Sunday Reading: Asset Growth vs. Stock Price Study

Asset Growth & Stock Price

Publish at Scribd or explore others: Finance Business & Law stocks assets

Disclosure ("none" means no position):

Ackman Ira Sohn Presentation on General Growth Properties

Hat Tip Investment Linebacker

GGP Presentation 5.27.2009

Publish at Scribd or explore others: usa air

Disclosure ("none" means no position):Long GGWPQ

Weekend Viewing: Neural Nets & Rule-Based Trading Systems

The 45% drop in the US equity markets has caused even stalwarts to question the wisdom of the "buy and hold" strategy. But rule-based approaches for deciding when to buy or sell suffer the same problem. Sometimes they work and sometimes they don't. In this presentation, Dr. Mike Bowles shows how familiar data-mining tools can be used to derive a robust algorithmic trading system.

A simple rule-based approach trend-following system serves as a starting point. He looks at that system's characteristics and then employs a neural net to predict which of the system's trades should be taken and which ones should be skipped.

Bowles demonstrates that this significantly improves the performance of the trading system (Sharpe's ratio of 1.6 to Sharpe’s ratio 3.6). This example illustrates one way in which data mining tools have proven useful to practitioners of quantitative finance.




Disclosure ("none" means no position):

Paul Krugman, Please Call Ben on This "Printing Money" Thing

So Extreme Left Wing Hack Paul Krugman came up with this one today in an article about those concerned with the possibility of inflation. In it he claimed "I suspect that the scare is at least partly about politics rather than economics."

He later went on to say:

So if prices aren’t rising, why the inflation worries? Some claim that the Federal Reserve is printing lots of money, which must be inflationary, while others claim that budget deficits will eventually force the U.S. government to inflate away its debt.

The first story is just wrong. The second could be right, but isn’t.

Oh, so the Fed is not printing "lots of money"? We'll, let's just ask the Chairmnan of said Fed and see what he says.



For those who do not wish to watch the video, here is the applicable exchange:

Asked if it's tax money the Fed is spending, Bernanke said, "It's not tax money. The banks have accounts with the Fed, much the same way that you have an account in a commercial bank. So, to lend to a bank, we simply use the computer to mark up the size of the account that they have with the Fed. It's much more akin to printing money than it is to borrowing."

"You've been printing money?" Pelley asked.

"Well, effectively," Bernanke said.

So, the obvious conclusions are either:

A) Paul Krugman has no idea how the Fed works or what its activities effectively do

OR

B) Krugman's defense of the current policies are what he claimed above "politics over economics"

I'll go with "B" because I do not think Krugman is dumb. Only a very smart person could be so obviously partisan and without a trace of moral objectivity in his ability to twist any data set to his pre-determined outcome and get away with it for years.

Now, it of course does not help that he works at the Democratic Party National HQ (errr NY Times) and preaches to the also pre-determined political predilections of its readers/editors. Nor does it hurt he won he won a Nobel Prize for his consistent trashing of anything the GOP attempted from a Noble Committee that considers him "conservative" despite his actual claim to be "liberal".. He is also on the record trashing the Reagan legacy as though the longest period of economic expansion those policies set off were either an accident or the result of Jimmy Carter's legacy.

The joke goes that any member of the GOP could walk out of the Capital and walk across the Potomac River and Krugman would eviscerate them in a column for "not being able to swim".

Back to the "article". Later in it he says:

But it’s hard to escape the sense that the current inflation fear-mongering is partly political, coming largely from economists who had no problem with deficits caused by tax cuts but suddenly became fiscal scolds when the government started spending money to rescue the economy. And their goal seems to be to bully the Obama administration into abandoning those rescue efforts.

Again Krugman simply lies. It is not the fact we have deficits that have economists up in alarms. Did you notice he declines to name names? It is easy to claim something as "fact" if you do not back it up with specifics like, oh, who is actually doing the "fear-mongering"? What has people so alarmed is that the current deficit that will exceed $2TRILLION is greater than every deficit ever run in the history of the country COMBINED.

Consier this, in 1996 Krugman wrote in an article called "First, Do No Harm":

Still, would a more relaxed attitude toward budget deficits do any harm? Here Kapstein's article becomes truly mischievous, by suggesting that concern about deficits is motivated entirely by ideology. Would that it were! Unfortunately, the West is past the point at which the virtues and vices of its budget deficits could be discussed in terms of uncertain macroeconomic effects. The stakes now are much cruder and more elemental: the long-term solvency of Western governments.

Debt as a percentage of national income in almost all Western nations is now comparable to the levels that historically have prevailed only at the end of major wars. But there has been no war, and instead of paying down their debts, as peacetime governments always have in the past, Western treasuries are continuing to increase their debt, for the most part faster than the increases in their tax bases. Moreover, in the current situation there are no major emergencies -- no big arms races or wars in prospect, no natural disasters that require extraordinary spending. But stuff happens. If governments cannot control their budgets when it is not happening, what will they do when it does?

The demographic time bomb makes this situation particularly worrying. The budgets of advanced countries are in large part engines that transfer money from workers to retirees, a system that runs smoothly as long as the population is steadily growing, so that the workingage population is large relative to the retired population. But Western populations have not grown steadily. Baby boom was followed by baby bust, and it is therefore certain that the demands on the social insurance systems of advanced countries will greatly exceed their resources beginning only a bit more than a decade from now. Or to put it differently, to the already huge explicit debts of Western nations one should add implicit debt in the form of their unfunded promises to future retirees. In short, concern about the budget deficits of Western nations can no longer be considered a matter of ideology. These days it is a matter of straightforward accounting, and one must deliberately stick one's head in the sand to imagine otherwise.

He finished the article with this:

There is a great deal that can be done to improve the economic situations of the ill-paid and unemployed. However, there is no reason to tie responsible, realistic proposals to raise incomes and create jobs either to irresponsible demands for bigger deficits or to unrealistic expectations about international coordination.

It is the almost unfathomable scope of current deficits that has economists up in arms (as it used to him), not that we are running one. To be sure, it would be near impossible to find an economist that declares given what has happen the last year that it would be wise for the government not to be running a deficit. Yet, Krugman insinuates this yet another "vast right wing conspiracy".

No Paul, just people being intellectually honest about what is happening....give it try sometime.



Disclosure ("none" means no position):

Latest Wall St. Media Appearance 5/28

Given today's action in General Growth Properties (GGWPQ), this was an opportune show. Also discussed was oil (USO), natural gas (UNG) and value investing in general.

More video at Wall St. Media




Disclosure ("none" means no position):long GGWPQ, UNG, USO

Sobering Housing News....Very Sobering

I was going to piece this in but it really needs to be read in its entirety. Any bold highlights are mine.

The Mortgage Bankers Association came out with their Q1 report today and then updated their forecast:

WASHINGTON, D.C. (May 28, 2009) — Foreclosure actions were initiated on 1.37 percent of first mortgages during the first quarter of 2009, according to the Mortgage Bankers Association. This was a 29 basis point increase over the fourth quarter of 2008 and a 36 basis point increase from one year ago. Both the level of foreclosures started and the size of the quarter over quarter increase are record highs.

According the MBA’s National Delinquency Survey, the delinquency rate for mortgage loans on one-to-four-unit residential properties was 8.22 percent on a non-seasonally adjusted basis, down 41 basis points from 8.63 percent in the fourth quarter of 2008. Delinquency rates always decline in the first quarter of the year due to a variety of seasonal factors. After accounting for these factors, the seasonally adjusted delinquency rate was 9.12 percent of all loans outstanding as of the end of the first quarter of 2009, up 124 basis points from the fourth quarter of 2008, and up 277 basis points from one year ago.

The seasonally adjusted rate is the highest in the MBA’s records going back to 1972 and the unadjusted rate is the highest recorded in the first quarter of any year back to 1972.

This means now that on every quantifiable level, this housing bust is far worse than the most recent one in the early 1990's. Read more on that and its effect here.

The delinquency rate includes loans that are at least one payment past due but does not include loans in the process of foreclosure. The percentage of loans in the foreclosure process at the end of the first quarter was 3.85 percent, an increase of 55 basis points from the fourth quarter of 2008 and up 138 basis points from one year ago. Both the foreclosure inventory percentage and the quarter to quarter increase are record highs.

The combined percentage of loans in foreclosure and at least one payment past due, meaning the percentage of mortgage holders not current on their mortgages, was 12.07 percent on a non-seasonally adjusted basis, the highest ever recorded in the MBA delinquency survey.

“The increase in the foreclosure number is sobering but not unexpected. The rate of foreclosure starts remained essentially flat for the last three quarters of 2008 and we suspected that the numbers were artificially low due to various state and local moratoria, the Fannie Mae and Freddie Mac halt on foreclosures, and various company-level moratoria,” said Jay Brinkmann, MBA’s chief economist. “Now that the guidelines of the administration’s loan modification programs are known, combined with the large number of vacant homes with past due mortgages, the pace of foreclosures has stepped up considerably.”

“In looking at these numbers, it is important to focus on what has changed as well what continue to be the key drivers of foreclosures. What has changed is the shifting of the problem somewhat away from the subprime and option ARM/Alt-A loans to the prime fixed-rate loans. The foreclosure rate on prime fixed-rate loans has doubled in the last year, and, for the first time since the rapid growth of subprime lending, prime fixed-rate loans now represent the largest share of new foreclosures. In addition, almost half of the overall increase in foreclosure starts we saw in the first quarter was due to the increase in prime fixed-rate loans. More than anything else, this points to the impact of the recession and drops in employment on mortgage defaults.

This means that the housing bust has cycled from a sub-prime to Alt-A to now an employment issue. Since we were already in the midst of the drop when the layoff began, those losing job had no way to sell their homes. Now even good borrowers with conforming loans are defaulting at a record rate.

“What has not changed, however, is the oversized impact of California, Florida, Arizona and Nevada in driving up the national numbers. Those states continue to account for about 46 percent of the foreclosure starts in the country, and represented 56 percent of the increase in foreclosure starts, including half of the increase in prime fixed-rate foreclosure starts.

“It is difficult to overstate the severe impact home price declines have had on mortgage performance in those four states. 10.6 percent of the mortgages in Florida are now somewhere in the process of foreclosure. In Nevada it is 7.8 percent, Arizona 5.6 percent and California 5.2 percent.

“In the first three months of this year, foreclosure actions were started on 3.4 percent of the mortgages in Nevada, 2.8 percent of the mortgages in Florida, 2.5 percent of the mortgages in Arizona and 2.2 percent of the loans in California. In comparison, the states with the highest foreclosure rates in the hard hit Midwest were Michigan and Illinois at 1.5 percent and Indiana and Ohio at 1.3 percent.

“While the national foreclosure start rate was 1.37 percent in the first quarter, in California, Florida, Nevada and Arizona it was 2.45 percent. Absent those four states, the national rate would have been 1.01 percent.

“Looking forward, it does not appear the level of mortgage defaults will begin to fall until after the employment situation begins to improve. MBA’s forecast, a view now shared by the Federal Reserve and others, is that the unemployment rate will not hit its peak until mid-2010. Since changes in mortgage performance lag changes in the level of employment, it is unlikely we will see much of an improvement until after that,” said Brinkmann.

Wanr more bad news? What could be worse? Well, we are actually in a trough for Alt-A and Option Arm resets as the following chart shows:

Simply put? It gets worse from here and here is already real bad...

So aside from the damage already done, rapidly rising mortgage rates and more folks losing their jobs, we have a wave of resets coming that dwarfs the first one that pushed housing off the cliff. Now, there is no way to know what percentage of those in 2010-11 set to reset have either a) already lost their job and will default before then, b) have already defaulted or c) have already converted into  conforming loans. 

But, we do know this, no matter how large the percentage of those set to reset that fit into a, b or c above, there is another serious body blow to the housing market waiting around the corner.

We also know that government programs designed to help have been abject failures as HOPE for Homeowners, designed to save 400k homes, has saved, ummm,  1 (that is 1...not a misprint).  A Fannie Mae program, HomeSaver Advance (HSA) has seen 70% of the people it actually did help re-default.  This isn't an issue we can govern our way out of and too be honest,  government meddling is making it worse. How many people held on to homes, wiping out savings in the HOPE a government program was going to bail them out? Only after it was too late did they find the program would not work for them and now not only were they losing their home, their saving was gone also.

It is the unintended consequence of government trying to artificially prop up a market.

The sad truth is this just has to play out and it will be a long and difficult process. Do not let anyone tell you any different...


Disclosure ("none" means no position):

"Davidson": Baltic Dry Index A Key Indicator

The Baltic Dry Index tracks the cost to ship dry bulk goods, i.e. grain, metal ores, coal and etc.(see chart 1) Baltic Capesize Index tracks the shipping costs on the largest of the dry bulk vessels, i.e. vessels that are in excess of 80,000 dwt.(see chart 2) Capesize vessels are viewed as primarily carry coal and iron ore vessels. The Baltic Capesize Index tends to fluctuate with the amount of steel being produced and reflects global economic activity. Over the last two weeks the Baltic Capesize Index has increased over 80%. The same two weeks the broader Baltic Dry Index has increased 21%. The Baltic Dry Index has increased over 470% from its low of 663 in Dec 5, 2008 to 3164 on May 27, 2009.

Most assume that speculators are not driving up the cost of vessels as the result of some speculative market activity and that these indices provide an untarnished view of world business activity. But, with the history of oil at $147bbl in 2008 still sharp in memory, it should always be considered that speculation could be playing a part in these indices. Regardless of the all the sources of these price increases, these indices are in line with the Port of LA activity regarding loaded containers which provides another reference point.(see chart 3)

That these charts reflect a substantial turn upwards in global business activity and psychology is a point that should catch the attention of all investors in my opinion.







Disclosure ("none" means no position):

Friday's Links

Socialism, Harvard, Cuban, Dasan

- Funny what the NY Times determined was socialism before today

- In financial trouble. Hat tip reader Alex

- Always fighting somebody

- Nice post on an investment thesis


Disclosure ("none" means no position):

Ackman Loses Proxy Battle With Target

A classic win some/lose some scenario unfolded today at the Target (TGT) meeting for investor Bill Ackman.

Here are some past posts on the subject here, here, and here

Here is soke of the press release from Target:

“On behalf of Target’s Board of Directors and management team, we thank our shareholders for their overwhelming support throughout this process,” said Gregg Steinhafel, Target’s Chairman, President and Chief Executive Officer. “Today’s outcome demonstrates the confidence Target shareholders have in our Board’s qualifications, diversity and experience to provide effective and independent oversight and direction to the company, contributing to the creation of one of the most recognized brands in the United States. We remain dedicated to serving the interests of all shareholders by sustaining Target’s competitive advantage, driving continued profitable growth and generating substantial shareholder value over time.”

Analysis From Bloomberg:


Ackman Said:



As an aside, he does have very valid points as to the voting process involved not just at Target but in corporate America in general. It should not be more dificult to vote for a Board of Directors than the President. It also should be a secret vote and a single ballot so as to not be influenced.



Disclosure ("none" means no position):

Bruce Berkowitz on Bloomberg

Note to CNBC: Watch and Learn, this is how to be prepared for an interview. First watch the muddles mess that was CBNC's effort this am then watch this. Unlike CNBC who had no idea what Bruce has invested in, this interviewer knew and had good questions related to it.




