Can Turtles Fly?

Ambac shares are really getting killed today (down 20% on no news). I wonder if it has to index changes (Ambac was removed from Russell 1000 on Friday and inserted into the Russell 2000 today.) Further decline will result in a risk of being de-listed from NYSE (although that risk is not near)... MBIA disclosed that it liquidated a portion of its investment portfolio , to the tune of $4 billion to satisfy collateral and early redemption requirements due to it being downgraded. It also denied a report from last week's Wall Street Journal saying that it had sold muni bonds. The bad news is that it resulted in $300 million in losses. The losses were supposedly already taken before but the sales crystallized the unrealized loss to a real loss. For those not familiar, the investment business is seperate from the insurance business. The monolines agree to manage the funds collected by municipalities and others in exchange for payments. If the monolines get downgraded, they are requireed t...

The collapse of Bear Stearns is a pivotal event that will live on in our memories--even for those of us simply sitting on the sidelines and never stepped on Wall Street. Bringing Down Bear Stearns , a feature-length Vanity Fair article by Bryan Burrough, chronicles the events surrounding the collapse (thanks to The Big Picture for the original mention.) As is generally the case with these events, everyone has their own biased story so we really have no idea what the truth is. If you have time to kill, pick up the magazine or check out the story online. This is not going to help you with your investments but you'll look back in 20 years as if history was being written all around you. Here is a taste of it... (source: Bringing Down Bear Stearns , by Bryan Burrough. Vanity Fair. August 2008) It was an uneventful morning—at first. Molinaro sat in his sixth-floor corner office, overlooking Madison Avenue, catching up on paperwork after a week-long trip visiting European investors. Then...

Actually, the talk of a bear market has been ongoing for months, if not years. However, this is the first week where I am seeing sentiment shift marktedly towards the bear camp. It wouldn't have been hard for anyone reading or watching any of the media to see mention of the Dow possibly entering a bear market after the unofficial definition of a 20% drop occurred. Given that the broader S&P 500 and technology-heavy NASDAQ haven't dropped 20%, is it really a bear market? Who knows? Who care? This would be my first bear market--assuming we are entering one. I actually invested some money in the stock market back in late 1999 or 2000 but I wasn't seriously pursuing investing back then (it also wasn't a lot of money given that I was in university and cash-strapped--this was a good thing or else I would have done a lot of dumb things and probably lost it all :)). I remember caring a lot more about bear markets when I first started investing about 4 or 5 years ago. Nowada...

Here is a Bloomberg interview with Mohnish Pabri (thanks to gurufocus.com for the original mention.) For those not familiar, Mohnish Pabri is a hedge fund manager who is heavily influenced by Warren Buffett's teachings. Some say he is a future Buffett but I'm not sold on that yet. Just like how every new star that blazes a trail in the NBA is called the next Michael Jordan, only to end up nothing like Jordan, you are not going to find the next Buffett from some media proclamation. I don't have access to Mohnish Pabri's hedge fund publications but my impression is that he has been doing very poorly lately. Some of his investments, such as Delta Financial (DFC) and CompuCredit (CCRT) have been terrible. Having said that, I still respect Pabri because he supposedly did very well during the 2000 to 2003 bear market. I think anyone that not only survived but also posted good returns deserves respect. For those that didn't listen to the clip, here are some few points tha...

In order to improve transparency Ambac is releasing monthly data related to some of their key subprime mortgage exposures . According to the disclaimer from Ambac, some additional items are only calculated at the end of each quarter so the final numbers may differ materially from what is reported. In any case, here are the April and May numbers (April was released a month ago but I didn't post it because it is meaningless without a comparison.) It looks like Ambac paid out more in claims in May ($23.1m vs $16.2m). If you extrapolate these numbers (this is a very crude calculation) then you are looking at Ambac burning around $270m per year. The mark-to-market losses seem to be much lower in May but I am not sure if Ambac is keeping the comparison consistent (I really hope they are keeping it the same and not misleading investors.) It looks like credit spreads narrowed in May so you are seeing some positive news there. However, I suspect spreads have widened quite a bit in June so n...

I have only been following Jean-Marie Eveillard for a few years but, boy, does he seem bearish . Nothing really new in this article but let me pick off some of his thoughts. Fed policies under Greenspan, Eveillard says, precipitated "one bubble after another" -- from the implosion of technology stocks in the late 1990s to the recent real-estate price collapse and the related financial-services industry meltdown. "In the last two or three years, the financial acrobatics were extraordinary," Eveillard said. "You could get a mortgage without having to document your income, your assets, or whether you had a job. Why do gold bulls always take a dim view of the Federal Reserve (not that Jean-Marie is necessarily one)? Or is that a pre-condition for being accepted into the fraternity of the brotherhood of the elite exclusive group for the shiny yellow element of Aurum? ;) I personally am not as critical of central banks as many others. I think Alan Greenspan is overra...

