Monday, December 29, 2008

Viva Le France

Of late I've felt as if I was Beldar Conehead. Over the Holidays I've consumed "mass quantities" of food and swallowed beer by the six-pack. Additionally, I'd feel comfortable saying I too was from France, as Beldar regularly answered, since our politicians are inserting the government into more and more aspects of  corporate America. We may soon be more French than the French.

During this period of uncertainty, social change, and paralysis, I've put some money into an American investment bank with a strong French heritage. Egads! An investment bank?

Lazard, Ltd. [LAZ] is the Bermudian successor to the old Lazard Freres partnerships in New York, London, and, you guessed it, Paris. It's been a public company for several years has an excellent reputation around the world.

Lazard is much more of an old fashioned IB than its larger cousins. They offer advise on M&A, financings, and restructurings and they have a large money management business. The money management business is a straight forward annuity which provides steady revenue. The advice business dispenses expertise without potential conflicts as they aren't in the market with proprietary trading and lending like the big houses and we know how well the big house gameplan has worked lately. So do their customers needing advise. Lazard's banking business is picking up and as the market improves they will take market share.

They have the world's largest restructuring business and, unfortunately, this is going to be a growth area. Lazard is well positioned worldwide to restructure large, complicated bankruptcies. A visit to their website to view a list of their representative transactions and engagements will show the type of worldwide clientele. This will be a growing investment bank while the others delever and shrink. 

At today's pricing I think LAZ is a good buy and I have. I think they can prosper in both bad times and during recoveries. I'm hopeful the market also starts to recognize Lazard's merits and differentiates it from the other I Banks by moving its market cap upward. 

Time to check with my other "parental unit" and see what's for dinner.

Thursday, December 25, 2008


Ho Ho Ho.  What did the fat fellow leave us to deal with in 2009? As an economy we've been more naughty than nice over the last 5 years. So I'm worried that we may get the proverbial lump of coal in our stocking and that isn't good as coal has lost huge amounts of value of late. We've all been looking for a nice present and I feel we will be disappointed as we have more difficult times ahead.

Earlier this week I spent my annual, pre-year end, tax planning session with my CPA and our work confirmed my assessment. All of my gain harvesting and bearish bets from the first half of 2008 were eliminated by attempting to catch falling knives in the last half of the year. The good news is that I had enough losses to offset the gains and ObamaHood will not be getting any taxes from me in 2008. Still I don't want a repeat performance in 2009 as the Kabourek household spending machine doesn't know how to shift into reverse, or at the very minimum, neutral. We continue to do our part in stimulating the local economy, so I need to duplicate my first half of 2008 performance and avoid Santa's lump of coal.

If Santa's present isn't a lump of coal, my remaining long positions, less than 50% of investable assets, will gain enough value to not only make me feel good, but offset our spending spree. But, the difficult decision will be when to allocate more funds to equities. A bear market rally of significant strength is a distinct possibility and they can be very painful when the glee is replaced with the old lump of coal. That is the scenario I see and am planning around.

ObamaHood euphoria will most likely generate a stimulus,infrastructure rally that will eventually give way to the realization that joblessness, tax receipts, capital spending, and ongoing  credit weakness' will continue long into the future. My current covered calls expire in January and I'm nicely in the money at present. If we rally soon and my shares get called, I'll get about a 20% upside from the time I wrote the calls and I'll gladly take that as I will just buy more shares and write more calls against them. I also anticipate adding S&P 500 index positions when I see my calls being eroded by a rally. But I do not plan to own the spiders long term. I think the rest of 2009 will be a return to the 700 S&P levels of a month or so ago and I'm not making the same mistake as this year. I'm going to keep my first half gains in 2009. I'm not going to be as "smart" as I was during the last half of 2008.


Saturday, December 13, 2008


The past two weeks have felt good. My attitude has improved, I've taken the mental "for sale" sign off my assets, frequented expensive restaurants, and even done some small, deferrable, home improvements. It's amazing how much better you can feel when the DOW retraces 1500 points. 

While I feel better, I'm also a realist. I don't believe we're in the process of moving higher, stimulus or no stimulus. The headwinds are severe and not all baked into the cake as yet. We may move somewhat higher, but we'll be coming right back down. So, as I reported recently, I've written covered calls and lightened some long positions. I've increased my gold ownership and inverse bonds. Both will help further out when inflation starts screaming. The inverse 10 year treasuries may not help as the economy deteriorates further.