Disclosure ("none" means no position):

Berkshire's Sokol: "No Green Shoots"

The man rumored to be taking over for Berkshire's (BRK.a) Warren Buffett says 2011 may be the turn....not now or next year.




Disclosure ("none" means no position):

Bruce Berkowitz at Morningstar Conference

This is disappointing that CNBC has one of the best and honest fund managers on and only gives him 3:50 to talk, a big whiff on their part. Meanwhile, they'll give Kneale and Gasparino 10 minutes to call each other names. Just when I forget why I stopped watching, they remind me...

Anyway, here is Bruce






Disclosure ("none" means no position):

Ackman: General Growth "worth $20 to $35"

Hat tip to Zero Hedge for this. Regular readers know we own a bunch of General Growth Properties (GGWPQ) at $.49. It currently trades at $1.60 today and if Ackman is right, it is still a stunning value.



Ira Sohn

Publish at Scribd or explore others: Creative Writing Short Stories Research Math & Engineering Magazines & Newspape Non-fiction world culture

Disclosure ("none" means no position):

The Bond Boys Come Out Swinging

Now this chart is either really good news or dark storm clouds on the horizon...



Scott Grannis says of it:

Treasury yields are heading skyward, as the bond market begins to realize that a) the economy is improving, b) monetary policy is incredibly expansionary, and c) fiscal policy is creating massive financing needs. This is a perfect storm for the Treasury market, and it could send yields far higher in short order.

The silver lining to this thunderstorm cloud is that it may cause our politicians to rethink their plans to spend money like a drunken sailor. It would be great if Obama came to have the same respect for the bond market as Bill Clinton did.

"Davidson" says of it all:

This piece by Scott Grannis begs the question: “Would Bernanke reigning in stimulus boost market confidence?” There are many indications that confidence in the credit markets have improved. It is understood that if lender’s confidence levels continued to improve as has been apparent then many of the looming refinance issues for commercial real estate would ease. The effect on lender’s confidence in the auto loan and home loan market could continue to improve which would go a long way towards easing fears of the after-effects of a GM bailout or easing the fears of Alt-A mtg rollovers.

If Bernanke declares that now is the time to reduce the stimulus, would this rein in the fears of pending inflation, boost lender confidence and stimulate economic improvement?

Confidence in our financial system is crucial to our society. It is the lack of confidence which causes deep recessions as everyone retrenches at once. It is the excess confidence that produces bubbles as many over extend themselves.

A boost to confidence would be welcome.

My two cents:

Obama is learning (hopefully) that all his spending plans can be put on hold by the "Bond Boys". Much as Clinton learned, should they not like the direction things are going, they have the ability to drive up interest rates.

Why is that a problem?

Consider a second chart, this one of 30 year mortgage rates


Look great right? What better to help spur housing except record low rates! But, look at the relationship between the 10yr. Treasury and the 30yr. mortgage. The 30 yr. on average tends to run about 1.7% greater than the 10yr.


So.......why does this matter? Well the 10yr. exploded to 3.5% today and that correlates to an appoximiate 30yr. rate of 5.2% upcoming or over 1/2 a point higher than just a week and a half ago. Nothing, and I mean nothing will throw more  cold water on this housing market that rapidly rising interest rates. Folks who were sitting on the fence just a week or two ago are going to be in for quite a shock when they look at the new monthly cost of a house. 

Now, here is where "Davidson's" comment on Bernanke comes in. Should Ben decide it is time to suck some liquidity out of the economy "due to its performance", we would see a reversal of the the rate jump. That might also have the effect of spurring those folks on the house buying fence out there the rush out and pick one up as they fear additional rate increases. This would be good news.

The huge risk is "what if there really aren't any buyers on the fence"? Rate increases will only serve in this case to deepen the problem and Bernanke's withdrawing of liquidity would serve to further tighten lending.

What really needs to happen? We need some responsibility out of Congress and the White House. If we cannot get it then the bond folks will force it on them and in that case, options become very limited very fast. The first volley has been tossed, let's see what happens now..


Disclosure ("none" means no position):

Thursday's Links

TAX, Shorts, Audible, Girlfriends

- Maybe will not raise you income tax, but Obama is considering taxing everything else..

- Money to be made in lightly shorted stocks

- Audible book on the Blackberry

- Another Onion classic



Disclosure ("none" means no position):

Seth Klarman to Take Stake in Red Sox?

As if we did not have enough reasons to like Baupost Group's Seth Klarman

From the Boston Globe:

Advertising mogul Ed Eskandarian is selling his minority stake in the Boston Red Sox to Seth Klarman, a well known Boston hedge fund manager, according to two people briefed on the transaction.

Eskandarian is one of a group of three Boston businessmen who together invested $25 million in the 2002 purchase of the Red Sox, led by John Henry and Tom Werner. Their stake at the time represented about 3.6 percent of the $700 million deal. Eskandarian, chairman of Arnold Worldwide, a Boston advertising agency, invested about $6 million.

Klarman and Eskandarian both declined to comment. The Red Sox also declined to comment.

However, by yesterday Eskandarian's name had been removed from the list of owners posted on the team website. Klarman, who runs Baupost Group in Boston, is not listed as an owner. Major League Baseball must approve any change in team ownership.

The New York Times Co., which owns The Boston Globe, is trying to sell its 17.5 percent stake in the Red Sox. According to published reports, the Times Co. believes its stake is worth $200 million, which would value the team at $1.1 billion.

One of Eskandarian's co-investors, TJX Cos. chairman Ben Cammarata, sold his stake in the team in 2007. The third investor, former textile executive Martin Trust, remains an owner.

It could not be learned yesterday what price Eskandarian is getting for his share. Cammarata, reached by telephone yesterday, said he did not know what a Red Sox stake would fetch today. He would not say how much he sold his $12.5 million stake for: "It was a wonderful time and a very good investment."

The Red Sox franchise has risen in value, to $833 million, according to rankings created by Forbes magazine each year. The Red Sox are the third most valuable team in baseball, behind the New York Yankees and the New York Mets.

When David D'Alessandro, the former chief executive of John Hancock Financial Services Inc., sold his $5 million stake in the team in 2007, he reaped just over double his original investment, $10.3 million, the Globe reported.

Disclosure ("none" means no position):Long Red Sox

Borders Still Progressing.....

Smaller operating loss, increased cash flows and 45% less debt, all very good things. Shareholders, unfortunately for those who bought shares 2 years ago are still paying for the sins of past management. But, this marks the third consecutive quarter of very good improvement in a dismal operating environment.

Work still needs to be done on Borders.com. The site is sluggish and ordering can be difficult. Customer service is responsive BUT, Borders needs to eliminate the necessity to even need them which seems to be all too frequent. On the positive side, the site is very visually appealing and the Rewards Program and the affiliate relationships do offer tremendous savings. But, to bring it to the next level as a destination purchasing site.....it needs to be faster....much faster and the ordering glitches need to be eliminated.


Borders Group Q1

Publish at Scribd or explore others: Finance Business & Law borders group

Disclosure ("none" means no position):Long BGP

"Regulate": Warren Buffett Rap $$

Some humor....Hat Tip Reader Jeff for finding & emailing..





Disclosure ("none" means no position):

David Rosenberg on the "End of the Recession" (video)

Interview and discussion with David Rosenberg of the Gluskin Sheff & Associates on both Fox Biz and Bloomberg. He talks about the comments from Krugman and Greenspan.

Rosenberg is one of the few that have nailed everything to date. Whether you agree with him or not, you must take his thoughts with a huge grain of salt. He also boosts his cause in my eyes as not being as dire as either Roubini or Taleb who seem to call for the "end of days" on a regular basis. Rosenberg is far more rational.






Disclosure ("none" means no position):

Housing: The 90's Revisited and A Look at Today $$

After having spoken about the "time factor" in housing so much recently, I decided to put some hard data to the words. 

Here is my appearance on Wall St. Media yesterday on the subject (housing comes in about 1/2 way though)

Below is the Case-Shiller housing data going back to Jan. 1987.  It is reflective of the housing markets for Boston, New York, LA, San Diego, San Francisco and the 10 City Composite. I cannot use today's 20 city data because back in the early 90's only the 10 majors went into it. 

I have taken the liberty of highlighting in yellow both the peaks of the various markets and then again when price finally returned to those peaks. You'll notice both for the cities and the overall composite, the basic take-away is that housing peaked in 1990 and it took until 1997 for prices to return to those levels.

Here is the bad news and yes, it gets worse than waiting the assumed 7 years for your home to be worth what it was in the spring of 2006, the most recent market peak (purple highlight). Notice the degree of decline in the 1990's?  Nationally peak to trough it was basically 8%-9% and in the select cities it averaged about 15%. 

Where are we now? Over 30% Nationally and as much as 40% in the major cities with more downside in store. If it took 7 years to return from far milder events in the 1990's than the ones currently being experienced, do we really think housing will return from this before 2013 (7 years peak to peak as in the 90's)? Do we really?

Still using the most recent housing bust as a guide we find that for the most part the bottoms in all the markets and Nationally came 4-6 years after the peak. Translated to today that again means we will not actually bottom until the Spring 2010-2012.  Another year of falling prices, at least.




Open spreadhseet in another window

One also has to remember for the majority of the 1990's we were not facing a recession anywhere near as severe as we are today.  Unemployment at its worst was 5% to 6%, roughly 1/2 of what we ought to see before this recession is over. According to the Mortage Bankers Association nationally "the percentage of loans in the foreclosure process at the end of the second quarter was 2.75 percent, an increase of 28 basis points from the first quarter of 2008 and 135 basis points from one year ago." Oh, in the 1990's? That percentage peaked at .35% (read it right, "point" 35%, not 35%).

Those facts alone, even if we disregard the severity of the price fall in housing would tend to force most folks to push the bottom of the current situation out a bit further. When you add the wealth destruction that has happened to healthy homeowners who may have been looking to scoop a bargain but no longer have equity to roll, we are further suppressing demand.


Disclosure ("none" means no position):

Davidson "Looks Across the Valley" $$

"Davidson" submits:

When you are a value investor you are really an asset buyer with an expectation on ROE on those assets over an anticipated future period. The “science” that Ian Cumming references in his quote, “The science is in the “In”. The poetry is in the “Out”.”, is in the means that a value investor assesses the potential that the expected returns are likely to be realized. It is important to be cognizant of financial history, Hamilton, Fed Reserve history, economic philosophy of Hayek and etc as well as how this has played out since the 1871.

A powerful record of the effect of the Federal Reserve acting as a financial shock absorber has been in effect since 1933-see chart 1 (click to enlarge).


With all the manipulations of govt., war, high taxation, excess govt. spending leading to inflation and the recovery and disinflation under Reagan and Volcker, one can build a great deal of confidence in US society and the its economic underpinnings that can serve to let one see thru the current fog of issues clouding our economic future.

If one measures BV (the productive assets of public cos) growth of the SP500 (I see this as quite steady at ~6.2%) (see Chart 2, click to enlarge) and then when one examines the ROE on these assets and measures that regression analysis produces a quite steady 14.2%.


Between 1978 to Present, one can produce a forecast for SP500 earnings and convert this to an earnings yield. This earnings yield is compared to the Real US GDP trend which is 3.16% and the current core inflation rate which is 2.3%; the combination of these 2 rates becomes the benchmark against which all investments are compared. The market has priced the SP500 against this benchmark return since 1978 in a fairly close relationship with allowances for market psychology which is an important factor at all times (see Chart 3, click to enlarge).


The current relationship is that the SP500 is priced at an estimated 8.08% earnings yield while the Market Cap Rate (MCR) is 5.4%. For the SP500 to return back to a normalized rate of return, this means that it needs to rise by 49.6% to roughly 1,350 from 900 currently. This is how a value investor converts assets to future returns by assuming that a historical trend with many periods of in which problems like those we fear today will eventually be resumed and return to trend.

Can value investors be wrong? Absulutely!! But, there is a very strong trend of economic history that supports these assumptions and the Fed is easing like it has done in the past. The cry, “But, but, but…it is different this time!!!” has be uttered at every major low in our financial history, i.e. 1974, 1982, 1987, 1990, 1998, 2002-2003 and 2008-2009. The odds greatly favor recovery, strong recovery which few are forecasting.

Our greatest problem today is fear and a complete lack of perspective. Historical perspective is how value investors look across the valley.

Wednesday's Links

Paulson, Gitmo, Home sizes, Taxes

- Paulson and Lehman

- 49% oppose its closing

- Size fluctuates

- Another state losing millionaires due to increased taxation


Disclosure ("none" means no position):

The Geography of Jobs - TIP Strategies

For those who want a more visual interpretation of the job situation. Full link to the flowing data below. It really is striking..

Jan. 2007


Q1 2009:


The Geography of Jobs - TIP Strategies

Posted using ShareThis

When you look at this and consider US home prices fell 19% in Q1 over last year, I still can not find a convincing argument for the "housing has bottomed" theme. People having confidence does not equate to having money in the bank to buy a home. Nor does it equate to banks not continuing to tighten credit standards....

When making investments, please keep these charts in mind...pictures really do tell a rather convincing story

SEC Proposed Proxy Rule Changes

This is interesting stuff. I don't see anyway this does not lead to a flood of nominees being proposed by investors should it pass. I also think it leads to chaos the first year and current managements will be unprepared for what comes but in the longer term, it becomes a normalized part of the business and then becomes better for all shareholders.

The less guaranteed job safety and person has in a job, in my opinion the better their performance in that job becomes.

Here is the proposal...

SEC Proxy Rule Proposal

Publish at Scribd or explore others: Law & Government Business & Law proxy Sec

Disclosure ("none" means no position):

Ackman Pledges to Keep Target Shares 5yrs. if Elected

As stated here before, I have no "skin in this game". The sole reason for my interest in this is the message it hopefully sends to other corporate boards should Ackman be successful.

Hopefully there is little objection to the "corporate boards are unresponsive to shareholders" meme. That being said, a successful Ackman may spur changes at other boards if for no other reason the avoid a similar situation.

My main issue is with Target's changing of their governance rules in order to entrench the board. Also, their refusal to publicly debate or discuss the ideas of their largest shareholder, while at the same time using press releases to snipe at the ideas he floats is more than a bit distasteful..

Read other ValuePlays post on this here, here, and here.

Here is today's CNBC appearance.

Part 1:


Part 2:



Pershing Square Press Release May 26

Publish at Scribd or explore others: Finance Business & Law project PMP

Disclosure ("none" means no position):None

Bernanke's BU Speech and a Candid Admission

Recently Fed chairman Ben Bernanke gave a speech to Graduates at the Boston College School of Law in which he said:

Instead, I'd like to offer a few thoughts today about the inherent unpredictability of our individual lives and how one might go about dealing with that reality. As an economist and policymaker, I have plenty of experience in trying to foretell the future, because policy decisions inevitably involve projections of how alternative policy choices will influence the future course of the economy. The Federal Reserve, therefore, devotes substantial resources to economic forecasting. Likewise, individual investors and businesses have strong financial incentives to try to anticipate how the economy will evolve. With so much at stake, you will not be surprised to know that, over the years, many very smart people have applied the most sophisticated statistical and modeling tools available to try to better divine the economic future. But the results, unfortunately, have more often than not been underwhelming. Like weather forecasters, economic forecasters must deal with a system that is extraordinarily complex, that is subject to random shocks, and about which our data and understanding will always be imperfect. In some ways, predicting the economy is even more difficult than forecasting the weather, because an economy is not made up of molecules whose behavior is subject to the laws of physics, but rather of human beings who are themselves thinking about the future and whose behavior may be influenced by the forecasts that they or others make. To be sure, historical relationships and regularities can help economists, as well as weather forecasters, gain some insight into the future, but these must be used with considerable caution and healthy skepticism.

