Can Turtles Fly?

The En Pointe Technologies (ENPT) management buyout seems like an attractive M&A arbitrage position to consider, except for one thing. Management is offering to buy out the company for $2.50 per share and given the current stock price, it offers a 21% return. The deal is expected to close in the 2nd quarter of 2009. The balance sheet looks clean, assuming it can be relied upon. It has almost no debt and actually has cash equal to almost 2/3 of market cap. However, it seems to have posted a massive loss in the 4th quarter of 2008. This is a microcap with a market value of around $15 million. What's Not to Like? As I said, everything looks good except for one thing. The exception comes from the possibility that this may be a shady company with dubious ethics. Reading the Yahoo! Finance message boards , one gets the impression that some investors, or at least one investor, is disgruntled and thinks this is a near-fraud. En Pointe Technologies seems to have had problems conforming ...

The current economic recession, like others in the past, can fundamentally alter the economic fabric. Often a benefit is created but it involves pain and suffering. Here is a good example of a situation where the good, bad, and ugly all happen at the same time: The New York Times has a very good story on how the economic recession is resulting in employment contracts being torn up. The depth of the recession and the use of taxpayer dollars to bail out companies have made it politically acceptable for overseers to tinker with employment agreements. So federal and local governments are looking for ways to pare payouts, endangering the promises made before the financial storm to people like Wall Street traders, automobile workers and garbage collectors. ... The Treasury Department is seeking broad powers to seize troubled companies and rewrite contracts like the ones promising bonuses at the American International Group. Some A.I.G. employees, meanwhile, have been pressured by officials ...

I get the feeling that many think stock market valuations will improve quickly over the next two or three years. It is doubtful that will be the case. Let me go over the various factors that will be a drag on the market. None of these are earth-shattering views but one should keep them in mind, especially if you are making macro bets or are a newbie, like me, who has a hard time telling when a stock is actually cheap. Psychology Will Impact Stocks I have suggested several times that the market may stay weak due to psychological reasons (i.e. people who get burned will largely exit the market; distrust of equities; etc.) If you look at long-term history, you almost always see the stock market overshooting on the downside after major booms. Since the market never hit extremely low valuation levels--even in November of last year--it is possible that market valuations may drop much lower than what many think is possible. (But do note that this doesn't mean that prices will necessarily ...

I'm left-leaning and hence am generally supportive of government intervention. However, I like to see it limited to extreme cases. This is definitely true when it comes to business where everyone is trying to profit one way or another. A good example is the unfolding saga of the American auto manufacturers. As The New York Times reports , the US government forced out Rick Wagoner of GM and is asking for steep concessions from Chrysler: The White House on Sunday pushed out the chairman of General Motors and instructed Chrysler to form a partnership with the Italian automaker Fiat within 30 days as conditions for receiving another much-needed round of government aid. ... Mr. Obama’s auto industry task force, in a report released Sunday night assessing the viability of both companies and detailing the administration’s new plans for them, concluded that Chrysler could not survive as a stand-alone company. The report said the company would get no more help from the government unless it...

(Illustration by Bill Mayer for The New York Times. Slightly edited to remove text. Where's the Plan, Wall Street? , March 26, 2009. The New York Times)

Here are some articles, in no particular order, you may find interesting: Self-proclaimed "Canada's Chinese Warren Buffett" goes down Madoff style (The Toronto Star): "Tang, who bills himself as "the Chinese Warren Buffett" and "the king of 1 per cent weekly returns," is a prominent figure in Toronto's mostly Mandarin-speaking mainland Chinese community...In late February, Tang sent a letter to his clients, apologizing for "the sin that I had committed" but insisted that he did not steal investors’ funds." Classic Ponzi scheme. We are going to see many more cockroaches--sorry for the harsh metaphor--come out into the light. I really hate to see many working-class people with very little wealth, in this case Chinese immigrants, lose everything :( BTW, I don't know anything about this guy but I am pretty sure that he isn't even a value investor so calling himself Warren Buffett is nothing more than a bait to attract non-...

