Greenblatt's calculation of ROIC in TLBTBTM is a useful quick and dirty tool but when it comes to really analysing companies it may need some adjustments to give a clearer picture.
Monday, December 31, 2007
52 Week Lows 12/31/2007
WRI Weingarten Realty Inv ... 31.50
WEN Wendy's International ... 25.76
SBGI Sinclair Broadcasting ... 8.21
RURL Rural/Metro Corp 2.14
RUBO Rubio's Restaurants, Inc. 8.25
RTLX Retalix Ltd 15.36
RRGB Red Robin Gourmet Bur ... 32.08
JNY Jones Apparel Group, Inc 16.00
JCOM J2 Global Communicati ... 21.21
JBLU Jetblue Awys Corp 5.91
BWS Brown Shoe Inc New 15.12
BONT The Bon-Ton Stores Inc 9.44
BJRI BJ's Restaurants, Inc. 16.23
CKR CKE Restaurants, Inc. ... 13.25
CHS Chico's FAS Inc 9.04
CHRK Cherokee Intl Corp 2.04
Donate to the ValuePlays Project for KIVA
ValuePlays: Best and Worst Calls of 2007
It is the end of the year and it is time to take credit for the prophetic like calls I have made and then take my lumps for the, well, "was he drinking?" ones.
BEST:
1- Starbucks (SBUX). On Feb 8th, with shares at $33, I wrote, "The switch to premium coffee is clearly working for McDonald's. In the last couple conference calls they have given huge credit to their coffee for both their increase in sales and customer counts. Contrast this to Starbucks' call in which they intimated their profit increases were mainly due to price increases on coffee and by selling customers more products once inside, not by increased customer counts. Translation, they are losing people to McDonalds (MCD)."
Since then Starbucks shares have cratered, down 40% and McDonalds shares are up 40% to all-time highs.
2- Oil (USO). On Jan. 30th, I wrote with oil at its lowest point since the index was created, "If you are long term (years) you are really only looking at supply and demand, as long as it does not change from its current long term trend, the price must go up." Since then the price has risen roughly 70%.
3- Harley Davidson (HOG): On Feb.7th with shares at $70 I wrote, "It will get cheaper". The initial price point was set at $60 and was then was reduce over the summer to under $45, where shares sit today, a 35% decline.
I have a feeling I will end up buying Harley shares around $40 in the not too distant future.
4- Dow Chemical: On 12/7 I wrote: "How about using the very same strategy they have been using for the past year? Selling chunk of this business to outsiders and placing them into the Joint Venture (JV) category. This would provide Dow billions of dollars instantly to be deployed in buying some specialty chemical makers without impairing the balance sheet."
The next week Dow did just that.
5- Ethanol: In January I said that 2007 & 08 will be a battle for the hearts of the FOS's (fly over states) for politicians and that battle would be fought with ethanol. Each party would battle to bring the largest biofuel mandate to that area and the #1 benefactor would be Archer Daniels Midland (ADM). Sure enough the 2007 Energy Bill featured massive biofuel increases. ADM? Up 50% since January.
WORST
1- Google (GOOG). On Feb. 2nd, I wrote with shares of Google at $500 "I repeat my prior statement. Google is a great company with great product, it's stock is just overpriced."
Since then shares have risen 35% to $685. I still think it is overpriced, maybe next year we will be able to move this one to the "best call column". Who knows...
2- Apple (AAPL). On May 16th, with shares at $110, I wrote "the introduction of the iPhone will be the first miscue for the company and send it's shares, priced for perfection tumbling."
Shares since then have risen 63% to $185. Here was the flaw, iPod and especially Mac sales have exploded and with it, the profitability of the company. iPhone sales have been "lukewarm" or "spectacularly average"? It surely has not been a flop but it has not been a smash hit either. The real winner in the iPhone rollout was AT&T (T), the sole carrier of the product. In all fairness to myself I did also say the phone at $599 was way over priced and apparently Apple agreed (or sluggish sales indicated) as the price was dropped 33% to $399 almost immediately after roll-out and $100 refunds given to early buyers. In my initial May post I did say "drop the price to $299 and you'll have something". Apple met me more than half way.
With Verizon (VZ) and Research in Motion (RIMM) the Blackberry maker coming out with touch screen phones in '08, it will be interesting to see how iPhone sales are effected.
The Jury is Still Out
1- Citigroup (C): Down 30% since first purchase.
2- Sears Holdings (SHLD): Ditto Citigroup
3- Owens Corning (OC): Down 30% since purchase
These do not go into the "worst" category for the simple reason I still hold them and as a value investor, you buy stocks when they are down, you are either right or wrong a year or two down the road, not in a few months. If these are still where they are now at thing time next year, we will have to move them into the "worst" category if for no other reason, the thought process behind the purchases and when they were made was flawed.
Please feel free to email or comment on any other ones you can think of and I will be happy to expand on any of them. I sure there are others but these are the ones off the top of my head...
Donate to the ValuePlays Project for KIVA
BEST:
1- Starbucks (SBUX). On Feb 8th, with shares at $33, I wrote, "The switch to premium coffee is clearly working for McDonald's. In the last couple conference calls they have given huge credit to their coffee for both their increase in sales and customer counts. Contrast this to Starbucks' call in which they intimated their profit increases were mainly due to price increases on coffee and by selling customers more products once inside, not by increased customer counts. Translation, they are losing people to McDonalds (MCD)."