UPDATE: Added a short summary of some points that were mentioned Poor audio quality but Bloomberg managed to capture a speech by Marc Faber at a Tokyo investment conference ( click here for the audio ). I'm not sure if I'm exceeding the fair use limit by quoting the majority of a short article but, in any case, here is what Bloomberg says : Japanese stocks, Asian real estate and commodities are investors' best bets as faster inflation erodes returns in the rest of the world's markets, investor Marc Faber said. ``Demand for commodities and oil will not vanish,'' Faber, the Gloom, Boom & Doom Report publisher, said at a conference in Tokyo. ``The shift in demand that drove up commodity prices is not going to go away.'' ... Faber, who told investors to buy gold as the metal began a seven-year rally, predicted inflation may boost Japanese share prices and Asian property will benefit as more people gain access to mortgages. ``For Japan, inflation is favo...

Too Sullivan of ValuePlays is of the opinion that short-sellers get a slight advantage from the fact that they do not have to disclose their positions (Todd has no problem with short-selling itself (neither do I)). I am not too sure if the lack of disclosure is much of an advantage but Financial Services Authority (FSA), the regulator in Britain, is forcing short-sellers with sizeable positions to disclose their positions in a rights offering (thanks to WSJ Deal Journal for original mention): The Financial Services Authority shocked the trading community a fortnight ago when it announced that investors would be compelled to disclose short positions of more than 0.25 per cent of share capital in companies carrying out rights issues. The announcements started on Friday, and continued yesterday with 20 investors, predominantly hedge funds, disclosing short positions in seven companies that are in the process of carrying out rights issues. The article also mentions a familiar name with ...

Another news-filled start in the world of bond insurers... Dexia, the French bank, injected $5 billion into FSA (via a credit line) . This is in response to William Ackman's assertions that FSA is the next big one to fall due to deteriorating assets. I think William Ackman is going to be proven wrong with his claim but that doesn't mean he won't make money off this. Dexia's stock sold off last week, and FSA's CDS seems to have widened so he is likely already in the black. I think his strategy will fail in the end because he needs to introduce doubt about Dexia and that's much tougher. Since FSA has largely steered clear of the questionable subprime mortgage insurance, Dexia is likely to support FSA. As long as that happens, Ackman will be wrong unless he can bring down Dexia. In other news, Financial Times is reporting that MBIA, Ambac, and FGIC are discussing with the insurance buyers (mostly banks) of ways to commute (cancelling) some of their insurance contra...

One of the worst industries for investors over the last 5 years has been the newspaper industry. If you ever want to know what seems like a value trap, this industry may be it. Just look at the chart below of some of the leading US newspapers, along with the Canadian TorStar (WPO=Washington Post; NYT=New York Times; GCI=Gannett; TS.B=Torstar): (source: bigcharts.marketwatch.com ) Needless to say, it has been disastrous for anyone that bought any of the newspaper companies back in 2004. But, rightly or wrongly, disastrous situations are what attracts me so it's time to consider investing in them. I have indirectly tracked newspapers for a few years. Initially because I was looking at newsprint/forestry stocks, such as Abitibi, whose main customers were the newspapers. Later on, I started looking into them because several value investors took positions in them (or at least were talking about them.) Finally, I have decided to take a deeper look and possibly take a position based on th...

I belong to the group that thinks that financial institutions writing down a lot of assets due to mark-to-market pricing are going to end up with mark-to-market gains in the future. The market still doesn't buy that (mostly because of incompetent accountants in love with fair value accounting) but we shall see. Add Frank McKenna, deputy Chairperson at TD Bank (one of the big Canadian banks), to the side that expects reversal of the marks : “This quarter, we're going to see massive continuing writedowns in the financial services sector, but over the next number of years we're going to see the pendulum swing up entirely the other way and we're going to see massive writeups, I would submit, as markets unfreeze and as the value of some of these underlying assets are shown to be worth a lot more,” Frank McKenna told a conference of finance professionals in Toronto. TD Bank really hasn't really taken any big write-downs related to the credit crisis so it's reassuring ...

AccruedInterest has a good post on the expected impact of Moody's change of municipal bond ratings : Investors should care for two reasons. First it appears that most municipal bonds will soon be upgraded by Moody's. It is not currently clear what the timing of the ratings revisions will be, but Moody's has previously published a guide to "mapping" municipal credits to the Global Scale. For direct obligations of States, anything rated A1 or higher on the muni scale would be Aaa on the Global Scale. That means every state would be Aaa except Louisiana. For other general obligations, including cities and counties, anything rated Aa3 or better would be upgraded to Aaa. A general obligation bond rated Baa3 would be upgraded to Aa3. Even riskier credits like hospitals would enjoy at least a 1-2 notch upgrade, according to Moody's mapping. There is still a lot of uncertainty over this whole re-rating strategy undertaken by the rating agencies. Even if almost all st...