Bold type emphasis mine..

Now this goes to a post herejust last week on the subject of the Fed's forecasts.

The only question we could have then is, "if Bernanke admits the forecasts made by himself and other economists are equatable to a weather forecast, why are the making them so far out into the future and why aren't we bring told they are essentially guesses"? I mean, even the weather man is not insane enough to be making prediction for next May, yet Bernanke and company are making them not only for next May, but the one after that.

Haven't we learned yet that any economic prediction, push out to a year is not at all reliable, much as a weather forecast for that date would be? Even the weatherman is careful enough to preface what he says with "stay tuned tomorrow because things can change".

Yet, when we read ANY of the Fed forecasts, they are delivered with such a certainty that one is lead to believe their belief in the accuracy of their predictions despite what we know to be the error rate (it is large). Now, there are those who will say they are required to make the forecasts they produce.

Then ought not the type of candor Bernanke expressed at BC be required when he is testifying before Congress and millions are being updated as to his every utterance? Since we are lead to believe he has a more exact idea of what the future of our economy holds for us than any other economist out there, if he truly believes in the inaccuracy of his profession, shouldn't he lead with that disclaimer. Even us bloggers put them on our blogs.....

The cold hard reality just may be he does know more, but because he must put on a "happy face" so as to not start a panic, hides it from us all. This was the essence of my previous post on the subject and if it is true, is a worse scenario. The more his "predictive" abilities are wrong, the less faith anyone will have in him or the institution he presides over. When that comes to pass, a certain level of panic/doubt cannot be avoided...

Who knows, maybe we are already there???

Full Text

Disclosure ("none" means no position):

Tuesday's Links

Foreclosures, Porsche, Nukes, Hyack

- 70% of "saved" homes.........re-default

- Almost worked

- This is a really big deal folks

- Revisited

Disclosure ("none" means no position):

Monday's Links

Music, Flip-Flops, Jim Rogers, Robert Reich

- All your music on your Blackberry FREE

- Say one thing and do another...

- Alex has a great site on Jim Rogers

- Looking at the problem backwards...Universites have >$340B in endowments.....how about lowering tuiton to reduce student debt?

Disclosure ("none" means no position):

Sunday Viewing....Madoff via "Frontline"

Frontline once again nails it...





Disclosure ("none" means no position):

Saturday Viewing....PJ O'Rourke's Satire (video)

Disclosure ("none" means no position):

S&P 500 PE: It Must Correct $$

A constant theme here and really for any value investor is "price always meets value". They just do. It is the "when" that we cannot predict but we know eventually it does. For that reason we buy when the value is above the current price and sell when it reaches or exceeds it. Easy right? Well, not really, it is the determination of what that value is that trips folks up and causes mistakes.

Thus is the dilemma of the current market. By any valuation it is way over valued. The S&P 500 last Friday after another quarter of reduced earnings (most are in now) sat at an stratospheric 122 times earnings. For those who are not sure what "normal" is, it is about 20 times earnings.

Here is the whole thing visually (from Chart of the Day):


So, that must mean the market is headed for a big fall, right? Well, there are two parts to the equation. The "P" or price and the "E", earnings. In order to get the ratio down to a normal level the "P" must fall and the "E" must rise. Q1 earnings numbers were smacked by a -6% Q1 GDP. We know Q2 will be better and Q3 three ought to show even more improvement (both may still be negative but less so). That means we can expect the "E" part of the equation to increase.

With S&P earnings as of last Friday at $7.21, it will not talk much improvement for the PE ratio of the market to be brought down by even a modest earnings improvement. For reference, last year at this time the S&P had earnings of $62 and sat at 1400 vs 888 today. For the market to sit where it is and have its PE fall to around a more "normal" 20 times earnings, they  must increase 485% to $45. 

Again, visually, this is what has happened to earnings:


So, what happened to Q1? Companies wrote off billions in Q1 and used it as a "kitchen sink" quarter. We all expected it to be bad so they wrote down everything that had or might deteriorate in value. Q2 ought to show improvement if for no other reason the massive Q1 writedowns ought to be just about over. Even if operating earnings stay flat, we will see overall earnings improve.

Again, visually (click to enlarge): This is the S&P operating earnings.


Notice Q4 was the worst operationally and improvement is expect through the year. This is what to watch going forward. As long as this continues upward, the rest will wash out in the end.

It is fairly safe to say that the decline in earnings is or is near over and we ought to begin to see improvement. Note: this does not mean the overall economy improves immediately or dramatically, just that the decimation in earnings is done. Because of that, there is a very real scenario where the market just pauses and waits for earnings to catch up. Then, depending on the Q2 results as they come in, the next move in the market is defined. If they are as or better than expected the market will feel justified at its current level. Should they begin to come in worse, the high levels it currently sit at will indeed appear irrational and we could see a decent sized sell off.

Please know that I am not predicting what the market is going to do over the next two months, no of us know that. What I do know is that the current PE of the market is unsustainable and has to come down to more normal levels. The only way for that to happen is a rapid rise in earnings and/or an fall from the current levels of the S&P.

It also means the risk to current levels is downward. If we do not get increasing earnings, the market has to fall to regain valuation balance. If we do get modestly increasing earnings, it could sit here while the earnings take down the valuation disparity. Either way, the markets upside is limited to down.

One then has to extrapolate from this that the market could continue its upward march if we get a large increase in earnings in Q2. That would justify the
recovery theme currently "en vogue" and reduce the market valuation in one step. All eye then turn to continued improvement in Q3 for continued market appreciation.

In talking with "Davidson" about the subject yesterday he said:

That is the way it happens. Markets that move ahead of earnings are always called “speculative”. It is a question that value players would answer that they buy on P/Assets or P/BV but sell on earnings expectation or P/E when the earnings come in.

A quote from Ian Cumming from the Leucadia (LUK) annual meeting I went to. “The science is in the “In”. The poetry is in the “Out”. The value buyer assesses the potential earnings power of the assets, but buys when there are no or at least very low earnings and the market not having the sense to do the same type of work is lost in the pricing and giving stocks away. But, when the earnings are at full potential and have recovered, the market believes that some new earnings trend has begun and priced the stock at “poetry levels”-“so beautiful” and it is this is where one should sell.

So what to do? Be careful. Something has to happen either way and two of the three scenarios have the market doing nothing to falling.



Disclosure ("none" means no position):

According to Target's Guidelines, 2 Directors Must Resign $$

Interesting development just days before the Target (TGT) proxy vote...

According to Target’s Own Governance Guidelines,
Two Directors Should Step Down Promptly


NEW YORK, May 22 – The Nominees for Shareholder Choice commented today on recent developments concerning corporate governance issues at Target Corporation (NYSE: TGT).

Under Target’s Governance Guidelines – which are based on principles articulated by Target’s former CEO and founding family member Kenneth Dayton – two current members of its board, Solomon Trujillo and Anne Mulcahy, are required to tender their resignations promptly, making room for directors with relevant experience and fresh perspectives. In light of the on-going proxy contest, the Nominees for Shareholder Choice expressed concern that the company has not made any public disclosure regarding each of these incumbent directors’ resignations under the company’s Governance Guidelines.

Two Incumbent Directors Should Resign Promptly
According to Target’s Governance Guidelines

Incumbent director Solomon Trujillo (who is currently running for re-election to the Target board) has recently been asked to resign as CEO of Telstra, the Australian telecommunication company that he headed. In addition, yesterday, Xerox Corporation announced that incumbent director Anne Mulcahy has stepped down as CEO of Xerox. Under Target’s Governance Guidelines, as a result of changes in their principal employment, Mr. Trujillo and Ms. Mulcahy are required to promptly submit their resignations. Target’s Governance Guidelines provide as follows:

“Changes in Director’s Principal Employment - Any director (including management directors) whose affiliation or position of principal employment changes substantially after election to the Board will be expected to offer to tender his or her resignation as a director promptly to the Board. The Nominating Committee shall make a recommendation to the Board on whether to accept or reject the offer, taking into consideration the effect of such change in employment on the director’s qualification as an independent director and on the interests of the Corporation.”

Given the clear mandate of Target’s Governance Guidelines, Target should disclose whether either or both of these directors have submitted a resignation, and whether the board intends to delay taking action on their resignations to thwart the effective exercise of the shareholder voting franchise at the upcoming annual meeting.

Ronald J. Gilson, a renowned corporate governance scholar and a Nominee for Shareholder Choice stated, “The board and nominating committee know that board policies require members to offer their resignations when their principal employment changes substantially. It is poor corporate governance to deprive shareholders of the opportunity to choose successor directors to Mr. Trujillo and Ms. Mulcahy.”

Trujillo Era at Telstra

Mr. Trujillo’s departure from Telstra has been widely reported in the Australian press. A recent article in The Australian IT entitled, “Quiet Last Supper for Sol,” observed that under Mr. Trujillo’s leadership, Telstra’s share price declined materially, its relationship with the Australian government became severely strained, and a $12-billion IT transformation program originally lauded by Mr. Trujillo was over-budget and over-time with little results to show for it. The Australian IT quoted an analyst as saying, “The Sol Trujillo era at Telstra will be characterised by $15 billion of shareholder value destruction, uncertainty around the outcome of his much-heralded transformation program and customer satisfaction at an all-time low.”

The Nominees for Shareholder Choice believe that the circumstances surrounding Mr. Trujillo’s departure from Telstra suggest that, after a 15-year long tenure on the Target board, it is time for him to give up his seat to make room for a director with fresh perspectives and more relevant experience.

Despite Mr. Trujillo’s departure from Telstra, not only has Mr. Trujillo apparently failed to tender his resignation, but instead the company’s nominating committee and board have nominated him for yet another three-year term at the upcoming annual meeting. Mr. Trujillo’s nomination comes after multiple extensions of Target’s director term limits – which have increased from 12 to 15, and more recently to 20 years – in an apparent accommodation to Mr. Trujillo who is the only incumbent director who would have been immediately impacted by the prior 15-year term limit.

The Nominees for Shareholder Choice believe that Mr. Trujillo’s continued board candidacy is emblematic of the erosion of the governance principles first articulated and implemented by Target’s founding family member and chairman Kenneth Dayton decades ago.

The Nominees for Shareholder Choice are of the view that under these circumstances, if he has not done so already, Mr. Trujillo should promptly submit his resignation, and the Target’s nominating committee and board should accept his resignation and withdraw his nomination. The resulting vacancy should be filled by a vote of all shareholders at the upcoming meeting. According to the express terms of Target’s Governance Guidelines, Ms. Mulcahy must also promptly submit her resignation.

Now the whole resigning thing isn't really the issue as the nominating committee could have recommended the Board not accept it. The problem is, and this is actually more disturbing is that so close to such a contested proxy vote that the Board and the Nominating Committee chose to ignore Target's own rules.

One has to assume they rather not draw attention to potential issue with current members so close to the vote and give shareholders a possible reason to not re-elect them. I have a real hard time believing it was any type of over-site on their part also. It really does not pass the smell test...not even close..

Pershing's Ackman has been on record questioning Target corporate governance.....they just gave his gas to add to his fire...

Read Former Board Member Bill George's rebuttle to Ackman written yesterday. It now reads as more that a bit ironic given today's events..



Disclosure ("none" means no position):None

Taubman: "No Distessed Sales at General Growth" $$

There has been a ton of speculation out there that General Growth would be forced to dump holdings on the cheap, reducing the odds of equity preservation in the Chapter 11 process. This ought to dump some cold water on them...

When you take this and the recent TALF news, things are looking better for shareholders daily..

From Bloomberg:

“Even with a distressed owner of a good quality regional mall asset, you rarely, rarely see distressed pricing of those assets,” Chairman and Chief Executive Officer Robert S. Taubman said in a telephone interview. “If you’ve got a great one, no one’s going to want to sell an asset like that at a distressed price.”

General Growth (GGWPQ) filed for Chapter 11 bankruptcy protection last month after amassing $27 billion in debt during an acquisition spree that made it the second-largest U.S. shopping mall owner. Taubman’s comments echo those made last month by hedge-fund manager William Ackman, whose Pershing Square Capital Management LP owns about 25 percent of Chicago-based General Growth. Ackman said the probability of competitors “buying any of General Growth’s properties on the cheap is zero.”

It continues:

Taubman, whose Bloomfield Hills, Michigan-based company (TCO) has 24 regional malls, said the court likely will support a plan by General Growth management to keep the company’s portfolio together and emerge from bankruptcy without selling off a large number of properties.

“Maybe on the margin an asset will leak out,” he said in an interview from the International Council of Shopping Centers convention in Las Vegas, where his company is meeting with retail tenants. Even so, the predictable income offered by regional malls such as those in General Growth’s portfolio will attract buyers willing to pay the full price, Taubman said.

“There are enough buyers out there,” he said. “You’re never going to see a genuinely distressed price.”

This further bolsters to "asset" part of the equation in the eternal "are assets > liabilities" argument. It is key because depending on the structure of the 11 process, having assets > liabilities is key for shareholders remaining partly or totally whole when all is said and done.

Usual disclaimer. This is a highly speculative bet that depends greatly on the whims of the US legal system. You must be prepared to lose 100% (or close to it) in this investment before you invest. BUT, if we are right (I think we are)........wow will it be good...


Disclosure ("none" means no position):Long GGWPQ, none

Friday's Links

Oil, California, Retiring?, France....We are it

- A look at price

- A mess..... no other words for it


- Here are the "Best Places"

- Another small biz killer


Disclosure ("none" means no position):

Sears Holdings Laps Estimates, Extends Credit Facility $$

Looks like another nails in the coffin for those calling for the demise of Sears Holdings (SHLD)

Q1 Earnings
Sears Holdings Q1 Earnings

Publish at Scribd or explore others: Finance Business & Law sears holdings eddie

For those who do not want to read the release, important items:

1- We had cash balances of $1.2 billion at May 2, 2009 (of which $515 million was domestic and $734 million was at Sears Canada) as compared to $1.4 billion at May 3, 2008 and $1.3 billion at January 31, 2009. For the quarter, the significant uses of our cash included $40 million for share repurchases, $76 million in capital expenditures, and $52 million of contributions to our pension and post-retirement plans. $465 million of common shares under the share repurchase program remain still available

2- The credit facility, the assumed reason Sears would self destruct as the dooms-dayers said it would not be refinanced or would be on onerous terms was, and at terms better than the previous one in terms of assuring more than ample liquidity for Sears.





Disclosure ("none" means no position):Long SHLD

Nielsen Finds US Consumer Still Retrenching $$

The new Nielsen Global Economic Scorecard, released yesterday, shows that consumer activity in the United States and China showed significant declines during the month of March—despite optimism for economic recovery.

Additional findings include:

• March marks the ninth straight month of declines in unit sales in the U.S.
  
• The Canadian market remains resilient and dollar and unit sales continue to increase.
• In Western Europe, March showed evidence of slowing transaction size.