Since then Starbucks shares have cratered, down 40% and McDonalds shares are up 40% to all-time highs.
2- Oil (USO). On Jan. 30th, I wrote with oil at its lowest point since the index was created, "If you are long term (years) you are really only looking at supply and demand, as long as it does not change from its current long term trend, the price must go up." Since then the price has risen roughly 70%.
3- Harley Davidson (HOG): On Feb.7th with shares at $70 I wrote, "It will get cheaper". The initial price point was set at $60 and was then was reduce over the summer to under $45, where shares sit today, a 35% decline.
I have a feeling I will end up buying Harley shares around $40 in the not too distant future.
4- Dow Chemical: On 12/7 I wrote: "How about using the very same strategy they have been using for the past year? Selling chunk of this business to outsiders and placing them into the Joint Venture (JV) category. This would provide Dow billions of dollars instantly to be deployed in buying some specialty chemical makers without impairing the balance sheet."
The next week Dow did just that.
5- Ethanol: In January I said that 2007 & 08 will be a battle for the hearts of the FOS's (fly over states) for politicians and that battle would be fought with ethanol. Each party would battle to bring the largest biofuel mandate to that area and the #1 benefactor would be Archer Daniels Midland (ADM). Sure enough the 2007 Energy Bill featured massive biofuel increases. ADM? Up 50% since January.
WORST
1- Google (GOOG). On Feb. 2nd, I wrote with shares of Google at $500 "I repeat my prior statement. Google is a great company with great product, it's stock is just overpriced."
Since then shares have risen 35% to $685. I still think it is overpriced, maybe next year we will be able to move this one to the "best call column". Who knows...
2- Apple (AAPL). On May 16th, with shares at $110, I wrote "the introduction of the iPhone will be the first miscue for the company and send it's shares, priced for perfection tumbling."
Shares since then have risen 63% to $185. Here was the flaw, iPod and especially Mac sales have exploded and with it, the profitability of the company. iPhone sales have been "lukewarm" or "spectacularly average"? It surely has not been a flop but it has not been a smash hit either. The real winner in the iPhone rollout was AT&T (T), the sole carrier of the product. In all fairness to myself I did also say the phone at $599 was way over priced and apparently Apple agreed (or sluggish sales indicated) as the price was dropped 33% to $399 almost immediately after roll-out and $100 refunds given to early buyers. In my initial May post I did say "drop the price to $299 and you'll have something". Apple met me more than half way.
With Verizon (VZ) and Research in Motion (RIMM) the Blackberry maker coming out with touch screen phones in '08, it will be interesting to see how iPhone sales are effected.
The Jury is Still Out
1- Citigroup (C): Down 30% since first purchase.
2- Sears Holdings (SHLD): Ditto Citigroup
3- Owens Corning (OC): Down 30% since purchase
These do not go into the "worst" category for the simple reason I still hold them and as a value investor, you buy stocks when they are down, you are either right or wrong a year or two down the road, not in a few months. If these are still where they are now at thing time next year, we will have to move them into the "worst" category if for no other reason, the thought process behind the purchases and when they were made was flawed.
Please feel free to email or comment on any other ones you can think of and I will be happy to expand on any of them. I sure there are others but these are the ones off the top of my head...
Donate to the ValuePlays Project for KIVA
Sunday, December 30, 2007
ValuePlays Most Popular Posts for December
1- Has Lampert "Lost It"?, Did Buffett?
2- Eddie Lampert, World's Worst Third World Dictator? Come on, Herb!!
3- MFP Investor's Micheal Price on Sears Holdings
4- Autozone Easily Beats Estimates. Is Lampert a Genius Again?
5- Did Lampert Dump Burnett?
6- Walmart.com Blows away Competition.
Donate to the ValuePlays Project for KIVA
"Fast Money" for Monday
Monday's Picks
Pete Najarian likes Caterpillar(CAT) Open $73.16
Karen Finerman says short Big Lots (BIG) Open $15.77
Guy Adami recommends Deere & Co (DE) Open $92.28
Friday's Results
Karen Finerman recommends being short the iShares Dow Jones US Real Estate ETF(IYR). Open $66.48 Close $65.18 GAIN
Guy Adami likes Intel (INTC). Open $26.83 Close $26.76 LOSS
Pete Najarian says investors should buy Archer Daniels Midland (ADM). Open $46.04 Close $47.09 GAIN
Results since 6/21/2007:
Guy Adami= 57-46 = 55%
John Najarian= 13-4 = 76%
Jeff Macke= 60-40 = 60%
Pete Najarian= 49-40 = 55%
Tim Seymore= 7-7 = 50%
Karen Finerman= 39-30 = 57%
Stacey Briere-Gilbert= 3-0 = 100
Ned Riley= 1-0 = 100%
Carter Worth= 0-1 = 0%
Donate to the ValuePlays Project for KIVA
Saturday, December 29, 2007
The Week's Top Stories at Value Investing News
Here are the top 10 from VIN
VALUEPLAYS NOTE: Read a similar post from February at ValuePlays
Donate to the ValuePlays Project for KIVA
2. Warren Buffett's "Bet on America": The Complete CNBC Interview
(via www.cnbc.com)
In a live interview this morning on CNBC's Squawk Box, Warren Buffett called his purchase of a big Marmon stake as a "bet on America over a long time." He also revealed that while he has been approached by financials companies about buying a stake, "we have not seen a deal that causes me to start salivating."