So far the Fed, Treasury, and Congress have attempted, ineptly and impossibly, to neutralize the necessary correction on housing, investment banking,commercial banking, and the auto industry. What's still to come? Here's my list of 2009 problems:
  • Emerging market sovereign debt. Developing countries have borrowed huge amounts and, with economies crumbling, cannot repay. We'll need to create old-time Brady Bonds to hide this mess for a few years. The same cast of characters, big investment banks, domestic and foreign, insurance companies, and hedge funds were at work here.
  • Municipal Bond defaults are coming. You've read about California's problems and the other states and cities lining up for handouts in Washington. Their claim is that they have only a liquidity issue. Wrong. They've built empires and now tax revenues are falling and they are not even going to be close to being able to pay their debt service. Tax increases will only compound their problems. Defaults are inevitable with bondholders taking losses in the restructuring. The yields are high for a reason.
  • Leveraged Buy-Outs are toast. They've stayed alive by refinancing when rates were dropping. A weak economy is going to kill their profitability and bankers won't be in a position to restructure creatively. Bankruptcy restructuring will become the LBO norm. Equity and bondholders will both lose, especially the stock ownership.
  • Public Pension Plans and University Endowment Funds will increasingly admit their mistakes. Both were the favorite sales target of all of the go-go financial ideas of the past decade. They will take staggering losses. The bad news is that the public pension plans will come back to cities and states and demand more funding to keep their obligations kosher. That will mean tax increases or program cuts elsewhere. Universities that built bloated structures, all did, based upon higher tuition through endowment help and student loans will find that neither are as plentiful as anticipated and will cry for help from the states.
  • Worst of all, the US Government and Congress, will find that tax revenues are woefully short of expectations. In the face of bailouts of all nature, massive stimulus spending, and Federal Reserve printing of money, the World will see that the U.S. tax receipts are slowing dramatically. Much less capital gains and corporate profits than in the Bush era plus a higher unemployment rate and less personal income tax doesn't fund debt service on tons of new, and old, treasury debt very effectively. That in itself should induce higher interest rates, but it will also lessen the safety trade into treasuries and this will move interest rates upward.
  • And we're still not done with crazy derivatives gone wild. They will be with us for years as they blowup and unwind.
The reasons I've listed above cause me to stay cautious by keeping lots of assets in reserve, albeit at lousy returns, and avoiding future falling knives. I enjoy thinking that I can find an undervalued stock so I'll forget my own warning and buy stock periodically, but I believe that I'll make more money in 2009 on negative bets on the market than I'll earn on my long positions. My bet is that after the euphoria of the Obama stimulus package dies in February, the market will be heading South once again due to the list I presented above. I've convinced myself that the odds of going down are higher than those of having stocks increase in 2009.

Who pays a special dividend in a credit crisis?

Werner Enterprises may be stupider than their, stereotypical, over-the-road drivers. Time will tell, but Werner's latest decision is a blue beauty.

One December 5th the company paid a $2.10 per share special dividend, or about $150M. They had slightly less than that amount on hand in cash. The dividend effectively wiped out their cash and required borrowing under the company's line of credit.

In face of the effects of the recession, less freight hauled and increased competition, most companies would find some solace in having $150M of cash and an unused credit line. But not Werner. Evidently the Werner family had better uses for the cash than the company. It hasn't helped anyone's net worth as the share price has dropped more than the amount of the special dividend since it was announced.

Now that the cushion is gone, Werner has to accumulate cash as quickly as possible. Earnings alone won't fill the till fast as they only make about $75M per year so capital expenditures and SG&A are going to need a trimming. Werner's operating margins aren't as stellar as some of their competitors so they probably have fat available to cut, however, they should have cut the fat and forgot the special dividend.

While cash and short term loans don't carry high rates of interest, WERN will miss the interest income and now be adding more interest expense. That's on top of a noticeably slowing level of freight and some pricing pressure as competitors attempt to keep trailers, tractors, and drivers utilized. The company, due to the special dividend, has set itself up for a disappointing quarter or two. It also limited its ability to be among the largest consolidators as weaker competitors fail over the next six months.

The special dividend was so stupid, in my mind, that I've sold a few shares short. Werner isn't going to fail or drop to the low single digits, but the recessions impact over the next 6 months will impact earnings and impact its share price downward before the benefits of a consolidating industry improve matters.

Monday, December 8, 2008


Buying stocks in this market has not been prudent of late. All good ideas have ended up worth less. They may, hopefully, end up profitable over time, but they sure affect the attitude and confidence during the downward spiral. Still buying or betting against is interesting and sitting on the sidelines is dull. So I've added Bunge, the South American agricultural giant. The stock is cheap, the business diversified by business and geography, the balance sheet is sound, and management competent. The spreadsheet compares other agricultural companies if one has decided that it's prudent to have exposure to farming and world population.

