sears Holdings Corp. posted an unexpected first-quarter loss as it increased discounts to clear merchandise in the face of increased competition and a softening economy. For the quarter ended May 3, the Hoffmann Estates, Ill. parent of the Sears and Kmart chains posted a loss of $56 million, or 43 cents a share, from net income of $223 million, or $1.45, a share, a year earlier. Shares outstanding fell 14% to 131.7 million. Revenue fell 5.8% to $11.07 billion from $11.75 billion. Excluding gains from sales of assets, the company's loss would have been 53 cents a share. Analysts, on average, estimated the company would have earned 21 cents a share, according to FactSet Research. S...

As I mentioned before, Jaclyn decided to go ahead with the forward-reverse split and the downgrade its stock listing to Pink Sheets OTC. I was slightly concerned a week ago about whether my purchase would run into problems because I'm in Canada (not clear whose account these shares are held) and I purchased two sets (249 each) under two different accounts I had. Well, it looks like it went through successfully and I received my payment. Good luck to Jaclyn in the future and all the best to its employees and shareholders. I will likely never hear about this company in the future given its tiny size and it being listed on the minor exchanges. This risk arbitrage position has been successful in a short period of time. It's a small position due to the offer requirements but I'll take anything the way things are going : Average return of around 20% in C$ with currency losses shaving off about 2% (the unfashionable US$ still keeps declining ;) ). Big thanks goes out to Jeff, who ...

Here are some articles on various topics that interest me. Click through if any of the topics interest you: Vietnam: One of the worst markets this year but is there a big future? Consequences of government intervention: The Hugo Chavez example Alabama County: Update on what may be the biggest municipal bankruptcy in American history Perma-bears rule the world--for now Vietnam Marketwatch updates the state of the Vietnamese stock market and provides some opinion from various money managers. Needless to say, given that all of them work in that region, all of them are bullish. As a contrarian, I like to discount opinions about particular sector/region/asset from those money managers who specialize in them. You can get use them to generate ideas but if they say something like 'the future looks good', I would be wary. What was once euphoria has turned to gloom. In a classic case of how emerging markets offer both risk and reward, Vietnam's stocks have tumbled more than 50% this...

Ok, what I am about to say will look biased since I would have profitted from the closing of the BCE deal; but even if I had no economic interest, I would say the same thing. The BCE court decision, handed down by the Quebec Appeals court, sets a bad precedent in my eyes. If it is upheld, it will take Canada in a new direction, away from established principles of other countries like USA. An opinion piece from Al Hudec, a lawyer at Farris, Vaughan, Wills & Murphy, summarizes the situation and questions the merits of the decision: On what the court is saying... In the course of its decision, the Quebec Court of Appeal ruled that the BCE board should have considered the interests, including the reasonable expectations, of the Bell Canada bond holders. The court held that the BCE special committee's process was fatally flawed because the committee had not made a detailed analysis of the costs and benefits of the leveraged buyout -- not just for shareholders, but for other stakeho...

The Globe & Mail's investing magazine insert, Globe Investor , has a feature article profiling the Canadian superinvestor hardly anyone has heard of: Francis Chou of Chou Associates Management. Even many Canadian investors who follow the Canadian markets have never heard of him (and it's not as if we have too many successful investors up here). Those value investors somehow miraculously manage to become successful without drawing much attention (some Hollywood stars should take note ;) ). The article is titled Is Value Dead? and uses the poor performance of value investing of late to ask some pointed questions about the Chou funds and value investing in general. It's a good read so check it out . (source: Is Value Dead? , Rob Carrick, Summer 2008 Globe Investor) Warren Buffett, a giant of value investing, has achieved an almost impossible compound average annual return of 21.1% from 1965 through 2007 with his holding company, Berkshire Hathaway Inc. (compared to 10.3% ...

Sears Holdings (SHLD) is hitting price levels that are quite attractive. I've been looking at Sears (and other retailers) lately. I have mostly looked at Sears from a credit point of view because I'm still thinking that the 7% Notes due 2042 trading on the Pink Sheets under the SBCKP symbol may be worth it (the concern is inflation more so than bankruptcy/default risk). Sears is a good contrarian retailer to investigate. It's one of the retailers with bearish Street consensus. According to Yahoo Finance, 3 analysts rate it a Hold (a polite way of saying sell) and 4 rate it Underperform (more direct indication of a sell). Analyst median target is $87/share with a low target of $70. The current price is getting close to the $87 target. I've also been waiting to see if I can consider buying it below book value. Given that some prominent investors, such as William Ackman, have indicated that real estate on Sears' books is understated, buying below or close to book value...