Here are the results for the US:



Full Report Here:

It is pretty clear things are not in a free fall anymore. At the same time, talk of "recovery" is probably more that a little bit premature. As long as the consumer is saving more and spending less, recovery is still going to be elusive. Now, for an over-leveraged consumer, that is just the thing they should be doing. It just is not conducive to economic growth.

What will most likely happen is we fall to a level, somewhere below where we are now and then rather than rise, that level becomes the "new normal" for activity for a while consumers continue to reduce debt.

Note: This a several year long event, not a quarter or two. Two decades of a credit card mentality cannot be rectified overnight...it will take time.

The consumer is doing the right thing though...

AAA CMBS Market's Improvement & General Growth Implications

Much of this is due to the recent decision from the FED to make CMBS eligable to TALF backing. Whatever the reason, the CMBS market has made a stunning reversal from the end of 2008

From Markit:

Markit, a financial service firm, is described as a leading provider of industry data and pricing products and services that are used globally by more than 250 asset management firms to help them monitor risk, mark-to-market, develop accurate forecasting models and asset class benchmarks.

Markit released the following chart of their AAA(Triple A) Commercial Mortgage Backed Securities Index that had been previously issued at 100(par). These securities are representative of those on which market professionals have expressed great concern regarding the lack of available refinancing options in the current credit environment. This concern was recently underlined by the declaration of bankruptcy of General Growth Properties (GGWPQ) which was viewed by many as having adequate cash flow with which to fund the interest payments on current debt, but could not find a lender to refinance the debt that it needed to roll over. Farralon recently provided Debtor in Possession (DIP) financing.

It may be the fact that Farralon and Pershing Square competed to offer financing with the net effect that General Growth Properties was acknowledged to have received a better agreement that had been previously expected that has begun to shift expectations regarding CMBSs. It is too early to offer an explanation for the dramatic improvements in market sentiment as seen in the chart below for these securities. But, certainly a positive shift has occurred since early March 2009.

This is one piece of information in a sea of swirling bits and pieces and one observation does not make a trend. Even the multiple observations that have been evident since December 2008 which appear to reflect a strong trend of economic recovery do not permit one to forecast with certainty that the trend will continue. Such, has been the impact of unforeseen events of the magnitude of 9/11. What can be said is that there is historical precedent that this trend which appears quite similar to previous recoveries has a high likelihood of continuing.

The typical pattern is:

First, there is a psychological recovery as reflected in stock and bond markets as investors are willing to buy into risk in anticipation of recovery. During this period many continue to bemoan the lack of fundamentals to support investment activity and the media continues to provide time to those whose forecasts continue to be bearish. If markets continue to improve, the costs of financing are reduced by lower bond yields and higher stock prices and businesses and market participants eventually resume activities that eventually result in profits.

For business recoveries no one rings a bell, it is a process. The pattern is psychology first, fundamentals second. This chart reflects improved psychology. If so, then the refinancing risk for existing commercial debt is diminishing.

The trend begun December 2008 continues.

The importance of this on the GGPWQ Chapter 11 cannot be understated. Anything that causes the CMBS market the strengthen does two things. It enables lenders to more easily sell refinanced debt & in essence encourages them the do just that rather than having them position themselves to replace said debt with equity. It also places a floor on CRE prices and by default, properties that General Growth may decide to sell. The more money received from any asset sales increases the odds of equity survivability.

The Fed said in announcing the facility ""The inclusion of CMBS as eligible collateral for TALF loans will help prevent defaults on economically viable commercial properties, increase the capacity of current holders of maturing mortgages to make additional loans, and facilitate the sale of distressed properties,". Emphasis mine..

It is not a big leap to then say that those properties of General Growth that were commercially viable at the time of the filing (the vast majority) would then stand a chance of TALF backed refinancing in Chapter 11. If this is then true, the outlook for the equity then increases. Now, a lot can happen between now ans next year when this stuff start getting taken care of. Properties that are performing today may just as well see performance deteriorate as they may see it improve and their lies the $27B question.

Remember, it was not the operating performance of General Growth that drove int into Chapter 11, but the lending markets. In December of 2008, then Treasury Secretary Paulson was told in a letter from a dozen commercial real estate trade groups "Right now, we believe there is insufficient systemic capacity to refinance expiring, performing commercial real-estate loans,".

My thought has been and still is General Growth's operations will be performing better and there will be plenty left for shareholders.

Usual disclaimer. This is a highly speculative bet that depends greatly on the whims of the US legal system. You must be prepared to lose 100% (or close to it) in this investment before you invest. BUT, if we are right (I think we are)........wow will it be good...




Disclosure ("none" means no position):Long GGWPQ

Is Kohl's the "New" Target?

I was on Twitter yesterday and came across the following tweet from @TalkRetail:

Impressed by Kohl's. Despite low-cost model, gleaming store & lots of style. Can anyone here speak 2 their product quality?

One of the respondents to the question said:

My wife buys clothes for all 4 of our kids there. Stores all over here in Dallas. Nice mix of price/quality. $KSS

Instantly I got to thinking, "where have I heard that before?". Oh, yeah, it was how people described Target (TGT) a few years ago. So I began asking around. The typical comment was that "Kohl's is like a Target without the food/grocery but better bargains on clothes".  Hmmmm

So, then I started looking closer. In order to do this, we have to look apples to apples. This was a little tough because we are going to look at monthly same-store-sales data and that means we are at the whim of what the company decides to report. For Kohl's (KSS) it is easier because we are using the the whole business, it is tough for Target because we need to find the similar segment date in order to make the comps mean anything. Including Target's electronics of grocery segments in the comps make the exercise meaningless.

I am using Target apparel and home sections as those two segments essentially cover all of Kohl's. I am also going back 5 months because based on what I am hearing, this is not a long term trend but a more recent one.

What did we find?

December:

Target: "Both the apparel and home assortments experienced high single-digit comparable-store sales declines in December" Release

Kohl's: "On a comparable store basis, sales decreased 1.4 percent." Release

January:
Target: "Comparable-store sales in apparel declined in the low teens overall" & "Comparable store sales in our home assortment declined at a high single-digit rate" Release

Kohl's: "On a comparable store basis, sales decreased 13.4 percent." Release

February:
Target: "Comparable-store sales in apparel declined in the low double-digit range," & "Comparable store sales in our home assortment declined in the high single-digit range," Release

Kohl's: " On a comparable store basis, sales decreased 1.6 percent." Release

March-
Target: "Comparable-store sales in apparel declined in the low double-digit range," & "Comparable-store sales in our home assortment declined in the low double-digit range" Release

Kohl's: "On a comparable store basis, sales decreased 4.3 percent." Release

April:
Target: "Comparable-store sales in home and apparel declined in the high single-digit range"  Release

Kohl's: "On a comparable store basis, sales decreased 6.2 percent." Release

Not in a single month has Target apparel/home sections bested Kohl's peformance. It appears they may have achieved a draw for two months, but that does not make up for the abysmal discrepencies the other months. Now, they are both experiencing declines like the rest of the retail world but Kohl's is decidedly hanging on to more of its clothing shoppers.

Fashion, in particular womens was what fueled the Target growth. If you look at some of the releases you'll see womens apparel down 20% in some months, stunning.

Am I saying that Kohl's is going to overtake Target someday soon? No. What I am saying is that I am hearing the same reasons for shopping at Kohl's today that I heard for shopping at Target a few years ago. What's worse? I no longer hear those things associated with Target anymore.

This is a double whammy for Target. It is already clear they have lost the "consumer value" proposition to Wal-Mart (WMT) based on all evidence and are falling farther behind the industry leader. Now they may be feeling heat from behind on the "fashion" end from the likes of Kohl's.

This is worth watching down the road to see if as the economy recovers, the two companies apparel result continue this disparity..

Disclosure ("none" means no position):none

Latest Wall St. Media Appearance

Talkoing about oil (USO) and some options in it..

More video at Wall St. Media




Disclosure ("none" means no position):Long Oil

Thursday's Links

Holmes, Earthquake, Macke, Oil

- Can't wait to see this..


- Whata 7.8 on the San Andreas fault would do...scary

- This is great


- Up and Up

Disclosure ("none" means no position):

Fed Minutes: Still Trying to Manage Sentiment

The chart at the end of the post says more to me that any words spoken....

First, from the release...

Staff Economic Outlook
In the forecast for the meeting, which was prepared prior to the release of the advance estimates of the first-quarter national income and product accounts, the staff revised up its outlook for economic activity in response to recent favorable financial developments as well as better-than-expected readings on final sales. Consumer purchases appeared to have stabilized after falling in the second half of 2008, and the steep decline in the housing sector seemed to be abating. However, the contraction in the labor market persisted into March, industrial production again fell rapidly, and the broad-based decline in equipment and software investment continued. Conditions in financial markets improved more than had been expected: Private borrowing rates moved lower, stock prices rose substantially, and some measures of financial stress eased.

The staff's projections for economic activity in the second half of 2009 and in 2010 were revised up, with real GDP expected to edge higher in the second half and then increase moderately next year. The key factors expected to drive the acceleration in activity were the boost to spending from fiscal stimulus, the bottoming out of the housing market, a turn in the inventory cycle from liquidation to modest accumulation, and ongoing gradual recovery of financial markets. The staff again expected that the unemployment rate would rise through the beginning of 2010 before edging down over the rest of that year. The staff forecast for overall and core personal consumption expenditures (PCE) inflation over the next two years was revised up slightly.

The staff raised its near-term estimate of core PCE inflation because recent data on core and overall PCE price inflation came in a bit higher than anticipated. Beyond the near term, however, the staff anticipated that the low level of resource utilization and a gradual decline in inflation expectations would lead to a deceleration in core PCE prices. Looking out to 2011, the staff anticipated that financial markets and institutions would continue to recuperate, monetary policy would remain stimulative, fiscal stimulus would be fading, and inflation expectations would be relatively well anchored. Under such conditions, the staff projected that real GDP would expand at a rate well above that of its potential, that the unemployment rate would decline significantly, and that overall and core PCE inflation would stay in a low range.

Full Minutes

Here is the chart I was looking at:


Notice every metric they are now forecasting is worse than their expectations in January? This goes back to Bernanke saying in 2007 he thought the housing crisis would "be contained" and "would not effect overall economy". The Bernake Fed has been consistently overly optimistic in its forecasts only to then have to lower them.

Now, the reason for being optimistic is obvious, to instill confidence in a fear ridden environment. But, after a while that strategy begins to backfire as folks begin to discount everything the Fed says as they begin to expect actual results to come in worse than expected. Then it becomes a "how much worse" guessing game.

I get the whole transparency effort vs Greenspan's ramblings, but if we are going to do it this way, then the transparency has to be 100% honest and not an attempt to steer investor sentiment in a particular direction. In that case, the transparency is simply "transparent manipulation".

Now, I also understand that no estimates are perfect, BUT, when over the course of a few years they almost to a 100% rate err in the same direction, then it is either intentional, OR the methodology to make them is flawed. Either scenario from the Fed is bad.

Just give it to us straight Ben, we can handle it far better than you think we can...


Disclosure ("none" means no position):

Dow Announces Another $900M in Asset Sales

After speaking with people familiar with Dow's direction, it appears an outright sale of Dow Ag is becoming more remote by the day. What is more often being discussed is a partial sale into a JV or a partial IPO. Either of these scenario's would be acceptable and in all reality, were Dow to IPO part of it and give existing shareholders first crack at pre-IPO pricing, that would be something I would be very interested in.

In press release lingo, "increased flexibility" translates to "we do not have to dump this asset if we don't get 100% of what we want". I'm starting to calm down over this whole thing now...


From the Release:

The Dow Chemical Company (NYSE: DOW) announced today that it has signed two separate sale agreements totaling in excess of $900 million as part of its de-leveraging plan designed to pay down debt, preserve financial flexibility, streamline its portfolio and improve cash flow. Sales of non-strategic assets announced so far this year now total in excess of $2.6 billion, well ahead of the Company’s original divestment plan.

The Company announced that it has signed an agreement to sell its Calcium Chloride business to a strategic chemical industry buyer for a value in excess of $210 million. At the closing of the transaction, employees of the Calcium Chloride business will transition to the buyer’s business. In addition, the Company announced a definitive agreement for the sale by Dow Europe GbmH and Dow Benelux BV of their interests in Total Raffinaderij Nederland N.V. (TRN), Dow's joint venture with Total S.A., to Valero Energy Corporation (NYSE: VLO) for an enterprise value expected to be approximately $725 million.

“These asset sales at valuations that result in significant de-leveraging represent another major step in the acceleration of Dow’s divestiture and de-levering plans despite a challenging economic environment,” said Andrew N. Liveris, Chairman and CEO of Dow. “We are delivering on our commitments ahead of schedule and creating the momentum needed to strengthen our financial position and create a faster path to earnings growth.”

The transaction for the Calcium Chloride business will include the calcium chloride assets associated with Dow’s Ludington, Michigan operations; Dow-owned calcium chloride terminals; and the nationally-known brands PELADOW™ premium ice-melt, LIQUIDOW™ calcium chloride solution, COMBOTHERM™ blended deicer, BRINER’S CHOICE™ calcium chloride, and DOWFLAKE™ Xtra calcium chloride flake. The transaction is subject to customary closing conditions, including regulatory approvals, and is expected to close by the end of June 2009.

Disclosure ("none" means no position):Long Dow

Oil Storm Brewing?

Have several different oil positions and want to briefly explain reasoning behind them.

I own:
DXO - the 2X monthly oil ETF
USO AO- Jan 2010 $42 call on USO (USO)- time frame 7 months
OLL AI- Jan 2011 $35 call on USO (USO)- Time Frame 19 months

Why the options? Example:
You are of the mindset that oil is going to rise rapidly for a variety of reason the rest of this year and next. Because of that you want to own it. Buying, for exmaple 500 shares of the oil ETF USO (USO) would cost you over $15,000. With the options, you can control the same amount for a fraction.

Real life example...
I paid $550 for each OLL AI Jan. 2011 calls. So, to control the same 500 shares of USO in our example above, it would have cost me $2750, not $15,000. Since USO has risen closer to my $35 price target since the purchase, so has the value of the option. At its current price $660 each option has an unrealized return of 20%. With the option, it has real value at any price over $35 for the USO. The real gains will kick in once USO surpasses $35 a share.

At the $165 I paid for each of the USO AO options, the same $500 shares would have cost $825. Now, there is no free lunch. IF USO does not rise rapidly and hit $42 (23% higher) by Jan, 2010, my options are essentially useless/worthless. This type of far "out of the money" option is very high risk/high reward. These positions should be very small wagers as you can be right on the direction of the movement (oil prices rise) but wrong on the degree (15% rather than 20%) and still lose money. But, if you are right on both counts....ka ching..

Why own oil?

Supply: A picture is worth a thousand words..


Here is the supply/demand equation:


Here is an expmple of the steepness of the decline in Mexico for example from the Cantarell field:


Source of charts is this excellent post at The Oil Drum. Please read it

Geopolitical

A few recent events:

After President Obama said in a White House press briefing he wanted Iran to come to the table "by the end of the year" to hold talks on it nuclear program. He reiterated his "holding out a hand" to Iran to open talks with them.

Just days after:

President Mahmoud Ahmadinejad said Iran test-fired a new advanced missile Wednesday with a range of about 1,200 miles, far enough to strike Israel, southeastern Europe and U.S. bases in the Middle East.