Down & Dirty Comparison

ADM 1.22 5.4 0.63 4.33 6.6 0.63 9.3
BG 0.66 2.9 0.49 4.99 7.42 0.36 4.97
MOS 1.6 2.7 0.19 32.35 21.97 0.93 3.04
POT 3.03 4.4 0.57 46.08 24.67 1.27 3.64
AG 0.85 2.97 0.31 6.56 7.28 0.36 5.21
DE 2.07 8.6 3.43 10.99 5.05 0.76 8.12
ANDE 0.54 3.8 1 3.73 6.93 0.4 4.84
VMI 2.05 5.86 0.48 11.99 11.69 0.67 10.81
LNN 1.87 4.87 0.17 13.1 13.67 0.46 9.39
MON 4.38 12 0.19 25.39 11.64 0.63 14.81

I apologize for the zigzag pattern that the spreadsheet came over from the Mac to the blog program, but you can follow the numbers with a little effort, after all I created it at great effort.

BG sells at the lowest percentage of book with only The Andersons lower, but they are having issues. You can also buy it for near the bottom of multiples of cashflow. Debt isn't excessive. You buy the growth at a PEG ratio of only .36 and forward earnings are only 5 times. Even if analysts estimates are off by half, you buy the company for a forward P/E of 10.

Bunge is a reasonable bet for the long haul. I hope it doesn't prove to be a nightmare in the short run.

The Obama stimulus rally has had serious legs the past several days, moving both infrastructure plays and the market, in general, up nicely. Investors have bid up all companies associated with Obama's sketchy stimulus outline. Among the biggest movers have been the aggregate companies as they are among the first to supply product in road construction projects. The concept makes sense except for the fact that they were on of the few sectors that wasn't cheap. I had planned on adding shares when Martin Marietta Materials sank to a reasonable multiple of Enterprise Value to EBITDA. But its slide abruptly stopped with all of the stimulus hoopla. It moved quickly up from $60 to $105. Vulcan and the other similar companies also rose dramatically. I can't bring myself to by MLM at the current price. I also won't bet against it like I did successfully last year as there are better targets.

Vulcan Industries, VMC, is the industry leader and has several negatives that can nullify any boost from highway spending. They are weighed down with lots of debt from last years huge purchase of Florida Rock, have been using their revolver, and have about $300M of debt coming due in 2009. Additionally, they have been paying a dividend of $1.96 and are expected to earn only $1.90 for the year ending December 2008! Analysts have projected earnings of only $1.98 for 12/09. If they keep the dividend the same they will be paying out 100% of earnings. You can't do that for very long. You have even less time if your bankers don't think it is a good idea. Vulcan will cut their dividend and they should.

Vulcan is a three legged stool with two legs broken and one promised to be fixed. Residential construction is obviously still in the doldrums and commercial projects have halted. The commercial activity that is ongoing was funded several years ago and those projects are past the rock and concrete stage. Vulcan is in for a 4th quarter that is not pretty. They will probably make money, but it is likely to be the 5th quarter in a row that they missed analysts expectations. The 1st and 2nd quarters of 2009 will also be skimpy as it will take awhile for any stimulus projects to kick in. During that time the dividend will be cut and debt ratings could be reduced.

I'm not going to short VMC tomorrow as there is probably still some piling in that will occur before year end as mutual funds want to show infrastructure plays in their portfolio. But, after the New Year I think I'll pull the trigger. I haven't talked about Eagle Materials, but I may diversify my short by adding Eagle. They are in aggregates and concrete like Vulcan, but also have larger parts of their business in cement and wallboard. They will get less help form a highway stimulus and their stock price has risen like they would.

The most reasonable infrastructure play is Trinity Industries, TRN. They are big in wind towers and highway crash cushions, both beneficiaries of a likely Obama stimulus. And TRN can be bought for good value metrics.

If Obamahood is going to take from the rich I want him to give to Trinity. Here's to Change!

Monday, December 1, 2008

At least PNC's dividend will produce a 3% yield

If PNC doesn't cut their dividend payout, and they haven't telegraphed that possibility, then I will earn a 3% dividend on my investment while I lick my NCC wounds and hope that any deal that PNC got gets reflected in its stock price. So far PNC is stuck in the financial stock downward spiral and hasn't signaled that the market sees any great benefit in acquiring NCC at a bargain price. Since this deal looks like it will go through I'm rooting for the bankers at PNC. I also am hopeful of a few pennies of recovery through settlement of class action suits against NCC's director's liability insurance coverage.

In my current state of paralysis it is very hard to commit cash to any investment class. On Friday I wrote covered calls on almost all of my long positions and pocketed some cash. These will either expire and I'll still own the stock or we'll see another bear market rally, as today shows last week was one, and I'll gladly be taken out before the eventual decline. Outside of call writing i'm frozen. I can find very good companies selling for private company multiples of cashflow, but every time I've bought I've been sliced by the proverbial falling knife. Corporate bonds are sporting very nice yields over treasuries as are preferred issues, but I haven't pulled the trigger yet. Waiting seems the best decision.