In a highly surprising move, the Quebec court ruled against the BCE deal arguing that bondholder interests weren't taken into account: BCE Inc. shares plunged Thursday morning following a shocking Quebec court ruling Wednesday that threatens the company's planned $35-billion sale to a group led by the Ontario Teachers' Pension Plan. But several analysts suggested the company may be able to reach a financial settlement with balky bondholders who oppose the deal – for somewhere between $500-million and $1.3-billion. As well, the head of the Canada Pension Plan Investment Board expressed concern about the precedent-setting court-ruling and its implications for Canadian capital markets. I didn't expect the court to rule against the deal, after the lower court ruled in favour of the deal. I think it sets a bad precedent when bondholders without any conditions in their bonds can block shareholder actions. I suspect the ruling will be overturned at the Supreme Court (it it go...

News keep getting worse on the credit front, with Moody's being accused of assigning and maintaining AAA rating on CPDOs even after the discovery of computer errors. I vaguely touched on CPDOs in a prior post where I was arguing that mark-to-market losses don't necessarily mean anything. In any case, Financial Times is accusing Moody's of rigging their rating of CPDOs after discovering a computer bug in their rating model (story from Bloomberg). Moody's Investors Service said it's conducting ``a thorough review'' of whether a computer error was responsible for assigning Aaa ratings to debt securities that later fell in value. Some senior staff at Moody's were aware in early 2007 that constant proportion debt obligations, funds that used borrowed money to bet on credit-default swaps, should have been ranked four levels lower, the Financial Times said, citing internal Moody's documents. Moody's altered some assumptions to avoid having to assign ...

I ran across a very good article on CDS , with some neat insight (such as how it is in the interest of CDS dealers to keep the market opaque; or how primitive the pricing system is (I'm actually shocked to see how lame it is.)) If you have time to kill (it's kind of long) and are interested in what was happening in the credit markets while Bear Stearns was imploding, I recomend reading the article. Here is a taste of it: (source: Hedge Funds in Swaps Face Peril With Rising Junk Bond Defaults By David Evans, May 20, 2008. Bloomberg.com) The banks played the role of dealers in the CDO market as well, and the breakdown in that market holds lessons for what could go wrong with CDSs. The CDO market zoomed to $500 billion in sales in 2006, up fivefold from 2001... By the middle of 2007, mortgage defaults in the U.S. began reaching record highs each month. Banks and other companies realized they were holding hundreds of billions in toxic debt. By August 2007, no one would buy CDOs. T...

Moody's cut CFIG to junk and believes it doesn't have enough capital: The bond insurance arm of CIFG Holding Ltd was slashed to junk status by Moody's Investors Service on Tuesday, due to concern about its capital position... Moody's downgraded the insurance financial strength ratings of bond insurer CIFG Guaranty, CIFG Europe and CIFG Assurance North America, Inc to "Ba2," two levels below investment grade, from "A1," the fifth highest, and kept the ratings under review with uncertain direction. The rating cuts "reflect the high likelihood that, absent material developments, the firm will fail minimum regulatory capital requirements," due to losses stemming from its debt and exposure to subprime mortgages, Moody's said. CFIG is a small monoline insurer owned by Banque Federale des Banques Populaires and Caisse Nationale des Caisses d'Epargne. It was downgraded earlier this year to A1 (Moody's), AA- (Fitch) and A+ (S&P). I ...

Here are some items that I find interesting, along with some thoughts running through my head: Jean-Marie Eveillard First Eagle Conference Call The Economist article on the financial crisis: Paradise Lost Would you average down into this stock? Junk bonds vs Stocks - still trying to figure out when junk bonds are better Jean-Marie Eveillard Conference Call Thanks to Fat Pitch Financials for referring me to the First Eagle conference call for their mutual fund owners (audio link on their site doesn't seem to work me but here is the text transcript ). I never heard of Jean-Marie Eveillard until a couple of years ago (goes to show how much of a newbie I am) but I have started to like him a lot more than other commonly referenced superinvestors. He is a value investor with a different perspective on many things. He also tends to be more international than many others. I recommend reading the conference call transcript if you are a newbie to investing, if you want some international i...