(Illustration by David Simonds; The Economist) Yahoo!'s descent, first gradual then sudden, during this decade marks a surprising reversal of the fates of the only three big internet firms to have survived since the web's earliest days. Back in 1994 Jerry Yang and David Filo, truant PhD students at Stanford, started to publish a list, eventually named Yahoo!, of links to cool destinations on the nascent web. Around the same time, Jeff Bezos was writing his business plan for a website, soon to be called Amazon, for selling books online. The following year, Pierre Omidyar, a French-born Iranian-American, put an auction site on the web that would become eBay. --The Economist I was quite bullish on Amazon in the post I wrote yesterday, and this article from The Economist provides a simple overview of how the turtle, Amazon, overtook the two hares, Yahoo and E-bay. Amazon looks wildly overvalued on earnings basis (trailing P/E around 70; forward P/E around 40) but I would take a lo...

Does it make sense to buy beaten-down stocks (say those that have fallen 50%+)? Most traders have a rule that says that one should never buy anything that is falling and hitting 52wk lows. Well, I'm not a trader so I don't follow that rule, but should one still avoid them? A stock that has fallen 50% would have wiped out 100% of its gains in the past since returns are geometric. For example, a stock appreciating from $5 to $10 results in a 100% gain, but if it falls to $5 then it is a 50% loss from the higher level. Roughly speaking, given that the stock market yields a long-term return of around 10% per year, that means it wipes out around 8 years worth of gains (10% compounded over roughly 8 years = 100%). Although stock price gains do not necessarily match profit growth, one can, in a simplistic sense, think of it as wiping out 8 years worth of company profits. A lot of the financial stocks in America have dropped 50% (or more) and are back to levels in early 2000's. Is...

The Supreme Court of Canada ruled in favour of BCE shareholders , overturning a lower court decision favouring the bondholders. Decision was unanimous and the reasoning is to be given later. Furthermore, it looks the banks are signalling a positive outcome: BCE Inc.'s $35-billion sale to Ontario Teachers' Pension Plan can proceed after the Supreme Court of Canada ruled in favour of the takeover. And the banks say they are onside to provide the funding. “The banks expect that the transaction will close in accordance with the Definitive Agreement between BCE and the sponsors. We continue to negotiate the financing documents in good faith with the sponsors and stand behind our original commitment to the transaction,” said a statement from the banking group. It is led by Citigroup, and includes Deutsche Bank, Royal Bank of Scotland and Toronto-Dominion Bank. They have committed to provide the $32-billion of debt portion needed to fund this sale. Bank financing can still run into pr...

A poster on the gurufocus.com forum, DaveinHackensack, quoted a hypothesis of a poster by the name of MathAnalyst on the Yahoo message board. The author's guess was that the steep run-up in oil prices since 2006 was due to government regulations implemented in 2006 that altered the sulfur content. His/her guess was that this caused the increase in sweet light crude oil. The answer seems to be that the hypothesis is incorrect. Here is the original post, followed by my quick look into this: MathAnalyst: So, why have crude oil prices risen so sharply since early CY-2006 - - - even faster than the rate of increase starting in CY-2001? Here’s my answer - - - which you won’t hear on CNBC, Bloomberg, Bill O’reilly or the Halls of Congress: In CY-2006 the Federal EPA began to require the use of Ultra Low Sulfur Diesel (ULSD) having less than 15 ppm sulfur. To achieve this stringent requirement, the demand by refiners for light-sweet (low sulfur) crude oil began to rise, while the demand f...

As telegraphed a few weeks ago, Moody's just downgraded financial strength rating of MBIA insurance company from Aaa to A2, and Ambac Assurance from Aaa to Aa3. MBIA surplus notes were downgraded to Baa1, and the holding company rating to Baa2 from Aa3. Ambac's holding company rating was cut from Aa3 to A3. Click through for the details along with my comments... Some interesting observations: MBIA is cut one level lower than Ambac. However, as short-seller John Paulson has remarked at a Monaco hedge fund conference , Ambac is leveraged more to the residential real estate industry. This is primarily because Ambac is the biggest insurer of CDOs. But according to the stress tests from Moody's and S&P, MBIA is expected to post slightly higher losses due to HELOC/CES and commerical real estate exposure (Ambac has zero commercial real estate exposure.) Note that these agency numbers are purely theoretical estimates. MBIA also has slightly higher leverage as the following cha...