An article written by James Daw for The Toronto Star summarizes the investment performance of Fairfax Financial and details the current investments Fairfax is pursuing. Fairfax, in case one is not familiar, is the insurance company run by Prem Watsa. I don't follow Prem Watsa or Fairfax closely and hence am not a follower of them. He is thought to be one of Canada's top investors, and certainly one of the top value investors in Canada. Fairfax has done exceptionally well in the last few years, betting against the financial bust through CDS (credit default swaps). The future is very uncertain and Fairfax is entering a tough stage. Let me summarize some points mentioned by the author of the article. But what have the smarty pants at Fairfax Financial Holdings Ltd. been doing lately? A freshly printed annual report reveals they: Dumped contracts that insured their stock holdings from losses, partly in October and entirely by mid-November. Jumped back in to buy $2.3 billion (U.S.)...

Yes, as hard as it may to believe, bonds have supposedly outperformed stocks since 1968. This, according to a short blurb from Barron's [free; scroll to bottom article] , which quotes some research by Rob Arnott of Research Affiliates. (Thanks to The Big Picture for bringing the story to my attention.) (source: Streetwise , Lawrence C. Strauss. March 28, 2009. Barron's) Before we look into what all this means, I should note that I haven't looked into the details and hence am not sure if this chart is plotting total returns or only price returns. If this chart is price only, I suspect that bonds would still beat total returns of stocks in the recent period but the period would be shorter. So the key conclusion still remains. The key point the chart is making, and what Rob Arnott is suggesting, is that, stocks may underperform for long periods of time. The chart suggests that stocks underperformed bonds for 70 years in the 1800's, 20 years starting with the Great Depre...

CORRECTION: It seems Ken Lewis doesn't advocate separating commercial banks from investment banks. Bloomberg corrects the original story, with Lewis claiming he was misinterpreted. Bloomberg reports : Bank of America Corp.’s Chief Executive Officer Kenneth Lewis said he doesn’t advocate a legal division of commercial and investment banking and that his comments about separating the two referred to rhetoric and public perception. “I was talking about the rhetoric, not physically separating the two,” Lewis said in an interview with Bloomberg Television. “We have an investment bank, we have a commercial bank as well that is the fabric of every community in which it operates.” hmm... ------------------------- Original post follows... Ken Lewis, CEO of Bank of America, suggested that he will advice Barack Obama to split commercial banks from investment banks : Bank of America Corp. Chief Executive Officer Kenneth Lewis said today the U.S. should consider separating commercial lenders f...

Does anyone out there believe that Ambac will survive? I am specifically referring to the insurance company (and not the holding company). Well, I ran across an interesting investment opportunity thanks to a write-up on ValueHuntr . A potential opportunity lies in the liquidation of a company called Alliance Semiconductor (PK: ALSC). Needless to say, anything that is uttered in the same breath as Ambac is a very high risk investment. I'm not going to do a thorough write-up here (if you are interested read the ValueHuntr post, along with my long comment I left on that blog) and will simply summarize the situation. Overview Alliance Semiconductor, a tiny microcap worth less than $10 million, is undergoing liquidation. It has managed to liquidate everything except about $60 million of Auction Rate Securities (ARS). Unfortunately, the ARS market locked-up last year and the company was unable to sell its ARS. To make matters worse, the ARS securities were issued by entities called Ancho...

One of the things one has to be really careful about is, avoiding the comparison of the near-future to the last 30 years. I am of the view that the near-future will be more like the 30's to 50's (in an investing sense) than the 80's to 2000's. I see a lot of people, including the mainstream media, using charts that only go back to the early 80's and I always shake my head. Although it is worth looking at the last 30 years, it is quite possible that the future will be nothing like that period. Consider the following chart from The Globe & Mail purporting to show that junk bonds outperform stocks for a few years after a recession: Conventional wisdom seems to hold that bonds outperform stocks in the immediate period after a recession. This may very well be true; but it's dangerous to form that opinion from that chart above. On top of only having 3 data points, one also needs to keep in mind that bonds have been in a bull market since the early 80's (yield...

MarketWatch is reporting that S&P has warned Berkshire Hathaway about its AAA rating, and calls for Berkshire to raise its capital cushion within 2 years: Standard & Poor's Ratings Services said Wednesday that it may cut Berkshire Hathaway's AAA rating if the insurance-focused conglomerate run by Warren Buffett can't boost its capital in a year or two. S&P affirmed its AAA rating on Berkshire but revised its outlook to negative from stable. If, over the next 12 months, Berkshire's big equity investments stabilize or improve, or if the company can rebuild capital in one to two years through earnings or other means, the outlook could be revised back to stable, S&P said. Reducing the volatility of Berkshire's capital position might help too, the agency added. However, S&P warned that if further big equity market declines dent capital more, or if insurance earnings and other sources of capital aren't enough to restore capital, then Berkshire...