3. Another Look At Greenblatt's ROIC
(via valetudoinvesting.blogspot.com)
4. Emil Lee : Are You a Value Pretender?
(via www.fool.com)
In 2005, Seth Klarman of Baupost Capital warned a group of Wharton business school students that a new class of "value pretenders" had emerged. Klarman, whose fund has earned more than 20% annual returns on more than $5 billion in holdings, provided the following description: "These investors apply a dip strategy.
5. SEC Probing Washington Mutual
(via biz.yahoo.com)
More bad news for WAMU. SEC is investigating the possible use of inflated appraisals.
6. Lessons From Ted Williams
(via shahinkhezri.blogspot.com)
"If they are in the strike zone at all, the business 'pitches' we now see are just catching the lower outside corner. If we swing, we will be locked into low returns. But if we let all of today's balls go by, there can be no assurance that the next ones we see will be more to our liking. Perhaps the attractive pries of the past were the aberrations, not the full pries of today.
VALUEPLAYS NOTE: Read a similar post from February at ValuePlays
7. If you read between the lines for what it is worth
(via www.atfreeforum.com)
Rockefeller and Buffett parallel
8. Mauboussin on Strategy : Fat Tails and Nonlinearity
(via www.lmcm.com)
Diversity Breakdowns and Invisible Vulnerability. For he who is acquainted with the paths of nature, will more readily observe her deviations; and, vice versa, he who has learned her deviations will be able more …
9. Want A Risk Free 14% Return
(via www.intelligentspeculator.net)
DVW is currently trading at a 14% discount from its acquisition price. This provides a relativley risk free 14% return in just a few months.
10. Martin Whitman's Bet on Asia
(via www.cnbc.com)
Insight on why he is investing in Asia, with Marty Whitman, Third Avenue Management and CNBC's Erin Burnett
This Week's Dividend Hikes
Bristol Myers Squibb-(BMY) = 10.7%
CCF Holding Co-(CCFH) = 5.3%
First Tr Morningstar Div-(FDL)= 19.5%
Freeport-McMoRan C & G-(FCX)= 40.0%
Kayne Anderson Engy Dev-(KED)= 1.2%
Donate to the ValuePlays Project for KIVA
This Week's Insider Purchases
Equity One Inc (EQY)= $7,755,627
World Acceptance Corp (WRLD)= $2,374,380
Cousins Properties Inc (CUZ)= $ 1,479,383
Hercules Offshore Inc (HERO)= $1,404,247
Nuveen Municipal Value Fund Inc (NUV)= $1,393,820
Nuveen Global Value Opportunities Fund (JGV) = $1,368,600
Neuro Hitech Inc (NHPI) = $1,326,750
Osiris Therapeutics Inc (OSIR)= $1,237,000
Aca Capital Holdings Inc (ACAH )= $1,214,080
Donate to the ValuePlays Project for KIVA
Friday, December 28, 2007
Martin Whitman Releases Annual shareholder Letter
Mr. Whitman's thoughts on the mortgage situation are just spectacular and more than worth the time to read. I get the letter by being a holder in the Third Avenue Value Fund (TAVFX)
Read the Whole Letter Here:
THE RESIDENTIAL MORTGAGE MELTDOWN AND HOUSING COLLAPSE
TAVF is investing heavily in the common stocks of companies suffering through the current housing crisis. These companies include financial institutions, a home builder, a building supplier, land banks and investment builders. The Fund’s reasons for this investment program provide a good case study as to how Third Avenue’s “safe and cheap*” approach works in practice:
First, the bad side of these investments:
1) The stock market pricing for these equity issues ischaotic. There is no way Fund management is able to pick a bottom for securities prices, or a near bottom.
2) Fund management has no good idea of how deep the crisis will become, or how long it will last. Our best guess is two to four years.
Second, the good side of these investments:
1) In each instance, TAVF is acquiring common stocks at meaningful discounts from readily ascertainable NAVs. In the case of certain financial institution common stocks – MGIC Common, MBIA Common and Radian Common, the prices the Fund is paying are no more that 40% of book value, or adjusted book value. For each of these companies, a normalized Return on Equity (equity equals book value) (“ROE”) ranges from 8% to 14%.
Assuming a 10% ROE sometime in the future, and no further dramatic deterioration in book value during the interim, probably a realistic assumption; and current pricing at 40% of book value, Third Avenue would be paying only four times future normalized earning power. There seems to be a reasonable probability, too, that TAVF is really paying less than four times normalized earnings, even assuming that future normalized earnings are fully taxed and even assuming some modest dilution of the common stocks.
2) Each common stock acquired, is acquired in a company which enjoys a strong financial position. While there can be no guarantees, the probabilities are that each of these companies will survive as solvent going concerns either without requiring major access to capital markets for new funding, or by obtaining new funding from others on terms that are only modestly dilutive for TAVF. On December 10th, MBIA announced that it is obtaining $500 million of equity financing from Warburg Pincus; and another $500 million from a rights offering which Warburg Pincus will backstop, i.e., underwrite. Assuming that Third Avenue participates in the rights offering and also takes advantage of any oversubscription privileges, the capital infusion should be, at worst, only modestly dilutive for TAVF.
3) Each company seems very well managed.