One of the key things required for the monoline insurers to improve is for the short-sellers to close their positions. This won't avoid losses (that's all up to fundamentals) but it will stabilize the equity price. Furthermore, it will increase confidence by customers. Yes, stock prices impact some customers since this is a confidence industry (who wants to pay insurance premiums to a company that is plastered all over the newspaper and may not pay out?). Prem Watsa of Fairfax, who seems like he was heavily short the monolines, closed out his shorts (CDS holdings) late last year. The big, public, short-seller is Wiliam Ackman of Pershing Square and it looks like he scaled back some of his Ambac short positions. Todd Sullivan of valueplays picked up on Pershing's 13-F filing and it seems that he has scaled out of his put options on Ambac, and lowered some of his put option holdings in MBIA. I suspect Ackman is still heavily short via CDS and he probably won't unwind tha...

Jaclyn announced that it is proceeding with the reverse-forward stock split in order to delist from the AMEX: Jaclyn, Inc., a Delaware corporation (the "Company"), held a special meeting of stockholders on May 7, 2008. At the special meeting, a majority of outstanding shares of the Company's common stock, $1.00 par value per share, adopted and approved amendments to the Company's certificate of incorporation to effect a reverse stock split of the Company's issued and outstanding shares of common stock at a ratio of 1-for-250, followed immediately by a 250-for-1 forward stock split of the shares of common stock. Nothing has happened to my shares but I hope it goes through successfully. I'm in Canada and I hope there isn't some complication with foreign holders. I also bought under two different accounts at two different brokerages (my regular investment account and my RRSP (similar to 401k/IRA in USA)) and I hope my shares get tendered (if it does fail, it...

( UPDATE: Added a section on mark-to-market accounting) William Ackman was part of a roundtable at CNBC so if anyone is interested in his opinions, check out the two videos below (thanks to The Big Picture for the original mention). The roundtable dealt with short-selling and it also had David Einhorn of Greenlight Capital, an Ackman friend and a superbear on monoline insuers. First Part Second Part I always wondered whether William Ackman was a value investor or not. After hearing him in the first part of the video I think he belongs in the value camp (he isn't a pure value investor though). Classic signs that lead me to believe him to be a value investor include his de-emphasis of economic conditions and focus on long-term value of a business. The most insightful thing he said was with regards to retailers. A business is the sum of its future cash flows, and William Ackman pointed out how investors typically shun retailers going into an economic slowdown, even though the stock ...

I purchased Jaclyn (JLN) as an arbitrage play. I evaluated the company in a post recently . The stock has been selling off over the last few days and I hope it isn't due to some bad news on the horizon. Some investors may be selling now that the stock is going to be demoted from AMEX to PinkSheets OTC but it's not clear. Since there are no arbitrage funds involved in this (only ownes with less than 250 shares get a cash offer) the price likely provides no signal regarding the buyout of minority owners. Purchase Price: $7.80 Time Horizon: Short-term (special situation)

There is a huge chasm opening up in the value investing camp over commodities. There are several prominent value investors, such as Bill Miller, who avoided commodities completely over the last few years (and hence have underperformed severely). There are other value investors who are overweight commodities and believe they will outperform for many more years. (Non-value investors like Marc Faber, Jim Rogers, and others, have been bullish on commodities for almost 10 years now but let's just look at value investing.) I have been bearish on commodities for over an year and been completely wrong. I used to be bullish a few years ago (mostly influenced by Marc Faber and Jim Rogers) but became bearish when I felt that it was driven by momentum and very little to do with any fundamentals (a good example is uranium, which is almost solely based on what may or may not happen in some of the developing countries.) I also switched my strategy from sector rotation to contrarian investing with...

Jeff, who started a new blog called Circle of Competence , suggested a special situation play with Jaclyn (JLN). Jaclyn, which is a clothing manufactuer with a market cap of around $20 million, is planning to delist from the AMEX in order to save regulatory compliance costs (supposedly up to $500k per year). In order to accomplish that they supposedly have to reduce the number of stockholders below 300 and are going to do it by going through a reverse split followed by a forward split with a ratio of 1-to-250. Anyone owning less than 250 current shares will be offered $10.21 per share (an upside of around 22% right now). Note that this size limitation pretty much rules out anyone with a big portfolio or a fund manager. I have never participated in any deal like this before but am seriously thinking about it. I have only been investing seriously for a few years now and all of my past experience is with mergers & acquisitions (currently pending BCE, along with Tribune and ABN-Ambro...