The art market in China had been booming over the last half-decade or so. The boom is a sign of creation of wealth in China, and in other parts of the world. It looks like the art market is starting to show signs of a bust . My impression is that a lot of art investors are wealthy speculators so it is not surprising to see the Chinese art market weaken. As China's decades-long economic boom cools, one clear sign of changing times is falling demand for contemporary art. For years, Chinese contemporary was one of the hottest tickets on the international market, making the fortunes of many Chinese painters, sculptors and photographers. Celebrities such as Hollywood director Oliver Stone and top British art collector Charles Saatchi paid millions for works by big-name Chinese artists. ... Reports in the Chinese press say that more than 30 galleries in Beijing's trendy 798 art district have closed their doors. Less than half the Chinese 20th century works put up for auction by Chris...

Two interesting articles from The Globe & Mail today. I'll cover the first one in this post. It looks like Zimbabwe is in the early stages of getting their hyperinflation under control . The opposition party gained some power a few months ago and this has led to radical changes in policy. It's not clear if these policies will be opposed by Mugabe's party in the future, but so far so good. As to be expected, hyperinflation was pursued largely for political reasons rather than anything economic. Nearly every single episode of hyperinflation was due to purposeful actions. Even the infamous German Weimar Republic hyperinflation in the early 1920's was purposely undertaken. Also disappearing is Zimbabwe's phenomenal level of hyperinflation, which last year reached a stunning 89.7 sextillion per cent (a number expressed with 21 zeroes), making it the most extreme hyperinflation crisis of any country in modern times. Zimbabwe's new coalition government has cracke...

We may have seen one of the biggest rallies in decades today. The catalyst seems to have been the Geithner asset buying plan, which is somewhat similar to Warren Buffett's idea of providing low cost financing to private investors. In my opinion, this is as close to a free market solution as we will see (liquidationists will obviously prefer the free market solution of letting everyone fail but that's neither feasible nor desirable.) The question with this plan comes down to the degree of the transfer of wealth from taxpayers to private investors. The stock market loves it because it is money transferred from taxpayers to banks and investors (financials were the strongest sector today) but politicians shouldn't be blindly rewarding private investors and incompetently-run banks. If this plan fails, the US government will be forced to consider the nuclear option of nationalizing banks. Almost every industry in America, using the Dow Jones classification system, was up strongly...

I'm going to start off a new series on this blog, Sunday Spectacle . Every Sunday, I'll post an image related to events in finance, business, investing, economics, and econopolitics. At times, it may be relevent to the present but at other times it may just be something to think about. In the vein of a painting in an art gallery, there won't be any text, except possibly a title. The goal is to present an image for the user to contemplate and draw their own conclusion. Perhaps fittingly, the inaugural graphic pertains to AIG... (Illustration by JAS for The Economist . March 22, 2009)

Perhaps the most significant event of the week was when the FedRes indicated that it will start using quantitative easing and buy up long-dated US Treasuries. The market reaction was largely neutral in my opinion. Inflation-sensitive assets like gold rallied but it didn't provide much signalling to me, given how gold is still below the March 2008 peak. The real question for macro-type investors is whether we have seen the bottom in the markets (i.e. a bull market has started) or whether this is a bear market rally. I believe it's the latter but I'm often wrong. Anyway, in the list below you'll find some articles you may find interesting. A lot of the articles I have linked in these lists in the last few months have been macroeconomic, political, or social stories. I want to move towards more stockpicking ideas (it's time to deploy capital) but I still haven't found many stock ideas that I find really attractive. If someone has long-term stock ideas, feel free to...

