Saturday, November 15, 2008 4 comments ++[ CLICK TO COMMENT ]++

Articles and thoughts for the week ending November 14th

Some articles you may find interesting, along with my thoughts...

  • Martin Whitman 4th quarter commentary (thanks to traderashish for original mention): I've not read it fully and if I get a chance, I'll make a separate post on this but quick items I noticed include his additioanl purchase of GMAC bonds and MBIA surplus notes, and sales of MBIA and Ambac common shares. He still seems to feel that the Asian property managers are trading at huge discounts.
  • Bill Miller 3rd quarter commentary (thanks to for pointing it out): Bill Miller is having a terrible year and a lot of so-called "value investors" have written him off as a value pretender. I haven't read his commentary fully but he touches on some important points including the situation with Fannie and Freddie (Bill Miller was a big shareholder so he lost a lot.) I am in the minority camp that believes that the Bush administration, and Hery Paulson in particular, made a huge mistake in seizing Fannie Mae and Freddie Mac simply due to alternative accounting standards and their belief of what may happen. There are a lot of people who say that letting Lehman Brothers fail was the biggest mistake of this administration but I think it is their actions towards the GSEs. As Miller correctly points out, once the government seized the GSEs, even though they were about stautory requirements using the accounting they were using, it was all over for all other financial institutions. There is no way anyone was going to invest in any of them given the threat of seizure at will. For instance, there was nothing to stop the government from taking over Goldman Sachs (before it turned into a bank) based on what it may or may not do. Some brave souls with favourable terms, like Warren Buffett, may take their chance but no one else is going to inject any capital into common or preferred shares. The proper thing for the government would have been to seize the GSEs only when they breach any regulatory conditions.
  • Jim Chanos CNBC Interview (CNBC; thanks to Todd Sullivan runs an interesting value investing website but it crashes my browser sometimes so be careful if you click on that link. Anyway, it's always good to get a short-seller's thoughts. The last video is interesting in that he is turning bearish on healthcare companies. There are quite a number of value investors who are bullish on healthcare so it'll be interesting to see how this plays out. In my opinion, healthcare is a disaster in the US. As Chanos alludes to, you have a system that doesn't cover everyone regardless of their wealth, yet it is one of the costliest in the world. The fact that healthcare has been growing faster than GDP for a while likely means that it will slow down substancially. Jim Chanos makes the insightful observation that healthcare opponents were limited to consumers and left-leaning individuals in the 90's but now consists of employers as well. If employers, who are half the system in the US, want to bring down costs, it's going to be rough for the healthcare industry. The fact that there will be a huge baby boomer retirement may not be enough to compensate for the pressure that will start being applied on profits.
  • Can China avoid a nasty recession? (The Economist): Pretty good article looking at all the different elements to the situation faced by China. As far as I'm concerned, the only hope for China is a deflationary boom. They seem to have overcapacity in manufacturing and fixed infrastructure. This will push down prices and China somehow needs to capitalize on that. Not an easy task.
  • Basic advice from Warren Buffett for investors ( An excerpt from Jeff Matthews' book Pilgrimage to Warren Buffett's Omaha. Haven't read the book but the excerpt touches on one of the suggestions for newbies: read.

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4 Response to Articles and thoughts for the week ending November 14th

November 15, 2008 at 2:14 PM

Miller is ridiculous. The GSEs were unlike other financial institutions in that they were (implicitly) backed by the gov't, so gov't is on the hook if they do something foolish - as the latest results for Fannie shows (lost 29B last quarter, more than all profits from 02-06). Of course, everyone is backed now. As for the threat of gov't seizure - come on. The reason why people don't want to invest in financial institutions is because everyone thinks they are overleveraged crap. Who has the gov't seized? AIG, where the gov't doesn't even want to take full ownership and lets the management continue to burn through tens of billions?

November 16, 2008 at 2:04 AM

GSEs may have been implicitly backed by the government but they were run as private corporations for something like 30 years. It's ridiculous for the government to say that they will let private markets supply capital and then seize them. I don't remember the details but I think Fannie issued several billion in preferred shares right before the government literally wiped them out (technically no one has lost 100% yet.)

If you say that investors don't want to invest because of high leverage, how come they were doing that all year long until the seizure. Like I said, I think Fannie raised several billion a few weeks before the seizure and many other banks raised a lot in the preceding 6 months. Everyone knew about high leverage all along so that's not new information.

Barclays, a British bank, raised several billion from foreign investors a few weeks ago. I don't follow the news closely but I can't recall the last time any American bank raised foreign capital in the last few months. If what I am saying is correct then you will see difficulties by American banks in attracting capital. We'll see if my argument holds true.

You don't go around saying that private investors should provide capital and then wipe them out a few weeks afterwards! The government, in this case FDIC, also made a similar mistake with Wachovia. They said Wachovia's financial condition was ok (not great but no imminent collapse) a week before they forcefully made it sell itself. It was so ridiculous that the government was talking to Citigroup without telling Wachovia executives or any other representative. Imagine the CEOs trying their best to raise money by saying that the situation is calm, and then the govt just wipes out all the investors who put up their money (in the Wachovia case they didn't manage to raise any capital but imagine if they had.)

November 16, 2008 at 6:25 PM

YMM finally apologized, and that's good enough for me. Unlike his arrogant, unrepentent 2Q commentary, YMM at least now admitted that he is wrong. That's quite a comedown i'm sure, but it's a necessary first step to correct his mistakes. But boy what an expensive lesson for him to learn, and for his shareholders to suffer through it.

His abiding faith in the policyholders and government to solve the problem is touching, if not naive. I still detect a whiff of contempt for those "gleeful" few who saw this coming and moved to cash. But, hey, he's an old dog, and at least he shows tentative signs of trying to learn new tricks. Whether he will be successful remain to be seen.

Whitman, on the other hand, is well on his way to position his shareholders toward better things. His commentary is informative and useful as far as actually laying out his strategy.

There is one unforunate aspect to YMM's 90% mea culpa. I think he may not see the recovery in his fund: my own opinion is that his hold on his job is in jeopardy. If we see another 20% plunge in the next next year, he is history.

November 17, 2008 at 12:12 PM


Bill Miller is far more humble than you imply. He has said several times that he was wrong on commodities (I think he said this in 2004 or thereabouts.) But you are right in saying that he didn't perceive any mistakes when it came to financials.

As for Miller being fired, it could happen but unlikely until things get really bad. Without Bill Miller Legg Mason wouldn't be what it is today. Similar to other mutual fund companies, the halo of the superstar investor makes these companies (e.g. John Neff -> Vanguard; Martin Whitman -> 3rd Avenue; Jeremy Grantham -> GMO; etc).

Anyway, it will be difficult for Miller to recover but this goes for many others (including me.) The only thing working in Miller's favour is that he owns contrarian stocks (e.g. homebuilders like PHM) and growth stocks (eg. Amazon, Google.) These can rally if things turn around. These are also the types of stocks that do well during protracted bear markets, especially of the deflationary type.

Anyway, we'll see...

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