4) It is possible that the crisis will become increasingly deep, and prolonged; or rating agencies will start to place great weight on soft, qualitative considerations. In those events, the companies might need capital infusions to remain going concerns. TAVF has proposed to MBIA, Radian and USG managements that such infusions be in the form of equity, and that existing stockholders provide the equity via pre-emptive rights offerings. MBIA proposes to raise $500 million via a rights offering. If this were to occur, and if other portfolio companies were to follow the MBIA path, the capital infusions would be, for Third Avenue, mostly nondilutive, or anti–dilutive (if there are oversubscription privileges).
In the case of MBIA and Radian, it is crucial if they are to remain going concerns, that the national rating agencies continue to assign AAA and AA ratings, respectively, to each company’s bond insurance subsidiaries. As an aside, given current prices, TAVF would probably not lose money if Radian or MBIA were to go into run-off rather than remain going concerns. Run-off, i.e., liquidation, simply is not a likely outcome, however. It would appear as if capital infusions would not become necessary if the rating agencies were to rely on only hard, quantitative data.
However, this month, Moody’s announced that in reviewing ratings it would also consider soft qualitative data, much as Moody’s views as to what “investor perceptions” are. Consideration of such qualitative factors as investor perceptions seems to increase the probabilities that Radian might seek a capital infusion as was the case for MBIA. At December 21st, TAVF owns 12.9% of the Radian Common outstanding, and 8.0% of the MBIA common outstanding.
At current depressed prices, the Fund would rather buy common stocks from the companies than from company stockholders. If rights offerings were to become available not only for MBIA, but also others, TAVF might have attractive buying opportunities. In analyzing each of the financial institutions, Generally Accepted Accounting Principles (“GAAP”) tend to be quite misleading. This is because GAAP require that derivatives such as the Credit Default Swaps be marked to market – and market prices now are highly capricious, to say the least.
Marks to market are the most appropriate, and helpful, tool in the appraisal of publicly-traded common stocks held in trading portfolios. Marks to market are an inappropriate, and unhelpful, tool in the appraisal of credit instruments held in portfolios where the intent is to hold the credit instruments to maturity. MBIA and Radian intend to hold their credit instruments to maturity. Third Quarter 2007 mark to market losses recorded by MBIA and Radian were as follows:
Mark to Market Losses,
MBIA $222,000,000 / $1.80 PER SHARE
Radian $404,000,000 / $5.02 PER SHARE
Further, MBIA announced on December 10th that its mark to market losses for the fourth calendar quarter of 2007 will be significantly greater than they were in the third quarter.
The real losses to MBIA and Radian will be determined not by marks to market, but by
(a) the percentage of the portfolios that suffer moneydefaults, plus
(b) how those money defaults work out after recoveries from foreclosures, restructurings, refinancings and reinvestments.
MBIA’s fourth quarter 2007 reported losses will be staggering. In addition to mark to market losses, the preliminary indications are that case reserves will be increased by $500 million to $800 million pre-tax. The Company, however, will remain with a quite strong capital position. When I first trained as an analyst – some 50 plus years ago – the primary role of GAAP was to meet the needs of creditors who held credit instruments to maturity. That’s all changed now.
The primary role of GAAP seems to have become to fulfill the perceived needs of equity holders who are vitally affected by day to day changes in common stock prices. As I’ve pointed out in previous letters – What a waste! GAAP can’t really be very useful to stock market speculators, but it can hurt issuers like MBIA and Radian. In any event, TAVF, as a “safe and cheap” investor, will continue to place primary weight on “what the numbers mean” rather than on “what the numbers are”.
Though I feel very good about our investing program into U.S. housing related companies, TAVF is hardly “betting the ranch” on such investments. At October 31, the Fund had $1 billion, or 8.3% of its net assets, in such investments. In contrast, for example, the Fund had $3.2 billion, or 26.2% of its net assets, invested in the common stocks of Hong Kong-based companies involved with real estate and private equity.
Over the years, TAVF has been rather successful in distress investing, the recent Collins & Aikman debacle notwithstanding. The key to most of the distress successes was the Fund successfully indentified, and acquired at bargain prices, the fulcrum security of the troubled issuer, i.e., the most senior security which would participate in a reorganization. Our current housing crisis investments are very much like our other distress investing (e.g., Nabors Industries, Covanta, Kmart, USG) except here the fulcrum security investment is common stock rather than credit instruments. To push the analogy a little further, as a return to normal times occurs, it appears as if the common stocks either will be reinstated (i.e., the capital invested will remain intact) or that there will be a reorganization (i.e., companies will need capital infusions.) A principal risk to the Fund could occur if the businesses seek capital infusions, and if such infusions are on a basis that would be highly dilutive to existing stockholders.
Historically, financial guaranty insurance has been a highly profitable business for the monoline insurers, even though the insureds received a very attractive deal by being able to obtain AAA ratings at low cost. Insurance company profitability is measured by a combination of underwriting profits and net investment income. Underwriting profit is measured by the “combined ratio”, i.e., the ratio of the sum of losses and expenses to net premium income and net premiums written. Net investment income, usually all interest income, tends to be larger as long as loss liabilities are “long tail”, i.e., the losses do not have to be paid out until long after the insurance premiums have been collected and then invested in bonds.
Typically, MBIA’s insurance subsidiaries have enjoyed a combined ratio each year under 40%. Net investment income for the MBIA insurance subsidiaries has grown over the years to almost $600,000,000 per annum. The prospects appear quite good to Fund management that, once past the current housing difficulties, MBIA will return to its historic patterns of very attractive combined ratios and relatively steady growth in net investment income.
