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Showing posts from July, 2008

Oil Potentially Topping Out

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Don't put much weight into my oil calls, but it does look like oil is topping out. I felt the same thing late in 2006 and that turned out to be temporary thing. Who knows for sure but I notice a few things. Firstly... First of all, price is off quite a bit... Secondly... Then ExxonMobil misses earnings for the second time in as many quarters. Missing earnings is not usually a big thing, except when it is a bellwether missing it during a huge bull market. For the quarter, Exxon Mobil posted net earnings of $11.68 billion, or $2.22 a share, up from $10.26 billion, or $1.83 a share, a year earlier. The results narrowly eclipsed its previous record of $11.66 billion, set in the fourth quarter of 2007. Despite the staggering numbers, Wall Street was underwhelmed. Investors polled by FactSet had been looking for a profit of $2.46 a share. It was the second consecutive quarter in which Exxon fell short of their lofty expectations. In a period during which crude-oil prices doubled, Exxon&

Geoff Gannon's Excellent Post About Benjamin Graham

Geoff Gannon of GannonOnInvesting blog has an excellent article on Benjamin Graham's thinking and investing strategies. The post was prompted by Jason Zweig, who you may recall is famous for being the editor of the latest version of The Intelligent Investor , says that Benjamin Graham would not invest in financials right now. Geoff Gannon says Graham likely won't either, but that Zweig's reasoning is incorrect. Tom Brown also doesn't agree with Jason Zweig but I am not sure how much of a vlue investor Tom Brown is (I'm not as familiar with him, although I have read nearly all of his public articles about the monolines.) I haven't read Geoff Gannon for very long (only about one or two years) but I would say this is arguably his best post ever. I like how he ties in varying elements of a superinvestor like Graham--actual practice, tactics, thoughts and justifications--into the present world. If you are an investor with an interest in value investing, I highly r

Preliminary US 2Q 2008 GDP Comes in at 1.9%... 4Q 2007 Revised Down to -0.2%

Well, the preliminary second quarter US GDP number came in at 1.9% so things are still neither good nor bad. But last year's fourth quarter was revised down to -0.2%, signalling a potential start of a recession. Annual revisions in the report also showed that the economy contracted in the fourth quarter of 2007, falling 0.2% for the first drop in real gross domestic product since the recession of 2001. The economy grew at a revised 0.9% annual rate in the first quarter. The second quarter was boosted by government stimulus (about $80 billion) so it's not clear what the actual rate would have been without the government help. I am still of the opinion that there is a high probability that the economy won't deteriorate as much as many as expecting. I actually think that USA may grow very slowly (between 0% and 1.5%) for the time being. My thinking is based on the view that unemployment may not rise significantly in this slowdown. I am influenced by GaveKal's thinking

Bill Miller 2Q 2008 Shareholder Commentary

It has certainly been a tough period for Bill Miller. In his second quarter commentary , he shares his thoughts. (source: Bill Miller Commentary , Bill Miller. 2Q 2008, Legg Mason Capital Management) Mason Hawkins said, “Warren, I’m an optimist. I think this whole thing can turn quickly, and surprise people. Are you an optimist?” “I’m a realist, Mason,” the sage replied. Warren went on to say he was optimistic long term, and backed that up in a talk the next morning on the remarkable history of growth, innovation, and wealth creation the U.S. had produced over the past 200-plus years. He also offered a sober assessment of the current challenges we face, and said it would take some time to work through them. He then made the perfectly sensible point that as we are all net savers, we should be happy if stock prices declined a lot more, so we could buy even better bargains. Warren, of course, is Warren Buffett. Nothing new from Buffett, who has said in the past that it could take a

Opinions on the Future of Newspapers

Everyone has an opinion on the future of newspapers and I list some I found on the web below (some of the articles are a few years old.) Anyone crazy enough to cotemplate an invest in a newspaper company should probably read some of the following. Hard News Daily Papers Face Unprecedented Competition... (Washingon Post, 2005) Do Newspapers Have a Future? (Time, 2006) Newspapers: The Future (Washington Post, 2005) What is the Future of Newspapers? (CBC, 2007) Can't get more contrarian than newspaper stocks but it's very scary. Newsosaur, an excellent blog covering newspapers, had a post a few weeks ago showing the performance of various newspapers since 2004. Nine of the publicly traded newspaper stocks are down 71.6% from 2004 to July 15th 2008. And that's without an economic slowdown. Wait until the economy slows (although the market is likely pricing in a lot of the negative effects from a potential recession already.) Truly, truly, ugly numbers...

