Showing posts from April, 2009

Commodity marginal cost of production tends to decline decline

I guess this blog is more about quantity rather than quality :) On a blogging roll in the last few days... Anyway... One of the difficulties for commodity investors—a point often ignored during bullish times—is that the marginal cost of production can decline over time. In fact, this is what tends to happen for most commodities. The vast majority of commodities seem to deflate over time (I need to check this but that's my impression). I want to illustrate this point by referring to what Talisman (TLM), one of Canada's largest oil & gas E&P companies, is saying about natural gas : Until recently, energy producers have found it too expensive to tap into the huge reserves of natural gas trapped in various shale formations. But as technology has improved, Talisman and several Canadian and U.S. firms have been flocking to the regions. "The gas price at which our unconventional business remains profitable is coming down all the time. We can see ways to ensure profitabili

Montpelier Re doing something positive for shareholders

Montpelier Re (MRH), my only core investment right now, has been a dissapointment lately. I don't follow it closely but do keep an eye on it once in a while. It suffered huge losses on their investment portfolio last year, which is never a pretty sight when the insurer is mostly investing in supposedly "safe" assets. As I indicated in my outlook for 2009, I am bearish on insurers. If interest rates stay low, we may see a period like the 40's or 50's, when insurance companies, who mostly own bonds, don't earn much off their investment portfolio. For this reason, I am not too optimistic with these companies in aggregate. However, specific companies can be good investments. In any case, in the latest quarterly conference call , I noticed something that I wish more businesses were doing. Namely, buying back bonds: The second was a repurchase of 21 million of our outstanding 2013 Senior Notes or 15 million resulting in an immediate $6 million gain and a 1 million a

One of the reason the market is rallying is because earnings are coming in strong

Bloomberg points out that companies are beating earnings estimates . I suspect this is one of the reasons the market is rallying. Corporate earnings worldwide haven’t been the disaster analysts predicted as companies from Ford Motor Co. to Siemens AG beat earnings estimates through job cuts, factory consolidations and a dose of lowered expectations. ... Some 188 members of the Standard & Poor’s 500 Stock Index have topped analysts’ estimates, or 69 percent of the 271 companies reporting so far. That’s more than the 62 percent for all of the previous quarter, Bloomberg data shows. In Europe’s Dow Jones Stoxx 600 Index, half of the 110 members reporting so far beat estimates, up from 38 percent in the previous quarter. If the strong earnings can be maintained, it's very bullish and signals the possibility of a strong recovery later in the year.

Opinion: One political party in America is equivalent to 2 or 3 elsewhere

(This post is about politics and has nothing to do with investing.) Paul Krugman recently commented on his blog that the Republican Party is getting marginalized, with the defection of Arlene Specter to the Democrats, and I spent some time reading some of the commentators (instead of doing something more productive with my life ;). I have to say I disagree with some commentator's opinions about the dominance of two parties in America. Although two parties dominate America, I would actually say that each party is equivalent 2 or 3 parties in a British-style parliamentary democracy. The lack of choice in American parties is mostly an illusion in my eyes. Under the American system, there has almost always been only two parties competing. It has ranged from Federalist Party vs Democratic-Republican Party, to Democratic-Republican Party vs Whig Party, to (old) Democratic Party vs (old) Republican Party, to the present Democratic Party vs Republican Party. There are some minor parties

A new compensation controversy in the making... at Chesapeake Energy

A lot of the controvery over compensation schemes have mostly centered on financial companies. The most famous so far is the Merrill Lynch bonus payments just before it was purchased by Bank of America—I'm sure to the shock of many involved, this has opened up a can of worms, with potential illegal actions by various government officials and the CEO of Bank of America. Another big one was the bonus payments to AIG Fincial Products employees. The controvery this time had to do with the fact that the employees that bankrupted the company and ended up requiring $100+ billion bailout by the US government was being paid bonuses. Admittedly, some of the key employees who brought down the house don't work there anymore, although many others, mostly lower level, likely still do. I mean, even my Ambac has paid more than $10 million to the executive who was on the board (at that time) overseeing the expansion in structured finance. Ambac hasn't caused any controvery yet though--mostl