The mortgage meltdown-housing collapse seems nothing new for the U.S. economy. During the last 60 years, virtually every sector of the American economy has gone through depressions as bad as anything that occurred in the 1930s. Remember the melt-downs during the past 40 years for, inter alia energy, banks, real estate, savings & loans, Wall Street brokerages, row crops, steel, automobiles, machine tools, etc. Unlike the 1930s, all these depressions occurred without domino effect. The probability seems to be that the next ten years in the U.S. will be more like the last 40 than they will be like the 1930s. Put otherwise, the odds favor overcoming the current crisis in residential housing and residential housing finance without underlying damage to the U.S. economy.
Martin J. Whitman
Donate to the ValuePlays Project for KIVA
Read the Whole Letter Here:
THE RESIDENTIAL MORTGAGE MELTDOWN AND HOUSING COLLAPSE
TAVF is investing heavily in the common stocks of companies suffering through the current housing crisis. These companies include financial institutions, a home builder, a building supplier, land banks and investment builders. The Fund’s reasons for this investment program provide a good case study as to how Third Avenue’s “safe and cheap*” approach works in practice:
First, the bad side of these investments:
1) The stock market pricing for these equity issues ischaotic. There is no way Fund management is able to pick a bottom for securities prices, or a near bottom.
2) Fund management has no good idea of how deep the crisis will become, or how long it will last. Our best guess is two to four years.
Second, the good side of these investments:
1) In each instance, TAVF is acquiring common stocks at meaningful discounts from readily ascertainable NAVs. In the case of certain financial institution common stocks – MGIC Common, MBIA Common and Radian Common, the prices the Fund is paying are no more that 40% of book value, or adjusted book value. For each of these companies, a normalized Return on Equity (equity equals book value) (“ROE”) ranges from 8% to 14%.
Assuming a 10% ROE sometime in the future, and no further dramatic deterioration in book value during the interim, probably a realistic assumption; and current pricing at 40% of book value, Third Avenue would be paying only four times future normalized earning power. There seems to be a reasonable probability, too, that TAVF is really paying less than four times normalized earnings, even assuming that future normalized earnings are fully taxed and even assuming some modest dilution of the common stocks.
2) Each common stock acquired, is acquired in a company which enjoys a strong financial position. While there can be no guarantees, the probabilities are that each of these companies will survive as solvent going concerns either without requiring major access to capital markets for new funding, or by obtaining new funding from others on terms that are only modestly dilutive for TAVF. On December 10th, MBIA announced that it is obtaining $500 million of equity financing from Warburg Pincus; and another $500 million from a rights offering which Warburg Pincus will backstop, i.e., underwrite. Assuming that Third Avenue participates in the rights offering and also takes advantage of any oversubscription privileges, the capital infusion should be, at worst, only modestly dilutive for TAVF.
3) Each company seems very well managed.
4) It is possible that the crisis will become increasingly deep, and prolonged; or rating agencies will start to place great weight on soft, qualitative considerations. In those events, the companies might need capital infusions to remain going concerns. TAVF has proposed to MBIA, Radian and USG managements that such infusions be in the form of equity, and that existing stockholders provide the equity via pre-emptive rights offerings. MBIA proposes to raise $500 million via a rights offering. If this were to occur, and if other portfolio companies were to follow the MBIA path, the capital infusions would be, for Third Avenue, mostly nondilutive, or anti–dilutive (if there are oversubscription privileges).
In the case of MBIA and Radian, it is crucial if they are to remain going concerns, that the national rating agencies continue to assign AAA and AA ratings, respectively, to each company’s bond insurance subsidiaries. As an aside, given current prices, TAVF would probably not lose money if Radian or MBIA were to go into run-off rather than remain going concerns. Run-off, i.e., liquidation, simply is not a likely outcome, however. It would appear as if capital infusions would not become necessary if the rating agencies were to rely on only hard, quantitative data.
However, this month, Moody’s announced that in reviewing ratings it would also consider soft qualitative data, much as Moody’s views as to what “investor perceptions” are. Consideration of such qualitative factors as investor perceptions seems to increase the probabilities that Radian might seek a capital infusion as was the case for MBIA. At December 21st, TAVF owns 12.9% of the Radian Common outstanding, and 8.0% of the MBIA common outstanding.
At current depressed prices, the Fund would rather buy common stocks from the companies than from company stockholders. If rights offerings were to become available not only for MBIA, but also others, TAVF might have attractive buying opportunities. In analyzing each of the financial institutions, Generally Accepted Accounting Principles (“GAAP”) tend to be quite misleading. This is because GAAP require that derivatives such as the Credit Default Swaps be marked to market – and market prices now are highly capricious, to say the least.
Marks to market are the most appropriate, and helpful, tool in the appraisal of publicly-traded common stocks held in trading portfolios. Marks to market are an inappropriate, and unhelpful, tool in the appraisal of credit instruments held in portfolios where the intent is to hold the credit instruments to maturity. MBIA and Radian intend to hold their credit instruments to maturity. Third Quarter 2007 mark to market losses recorded by MBIA and Radian were as follows:
Mark to Market Losses,
MBIA $222,000,000 / $1.80 PER SHARE
Radian $404,000,000 / $5.02 PER SHARE
Further, MBIA announced on December 10th that its mark to market losses for the fourth calendar quarter of 2007 will be significantly greater than they were in the third quarter.
The real losses to MBIA and Radian will be determined not by marks to market, but by
(a) the percentage of the portfolios that suffer moneydefaults, plus
(b) how those money defaults work out after recoveries from foreclosures, restructurings, refinancings and reinvestments.