Merrill Lynch Commutes Bond Insurance Contracts with SCA

Merrill Lynch announced some writedowns along with a big capital raise this afternoon. Of interest to me is the fact that they commuted bond insurance contracts they had with SCA: Merrill is being paid $500 million to commute, or rip up, guarantees it bought from bond insurer Security Capital Assurance. It's also negotiating with other bond insurers to try to commute similar guaranty agreements. This is good news for the tainted bond insurers (and hence bad from a competitive point of view for the untainted ones: FSA, Assured Guaranty, and Berkshire Hathaway Assurance.) Generally this is a negative for the industry since it weakens the argument for buying insurance in the first place. Nevertheless, given that the bond insurance industry itself is almost on the verge of being dead, I don't think it hurts the industry as much as it generally would have. SCA, the worst bond insurer out there (partly because their contracts required them to post collateral upon downgrade,) lo

Asian Subsidy Scheme Ready to Collapse

It has become evident over the last few months how disastrous the Asian subsidies for energy (among other items) is turning out to be. My opinion is that the subsidy scheme is about to collapse. Bloomberg has a story which almost seems to imply that stagflation is on the horizon for many Asian countries. I am not too sure about the stagflation case but I do agree with some items in the article. One thing that is not clear to me is if the GDP growth rates quoted in the article are nominal growth rates or real growth rates. If it is real growth then there is a big flaw in the article. The article compares GDP growth to inflation and implies that inflation that is higher than GDP growth portends to bad things. That is only true if the GDP growth that is referenced is nominal growth rate. If it happens to be real GDP then inflation is already taken into account (i.e. real GDP = nominal GDP minus inflation). I'm too lazy to look up the original reference and see what is actually quot

New York Times: A Proxy for the Newspaper Industry

Businessweek has an article presenting the situation at New York Times. NYT is a good proxy for the industry. Some comments to article bash the NYT for its liberal stance but obviously none of these commentators are stock market investors for they clearly must have missed how conserivative outlets like News Corporation (NWS) is also down around 50% in the last year. Anyway, the description provided in the article is quite similar to the Canadian Torstar. (source: How Can The New York Times Be Worth So Little? by by Jay Yarow and Jon Fine. July 2008. BusinessWeek) At its current $12.48 stock price—down 46.3% from a year ago—Times Co. has a $1.79 billion market cap. To put this in perspective, CBS recently acquired tech publisher CNET, a much weaker media brand, for $1.8 billion. Add in the company's $1.1 billion of debt, subtract $42 million for its cash on hand, and the company's total enterprise value—a valuation measure that totals up those items in such a fashion—is jus

Cutting Taxes Can Be Bad

One of the big differences in economics between those leaning towards the left (e.g. liberals) and those leaning towards the right (e.g. conservatives) often centers around tax cuts. I hate to paint everyone with a broad brush but conservatives often have this blind faith in tax cuts. So-called libertarians also often have the view that tax cuts are almost always good. Liberal such as myself, who are in favour of balanced budgets (I wished more on the left were), are not a fan of cutting taxes across the board. One of the flaws with the conservative/libertarian tax cut thinking is their unrealistic expectation that tax cuts also implies government spending cuts. This is almost always false! In fact, you can consider it almost a law of politics that government spending cuts will rarely be enacted--and even if they were, they won't stick. It doesn't matter what type of government is in power. They are all unlikely to cut spending. The guilty pleasures for the left are social sp

City of Los Angeles Sues Bond Insuers and Investment Banks

Not entirely surprising and I expect many more lawsuits will be filed before all this is said and done. Reuters is reporting that the City of Los Angeles is suing more than 30 bond insurers and investment banks in what seems like an accusation of mass conspiracy to defraud the bond issuers, as well as accusations of bid rigging. The bond insurers are also being accused of violating California's anti-trust laws. It's not clear but I think there are multiple lawsuits being filed, some against the insurers and some against investment banks. The city of Los Angeles sued more than 30 municipal bond insurers and Wall Street investment banks, accusing them of fraud and antitrust that it said cost taxpayers millions of dollars... In the complaint against bond insurers, including Ambac Financial, MBIA Inc's MBIA Insurance Corp and Financial Guaranty Investment Co., the city claims it was forced to purchase insurance from a triple-A-rated guarantor in order to benefit from that to