Gary Shilling interview with Advisor Perspectives

Sticking to my contrarian knitting, albeit with the potential to go completely astray and lose my shirt, let me go against a strongly rallying market and present a bearish view from Gary Shilling. Thanks to GuruFocus for pointing me to a Gary Shilling interview with Advisor Perspectives . For those not familiar, Gary Shilling is considered by the mainstream to be a perma-bear since he has mostly been bearish and called for a deflationary bust that never materialized in the late 90's. I dismissed him a few years ago, similar to my ill-advised dismissal of Jeremy Grantham, because he seemed too bearish. One of the things that has separated Gary from other bears is that he is an economist and approaches things from a macro point of view. In contrast, many other bears tend to be traders that rely on technical analysis (Mike Shedlock of Mish's Global Econmic Analysis blog, for instance, says a lot of economics but seems to make his investment decisions off technical analysis.) In a

US GDP contracts 6.1% (annualized) in 1st quarter

Shouldn't be a surprise to anyone, although it seems slightly worse than consensus expecation, but US GDP contracted by 6.1% (annualized rate) in the 1st quarter of 2009: Real gross domestic product -- the inflation-adjusted, seasonally adjusted value of all goods and services produced in the United States -- fell at a 6.1% annualized rate in the first quarter, nearly matching the 6.3% decline in the fourth quarter of 2008. Read the full report. The two-quarter contraction is the worst in more than 50 years. Since the 1947, the economy had never contracted by more than 4% for two consecutive quarters. With a 0.5% drop in the third quarter of 2008, it's the first time the economy has contracted for three consecutive quarters since 1975. In the past four quarters, the economy has fallen 2.6%, the biggest year-over-year decline since 1982. The big story for the first quarter was in the business sector, where firms halted new investments, and shed workers and inventories at a dizz

If you are a contrarian and believe in re-flation, worth considering natural gas

I'm mildly bearish on commodities and don't really believe in the re-flation scenario, which is pinned on strong economic growth. But if you disagree with those views, and I suspect many readers are :), you may want to do some homework on natural gas. Strictly from a contrarian point of view, it is starting to look attractive. As you can see in the chart below from , its price has declined quite a bit and is possibly on its way to a decade low. Without looking at fundamentals and strictly looking at that chart, it is probable that natural gas can fall another 40% to, say, $2. This was the price back in 1999 and 2001-2002. If you assume that fundamentals, either on the production or demand side, hadn't changed much and value of the US$ hasn't changed much, it wouldn't be unreasonable to expect prices to go back to the lows set a decade ago. Has the Fundamentals Changed? I don't follow the natgas market but did read up on it several years ago (when I

Well, looks like we don't need to wait until May 4th for bank results

I thought there would be lot of suspense until the week of May 4th, when the bank stress test results are to be revealed, but it seems the media has killed the suspense. The Wall Street Journal is reporting that Bank of America and Citigroup have been told to raise capital (don't have access to original article so here is a summary from Calculated Risk .) Both banks are supposedly in the process of responding with rebuttals. It's not clear if other potentially distressed banks, such as Wells Fargo, Fifth Third Bankcorp, and others, have also been told to raise capital. By not nationalizing banks—admittedly very difficult to do this in America since conservatives tend to be completely against it and it seems to run somewhat against American character—I wonder if the Obama administration is going to end up zombifying all the other distressed banks as well. If the government gains sizeable ownership, which it will if preferred shares are converted to common or if it purchases a lo

Articles to Peruse

Some articles to increase your knowledge... maybe :) ... (Recommended) The case for deflation (Van R. Hoisington and Lacy H. Hunt; via Mish's Global Econommic Trend Analysis): The link to the original article doesn't seem to work consistently :( but do read the original article mentioned by Mike Shedlock, along with his response. Since you will see very few deflationists, you may want to read this article, even if you are an inflationist or a neutral, to see why the deflationists believe what they do. Profile of several workers laid off (Report On Business magazine by The Globe & Mail): Some depressing stories of people in wide spectrum of industries and positions losing their jobs. One of the sad things about losing a job, and capitalism in general, is that the layoffs can be indiscriminate. Some like to think that the worst workers or the overpaid or those willing to leave are the ones to go, but reality is that almost anyone's job can be lost. Tampa Bay Lightning