MBIA’s fourth quarter 2007 reported losses will be staggering. In addition to mark to market losses, the preliminary indications are that case reserves will be increased by $500 million to $800 million pre-tax. The Company, however, will remain with a quite strong capital position. When I first trained as an analyst – some 50 plus years ago – the primary role of GAAP was to meet the needs of creditors who held credit instruments to maturity. That’s all changed now.
The primary role of GAAP seems to have become to fulfill the perceived needs of equity holders who are vitally affected by day to day changes in common stock prices. As I’ve pointed out in previous letters – What a waste! GAAP can’t really be very useful to stock market speculators, but it can hurt issuers like MBIA and Radian. In any event, TAVF, as a “safe and cheap” investor, will continue to place primary weight on “what the numbers mean” rather than on “what the numbers are”.
Though I feel very good about our investing program into U.S. housing related companies, TAVF is hardly “betting the ranch” on such investments. At October 31, the Fund had $1 billion, or 8.3% of its net assets, in such investments. In contrast, for example, the Fund had $3.2 billion, or 26.2% of its net assets, invested in the common stocks of Hong Kong-based companies involved with real estate and private equity.
Over the years, TAVF has been rather successful in distress investing, the recent Collins & Aikman debacle notwithstanding. The key to most of the distress successes was the Fund successfully indentified, and acquired at bargain prices, the fulcrum security of the troubled issuer, i.e., the most senior security which would participate in a reorganization. Our current housing crisis investments are very much like our other distress investing (e.g., Nabors Industries, Covanta, Kmart, USG) except here the fulcrum security investment is common stock rather than credit instruments. To push the analogy a little further, as a return to normal times occurs, it appears as if the common stocks either will be reinstated (i.e., the capital invested will remain intact) or that there will be a reorganization (i.e., companies will need capital infusions.) A principal risk to the Fund could occur if the businesses seek capital infusions, and if such infusions are on a basis that would be highly dilutive to existing stockholders.
Historically, financial guaranty insurance has been a highly profitable business for the monoline insurers, even though the insureds received a very attractive deal by being able to obtain AAA ratings at low cost. Insurance company profitability is measured by a combination of underwriting profits and net investment income. Underwriting profit is measured by the “combined ratio”, i.e., the ratio of the sum of losses and expenses to net premium income and net premiums written. Net investment income, usually all interest income, tends to be larger as long as loss liabilities are “long tail”, i.e., the losses do not have to be paid out until long after the insurance premiums have been collected and then invested in bonds.
Typically, MBIA’s insurance subsidiaries have enjoyed a combined ratio each year under 40%. Net investment income for the MBIA insurance subsidiaries has grown over the years to almost $600,000,000 per annum. The prospects appear quite good to Fund management that, once past the current housing difficulties, MBIA will return to its historic patterns of very attractive combined ratios and relatively steady growth in net investment income.
The mortgage meltdown-housing collapse seems nothing new for the U.S. economy. During the last 60 years, virtually every sector of the American economy has gone through depressions as bad as anything that occurred in the 1930s. Remember the melt-downs during the past 40 years for, inter alia energy, banks, real estate, savings & loans, Wall Street brokerages, row crops, steel, automobiles, machine tools, etc. Unlike the 1930s, all these depressions occurred without domino effect. The probability seems to be that the next ten years in the U.S. will be more like the last 40 than they will be like the 1930s. Put otherwise, the odds favor overcoming the current crisis in residential housing and residential housing finance without underlying damage to the U.S. economy.
Martin J. Whitman
Donate to the ValuePlays Project for KIVA
Online Retail Traffic Through 12/22
I have an interesting question about the group.
1. www.walmart.com (WMT)= 7.94%
2. www.target.com (TGT)= 5.06%
3. www.bestbuy.com (BBY)= 3.96%
4. www.sears.com / www.kmart.com (SHLD)= 3.72%
5. www.circuitcity.com (CC)= 3.07%
6. www.jcpenney.com (JCP)= 2.03%
7. www.toysrus.com (private)= 1.97%
8. www.macys.com (M) = 1.43%
9. www.kohls.com (KSS)= 1.3%
Data from Hitwise
The question? How in all that is holy can Circuit City be losing money? They have been in the top 5 all season and are currently the only one of the group losing cash. Pathetic comes to mind...
Wal-Mart has commanded essentially a 3% lead over #2 Target all fall. Now, with Target announcing a recent December sales disappointment, this 3% may be the difference for Wal-Mart being successful this holiday season. When you add Wal-Mart advertising of its very popular "site-to-st0re" program and Target's lack thereof, a hard lesson may have been l;earned by Target execs this season.
What will be interesting is to see results from Sears Holdings which has a similar program but did not advertise it as hard..
Donate to the ValuePlays Project for KIVA
1. www.walmart.com (WMT)= 7.94%
2. www.target.com (TGT)= 5.06%
3. www.bestbuy.com (BBY)= 3.96%
4. www.sears.com / www.kmart.com (SHLD)= 3.72%
5. www.circuitcity.com (CC)= 3.07%
6. www.jcpenney.com (JCP)= 2.03%
7. www.toysrus.com (private)= 1.97%
8. www.macys.com (M) = 1.43%
9. www.kohls.com (KSS)= 1.3%
Data from Hitwise
The question? How in all that is holy can Circuit City be losing money? They have been in the top 5 all season and are currently the only one of the group losing cash. Pathetic comes to mind...