General Commander of the Iranian Army Ataollah Salehi: It Will Take Us 11 Days "to Wipe Israel Out of Existence"


Now, whether either statement is 100% accurate is not really the point, nor is the "whose fault is it" argument. What is the point is that it is clear what Iran's intention are and one would have to be a bit naive to think Israel will just sit pat and allow the storm to continue to gather.

Now, were this an Afghan leader saying this the effect on oil would be insignificant (or exponentially less). Because Iran is a huge oil exporter and it sits on the Persian Gulf, so it matters a great deal to oil.

In an odd move, 75 of 100 US Senators sent a letter to Obama reminding him of the "risks" Israel faces. Now, the letter is odd in that it almost implies the President is not fully aware of Israel's situation or is discounting it. Coming so soon after the recent events, its curiosity cannot be ignored. Again, no matter your political leanings, both the left and the right must wonder at the letter coming from both party's Senators to the President.

Right now crude oil sits at $60 given the current economic/political conditions globally. What are the risk to the price in either direction?

1- Global growth. An increase or decrease will lead to oil prices following in either direction. After a Q4 and Q1 globally worse than any in recent memory, improvement is probable. This does not mean we return to 2007-2008 levels soon, but with the oil supply destruction taking place, that is not necessary to cause prices to rise.

2- Geopolitics. Can anyone see a scenario in which the geopolitical risk to oil is lessened? What is far more likely is that it is increased. There are a number of nations in which the threat could come from as almost all are lead by, shall we say, erratic regimes?

3- Inflation. Eventually the trillions of dollars created out of thin air has to have its intended inflationary effect. Since oil is priced in those dollars, its price will rise accordingly. Can the Fed put the inflationary genie back in the bottle once it is out? Not easily, quickly or at all without destroying the growth it is intended to create...

My though is clearly heavy risk to the upside for oil. If oil can rise from under $40 to $60 on benign economic news then either good economic news, bad political news or renewed inflation (or all of the above, a very possible scenario) ought to cause it to spike......hard


Disclosure ("none" means no position):Long oil

Jack Welch Comments on Housing

The former GE (GE) Chairman was in Boston yesterday and commented on a range of subjects...

From Bloomberg:

Welch said he’s optimistic about an economic recovery and looking closely at the housing market for signs as to when it may begin.

“I want (new) housing starts to go down, down, down,” he said. “It’s the only way to get housing prices stabilized, and we need to stabilize housing prices.”

Housing starts slid 13 percent to an annual rate of 458,000, a lower level than forecast, Commerce Department figures showed today in Washington. The drop was led by a 46 percent tumble in multifamily starts, a category that tends to be more volatile. Housing starts fell 10.8 percent to an annual rate of 510,000 in March.

“While the market didn’t like it -- housing starts going down again -- I like it,” Welch said.

This goes to commentary on this blog. With the demand side of the equation plummeting, housing cannot be stabilized until the supply side of the equation is adjusted. With foreclosures hitting the market at a record rate, the ONLY way left for this to be done is for housing start to fall......dramatically, for a prolonged period.



Disclosure ("none" means no position):

Can't Decide Who To Vote For Target's Board?

Well, there are plenty of opinions.....my thoughts at the end...

From the FT

Proxy Governance recommended that its clients vote for two of the five nominees supported by Mr Ackman’s Pershing Square funds – Jim Donald, the former chief executive of Starbucks, and Michael Ashner, a real estate executive.

It also advocated voting against Target’s proposal to reduce the size of its board from 13 to 12 members. Since shareholders have to choose between two competing proxy ballot cards, it argued that they should only return the Pershing Square card, in effect withholding votes from Target’s four nominees for re-election.

From the FT:

RiskMetrics recommended on Tuesday that clients vote for Mr Ackman and Jim Donald, the former chief executive of the coffee chain Starbucks, in board elections at Target’s annual meeting on May 28, where four members are up for re-election.

But Glass Lewis, another leading proxy adviser, said it was endorsing Target’s four nominees.

Target said it was “disappointed” with RiskMetrics’ opinion. Gregg Steinhafel, chief executive, said in a statement: “We believe RiskMetrics reached the wrong conclusion . . . We urge Target shareholders not to cast their votes solely on the basis of RiskMetrics’ report and to undertake their own analysis.”

D. F. King, the proxy solicitor working for Pershing Square, estimated that more than 40 per cent of Target’s institutional shareholders vote their shares with reference to RiskMetrics.

RiskMetrics called the proxy battle “atypical”, given the experience of both sets of board nominees, and the fact its management “appears to be universally respected”. “Unlike the majority of other contests, the object of the dissident’s campaign is not a ‘broken’ company,” it said. But it argued Target’s board would “benefit from new blood and incentives to ensure the company is able to quickly capitalise on future opportunities”.

From TheDeal.com:

Former Target board member Bill George takes issue with Ackman's assertions. Writing a column for The Deal, George, the former CEO of Medtronic Inc. (NYSE:MDT) and a professor of management practice at Harvard Business School, said:

"Ackman is off base in suggesting that the Target board lacks relevant expertise, with no CEO-level expertise in retail, credit cards and real estate. Target's board includes financial experts with real estate and credit card expertise like Richard Kovacevich of Wells Fargo & Co. and Jim Johnson of Fannie Mae, and marketing experts General Mills Inc.'s Steve Sanger, McDonald's Corp.'s Mary Dillon, and Coca-Cola Co.'s Mary Minnick."

Whose advice to take? Simple, if you are relying on these folks to tell you what to do you have two choices:

1- Sell your shares
2- Don't vote at all

Situations like this are the reason most shareholder control legislation or votes fail. A great number of shareholder own shares in companies they no little about and do not care to educate themselves on the details. If they did, these "advisory" firms would have little power. The simple fact that it is assumed 40% of shareholders will follow the recommendations of one of them is stunning, and sad.

This isn't really even a tough one. If you own shares just think:

1- Are you happy with the current direction and performance of the company?
2- Do you see a clearly communicated direction/strategy from management?
3- Has mangement been professional in their opposition to Ackman's slate?
4- Has mangement debated openly and honestly the proposals he submitted?

If you cannot answer YES to all of them, you need to vote for some type of change to the board. If you answered NO to all of them, hell, vote for his whole slate.

Whatever you do, for God's sakes, do not do what someone else tells you to do. Take 10 minutes and think about it and make up your own mind......or do nothing..

But, just in case you want one more opinion, here are some thoughts from a previous post


Disclosure ("none" means no position):none

Seth Klarman Interview...

2009 Klarman Interview

Publish at Scribd or explore others: Finance Business & Law seth klarman baupost

Disclosure ("none" means no position):

Wednesday's Links

VIC West, Market Folly, Palm, Feingold

- Notes from the California Value Investing Congress (hat tip reader Aaron)

- Jay does a great job tracking the hedgies

- An Apple/Palm price war for phones?

- Democracy in Action: 1 man can block a Senate vote to honor a President......(please note sarcasm)

Disclosure ("none" means no position):

Finally Good News For Housing: Construction Plummets

We have been talking about housing here a ton lately and finally have some good news to report.

First, here is some of the previous conversations: 5/6, 5/13, 5/15

Today:

The Commerce Department said Tuesday that construction of new homes and apartments fell 12.8 percent last month to a seasonally adjusted annual rate of 458,000 units, the lowest pace on records going back a half-century.

In a disappointing sign for the future, applications for new building permits dropped 3.3 percent to a new record low annual rate of 494,000.

Economists had expected home construction and building permits to post modest increases in April as signs that the worst collapse in housing activity in the post-World War II period was drawing to a close.

Even in last month's big decline, there were some signs of stabilization. Construction of single-family homes rose 2.8 percent to an annual rate of 368,000, following a 0.3 percent gain in March and no change in February. The stability in single-family construction likely will be viewed as a hopeful sign that the three-year slide in housing could be bottoming out.

The weakness last month came in the more volatile multifamily sector where construction plunged 46.1 percent to an annual rate of 90,000 units after a 23 percent fall in March.

Housing construction fell 30.6 percent in the Northeast, the largest drop for any region. Housing starts dropped 21.4 percent in the Midwest and 21.1 percent in the South.

The article misses the point. We have too much supply and a permanently depressed demand situation in housing due to current foreclosures and tightened credit markets. If that is true (it is), then the ONLY way housing prices firm is for supply to be reduced.

The fastest way to do that is on the production end of the equation by slowing or stopping the rate of new homes hitting the market. This forces price firming for those new homes currently out there and also increases demand for "used" housing for sale. Is more needed? Yes. It this a step in the right direction? Yes. If it rebounds next month and rises, proving this to be a 1 month anomaly is it bad? Yes.

What would make this exceptionally good news would be for a decline in single family housing...

This needs to be a trend, not a one-off event

Disclosure ("none" means no position):

Congrats to the Folks at Stocktwits (video)

See more at Stocktwits




Disclosure ("none" means no position):None

The Investment I Didn't Make & Sick About It

The absolute worst part about it? I used its products several time a day...

In 2006 I started looking at a company called Green Mountain Coffee (GMCR). Then it traded at $12 and change (split adjusted) and was earning $.39 a share annually. I liked the coffee but it traded at a PE of 30 times earnings and despite growing revenues 40% in 2005 over 2006, a rise in expenses caused earnings to dip in 2006 over 2005. So, I decided to stay away but check in on it occasionally.

2007 rolled around and even though earnings jumped over 40% the share prices ran ahead of that and its PE that year ballooned to over 50 times earnings. Not exactly a value.

2008 came and the stock just kind of slowly drifted a bit higher while earnings jumped another 67% but, the PE still sat at 50 times earnings. Still no value.

So, why am I sick about it? It was at this point, mid 2008, I stopped watching it. Then came October 2008 and the market sell-off that took shares down to $24 each which when one considers the $1.90 they should earn this year means shares traded at 12 times earnings growing >50% a year. At this point, shares were a great value (there is of course more to the analysis of the company but I am trying to make a general point here).

Now, that is not the worst part...

You see, back in Feb. 2007 I actually wrote how McDonald's (MCD) was going to win the coffee wars over Starbucks (SBUX) because they were using, at least in the Northeast the "Newman's Own Organic" coffee made in conjunction with GMCR (the deal was recently extended). I apparently neglected the effect this would have on GMCR sales while focusing on McDonald's and by extension their effect on Starbucks.

Later that year we were at a friends house and they had a "Keurig K-cup" coffee maker (the company was purchased by GMCR). My wife I used it and thought (and still do) that it was the greatest things ever made. It was so great that anyone who came to our home after inquiring as to what it was and receiving a demo from us, instantly loved it and wanted one.

We have given out no less that 5 of them as gifts with the explanation of the "great deals" GMCR gives on the coffee "that is wicked good". Many of them in turn, have either given one as a gift OR had friends who, after seeing theirs, then got one of their own. I am doubting seriously the chance my experience is that unique to other people and that theyr are not seeing the same thing happen. BUT, I neglected to turn this into an investing idea because "GMCR was an expensive stock vs earnings". It was, but not in October 2008 when after it just recently left my radar..

Then, in April this year GMCR signed a deal to sell the makers and coffee in thousands of Wal-Mart's (WMT) across the US.

Today's share price?????? $79....For those wondering why I did not buy on the Wal-Mart news, it was too late. The deal was announced after hours and the stock jumped from the $50's to the $70's almost instantly.

Yea....that would have been a cool 229% in 6 months in perhaps the most dreadful market in our lifetime...and it was in my cup right in front of me every single day...

Lesson? If you have a good company with a great product whose stock may be a bit expensive.....DO NOT EVER LET IT FALL OFF YOUR RADAR.......




Disclosure ("none" means no position):None........and sick over it

Tuesday's Links

SCOTUS, NY Times, Taxes, Denial

- This just cannot be true.....can it?

- No they don't

- Raising them hurts.........everyone

- How can this be?


Disclosure ("none" means no position):

Dow Chemical Reduces Debt, Backs off Dow Ag Sale Talk

Dow chemical (DOW) has given an update on the bridge loan it used to pay for the Rohm & Haas deal and changed the rhetoric on the possible Dow Ag sale.

At the recent annual meeting of shareholders CEO Andrew Liveris said Dow's focus through the end of the year will be to pay down the bridge loan and deleverage the company, run the business effectively and integrate Rohm and Haas to begin growing once again.

Originally, Dow had planned have the Rohm purchase bridge loan of $9.5 billion down to a balance of $4.2 billion in 90 days. As of last Thursday the loan is now down to $3 billion, meaning $1.2 billion additional has been paid off 55 days ahead of schedule according to the company.

Dow said it continues to look at its options to sell units. In addition to over $3 billion from the sale of Morton Salt, TRN, Calcium Chloride and other units, Dow is considering raising $4 billion to $6 billion from businesses in a successor to the K-Dow Petrochemicals deal or regional agreements; $1 to $2 billion from aromatics and derivatives.

Liveris repeated the company position that AgroSciences is a growth unit that is valuable to Dow, and would only be sold if a full-value offer is made ($15 billion). they also gave the usual boilerplate disclaimer that they are "still assessing its options" to keep the business, create a joint venture or sell it outright. This is a slightly harder line on the unit that when the original announcement was made that "all options are on the table". At that time there was very little talk of price for the unit and it was stated that there were "several" interested parties.

I don't think it is a great leap to assume those parties perhaps assumed they could pick up an incredibly valuable asset on the cheap from a distressed seller. I think it is also the reason not long after we saw both the equity and debt offerings and no additional mention of a DowAg sale. If the above is true, then Liveris does deserve kudos for not dumping the unit and holding firm on price. All that being said, even a full value sale of it is unacceptable.

The joint venture makes sense and since they already have one with Monsanto (MON), they would be a powerful partner. It would aid in cost reductions/capex and produce the clear industry powerhouse. what would remain would be looking at the composition of it.

Dow also announced today that it will increase the off schedule price in all regions for the product lines of both Acrylic Monomers and Vinyl Acetate Monomers effective June 1, 2009, or as contracts allow. The increases are $0.03/lb or $66/MT for Acrylates and Vinyl Acetate Monomers and $0.04/lb or $88 MT for Methacrylate and Specialty Monomers. This too is good news as price increases do mean some demand is coming back into the system.

Now, it is only 1 increase and we need to see if it sticks and if other products follow suit. Never the less, it is good news.


Disclosure ("none" means no position):Long Dow, none

Margins Levels vs S&P 500

"Davidson" comments on this and I have some after the image.

This chart of the record of use of margin debt by Hays Advisory reveals a fascinating view of the relationship of the SP500 vs. Margin Yr/Yr Change and the signals provided for tops and bottoms.

This chart says volumes regarding the effects of investors’ appetites for risk, how rapidly it can build and signal tops, how the rise in risk appetite can signal market recovery.

This is an interesting relationship and one that makes sense regarding market attitudes at tops and bottoms. The current rise in margin debt does fit other leading indicators which suggest changes in investor attitudes.

This is in my view a useful as well as fascinating indicator to watch.

This does bear close watching. I would focus on the relationship since the explosion of the "guy next door" investor. It, in my opinion gives a better sample of behavior.

If we accept that and use it as a guide, then the last recession was the 2001-2002 on. Looking at the peaks in the market in both 2001 ans 2008, the both correlate almost exactly with the peak in margin debt. This makes sense because margin selling is fast and furious so as it fell, the market would follow violently.