Assured Guaranty Being Sold Off... But a Potentially Positive Sign

UPDATE: An anonymous reader pointed out that the mark-to-market gains seem to be due to marking down liabilities. So this isn't as positive as it seems (I retract my somewhat-bullish opinion :( ). One of the quirks of fair value accounting is that you can end up with positive results simply because the value of your debt went down, for example. I haven't calculated it but I think companies like Ambac would have negative book value if it weren't for this benefitial result (I mentioned this before .) Assured Guaranty is off 50% in heavy trading and I'm not sure what it will do now. I guess the likely rating cut of AGO and FSA likely means the Connie Lee idea is off the table for Ambac. Anyway, there was one positive piece of news that Assured Guaranty released in their earnings call. Around $500m of their mark-to-market losses reversed in the last quarter. I don't know the breakdown of Assured's insurance portfolio but this is a positive sign. The monolines, as

Wow, Moody's Potentially Close to Cutting Assured Guaranty's and FSA's AAA Ratings

I'm actually quite shocked by this. Moody's is reviewing Assured Guaranty and FSA for a potential downgrade of their AAA ratings. Moody's Investors Service on Monday said it may cut its top ratings on bond insurers Assured Guaranty Corp and Financial Security Assurance, citing concerns about securities they guarantee and raising questions over the future need for bond insurance. It's one thing for the tainted monolines to be cut but it's another for these two to face ratings dowgrade threats. Assured Guaranty steered clear of the subprime mortage bonds and didn't insure any of those risky stuff since 2004 (if I recall). Similarly, FSA has very low exposure to subprime RMBS, CDO, and CDO-squared. Assured Guaranty also received around $1 billion capital infusion from Wilbur Ross early this year so it is way above capital requirements. As has been the mantra at the rating agencies lately, the rating cuts are coming due to uncertainty over future business. I

Torstar Valuation (Part II)

There are many ways to value a business but one way is to lump all the techniques into two methods. One focuses on earnings, while the other concentrates on asset values. Typically each method suits a particular type of business, although you can apply both when looking at a business. Martin Whitman would consider the first method (earnings-oriented) when looking at "earnings common stocks"; while the asset value method is more useful for "wealth creation common stocks." The earnings method is what is most common on the Street. It basically involves trying to determine the value of a going concern based on future earnings. The wealth creation method is more rare, but Martin Whitman's Third Avenue Value Fund generally specializes in these. This method involves unlocking value through corporate restructurings, share buybacks, spin-offs, asset sales, and so on. Looking at earnings will not capture the possibility of wealth creation potential for these firms. C

Rupert Murdoch and the Last Newspaper Battle In America

I have been thinking of investing in newspaper companies so I have been reading up on them lately. I ran across a nice long-form journalism piece from The Atlantic covering Rupert Murdoch and his takeover of The Wall Street Journal. In Mr. Murdoch Goes to War , Mark Bowden sketches out Rupert Murdoch's final battle to decide the winner of America's newspaper market. Given how a day doesn't go without some newspaper on the verge of shutting down, this is a winner-takes-all battle. Murdoch is slightly altering the WSJ to battle directly against The New York Times, and whoever that wins will likely be the dominant voice of America--assuming print still exists and garners the respect it used to. No one really knows what Rupert Murdoch is thinking but the article suggest some possibilities. The article is also quite good in tying in some of the history of the industry into Murdoch's present-day strategies. (source: Mr. Murdoch Goes to War , by Mark Bowden. July/August 20

Toronto Housing Performance

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The value investing mantra of buying an asset at low (undervalued) prices apply to housing as much as to stocks. The following excerpt from a Toronto Star analysis shows the performance of housing over various points of purchase over the last few decades. The table includes various statistics, including prime rate (interest rate charged to prime borrowers), inflation, house price to income ratio, and TSX (stock) return. A user comment to the story mentions that the stock market return seems to be price return only (so you should add roughly 3% to 5% to account for dividends.) One of the points that stands out, not surprisingly, is how the returns on the house depend on the time period of purchase. For example, if you bought the house in 1989, your return was roughly 1.9% per year, whereas if you bought it in 1979 or 1999, you made 6.1% per year. Housing peaked somewhere near 1990 and it collapsed after the recession in 1990 so buying in the late 80's wasn't exactly a great ide