Wal-Mart has commanded essentially a 3% lead over #2 Target all fall. Now, with Target announcing a recent December sales disappointment, this 3% may be the difference for Wal-Mart being successful this holiday season. When you add Wal-Mart advertising of its very popular "site-to-st0re" program and Target's lack thereof, a hard lesson may have been l;earned by Target execs this season.
What will be interesting is to see results from Sears Holdings which has a similar program but did not advertise it as hard..
Donate to the ValuePlays Project for KIVA
Happy New Year, Macy's Style
Today, Macy's (M) announced they are closing nine underperforming stores, citing declining sales with no identifiable growth opportunities.
The store are located at: Washington Square, Indianapolis, IN; Prien Lake Mall, Lake Charles, LA; Rolling Acres Mall, Akron, OH; Canton Centre, Canton, OH; Randall Park Mall, North Randall, OH; Crossroads Mall, Oklahoma City, OK; Valley View Center, Dallas, TX; Sharpstown Center, Houston, TX; Family Center at Riverdale, Riverdale, UT.
This is just lousy. They could not wait a week? It is especially repugnant when just a few weeks ago Chief Executive Terry Lundgren said, "We always go through the normal process of pruning our real estate portfolio, but there are no plans for a wide-scale closure of stores."
Nice.......
On another note, retail is must suffering currently. This will make the results Wal-Mart (WMT) turns in Jan. 10th even more impressive.
Donate to the ValuePlays Project for KIVA
The store are located at: Washington Square, Indianapolis, IN; Prien Lake Mall, Lake Charles, LA; Rolling Acres Mall, Akron, OH; Canton Centre, Canton, OH; Randall Park Mall, North Randall, OH; Crossroads Mall, Oklahoma City, OK; Valley View Center, Dallas, TX; Sharpstown Center, Houston, TX; Family Center at Riverdale, Riverdale, UT.
This is just lousy. They could not wait a week? It is especially repugnant when just a few weeks ago Chief Executive Terry Lundgren said, "We always go through the normal process of pruning our real estate portfolio, but there are no plans for a wide-scale closure of stores."
Nice.......
On another note, retail is must suffering currently. This will make the results Wal-Mart (WMT) turns in Jan. 10th even more impressive.
Donate to the ValuePlays Project for KIVA
Friday's 52 Week Low's
WM Washington Mutual Inc 13.09
WEN Wendy's International ... 26.26
TLB The Talbots, Inc 11.93
TIN Temple-Inland Inc 29.51
PFCB P F Chang's China Bis ... 22.76
PETM PETsMART Inc 23.77
MSO Martha Stewart Living ... 8.84
MDS Midas Group Inc 14.97
MAT Mattel, Inc 19.12
JBLU Jetblue Awys Corp 5.98
FIG Fortress Investment G ... 15.47
FIC Fair Isaac Corporation 32.42
FDX Fedex Corp 90.39
CC Circuit City Stores, ... 4.17
C Citigroup, Inc 29.22
Donate to the ValuePlays Project for KIVA
Citigroup Dividend Cut Talk: Just That
Citi (C) CEO Vikrim Pandit has already commented on the dividend issue and as far back as early November I commented that I felt it would not be cut. Despite recent reports like the Goldman Sachs (GS) estimate of a 40% cut, recent events have only buffered my feelings on the subject.
Currently Citi pays just under $11 billion a year in dividends. Sounds like a lot until you consider in the last 12 months Citi earned almost $24 billion. My guess is that Pandit had no desire to be the guy who cuts the dividend. It would be construed as taking the easy way out, rather than trying to actually fix Citi's issues. I have said repeatedly in the past he has $2.3 trillion in assets under his control and can easily sell chunks of them to raise capital if he needs it.
Thursday the Wall. St. Journal reported that Citi is looking at doing just that. Units rumored on the block include Student Loan Corp., which is 80 percent owned by the bank, its North American auto lending business, the Brazilian credit card company Redecard SA, in which Citigroup held a 24 percent stake as of Sept. 30 and its Japanese consumer finance business.
Pandit's also is laying off about 20,000 employees as he streamlines operations. Now, the current list of items for sale is just the beginning and the "low hanging fruit". In his first interview as CEO Pandit did say regarding possible asset sales "all options are on the table". He was far less open to a dividend cut saying "the board has spoken on that and the dividend is where it is".
Do I think the dividend will be raised in 2008? not by a long shot. But sitting here getting over 7% taxed a 15% is a real nice deal while we wait for this thing to shake out.
Financials are a huge opportunity here, for investors with the right time frame and temperament.
Donate to the ValuePlays Project for KIVA
Currently Citi pays just under $11 billion a year in dividends. Sounds like a lot until you consider in the last 12 months Citi earned almost $24 billion. My guess is that Pandit had no desire to be the guy who cuts the dividend. It would be construed as taking the easy way out, rather than trying to actually fix Citi's issues. I have said repeatedly in the past he has $2.3 trillion in assets under his control and can easily sell chunks of them to raise capital if he needs it.
Thursday the Wall. St. Journal reported that Citi is looking at doing just that. Units rumored on the block include Student Loan Corp., which is 80 percent owned by the bank, its North American auto lending business, the Brazilian credit card company Redecard SA, in which Citigroup held a 24 percent stake as of Sept. 30 and its Japanese consumer finance business.