But, we are not interested in that now are we? We want to know about bottoms. Again going back to 2001-2002, we see a lag from when margin debt begins to again increase until the market turns. This also makes sense as recently burned buyers will tip-toe back into the market using margin gingerly and that means any rally will lag their entry.

Using that as a guide, it looks as though we can look for the market to gain more permanent footing in 6 months to a year. Now, while I do not as a rule place too much faith in charts, margin charts are useful because they go directly to investor sentiment. A confident investor is more likely to use larger margin amounts to purchase stocks that one who is pessimistic about the future.

Like any indicator this is not perfect and does bear close watching. It does give us more confidence though that the worst of the market may be over but, a true recovery in equities may be of a bit....


Disclosure ("none" means no position):

Monday's Links

Law, Stewart,  Pelosi, 

- Sooner or later people are going to see all this for what it is..

- I agree with him here...

The Daily Show With Jon Stewart	M - Th 11p / 10c
The Pageant of the Christ
thedailyshow.com
Daily Show Full Episodes Economic Crisis Political Humor

- when CNN goes after a Dem, you know it is bad...




Disclosure ("none" means no position):

Berkowitz Files 13-HR: Adds More Sears Holdings

Berkowitz has been busy buying in his Fairhome Fund (FAIRVX)

Added:
American Express (AXP), 10 million shares
Sears Holdings (SHLD), 2 million shares
St. Joe (JOE), 7 million shares

Reduced (number shares sold):
Canadian Natural Resources, (CNQ) 9 million shares
United Health (UNH), 5 million shares

Sold Out:
Bekshire Hathaway "B" shares (BRK.B)
Mueller Water Procuts (MWA)

Fairholme Q1

Publish at Scribd or explore others: Finance Business & Law fairholme bruce berk

Disclosure ("none" means no position):

AutoNation: Closings Represent 0% of Operating income

Mike Jackson of AutoNation (AN) commented today on the GM (GM) closings announced.

ORT LAUDERDALE, Fla., May 15 /PRNewswire-FirstCall/ -- AutoNation, Inc.
(NYSE: AN), American's largest automotive retailer, today announced that
General Motors notified AutoNation that six of its dealerships were identified
for potential closing by GM. The notification is part of GM's communication
today to approximately 1,100 dealers that GM does not expect to continue as GM
dealerships past October 2010. The AutoNation stores potentially impacted by
the consolidation plan represent 0% of AutoNation's 2008 operating income.
AutoNation does not believe that any one-time charges that may be associated
with these actions will be material to its continuing operations or debt
covenants.

Commenting on the consolidation plan, Mike Jackson, Chairman and Chief
Executive Officer, said, "We believe GM's consolidation plan is a difficult but
positive step that will strengthen America's dealer network and improve dealer
profitability over the long term. The consolidation plan is consistent with
AutoNation's long-term strategy that we implemented in 2000 to consolidate
domestic dealerships and realign our brand mix more towards import and premium
luxury franchises. With our financial and operational strength and diversified
brand mix, we are well-positioned to succeed in the rapidly changing automotive
retail landscape."

Have been saying for a while now this would be helpful for AutoNation (AN) in allowing for it to expedite its domestic reduction plans. What remains to be seen is what is happening around them. 1100 GE dealers closed by the end of 2010, mostly in metro areas leaves a lot of competition be be shuttered.

Will update as soon as I get word...


Disclosure ("none" means no position):Long AN

Ackman Files 13-HR: Adds YUM! Brands

Notable activity for Q1 2009 vs Q4 2008.:

Added:
Yum! Brands (YUM) : >1.5 million shares
General Growth Properties approx. 3 million more shares

Reduced:
Visa (V), sold almost 5 million shares

Sold out:
Sears Holdings (SHLD)
Dr. Pepper Snapple (DPS)

Pershing Q1

Publish at Scribd or explore others: Finance Business & Law pershing square bill

Disclosure ("none" means no position):

Buying News Corp...... Finally

Finally took the plunge and bought the "limited voting" A shares at $8.86 of News Corp. (NWSA) vs the "B" shares (NWS)

Here is some of the reasoning for News Corp from previous posts...

Why the "limited voting" shares vs "B"?

Couple reasons.

1- Murdoch owns 40$ of the voting shares so buying "B" shares really affords the purchaser no advantage as what Ruppert wants, Ruppert will get.

2- Discount. Currently the A shares trade at about a 13% discount to the regular (NWS) shares. Now, that discount has typically been around 8% so I am adding a 5% normalization of value into the mix.

3- Dividends between the two shares are treated equally.

Here is the SEC filing regarding the two classes of shares:
News Corp. A vs B

Publish at Scribd or explore others: Finance Business & Law news corp todd sulli

Here is the "Murdoch Agreement":
"Murdoch Agreement"

Publish at Scribd or explore others: Finance Business & Law news corp. todd sull

So, if you have "x" amount of money to invest in the stock, the "A" shares are the way to go as they enable you to, as today's prices purchase 13% more share and participate is essentially equal performance. I am assuming this is the reason they were created, the ensure Ruppert's control of the company was not challenged. Personally, given his track record, I have no reason to want to.

I have saved some money in case we get a sell-off in shares, if that happens, I will resume buying on the way down.

So there it is, will update later.



Disclosure ("none" means no position):Long NWSA, none in NWS

Friday's Links: Friedman on Free Markets

Disclosure ("none" means no position):

Seth Klarman Files 13-HR

Klarman's Baupost Group made some interesting additions since the February filing

News Corp "A" (NWSA) shares up from 16 million to 27 million shares
RHI Entertainment (RHIE) from 3.6 to 4.9 million shares
Domtar (UFS) from 33 million to 40 million shares
Linn Energy (LINE) from 7.9 million to 4 million shares


Baupost Q1 2009 13-HR

Publish at Scribd or explore others: Finance Business & Law seth klarman baupost

Disclosure ("none" means no position):

Yet Another Housing Headwind

I was stunned when I saw this. Why am I so focued on housing? Because I feel the disinformation out there on it is staggaring and hope to give folks a different, more accurate outlook on the situation.

First, 60% of homeowners think their home has fallen in value and 22% say it has stayed the same. Reality? 80% have lost value. Which means 20% of homeowners are not living in reality.

Here is the chart that got me:

So, 31% of all homeowners out there are likely to add to record home inventory levels at the first sign of improvement in the housing market. Now, we need to define "improvement". According to the survey, the top response from 71% of people, think the market is improving if "there is evidence homes sales in my neighborhood are increasing".  

What does this tell us? At the first signs of stabilization in housing, it would seem we have yet another wave of inventories set to hit the market from people wanting to sell their home.

This again leads to a negative view on housing. Look at the supply demand equation:

Demand Decreasing:

• Foreclosed buyers cannot go out and purchase another home
  
• Tightened credit standards by banks eliminate marginal buyer
  
• Rising unemployment
  
• Falling prices reduce existing equity used to roll into new homes

Supply Increasing:

• Foreclosed homes hitting market in record numbers
  
• Homebuilders still building new homes
  
• 31% of existing homeowners ready to put homes on market at first sign of market stabilization

How does this equate to a rebound in housing anytike soon? It isn't even enough for one of these factors to be eliminated from the equation, we need several.

Full Report:

Homeowner Confidence Q12009

Publish at Scribd or explore others: Real Estate Business & Law Housing

Disclosure ("none" means no position):

Retails Sales & Economic Recovery: Yes? No?

All the talk today is, "are we in recovery or not". Let's look at a chart of retail sales which dictates the health of the consumer who is 2/3 of the economy (click to enlarge):


What does it tell us? Things are worse than February but not a bad as March. We could say that the "rate of decline" has slowed so that is good news. We could also say we are "still declining" so that is bad.

What do I think? March was abnormally bad, making April better than it really was. I think we in the middle of the two which means still a sizable decline. This makes sense to me when you seen the recent foreclosure wave, continued record declines in home prices, rising unemployment and steep declines in GDP.

Here is another issue not talked about. 342,000 homes received foreclosure notices last month, on top of the 320,000 the month before. Here is the "issue". These folks have been mostly being held out of foreclosure because of a 6 month foreclosure moratorium by the banks. During that time frame they clearly were not paying their loan. So, where was the money going? My guess would be clothing, dinners, entertainment, etc. There was no rent or mortgage to pay so it was spent. We know that once people admit foreclosure, they sit and wait without making payments until forced to leave. Unless they are one of the unfortunate to have lost a job (the minority), they now have disposable income that they were before putting towards a home payment.

Now that these folks are getting foreclosed on and booted from their homes, they'll need to come up with a rent payment. That means far less disposable income available for other uses. The argument can be made this money has be artificially making retail sales better than they would ordinarily have been, and that is a scary thought. It also means we can expect another negative headwind for sales trends to continue down on top of the others previously mentioned.

The point in the exercise is two-fold. First, don't make long term predictions based on small time data samples. You need a longer series. Second, and more importantly, you need to look at different data, not just one. For instance, if we only looked at the chart above, the clear conclusion might be things are improving. But, if we add the data from home prices, foreclosures and unemployment we get a very different story and then we would have to wonder where the money for people to improve retail sales is coming from.





Disclosure ("none" means no position):

Auto Dealers Fate (update)

(UPDATE: At end of post is the list of Chrysler dealerships closing. AutoNation has 7)

This has been a long time coming. Both Chrysler and GM (GM) are expected to notify up to 2000 dealers combined that they are closing either today or tomorrow. The moves are expected to cost about 150,000 jobs at the dealership level. Note, these job losses DO NOT include losses associated with the dealerships such as cleaning & maintenance crews contracted to do work on the premises and other ancillary services.



Is this a good thing? As sad as it is, and a bad as the job losses will be, it is the best thing for the industry on all levels. Those dealerships left will become stronger as their market share immediately grows and increased profitability ought to follow.

Now the GM closings, as far as I know can only be done in a Chapter 11 scenario. In any other scenario, GM will most likely spend an eternity in State Courts for violation of State Franchise Laws. A Chapter 11 eliminates that scenario. Now the other option is for GM to offer franchisees a sweetner to take the deal (they just may as those being closed are most likely not profitable now). This would be a waste of time and money for GM, BUT, based on its history, just may be what happens.

Who is the main beneficiary of this? AutoNation (AN). Why?

1- They have made no secret of their desire to reduce domestic exposure, this may do it for them very easily. Now, if some of their dealerships are chosen, since AutoNation owns the building and land on almost all dealerships, transferring that property to another brand is virtually as simple as moving existing inventory to another dealer, changing signs and then moving new inventory in.

2- Most of the closing are expected to be in Metro markets. AutoNation has heavy exposure to those very markets. So, even if the scenario in #1 does not unfold, they do just fine because they receive large market share from the dealerships closing around them.

3- Totally aside from the other two scenarios, there are other dealer groups in a precarious situation that simply will not be able to withstand the loss of a franchise, even a marginally profitable one. Consider the scenario. A dealer with three dealerships Ford (F), GM (GM) and Chrysler. Depending on the mix, the GM dealership could be covering for losses at Ford and Chrysler (or Chrysler at Ford & GM). But, because of the area concentration of GM (Chrysler) dealerships, their is selected to close. Now the dealer is stuck with two money losing dealerships and that may just force the closure of the other two.

Before you dismiss this scenario, you must consider that most dealers own multiple locations and depending on the sales mix in the area, the above scenario is not only possible, but very likely in a number of locations.

The summary here is that the end number of closings from these actions will be in excess of the final, stated number form both Chrysler and GM.

When all is said and done, the clear winners will be those left standing. Their earnings power when its over will be in excess of pre-dealer decimation levels even with industry sales below 2006-2007 levels. They will receive immediate benefits from share and margin increases that will be maintained as a return to previous dealer levels is not likely for years..

UPDATE: Here is the list of Chrysler Dealers:
List of Chrysler Dealers

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Disclosure ("none" means no position):Long AN, none


Disclosure ("none" means no position):

Auto Dealers Fate Decided This Week

This has been a long time coming. Both Chrysler and GM (GM) are expected to notify up to 2000 dealers combined that they are closing either today or tomorrow. The moves are expected to cost about 150,000 jobs at the dealership level. Note, these job losses DO NOT include losses associated with the dealerships such as cleaning & maintenance crews contracted to do work on the premises and other ancillary services.



Is this a good thing? As sad as it is, and a bad as the job losses will be, it is the best thing for the industry on all levels. Those dealerships left will become stronger as their market share immediately grows and increased profitability ought to follow.

Now the GM closings, as far as I know can only be done in a Chapter 11 scenario. In any other scenario, GM will most likely spend an eternity in State Courts for violation of State Franchise Laws. A Chapter 11 eliminates that scenario. Now the other option is for GM to offer franchisees a sweetner to take the deal (they just may as those being closed are most likely not profitable now). This would be a waste of time and money for GM, BUT, based on its history, just may be what happens.

Who is the main beneficiary of this? AutoNation (AN). Why?

1- They have made no secret of their desire to reduce domestic exposure, this may do it for them very easily. Now, if some of their dealerships are chosen, since AutoNation owns the building and land on almost all dealerships, transferring that property to another brand is virtually as simple as moving existing inventory to another dealer, changing signs and then moving new inventory in.

2- Most of the closing are expected to be in Metro markets. AutoNation has heavy exposure to those very markets. So, even if the scenario in #1 does not unfold, they do just fine because they receive large market share from the dealerships closing around them.

3- Totally aside from the other two scenarios, there are other dealer groups in a precarious situation that simply will not be able to withstand the loss of a franchise, even a marginally profitable one. Consider the scenario. A dealer with three dealerships Ford (F), GM (GM) and Chrysler. Depending on the mix, the GM dealership could be covering for losses at Ford and Chrysler (or Chrysler at Ford & GM). But, because of the area concentration of GM (Chrysler) dealerships, their is selected to close. Now the dealer is stuck with two money losing dealerships and that may just force the closure of the other two.

Before you dismiss this scenario, you must consider that most dealers own multiple locations and depending on the sales mix in the area, the above scenario is not only possible, but very likely in a number of locations.

The summary here is that the end number of closings from these actions will be in excess of the final, stated number form both Chrysler and GM.

When all is said and done, the clear winners will be those left standing. Their earnings power when its over will be in excess of pre-dealer decimation levels even with industry sales below 2006-2007 levels. They will receive immediate benefits from share and margin increases that will be maintained as a return to previous dealer levels is not likely for years..


Disclosure ("none" means no position):Long AN, none

Talking Target, Housing & News Corp On Wall St. Media

More video on Wall St. Media




Disclosure ("none" means no position):

Another News Corp. Division Posts Impressive Results

Now that the market has sold off some, time to buy some items performing well.

Recently we looked at News Corp (NWS) and noticed that unlike its various industries, both the Newspaper business lead by the Wall St. Journal was increasing paid subscriptions and the Cable TV dicision, lead by Fox News was both increasing share and advertising rates. This was one of the reason we were tempted to buy shares. At the tine, only the recent market surge prevented us from doing so.

Now this on Fox's internet sites is but more good news for the company.

From MediaWeek.com

Fox News' online ascent continues, as the network's formerly lightly-trafficked Web site FoxNews.com has significantly improved its numbers for several key engagement scores over the past year as its audience has steadily climbed, according to newly-released data from Nielsen Online.

According to Nielsen, FoxNews.com's audience ballooned by nearly 50 percent in April to 15.7 million uniques versus the 10.5 million reached during the same month in 2008. The site reaches over 18 million users when all of its sub-domain URLs are included (such as Fox News' mobile site and FoxBusiness.com).