One of the big stories of the week was the annoucement of the plan by the FedRes to monetize long bonds. This basically means that the FedRes will print money and buy US government bonds. Bond bears, and those that believe the central bank has more power than the free market, believe that this will cause high inflation in the future (I don't share that view but it depends on how much money is monetized. The $300 billion that was mentioned is unlikely to cause much inflation in my opinion--unless the economy unexpectedly recovers quickly and the velocity of money turns all this into high-powered money.) What is the Goal of the FedRes? For those not familiar with central banks, they almost always target the short-term rates. The move to buy long-term bonds is unusual and is an attempt to drive down the long-term rates. By driving down the long term rates, it will lower the cost of financing, particularly for home buyers (mortgage rates) and corporations (corporate bond yields). My un...

This post has nothing to do with investing so move along if that's what you are looking for :) There are very few major things in the world that cannot be reversed. An example in my opinion is pollution. Unless we discover some super-high-end technology to reverse environmental damage, it is likely that pollution right now or any point in the future will be higher than a few thousand years ago. Another irreversible trend is the decline of languages. I don't view the trend as neither good nor bad; it is what it is. Whenever I look at chart like the following one from The Economist , I'm always speechless. It feels weird. Not really sure what to say other than the fact that humans a few thousand or even a few hundread years from now will wonder how the world was when there were thousands of languages.

As I have repeated many times, one of the best ways to earn returns in a bear market is through risk arbitrage (you can also add liquidations, tender offers, and so forth, but it's hard to get information for some of them.) Risk arbitrage is largely uncorrelated with the market and you will earn returns based on whether the deals succeed or fail, rather than what happens to the economy or whether a company is increasing profits or whatever. The downside to risk arbitrage (or other special situation investing) in this market is that you may miss the upside of buying cheap stocks. If a bull market starts tomorrow, or if you manage to locate an undervalued stock that the market recognizes, you will earn far more by having normal exposure to companies. There are a bunch of M&A deals I've been tracking. I ruled out deals like Wyeth (WYE) because (i) the returns were low when I looked at it a few months ago, especially given the far-off closing date, and (ii) it is not a 100% cas...

The FedRes had been signalling this for months and they finally implemented it. Associated Press is reporting that the FedRes will buy up to $300 billion in long-term government bonds, and an additional $750 billion of mortgage bonds from the GSEs. The Federal Reserve announced Wednesday it will spend up to $300 billion over the next six months to buy long-term government bonds , a new step aimed at lifting the country out of recession by lowering rates on mortgages and other consumer debt. At the same time, the Fed left a key short-term bank lending rate at a record low of between zero and 0.25 percent. Economists predict the Fed will hold the rate in that zone for the rest of this year and for most -- if not all -- of next year. Fed purchases should boost Treasury prices and drive down their rates. That would ripple through and lower rates on other kinds of debt. The last time the Fed set out to influence long-term interest rates was during the 1960s with Operation Twist, conceived ...

There has been a massive short covering rally in Citigroup (C). Barron's says its arbitrageurs covering their long-Citi-preferred/short-Citi-common pair trade ... but some analysts expect shares to fall once the pref-common exchange is complete: CITIGROUP (ticker: C) SHARES WERE UP 25% today in late-morning trading amid a big short squeeze in the stock tied in part to an upcoming massive exchange offer for the company's preferred stock that will result in a huge increase in the number of Citi shares outstanding. Citi shares, which were recently trading at $3.14 a share, now have more than tripled from a low of $1 reached on March 5. Arbitragers say that Citi shares are virtually impossible to short now because of heavy demand from those who had set up an arbitrage in which they bought Citi preferred and shorted the stock after the banking giant announced the exchange offer on Feb. 27. Traders say that Citi shares could fall once the exchange offer is complete, which is expected...

John Paulson's fund has taken a huge stake in AngloGold Ashanti, a South African gold miner. For those familiar, Paulson is famous for making billions off his correct call of the housing meltdown. I know very little about his fund or his strategy other than the fact that he is a hot investor right now. Change Alley picked up the same story but there is an article in The Globe & Mail as well. Paulson & Co. paid $1.28-billion (U.S.) yesterday for an 11-per-cent stake in AngloGold Ashanti Ltd., one of the world's largest miners of the precious metal. The deal is just the latest example of a major international investor buying into bullion as a safe haven amid the global financial crisis. As the economic meltdown has worsened in recent weeks and months, firms such as Eton Park Capital Management LP, Greenlight Capital Inc. and Hayman Advisors LP have been boosting their exposure to the yellow metal. ... Paulson owns about 28 million shares of Toronto's Kinross Gold Co...