The Housing Crisis: Stock Market May Recover Long Before The Recovery Is Evident

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Ever heard the expression that the stock markets are forward looking? Well, here is an illustration of that. The New York Times has a story on the housing collapse , summarizing various aspects of the economy. Anyone following the markets or reading up the economy would not find much insight in the story, but there are some nice charts illustrating the housing price decline and stock market recovery for various housing crises in the past. One of the key things that stand out in the charts--at least for me--is how the stock market in past crises recover long before the housing downturn stabilizes. The following charts , courtesy of The New York Times, shows the cumulative change in real home prices (top chart) and cumulative change in real stock prices (bottom chart): The three lines in the chart represent the present day USA, banking crisis average, and top 5 banking crisis average (the top 5 happen to be Spain 1977, Norway 1987, Finland 1991, Sweden 1991, and Japan 1992.) The th

Are Newspapers the Modern Day Horse & Buggy Whip?

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Looking at the share prices for the newspaper industry, you would think that this is like investing in the horse & buggy whip just before the ascent of the automobile. The 5-year chart above illustrates the beating taken by the leading North American newspaper companies. The main candlestick chart, along with the P/E ratio and yield is for Torstar, one of the leading Canadian newspaper companies. Practically every single company is down 50% to 90%. One of the interesting things is that the market is pricing well ahead of any severe collapse in profits. You would think that all these companies are posting big losses and on the verge of bankruptcy but, ignoring the several that are heavily leveraged or really struggling, they will still post profits and do not have liquidity or insolvency issues. Either the market is wrong with the industry; or it is re-pricing for a new future. Even if the companies survive, market expectations are much lower right now. Another interesting thing, fr

China: Long-term P/E Ratio

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Bespoke Investment Group has a nice chart of the Shanghai market showing P/E ratio versus the index: (source: Bespoke Investment Group ) The P/E ratio seems to have been between 30 and 60 in the late 90's and early 2000's. It hit a low of around 16 somewhere in 2005 and then rose to around 50 in 2007. According to Bespoke Investment, the P/E is right now 20.95, and had averaged 36 in the last 10(?) years. Contrarians who think a P/E of 21 is cheap (compared to a historical average of 36) may want to start looking at China. It's impossible for foreigners to invest directly in the local exchanges but you can (i) invest in the Hong Kong market, which has a lot of cross-listed shares or companies that do a lot of business in China, (ii) invest in a US-listed Chinese company (many of the smaller ones are usually shell companies incorporated in a tax haven), or (iii) invest in multi-nationls that operate in China. One of the popular techniques is to bet on China through com

Opinion About the Markets; Ambac Sued by New England Patriots, and S&P Suggests Rating Changes

The market is totally driven by short selling and short covering, and rumours. Even some company like Sears Holdings (SHLD) was up 6% today on likely short-covering (one of the rumours I read a while ago was that a lot of shorts have taken big positions in anticipation of Bill Miller being forced to liquidate his large Sears position--this is just some wild rumour.) The interesting thing to me--and I mentioned this a while ago--is that the US economy does not seem to be bad . So even though people are throwing around phrases like "worst since the Great Depression," it is nowhere near that. In fact, I think it does a disservice to the severity of the Great Depression to compare the present to that. In fact, I remember seeing a chart in my local paper showing that consensus estimate has Canada with a lower GDP growth rate this year than the US (Canada has no problems with any real estate bubble (so far) but it depends heavily on the US and the high C$ is killing manufacturing

Preliminary Look At Torstar (TS.B) [Part I]

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I'm really intrigued by the idea of investing in a "newspaper" company. I hope this isn't my next great shooting-for-the-stars idea that's going to end up in flames. I have been reading up on the industry, as well as comparing some companies, and they look interesting. First thing to keep in mind, though, is that they are risky (especially if you don't know what you are doing like me.) You will certainly be going against the Street consensus which is that newspapers are in a long-term secular decline. It's not easy to argue against that, if you focus on the printed news side of things. Based on my read of history, newspapers have faced some industry-altering events in the past. The last big crisis faced by the newspaper industry was probably the rise of television news. The thinking back then was that television news was going to seriously damage printed news and possibly make it obsolete. It hurt the industry but not to the degree some anticipated. Howeve