But even more eye-catching is overall increase in FoxNews.com¹s stickiness. For example, the site¹s total page views jumped by 75 percent in April, going from 382 million last year to 669 million this year.

That's more page views than were recorded by category giant Yahoo News (which generated 614 million), despite reaching an audience less than half its size (Yahoo officials contend that the home page for Yahoo News does not automatically refresh its content, limiting the total number of page views it serves).

Furthermore, when examined on an individual site vs. site basis, FoxNews.com led all the major sites in Nielsen¹s News and Information category in time per person (an average of 39.9 minutes, just edging CNN.com) and pages per person (an average of 43, four more than the AOL News) in April.

It seems every division of the Fox franchise is running full speed ahead in a very difficult environment. As a potential investor, when you can see this (and the company is buying back shares), over $6B of cash on the books and a low stock price, the decision to buy or not becomes much easier. Look at it this way, the cash on the books is roughly $3 a share which means you are paying just $6 for all the assets and operations.

Shares closed at $9.91 Wednesday. any lower, not starting to buy might be impossible..




Disclosure ("none" means no position):None...will be buying soon

"Davidson" Talks Leucadia

Was having a conversation with "Davidson" about Leucadia (LUK) after posting the annual meeting notes the other day. He was talking about the excellence of management of which I agree. He is an owner of shares. I said my hesitation in owning shares was that I could not accurately forecast earnings into the future due to the fact they tend to buy then sell businesses.

Here is his reply:

Ahh. Here is where you plot management’s results, read their history of investing in distressed assets and turning them into gains and then realize that this is not a cash flow nor an earnings story. LUK is a holding co. They report boosts in BV only when an asset has been sold which may take 10yrs. Analysts really have to do a bit of leg work to grasp the value growth from year to year. My plot of BV vs. stock price I think tells the story of success.

Book Value/Share Price Analysis


There really isn't any doubt as too the skill of Steinberg or Cummings skill. It is pretty clear that earnings will fluctuate wildly depending on what is sold in what year. So, Davidson's BV chart is the way to go.

If we look at the chart, it is pretty clear that Leucadia, when priced right, tend to trade around book value. That gap rose to almost 2 times book over the last couple years and the stock has responded by falling from the $50's to the current $20 as book value fell.

Current book has fallen to roughly $12 a share and that is due mainly to $1 billion in asset write-downs in Q4 2008 (like the rest of the world) and an additional $900m in debt. A normalized operating environment book is more likely to be in the $15-$16 range which means shares, currently price at $20 are getting close to a "buy" point for those who want to be shareholders.

Latest 10-Q


Disclosure ("none" means no position):None

Thursday's Links: Milton Friedman

Milton Friedman on "Limited Government".

Note: The intro in in Iclandic but the discussion in English



Friedman vs 3 Left wing "Scholars" on Iclandic television, 1984




Disclosure ("none" means no position):

April Foreclosures Hit Record: You're Not Surprised Are You?

I hope this was not a surprise. We have been pounding this point here repeatedly. April was the month moratoriums in foreclosures expired. It should not be a surprise that folks in November 2008 whom could not afford their home still can't in April 2009. People losing their jobs who put no money or minimal money down on a home and then tapped what little equity they may have had in it have no ability at all to stay in those homes, none.



Here is the Realty Trac Report:

RealtyTrac® (realtytrac.com), the leading online marketplace for foreclosure properties, today released its April 2009 U.S. Foreclosure Market Report™, which shows foreclosure filings — default notices, auction sale notices and bank repossessions — were reported on 342,038 U.S. properties during the month, an increase of less than 1 percent from the previous month and an increase of 32 percent from April 2008. The report also shows that one in every 374 U.S. housing units received a foreclosure filing in April, the highest monthly foreclosure rate ever posted since RealtyTrac began issuing its report in January 2005.

“Total foreclosure activity in April ended up slightly above the previous month, once again hitting a record-high level,” said James J. Saccacio, chief executive officer of RealtyTrac. “Much of this activity is at the initial stages of foreclosure – the default and auction stages – while bank repossessions, or REOs, were down on a monthly and annual basis to their lowest level since March 2008. This suggests that many lenders and servicers are beginning foreclosure proceedings on delinquent loans that had been delayed by legislative and industry moratoria. It’s likely that we’ll see a corresponding spike in REOs as these loans move through the foreclosure process over the next few months.”

the more important number in my opinion each month is the foreclosure number. It represents not only an addition to the existing housing inventory, but a more permanent reduction in demand as foreclosed buyers are not going to then go out and purchase another home.

When you add these folks to those losing jobs, demand is plummeting. What's worse is that this is not demand destruction in terms of those waiting for better prices, this is a more permanent kind of demand destruction as these buyers are not coming back into the market for quite some time (years).

I have still yet to been offered any type of evidence that housing is going to do anything but fall further from here for at least the next 6 months..

If you have it, please either email it or add it to the comments...

Disclosure ("none" means no position):

Ackman Disucsses Target, Target Makes Grocery Move

No matter what your opinion of Ackman, we all have to be thankful he is giving us something other that the Government to talk about.

In an interesting development yesterday Target (TGT) made a move that to some extent, validates what Ackman has been saying for over a year now, Target badly underutilized their grocery potential. Target announced that in 100 stores they are dramatically expanding their grocery offerings. This is a move that Ackman has been pushing for and Target's grudging acceptance if it, so close to the upcoming meeting in which Ackman's slate of electors will be voted on, well ought to give current shareholders pause before checking their prospective boxes on the proxy.

Here is the thing. If you are a shareholder and happy about the company's performance the past two years, stick with what you have. IF, on the other hand, you are not and feel that like Wal-Mart (WMT), Target ought to have seen results improve as the consumer felt more pinched, not deteriorate, that you need change. Change on the board level would not be akin to "wholesale change" but would be significant enough to alter the company's focus and direction in way that should pay of long term.

Either way, will be fun to watch..




Disclosure ("none" means no position):Long WMT, none

Latest Wall St. Media Appearance 5/11

Talking about General Growth Properties, GM, housing and the economy.

More video at Wall St. Media




Disclosure ("none" means no position):

Jim Rogers Talks About the Current Economy

I agree with Rogers although I am not nearly as dire in my outlook. Rather a continued downtrend, I think we slog along the bottom for a long while...

Rogers does like raw materials, agriculture and metals.




Disclosure ("none" means no position):

Wilbur Ross Interview (video)

Ross Discusses Real Estate, Banks, and Automakers




Disclosure ("none" means no position):

Wednesday's Links: More Ayn Rand

From 1959

Part 1


Part 2


Part 3




Disclosure ("none" means no position):

General Growth DIP Group Chosen

Turn out Goldman Sachs and Brookfield Asset also got involved in the bidding. The final DIP lender must be approved by the judge but after the process that has been undertaken, one ought to assume that it gets rubber stamped.

Now that this is done, the next big decision, expected tomorrow and on the CMBS lenders challenge to certain properties being included in the filing. The judge is expected to rule with GGP in this one also and that sets the stage for stronger operational results through the BK process.

Here is the DIP news from this afternoon.

From the WSJ:

The Farallon group, which includes Canpartners Investments IV LLC and Delaware Street Capital Master Fund LP among others, beat out both activist investor William Ackman's Pershing Square Capital Management LP and a third group led by Goldman Sachs Group Inc. (GS) to provide the $400 million in financial backing, according to people familiar with the talks.

General Growth outlined the new debtor-in-possession, or DIP, financing in filings in its case on Tuesday in U.S. Bankruptcy Court in the Southern District of New York.

The new Farallon pact caps nearly four weeks of back-and-forth negotiations in which General Growth first chose a proposal from Pershing, then went with Farallon's group, then back to Pershing and finally back to Farallon. The drawn-out process resulted in several aspects of the deal shifting in favor of General Growth, including the DIP lenders requiring less collateral for their loan and the elimination of an offer of warrants convertible to company stock after the bankruptcy.

The new Farallon pact provides lenders in the DIP pact a secondary claim to cash flow at General Growth's corporate level, behind the claims of secured lenders. Previous pacts provided the DIP lenders a senior lien on that cash flow, raising objections from General Growth's secured lenders. Another change: The DIP lenders no longer get a second lien on General Growth assets that already have first mortgages. The DIP lenders do, however, retain a first lien on a collection of unencumbered properties.

The new pact also omits any warrants for the lenders similar to those in the initial Pershing deal, which would have granted Pershing warrants convertible to 4.9% of General Growth's stock upon emergence from bankruptcy. Pershing already amassed a nearly 8% stake in General Growth through buying stock in the months before the bankruptcy filing. Pershing also tied up another 17% of General Growth stock by putting it in swap contracts with various investment banks.

Now, the new arrangement with the Farallon group allows for General Growth to pay off the DIP lenders by converting their loan into up to 8% of the company's stock, depending on the company's equity value upon emerging from bankruptcy, rather than paying in cash. The original Pershing deal had a similar provision. Farallon and some of the other lenders in its group already are General Growth creditors, holding an undisclosed amount of the company's bonds.

The Farallon deal comes with an interest rate of Libor plus 12%, limiting the lowest-acceptable Libor rate to 1.5%. The pact has a term of two years. The exit fee is set at 3.75%, down from 4% in the Farallon group's initial proposal.

General Growth intends to use much of the DIP financing to pay a short-term, high-interest loan that Goldman provided it in the months before its bankruptcy filing. Goldman's failed bid to provide General Growth's DIP financing included participation from Brookfield Asset Management Inc. (BAM), the Canadian office and retail property owner.

Disclosure ("none" means no position):Long GGWPQ, None

Tuesday's Links: Friedman and Rand

Greed, Ayn Rand,


- Watch and Listen:


Part 1
-

Part 2
-

Part 3
-

Part 4


Part 5


Disclosure ("none" means no position):

General Growth Files Cash Flow 8-K

General Growth Properties (GGWPQ) today filed an 8-K (below) for its estimates cash flows for 2009-2010, the estimated bankruptcy period.

A Few Notable figures:
Unrestricted cash balance end 2009= $381 million
Unrestricted cash balance end 2010= $570 million
Cash flow from operations 2009= $1.2 billion
Cash flow from operations 2010= $1.9 billion

The filing backs the claim that General Growth is not a company that cannot function on a day to day basis ie. GM (GM). It is in Chapter 11 not because it cannot pay its bills but because credit markets have frozen and it debt cannot be refinanced.


General Growth 8-K BK Cash Flow

Publish at Scribd or explore others: Finance Business & Law general growth prope

Disclosure ("none" means no position):Long GGWPQ

Sears Holdings Meeting Notes

Attendee notes from the recent Sears Holdings (SHLD) annual meeting.

Via Fool Boards and verified for accuracy by reader Russ who was at the meeting

I went to the Sears Holdings annual shareholders meeting on May 4th, and thought i'd share some of what i heard.

First, i will say that i was extremely impressed with Eddie Lampert and left the meeting 100% reinforced that he is one of the smartest people out there.

The meeting was about 3 hours, the first 20 minutes or so, Bruce Johnson gave a presentation on the operating businesses, talked about things like expense control and inventory reductions, and he also highlighted things i had not noticed before, such as the improving performance of comp sales relative to competitors, quarter by quarter. The number of competitors who had comp sales worse than Sears Holdings accelerated dramatically towards the end of last year and Eddie Lampert brought up the point of saying, Which is worse, negative 4% comps four quarters in a row, or flat comps for three quarters and then a single quarter of negative 25% comps, as in the case of Abercrombie.

K-Mart had 1.4 million new layaway customers last year. Bruce Johnson talked about the subsequent purchases that layaway brings as customers visit the stores every two weeks to make payments.

Bruce Johnson talked about market share, saying that Sears Holdings has 34.6% market share in appliances, which leads all competitors, up from 30% in Q3 2007. Said they are reversing years of declines in market share in the appliance category. Eddie Lampert said that while you could sell a heck of alot of $3,000 washer/dryers at $1,500... all you'd essentially be doing is "renting market share" and that they wanted to "own market share".

Market share in other categories mentioned:

22.3% tools
14.2% home repair
21.0% power lawn and garden

The majority of the meeting though Eddie Lampert took questions from the audience. Some interesting points and comments he made were:

Lampert wants to encourage more experimentation, even though it could mean more failures.

He noted that Sears is determined not to make any "serious mistakes" that can put you out of business, he noted ethical mistakes and serious amounts of leverage as two "serious mistakes"

He noted that he wants Sears to "grow out of the difficult operating enviornment" rather than only being defensive.

One of my favorite comments was Lampert saying "We don't package B.S"... making reference to other company managments that claim to have ideas they are sure will work, in which they spend large amounts of capital rolling the plan out only to see it fail... after which they make an excuse as to what went wrong and then never mention it again. He told the audience that he's not going to stand there and tell everyone he knows exactly how to fix all of Sears Holdings problems, and that he wants to "get this thing right" and they were willing to continue to try ideas such as MyGopher until they find what will work before they spend significant shareholder capital on any ideas. He also said there is nothing wrong with making a five million dollar mistake but there is something wrong with making a five hundred million dollar mistake.

On the subject of naked short selling, Lampert said he doesn't have a problem with short selling, but he does have a problem with "selling something you don't own, and can't deliver".... adding that... "it's not a sport to destroy companies or jobs, even if you are right."

Lampert made the comment that layaway sales were up 106% last year, to $157 million dollars.

Lampert said that "the ultimate goal is the transformation of the business", transforming two american icons.. and he also said that "if the economic envioronment were different, we'd know better if what we are doing is working"

On the subject of inflation, Lampert said that we are probably likely to have higher inflation in the next few years, and that they were "trying to be ready for it"... He said that in certain categories inflation will help the company and in certain categories it will hurt. Higher inflation forces larger investments in working capital.

Lampert said that Sears should have no problem getting a new revolving credit line before the current one expires, saying that Sears Holdings has substantial collateral (inventory) to support one, although he did say the current four billion dollar revolver was more than necessary, and the new one will be smaller.

When asked at what point will Sears have enough cash flow to consider investing in other companies, Lampert sort of dodged the question, saying that "just because the market is valuing a stock a two dollars per share, does not mean the company will agree to sell itself at that price".. I say he sort of dodged the question because the person asking the question (a representative of Fairholme Capital Management) seemed to be asking why Lampert didn't use the extreme low market prices in February and March to invest Sears cash in different stocks, and Lampert responded as if the question was instead, why didn't Sears use the low market prices to acquire whole companies.

At one point in a discussion with a shareholder, Eddie Lampert referred to himself as "a professional investor", which i found very interesting because he could have claimed to be a merchant, or a retail guy. He also said that "At some point ESL will sell shares of Sears Holdings", although they have not sold any since taking K-Mart out of bankruptcy.

Much of the meeting focused on retail, and Lampert does seem genuinely interested in turning around Sears Holdings, There was very little discussion on capital allocation decisions, real estate values, etc.. and no discussion on liqidation values of the company. Whenever someone would ask capital allocation question, Lampert basically dodged the question, instead talking about the retail operation...