Pandit's also is laying off about 20,000 employees as he streamlines operations. Now, the current list of items for sale is just the beginning and the "low hanging fruit". In his first interview as CEO Pandit did say regarding possible asset sales "all options are on the table". He was far less open to a dividend cut saying "the board has spoken on that and the dividend is where it is".
Do I think the dividend will be raised in 2008? not by a long shot. But sitting here getting over 7% taxed a 15% is a real nice deal while we wait for this thing to shake out.
Financials are a huge opportunity here, for investors with the right time frame and temperament.
Donate to the ValuePlays Project for KIVA
"Fast Money" for Friday
Friday's Picks
Karen Finerman recommends being short the iShares Dow Jones US Real Estate ETF(IYR). Open $66.48
Guy Adami likes Intel (INTC). Open $26.83
Pete Najarian says investors should buy Archer Daniels Midland (ADM). Open $46.04
Results since 6/21/2007:
Guy Adami= 57-45 = 60%
John Najarian= 13-4 = 76%
Jeff Macke= 60-40 = 66%
Pete Najarian= 48-40 = 57%
Tim Seymore= 7-7 = 50%
Karen Finerman= 38-30 = 56%
Stacey Briere-Gilbert= 3-0 = 100
Ned Riley= 1-0 = 100%
Carter Worth= 0-1 = 0%
Donate to the ValuePlays Project for KIVA
Thursday, December 27, 2007
Year in Review
For those who do not know who Todd Harrison is, you should. He is the founder of Minyanville.com. He has an article on 2007's top 10 themes. It is a great read.
Read it here:
Donate to the ValuePlays Project for KIVA
Read it here:
Donate to the ValuePlays Project for KIVA
Dow Chemical To Invest Heavily In China
There has been a ton of speculation as to what Dow Chemical (DOW) was going to do with the $9.5 billion it is getting from Kuwait in the recent JV agreement.
Some backround:
On 12/7 I wrote "How about using the very same strategy they have been using for the past year? Selling chunk of this business to outsiders and placing them into the Joint Venture (JV) category. This would provide Dow billions of dollars instantly to be deployed in buying some specialty chemical makers without impairing the balance sheet."
A week later Dow announced it has sold 5 of those very commodity businesses into a new JV with Kuwait and would receive $9.5 billion for them AND still receive a 50/50 split of the businesses results.
Where is the money going?
Dow Chemical plans to invest $5 billion in China in the coming 10 years, said CEO Andrew N. Liveris in Shanghai yesterday. The $5 billion fund budget will not cover a potential coal-to-chemical project in central China's Shaanxi Province, where the chemical giant is conducting a feasibility with Shenhua Group Corp, the world’s second largest coal producer, added Liveris.
Now that is has signed the agreement with KPC (Kuwait Petroleum Corp.) Dow is in talks with Sinopec (SHI) to take over stake in the refiner's $5 billion joint venture oil refinery and petrochemical project with Kuwait Petroleum Corp in East China's Guangdong province.
China welcomes chemical producers from Kuwait and Saudi Arabia because they are able to provide crude oil to the country's large petrochemical projects, said Wang Jin, an analyst at Orient Securities recently.
Dow is on a path to be the world's dominant petrochemical producer. Early this year CEO Andrew Liveris called 2007 "a transformational year". He has delivered.
Donate to the ValuePlays Project for KIVA
Some backround:
On 12/7 I wrote "How about using the very same strategy they have been using for the past year? Selling chunk of this business to outsiders and placing them into the Joint Venture (JV) category. This would provide Dow billions of dollars instantly to be deployed in buying some specialty chemical makers without impairing the balance sheet."
A week later Dow announced it has sold 5 of those very commodity businesses into a new JV with Kuwait and would receive $9.5 billion for them AND still receive a 50/50 split of the businesses results.
Where is the money going?
Dow Chemical plans to invest $5 billion in China in the coming 10 years, said CEO Andrew N. Liveris in Shanghai yesterday. The $5 billion fund budget will not cover a potential coal-to-chemical project in central China's Shaanxi Province, where the chemical giant is conducting a feasibility with Shenhua Group Corp, the world’s second largest coal producer, added Liveris.
Now that is has signed the agreement with KPC (Kuwait Petroleum Corp.) Dow is in talks with Sinopec (SHI) to take over stake in the refiner's $5 billion joint venture oil refinery and petrochemical project with Kuwait Petroleum Corp in East China's Guangdong province.
China welcomes chemical producers from Kuwait and Saudi Arabia because they are able to provide crude oil to the country's large petrochemical projects, said Wang Jin, an analyst at Orient Securities recently.
Dow is on a path to be the world's dominant petrochemical producer. Early this year CEO Andrew Liveris called 2007 "a transformational year". He has delivered.
Donate to the ValuePlays Project for KIVA
Wednesday, December 26, 2007
Wednesday's Links
Dumbest moments, Bill Miller, Standardized Tests, Bloggystyle.
- Here they are, the 100 dumbest business moves of the year.
- A very interesting interview with Bill Miller.
- We need them. It is the only way to compare. Life is about being tested, might as well learn how to deal with it.
- Adam's missive...
Donate to the ValuePlays Project for KIVA
- Here they are, the 100 dumbest business moves of the year.
- A very interesting interview with Bill Miller.
- We need them. It is the only way to compare. Life is about being tested, might as well learn how to deal with it.
- Adam's missive...
Donate to the ValuePlays Project for KIVA
Subscribe to:
Posts (Atom)