Wow... Crazy Day... SEC Limits Naked Shorting on Fannie, Freddie, Lehman, Morgan, and Goldman

Wildest day--and I'm not even a day trader :) In what seems like an unprecedented move, SEC is limitting naked shorting of Fannie Mae, Freddie Mac, and the primary dealers (Goldman Sachs, Merrill Lynch, Morgan Stanley and Lehman Brothers): Christopher Cox, chairman of the Securities and Exchange Commission, said on Tuesday that the regulator will try to limit so-called naked shorting of shares in Fannie Mae, Freddie Mac and primary dealers including Lehman Brothers, Merrill Lynch, Morgan Stanley and Goldman Sachs. The SEC will issue an emergency order stating that all short sales of shares in these companies will be subject to a "pre-borrow" requirement, Cox explained. This will last for 30 days, he added. The SEC is also planning more rule-making focused on the broader market, Cox said. I'm not sure what this means for shorts who took positions in the last few weeks, such as William Ackman and others , if they can't deliver the shares. I suspect it probably a

One Big Risk With Investing in Financials

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One of the big risks cited by some for the financial services industry is the possibility that a structural change may be occuring (to the detriment of financials.) Financials have been above-GDP-growth earnings from the late 90's to the early 2000's. FT Alphaville refers to a Deutche Bank report illustrating the above-GDP-growth profits and asks whether profits are reverting to the mean (ironically they also point out that a lot of problems with CDOs were because the mean-reverting assumption built into the CDO models turned out to be wrong.) I brought up this point a few months ago when I mentioned an article from The Economist dealing with the same point. Are we seeing a negative structural change for financials? Will their revenue (relative to GDP) decline in the future? Will their profits (relative to GDP) decline permanently? If you are investing in financials (or thinking about it), and are a long term investor, this is an important point. If future profitability is l

John Templeton: The Ultimate Contrarian, And More

Wherever we are and whatever we are doing, it is possible to learn something that can enrich our lives and the lives of others... No one's education is ever complete. -- John Templeton (1912-2008) As many are likely aware by now, John Templeton, one of the top contrarian investors of all time, passed away last week. While everyone is running scared in the week when we had the second largest bank failure in US history (it isn't as big as it seems when adjusted for inflation) and rumours of imminent collapse of Freddie Mac and Fannie Mae circle the world, I suspect John Templeton would have been cool, stayed calm, and probably started looking at investing in some names. Although many investors would not pick the quote I show above, I think it sums up the essence of what John Templeton was. John Templeton was very religious and, myself being an atheist, I am sure I would disagree strongly on many of his views on life. Nevertheless, I respect people who can be spiritual even d

Has Everyone Forgotten About the Yen Carry-trade?

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The Yen carry-trade, which used to make the news a few years ago, seems to have been forgotten by many. The carry-trade is still alive and will be so until interest rates in Japan go up and/or investing within Japan becomes more attractive than overseas. Contrary to the popular view of hedge funds being the big players in the carry trade, my opinion is that the carry trade is due to local Japanese investors investing overseas. I have posted articles about this point in the past but to recap, Japanese investments are so unattractive that locals (mostly Japanese women supposedly) invest overseas. I ran across a post by Schreyer at GaveKal's forum examining the relationship between the Yen carry-trade and stocks. Schreyer provides the chart below showing MSCI World stock index versus Euro/Yen currency cross: Although this is a short-term covering only 2 or 3 years, it does provide a quick glance of the relationship between the Yen carry-trade and stock market investments. Both stocks

An M&A Deal to Consider: Energy East Acquisition by Iberdrola

One of the few strategies that can do well during bear markets is risk arbitrage. If my understanding of Warren Buffett is correct, he made a big chunk of his gains in his partnership days during bear markets from risk arbitrage or similar specialist tactics (generally they are known as 'workouts'.) Deals can blow up--the Penn National (PENN) deal comes to mind--but if one can side step the failures, they should be able to post positive returns in a tough market. The only holding in my concentrated portfolio showing positive returns so far is the BCE M&A position. One of the deals I have been thinking about over the last few weeks is the Iberdrola acquisition of Energy East (EAS) . Energy East is a utility operating in the Northeast (New York and Maine.) Iberdrola is a Spanish utility that is one of the largest utilities in the world. The Energy East friendly takeover was announced last year and all the requirements have been met (shareholder approval, financing (finally a