I absolutely get the feeling that Lampert will continue to try to make the retail value of the business worth more than the liquidation value, but i also think that he will not do anything in the process that destroys shareholder value. After all, he owns over 50% of the company. I still feel that Sears is a long term runoff situation, that a majority of the cash generated will go towards reductions of debt and repurchases of shares, atleast until the point that the public float is nearly non-existent.... and I think that this will play out over many years, perhaps over a decade.... In the meantime Lampert will try different ideas and see if anything seems to work, and why shouldn't he? Why kill a business that is generating and will continue to generate free cash flow? In the end though, I am basically indifferent as to whether or not the company gets liquidated or is turned around. Either way the end value will be significantly higher than today's prices, or any price that Lampert ever paid for share repurchases. It will be very excited indeed to watch it play out over time.

What is most exciting is the growing share in appliances. That will bring shoppers into the stores and reinforce the value/quality proposition for the company with shoppers.


Disclosure ("none" means no position):Long SHLD

Leucadia Meeting Notes

Hat Tip to The Inoculated Investor for posting these. Leucadia (LUK) is an eclectic mix of assets that long time managers Steinberg and Cummings make work.



2009 Leucadia Annual Meeting Notes

Publish at Scribd or explore others: Brochures & Catalogs Magazines & Newspape leucadia (luk)

Disclosure ("none" means no position):

Ackman & Pershing Square Close Wendy's Position

Busy day for Bill Ackman. CNBC in the morning, Target "Town Hall" Meeting at lunch, court hearings for General Growth (GGWPQ) in the afternoon and closing his Wendy's (WEN) stake.


Wendy's 13G/A Pershing

Publish at Scribd or explore others: Finance Business & Law bill ackman wendys p

Disclosure ("none" means no position):Long GGWPQ, none

Whitney Pours Ice Water on Rally

You know, she was on top of this from day one. To me, what she is saying now still does make sense.

She backs what I have been saying here.. "the government is changing the rules in the midle of the game...."

Also, "The rally was based on zero fundamental improvement".

She also questions how fewer people working can cause an increases in economic fundamentals.




Disclosure ("none" means no position):

Key Ruling for General Growth Properties CMBS Wednesday

If the ruling goes as indicated by the judge, his is bad for bondholders, very good for General Growth and then good for shareholders as anything that strengthens the holding company is by default good for them.

Also, tomorrow a ruling is expected on the DIP financing General Growth will present to the judge. We may find out today whom they have selected.

From the WSJ

(Dow Jones)--A final ruling is expected Wednesday on whether General Growth Properties Inc. (GGP) would be allowed to tap into the cash flow from its properties, and overturn what was believed to be a basic tenet of commercial mortgage securities.

At a hearing last Friday, the bankruptcy judge postponed the decision, but indicated he was likely to side with the company.

He pointed out investors in commercial bonds would continue to receive their interest payments, and General Growth is only looking to sweep the excess cash into a centralized account that would pay for its general expenses.

Investors and lenders had believed pools of mortgage collateral that back commercial bonds would be cocooned in these special-purpose entities, and steady cash flow to investors would be protected even when the parent company files for bankruptcy.

So when General Growth dragged 166 of its properties into the bankruptcy filing and sought to consolidate the income from these properties, more than a dozen investors and industry groups rallied to protest strongly against such a move.

The Commercial Mortgage Securities Association and the Mortgage Bankers Association filed a brief stating such a move would hurt the $1 trillion commercial mortgage market.

However, the bankruptcy judge called such statements "hyperbole."

"I am not surprised," said Richard Zeigler, counsel in Mayer Brown's bankruptcy and restructuring group.

"Bankruptcy remote doesn't mean bankruptcy proof, and that's what investors are finding out," he said. Zeigler isn't representing any of the interested parties in the bankruptcy.

Disclosure ("none" means no position):

Elizabeth Coleman Inspector General for the Fed......WTF?

At first I thought this was an SNL skit.......it would be hysterical is it wasn't true..

For the record, I have no idea who appointed her nor do I care.......this actually leaves me speechless..




Disclosure ("none" means no position):

The "Sucker's Rally" & My Perverse Situation

This rally has put me in a rather perverse situation. I've been on record several times saying I do not believe in it (the market rally) and it is due for a fall. I still believe I will be proven right sooner rather than later, yet at the same time, I am really enjoying the profits being made being wrong for now. It's odd as no one like to be wrong, especially when you broadcast those opinions to the masses but having what you own and what you have purchased recently (oil (USO) & gas (UNG) options) rally huge along with the market really takes the sting out of it.

Additionally, since I do not "short", and have not advised others to do so, there has not been monetary loss from being wrong (the most important point).

Because of all that I have made it a point to post thoughts contrary to mine here in order to give readers both side of the argument (suckers rally or bull market)and let them decide for themselves.

This morning I posted thoughts from "Davidson" contrary to mine.

Here are some supporting my thoughts.

From TechTicker:
Merrill's economist David Rosenberg left the firm yesterday (planned for several months). And he went out swinging. David has maintained from the beginning that the recent rocket rally off the lows is just a suckers' rally, and he reiterated that view as he walked through the doors.

Market likely to peak the end of the week [Friday]. Just as the clock is winding down on my tenure at Merrill Lynch, the equity market is winding up with an impressive near-40% rally in just nine weeks. For those that were still long the equity market back at the March 9 lows, a good ‘devil’s advocate’ exercise would be to ask yourself the question whether you would have taken the opportunity, if the offer had been presented, to have sold out your position with a 40% premium at the time. What do you think you would have said back then, as fears of financial Armageddon were setting in? We haven’t conducted a poll, but we are sure at least 90% of the longs at that point would have screamed “hit the bid!”

Are we at risk of missing the turn? Fast forward to today, and within two months optimism seems to have yet again replaced fear. Are we at risk of missing the turn? What if this is the real deal — a
new bull market? This is the question that economists, strategists and market analysts must answer.

Risk is much higher now than it was 18 weeks ago. The nine-week S&P 500 surge from 666 at the March lows to 920 as of yesterday has all but retraced the prior nine-week decline from the 2009 peak of 945 on January 6 to the lows on March 9. We believe it is appropriate to put the last nine weeks in the perspective of the previous nine weeks. To the casual observer, it really looks like nothing at all has happened this year, with the market relatively unchanged. But something very big has happened because the risk in the market, in our view, is much higher than it was the last time we were close to current market prices back in early January, for the simple reason that we believe professional investors have covered their shorts, lifted their hedges and lowered their cash positions in favor of being long the market.

Employment, output, income, sales still in a downtrend. Considering what transpired from an economic standpoint, the decline in the first nine weeks of the year was rather appropriate in the midst of the worst three-quarter performance the economy has turned in roughly 70 years. The rally of the past nine weeks appears to be rooted in green shoots. While it may be the case that the pace of economic decline is no longer as negative as it was at the peak of the post-Lehman credit contraction, the reality is that employment, output, organic personal income and retail sales are still in a fundamental downtrend.

Need to see an improvement in the first derivative. We have evidence that the consumer, after a first-quarter up-tick that was front- loaded into January, is relapsing in the current quarter despite the tax relief (didn’t we see this movie last year?). Not until improvement in the second derivative morphs into improvement in the first derivative with respect to the important economic data will it really be safe to declare what we are seeing as something more than a bear market rally, as impressive as it has been.

This is a bear market rally that may have run its course. The investing public is still holding tightly to their long-term resolve, but much of the buying power at the institutional level seems to have largely run its course, in our view. That leaves us with the opinion, as tenuous as it seems in the face of this market melt-up, that this is indeed a bear market rally and one that may well have run its course. We have “round-tripped” from the beginning of the year and there is real excitement in the air about how these last nine weeks represent evidence that the economy will begin expanding sometime in the second half of the year.

Growth pickup will likely prove transitory While it is likely that headline GDP will improve as inventory withdrawal subsides and fiscal policy stimulus kicks in, our view is that whatever growth pickup we will see will prove to be as transitory as it was in 2002, when under similar conditions the market ultimately succumbed to a very disappointing limping post-recession recovery. So yes, there may well be some improvement in the GDP data, but it is based largely on transitory factors. We strongly believe it is premature to totally rule out the end of the vicious cycle of real estate deflation – residential and now commercial – that we have been experiencing since 2007. Balance sheet compression in the household sector will continue to pressure the personal savings rate higher at the expense of discretionary consumer spending. This is a secular development, meaning that we expect it will last several more years.

Chances of a re-test of the March lows are non-trivial. To reiterate, it seems to us likely that the risk in the market is actually higher today than it was back at the same price points in early January, and we say that with all deference to the stress tests (which given the less-than-dire economic scenarios, along with the changes to mark-to-market accounting, were destined to reveal healthy results). While the consensus seems gripped with the burden of trying to decide if there is too much risk to be out of the market, we actually still believe that the chances of a re-test of the March lows are non-trivial, especially if the widely touted second-half economic rebound fails to materialize...

The data flow is less relevant this cycle than in the past. This was not a manufacturing inventory cycle, which makes the data flow less relevant than in the past. Real estate values are still deflating and the unemployment rate is still climbing; these are critical variables in determining the willingness of lenders to extend credit. And as we just saw in the Fed’s Senior Loan Officer Survey, while there may be a ‘thaw’ in the financial markets, banks are still maintaining tight guidelines. In fact, the weekly Fed data are now flagging the most intense declines in bank lending to households and businesses ever recorded.

Regular readers know I lean towards Rosenberg's analysis. For a while now I have been saying "not as bad" is not the same as "getting better". Consider when GM (GM) sheds its dealer ranks this summer, conservative estimates say it will cost another 150K jobs just from dealership closing and almost 70k of last month's unemployment report (the "getting better report") was temporary census workers, not permanent jobs. Just these two alone must leave people wondering where to bottom in employment is...

Today we here the Administration raised its estimate for the federal budget for this fiscal year by $89 billion, 5%, to $1.84 trillion. The new, higher number is nearly the same as the one provided by the Congressional Budget Office. Remember that one? Early on is was criticized as being "overly pessimistic".

On April Fool's Day I covered the Budget issues here:

But, don't worry, the Obama administration projected today that the U.S. economy will expand at a 3.5 percent annual rate by year-end, a rebound that would be almost twice as strong as private forecasters expect. I can't even really comment on that. It is so devoid of any reality........stunning.

They also expect “housing starts to reach bottom this year and to begin a robust recovery as relative housing prices stabilize,”. Right....we covered that last week here.

Finally the report also said “inflation is expected to remain subdued over the next few years.”

Call it the "Alice in Wonderland" report......


Disclosure ("none" means no position):Long Jan 11 $35 USO calls and UNG Oct. 2009 $15 & $16 calls.

Ackman Talks General Growth Properties

This is an interesting conversation regarding General Growth (GGWPQ) and the DIP financing drama currently unfolding. He also owns $177 million of unsecured debt.

Of course CNBC has the wrong ticker for the company on its chart.






Disclosure ("none" means no position):

Ackman on CNBC Talking Target

Today is Ackman's "Town Hall" Meeting on his board slate regarding Target (TGT)...








Disclosure ("none" means no position):none

"Davidson" on the "Fretters"

so Davidson has a response and a take on the constant fretting about the "frothy" market and the upcoming sell-off they fear/predict. NOTE: I am one of those "fretters" although not shorting....just not buying

The genesis of this was a recent article in Barron's that said in part:

HOW MUCH WOULD YOU PAY, IN ROUND NUMBERS of unmarked bills, for a quick 10% retreat in the Dow? For the kind of 10% correction that was a thing to be feared when we went a couple of years without one, but now would make it easier for an investor to buy stocks that are up 40% from their lows, stocks for which there seemed no rush to own just two months ago?

Most investors, especially those long-only pros who grapple a benchmark for a living, seem to wish for a fleeting drop of 10% or more to provide psychological cover for entry.

More staunchly bearish folks -- among them those who, based on the latest exchange data, have been reloading short positions -- want that 10% as a small down payment on the resumption of the bear's dominance.

The rest of us just pray for the wisdom to know the difference should such a pullback arise.

Strategist Jason Trennert of Strategas Partners sums up a common stance: "Simple valuation analysis leads us to be skeptical about the potential of the market to rally from these levels. The problem, it seems, after spending the last week on the road and looking at recent short-interest data, is that we have a lot of company -- very few of our clients believe the rally is real."

John Roque, the technical strategist at Natixis Bleichroeder who has been in synch with the rally and the preceding collapse, detects an upside "breakout" on the chart of investor frustration, because they have doubted the rally and owned too little of the stuff that has run the most.

The blogger sentiment poll on Birinyi Associates' Ticker Sense blog (http://www.tickersense.typepad.com) last week showed 50% bears to 33% bulls -- almost as many bears as at the early-March lows. In late January, just as the market was ready to roll over hard, 65% of the bloggers were bullish.

Other sentiment indicators are leading Ned Davis Research to get behind the idea that "a monster rally could continue within this secular bear market."

This remains a net positive for the market, the idea that investors (and financial columnists, it should be said) continue to "fight" this move. Sure, they (and we) have been fighting it with some plausible ammunition: the slipshod quality of the leading stocks, the massive speculative volumes in stock options, the spike in corporate-insider selling, the fatigued look last week of the recently indomitable Nasdaq index. These characteristics can, and would, accompany both a doomed head-fake rally and something larger, for sure.

Of this think, Davidson opines:

"This is the type of article that imparts a great deal of information without being definite. From this I get that there appears to be great concern amongst many noted investors, esp. technical types, that a correction is due and most have invested in anticipation of a correction to what appears to be obvious over zealousness by current market participants. I don’t invest trying to catch short-term dips. My time perspective is a business cycle with the goal of adding fresh capital during the down portion of a cycle and removing capital during the up portion.

Reading of the angst of traders not knowing what to over the short term leaves me in a positive frame of mind, knowing that their stance in the market will add additional buying pressure when there is additional recovery in the business cycle.

For business cycle investors this is a bullish environment."



Disclosure ("none" means no position):

Monday's Links

Optimism, PIPP Explained, Gas, Energy

- I disagree, in the interest of full information

- Nice compilation here

- Let's hope so

- A great article on the debate

Disclosure ("none" means no position):

"Fat Tail" Author Ian Bremmer: (Video)

From nationalization to terrorism, social revolutions to government regulations, sudden political changes can generate acute economic reverberations in markets and investments across the globe. In this video interview, Ian Bremmer discusses the value of developing business strategies that help companies and investors limit their risk exposure to these shocks. He also shares political risk–management lessons from his new book, The Fat Tail: The Power of Political Knowledge for Strategic Investing, cowritten with colleague Preston Keat. Bremmer, the president and founder of political-risk consultancy Eurasia Group, spoke with McKinsey’s director of publishing, Rik Kirkland, in Eurasia Group’s New York office in March 2009.






Disclosure ("none" means no position):

Weekend Viewing: "Innovation During Crisis"

See some signs of hope in dark economic times as panelists explore some of the mind-boggling innovations that are changing our lives and can shape the future of the country. Even in the midst of economic free fall, there are signs of hope.

As of January 2009, the United States has built a flying car, found ways to turn algae into fuel, synthetically reproduced organs, had face-to-face conversations with people on the other side of the planet, and built robots to do our house cleaning for us.

Tune in to find out how some of the smartest people in California are trying to innovate us out of disaster.





Disclosure ("none" means no position):

David Sokol in "Cap and Trade"

MidAmerican Energy Chairman David Sokol gives the administration a failing grade on cap and trade. For those who do not know who Sokol is, he very well may be one of the successors to Berkshire's (BRK.A) Warren Buffett