Sign of the times: some banks exiting proprietary trading

Not surprisingly, TD and CIBC, two major banks in Canada, are shrinking or shutting down their proprietary trading divisions : As international policymakers prepare to force banks to reduce risky trading activity and embrace a more balanced business model, TD and CIBC are taking the leap on their own. TD's Mr. Clark says his bank is going to give up the industry-wide practice of placing casino-like bets with the bank's own capital. The 61-year-old's decision to halt this profitable-but-risky activity -- known as proprietary trading--makes TD one of only two big banks in the world to make such an explicit pledge, along with Germany's Deutsche Bank. Mr. Clark says the "wholesale" side of his bank, which advises institutional clients and handles market trades, should not behave like "a hedge fund in disguise." He wants to stick to activity that produces economic value as the core of new banking model that is emerging from the financial crisis "Our

Does Ken Lewis and Bank of America have a way out?

Ignoring the swine flu issue, which may or may not turn into anything serious in the end, one of the big scandals brewing in the background is the coercion by the government of Ken Lewis and Bank of America to act against their own shareholders in the buyout of Merrill Lynch. Basically, if Ken Lewis is to be believed, Bank of America was prevented from backing out of the Merill Lynch deal in order to save the country's banking system, at the expense of Bank of America shareholders. This is a serious issue that goes all the way to the highest levels of government. In particular, Henry Paulson, Ben Bernanke, and since he was the president overseeing the Treasury, George Bush, seem to have engaged in some dubious behaviour. It is also possible that Timothy Geithner may be involved in this somehow, since he was the head of the New York Federal Reserve at the time, but that is uncertain right now. Henry Paulson has shifted the blame to the Federal Reserve; and the Federal Reserve has de

A Black Swan just flew into view: the swine flu

Diagram of the Flu Virus (source: Too early to tell but the swine flu that has started spreading throughout North America can supposedly turn into a major pandemic. So far, the incidence of death and infection rate does not seem too terrible but it's something to keep an eye on. In addition to loss of lives and health issues, this is going to cause sizeable economic losses, particularly for Mexico (and its tourist industry.)

Sunday Spectacle VI

Was an American Icon... (source: Car Collector Online )

Some articles for the week ending April 25 of 2009

Some articles, in no particular order, that may be of interest... Current recession close to being the worst since the 60's (The New York Times): According to some indicators, our the recession in the US is on par to be one of the worst since the 60's. The question is, will it linger on? (Further comment below) Andrew Mickey interview with John Calamos, a convertible bond investor (Q1 Publishing; via SeekingAlpha): I don't know the track record of either of these guys but I ran across this insightful interview regarding convertible bonds. As I have remarked before, convertible bonds are arguably the ultimate security for distressed investment. They generally give you the upside of equity and the downside of bonds. Unfortunately many companies haven't issued them in the last decade (possibly because financing cost of straight bonds was really low in the last 5 years; and it leaves them open for hedge funds to aggresively short-sell shares while owning the convertibles.

William Ackman -- The Man Who Stood In Front of the MBIA Train

(source: Portfolio ) I have trouble saying 'MBA' without saying 'MBIA' — William Ackman I have the same problem as William Ackman when it comes to MBIA. I get it mixed up with MBA and, unlike Ackman, I also get it mixed up with MBNA. In The Optimist , Jesse Eisinger of Portfolio magazine presents an in-depth profile of William Ackman. For those not familiar, William Ackman is a hedge fund manager whose reputation for activist investing has risen rapidly in the last few years. This article has been making the rounds on the blogs but I thought I would highlight it in a separate post. It is only fitting given how I had mentioned some negative things about him in the past. Long time readers of this blog may recall how I have been critical of William Ackman over the years. Part of it possibly arises due to opposite bets on the fate of the monoline bond insurers; but most of it is probably because he is not the type of investor that I hold in high regard. I'll bet if we

Tangible common equity ratio for major American banks

Yesterday I mentioned the risk to Wells Fargo shareholders from regulators and shown below is a table listing TCE (tangible common equity) for major American banks (the table is from OptionARMageddon and I can't vouch for the accuracy of it. The source is a bearish site so it likely has a bearish slant.) As you can see, if you went with this simple TCE calculation, Wells Fargo and Citigroup are at the bottom and at risk of requiring capital injections probably on the order of $15 billion (if 3% TCE is required.) Additional capital may be in the form of new equity or conversion of prefered shares. Wells Fargo's market cap is $88 billion so you are looking at slightly less than 20% of market cap. But that's all assuming a simplistic TCE calculation without considering the supposed superior underwriting and risk evaluation skills of Wells Fargo. From the table, you can also see how simplistic ratios are misleading. For instance, Bank of NY Mellon seems to be near the bottom o

