Can Turtles Fly?

After thinking about the previously mentioned merger-"arbitrage" situations, I decided to go with the Tribune (TRB) deal. This is the one that really interested me in the first place (the returns on the others weren't as attractive to me). The upside is around 25%. The downside is uncertain and can be very large. If the deal does not complete, Tribune will end up being a heavily leveraged business in a declining newspaper industry. I can see the stock price dropping quite a bit (more than 30%). In such a case, I will likely sell with a loss. However, one should consider whether new bidders may emerge if the Zell deal fails. There were a few bidders before so Tribune may still be of interest to some (although, with a large debt load the interest may be less than before). If the stock drops more and if I can save a few thousand more over the next month, I'll consider adding to this position. Right now the position is too small for my liking (it's around 5% of my por...

As I have remarked before, merger "arbitrage" looks like the most attractive strategy to a newbie like me right now (I put "arbitrage" in quotes because this is a speculation, as opposed to an arbitrage, since I don't hedge by shorting (not possible in some of these cases anyway)). I find the mergers attractive because they are not dependent on the broad market, which is heavily influenced by economic growth, profitability, sentiment, etc (there is a lot of uncertainty with these numbers right now). Furthermore, the merger discount is very large right now due to credit issues and, supposedly, some merger-arbitrage hedge funds leaving the market (due to liquidity problems in other strategies within their family of hedge funds). You don't see such discounts during a normal scenario (i.e. during a typical bull market or bear market). Of the announced mergers, the three I found attractive were ABN-Amro (ABN), BCE (BCE), and Tribune (TRB). You can read my prior w...

I came across a bunch of articles on China and thought I should talk about China. What is happening in China now can be best described by Charles Dickens' opening for A Tale of Two Cities : "It was the best of times, it was the worst of times..." Top Economic Power by 2100 China will become one of the top economic powers--likely #1--in about 100 years. In fact, some analysts expect China to play a bigger role in the world economy than any other country by 2050. The chart below is from an HSBC report, where they project China's (and India's) impact on the world. (source: From Hero to Zero and Back Again, by Robert Prior-Wandesforde and Garry Evans; India Watch (Issue 15), Macro - India Economics & Strategy, HSBC Global Research; August 17, 2007) The fact that some Asian countries like China and India will start playing a bigger role should not be a surprise from a super-long-term point of view. In 1700 of the of the last 2000 years, either China or India has ha...

John Hussman has an article on P/E valuations and how the general consensus may be misleading. Contrarians should permanently bookmark his site. It's worth reading the article but I'm going to quote the last part of his article which talks about some recession indicators. 1) The "credit spread" between corporate securities and default-free Treasury securities becomes wider than it was 6 months earlier. This spread is measured by the difference between 10-year corporate bond yields and 10-year U.S. Treasury bond yields (or alternatively, by 6-month commercial paper minus 6- month U.S. Treasury bill yields). This spread is primarily an indication of market perceptions regarding earnings risk and default risk, which generally rises during recessions. 2) The "maturity spread" between long-term and short-term interest rates falls to less than 2.5%, as measured by the difference between the 10-year Treasury bond yield and the 3-month Treasury bill yield. A narr...

John Mauldin has written one of his best articles ever on the current credit problems. He traces out the origins and explains what the problems are and suggests some solutions. I highly recommend that you check out the full article (quotes do no justice to the details behind this article). Here are some excerpts that I find insightful. Part of the problem is the shift towards more ARM mortgages... In the beginning, subprime loans were made the old-fashioned way. You had to have 80% loan to value and show you had a job and could actually pay back the money. And these loans were packaged up into a subprime Residential Mortgage Backed Security...But then in 2004 loan practices began to change and had got completely out of hand by 2006. In 2005-6, about 80% of subprime mortgages were adjustable-rate mortgages, or ARMs, also called "exploding ARMs." These loans are so-named because they carry low teaser rates that often reset dramatically higher, increasing the borrower's mon...

Bloomberg has a good summary on the current situation with Tribune. Billionaire Sam Zell has a knack for buying low and selling high -- which is why his $8.2 billion takeover of Tribune Co. may return 35 percent to anyone who now buys the shares and 11 percent for anyone purchasing the bonds. So you are looking at around 30% return in just under 6 months. A Lehman Brothers analyst supposedly thinks the chance of a close is only 50%, and has a price target of $5 if the deal falls. Lehman Brothers Holdings Inc. said this week the deal has no better than a 50-50 chance of being completed as scheduled, and credit markets indicate a 57 percent probability of insolvency if it is. I am sure the shareholders will vote for the deal and Sam Zell will be ok with the deal, but the question is with the financiers. Three big banks are supposed to raise debt and certain conditions have to be met: For lenders to renege, adjusted earnings would have to plunge further than a 22 percent decline in the f...

I placed a limit order to purchase Takefuji on the Tokyo Stock Exchange (symbol: 8564; PinkSheets: TAKAF). My broker, HSBC, is very slow to post transactions online so I'm not sure of exact purchase details. But I'm sure it went through given that the price dropped a lot more than my limit price. This is my first purchase on a foreign exchange (ignoring US exchanges (I'm in Canada)). This is a long-term purchase that is more characteristic of a value investing purchase (very little speculation in this one). You can read my original investment evaluation analysis here but do note that numbers will be slightly out of date. Since I posted that analysis, the stock has dropped around 20% more. The forward P/E ratio is around 11 with the p/bv around 1 right now. Purchase Price: Yen 3270 Investment Time Horizone: Long (2+ Years)