Opinion: Warren Buffett has a problem with Wells Fargo

This is going to be a provocative post and I have to admit it isn't based on anything solid. Nevertheless, I have a feeling that Wells Fargo is in trouble with the regulators. Before I say anything, I should note that I know very little about Wells Fargo or banking in general. My impression, for what it's worth, is that Wells Fargo is far better off than possibly all the other American megabanks. But that may not be enough in these times... No, Wells Fargo is not going bankrupt. Buffett also probably won't lose real money in the long run. But Wells Fargo is not what it seems. It seems quite rare, and out of character, for Warren Buffett to take a public stand defending Wells Fargo all of a sudden. What I am referring to is his Fortune interview conducted a month ago but only published a few days ago. Although Buffett has been making himself available to media in the last few years, this Fortune piece seems like it was directed at the regulators and the public. What Buffett

Bear case for commodities

I am not a huge fan of relying on opinion pieces from Wall Street analysts--in this case an analyst from Morgan Stanley--but I felt the following Newsweek article summarizes many of the reasons I am staying squarely away from commodities. My impression is that most readers of this blog, as well as the market itself, is still bullish on commodities. One just needs to look at the futures curve to see how the market is betting. The article If It’s in the Ground, It Can Only Go Down by Ruchir Sharma for Newsweek was pointed out to me by Naked Capitalism , which in turn relied on Metal Miner . I recommend it to anyone interested in commodities; even if you are bullish, it's worth reading the bearish case. Here is an excerpt of it: As playwright Arthur Miller once observed, "An era can be said to end when its basic illusions are exhausted." And most of the illusions that defined the late global economic boom—the notion that global growth had moved to a permanently higher plane

Bank stress test results may be revealed on May 4th

Saw the story first at Calculated Risk ... Bloomberg is reporting that the US government is planning to reveal the results of the bank stress tests on May 4th: The Obama administration may direct banks that are judged to be short of capital after stress tests to disclose how they are going to get additional funds when the government reveals the results on May 4, according to a person familiar with the matter. The government would release a bank-by-bank assessment, while the lenders would say how they plan to shore up their finances, said the person, who spoke on condition of anonymity because a decision hasn’t been made. ... The Treasury and banking regulators are still working out the final details of how to reveal the test results and plans could change, said the person. Generally, the regulators favor less disclosure because bank exam data is confidential, while the Treasury advocates releasing more details. ... Regulators conducting the stress tests are increasingly focusing on th

Flashback... Interviews with Shloss and Klarman

I don't know if it's just me but I am seeing quite a number of amateur-oriented investment blogs start up in the last year. Several of them seem to be focused on value investing and tend to cover material that are useful for newbies like me. I don't know if it's just the rising popularity of blogging or if it's someone trying to take out their misery on the written ink ;) but I hope the bloggers continue doing what they are doing... Older investors or those with good historical research skills may have seen the following two articles before but it's the first time I have encountered them and thought others may find it interesting. The two interviews come from a new blog I ran across, Mr. Market Blog . The first is an interview with Seth Klarman conducted by Fortune in 1990 . From the article, you can get a sense of the type of investments he was investing in when he started out. I don't really follow Klarman--not my style and virtually impossible to know wha

Historical junk bond default rates

Felix Salmon, who now blogs for Reuters, managed to get some information on junk bonds (aka high-yield bonds, aka speculative-grade bonds). Since my interest, if I were to invest any bonds, is with junk bonds, I have always been interested in historical default rates. The following chart (from Moody's I believe) plots defaults on junk bonds since 1920: Moody's is projecting defaults that are on par with the rates during the Great Depression. In the worst case, the default rates are supposed to exceed those during the 30's. However, the business environment is radically different now. The junk bond market only took off in the 80's. Furthermore, there is higher corporate leverage now than in the 30's. So, high defaults don't necessarily mean that we are looking at a depression. What does all this mean for bond investors? Well, here is how I look at it. The yields on junk bonds are high (15% to 20% or so) but the risk of default is extremely high as well. I don