The only bright spot on the horizon is that after offsetting gains taken earlier in the year by taking some current losses, I intend to withdraw as much as I can from my IRA to use all of my deductions and pay zero tax. I never contemplated being able to distribute IRA earnings without being taxed, but I'll take small gifts any day and, lately, i need small gifts to make up for market losses.

Sunday, November 9, 2008

Something stinks in Denmark & I smelled it in Italy

I’ve just returned from several weeks in Italy. We had a great time in a beautiful country. I would have had a better trip had not NCC sold itself to PNC for a pittance.

The company has never issued a press release that detailed their reasoning. One newspaper article alluded to finding out that the Treasury probably wouldn’t put capital into NCC and the FDIC wouldn’t guarantee their debt. When word got out they would be at a disadvantage to their peers. OK, but why sell for peanuts? They had close to $1B of Visa stock and an asset management subsidiary worth several hundreds of millions. They touted the fact that they had the highest tier 1 capital of all big banks and told analysts that they had no need to raise capital or sell the company. New tax rulings would have made their bad loans more valuable.

The loans had to be worse than presented and that stinks. But that’s the way it goes. At least it is a stock deal. That will likely push the holding period into the capital gains/loss timeframe and, most importantly, if PNC did get a sweetheart deal, allow NCC shareholders to participate in PNC’s benefit. This assumes that the market ever recognizes such and moves PNC up. It will be the 5th largest bank and not pay any taxes for the next 5 years.

My NCC position is underwater and I’m going to ride PNC for awhile.

Tuesday, October 21, 2008

NCC’s second quarter was improved

A bank run was the wild card that could have derailed NCC’s turnaround. The latest FDIC increase to $250,000 has all but eliminated that possibility. NCC has only 5% of their funding in uninsured deposits. Therefore I’m not going to worry about that risk any longer.

Neither should other bank stock investors. That leaves credit quality and capital dilution as remaining worries. Now that the deposit run fears have ebbed, investors should be able to make estimates on the remaining two risk areas and come to the same conclusions that I have. If so, the stock price will rise.

NCC is cheap as a survivor and cheap as an acquisition. At quarter end NCC had a bok value of about $9ish and tangible book of $6.50ish. At a $3 share price it is selling at 1/3 of book and 1/2 of TBV, much lower than most regional banks. That would be warranted if their oan portfolio was going to deteriorate significantly requiring a capital raise with related dilution. but NCC already raise their $7B of capital in April which allows Tier 1 capital to be 11%, the highest of big regional banks. they also have a $4B loan loss reserve. If loans deteriorated sharply and they lost $8B that would eat through the LLR and require another $4B of provision to write-off the loans and an additional $2B to replenish the reserve. That $6B would be equal to $3 per share, leaving $6 still in book value-twice the current share price. I don’t think they will lose $8B and eventually investors and acquirors will come to the same conclusion.

The new Federal capital injection program will augment NCC’s capital and that of other regional banks. Deals will be easier to do and capital will be available. I remain hopeful that the share price will move up over the net 3 months. Ideally there is not an acquisition and the price moves up over the next 12 months as the credit picture gets clearer and I enter capital gains territory.

NCC is a special situation and similiar opportunities will present themselves over the next 5 years. These mispriced investments are where money can be made. The broad market is going to be mediocre at best. There remains too much debt to liquidate and the resultant slowing of consumption will result in a slower growth economy. We are not going back to endless credit, 7 year car loans, large credit card lines, home equity cashouts, and exotic mortgages. Only the credit worthy will have access to cheap credit and everyone will save more. We are entering into an era of anti-consumerism. it won’t be the time to invest in index funds as the overall market will not do well over thenext 5 years.

Additionally we still haven’t learned our lessons. We still pay attention to and invest in activities that have no economic basis. We constantly worry about the VIX and base decisions off this invention. I’ve gone to the Chicago Board of Options Exchange, read the VIX description, and I have no idea what it is. We’ve got another storm brewing in synthetic CDOs. Real CDOs consist of lousy bonds, but at least bonds. The synthetic variety consist of income derived from credit default swaps and are leveraged. Great! Until we work through all of these crazy investments created by brilliant ivy league types and get back to plain vanilla, logical investment structure we will continue to have problems in both the credit and stock markets.

I’m staying cautious because of the forgoing belief and looking for only special opportunities. Remain cautious.

Saturday, October 11, 2008

Mass and personal hysteria are rampant

All of my remaining stock positions have been killed over the past several weeks. They’ve fallen faster and more severely than I would have imageined. Gold, inverse 10 year treasuries, and inverse nasdaq were not able to compensate for the swoon in equities. National City is the position that concerns me the most because it contains the most risk and has developed into a large position. So I’m going to talk to myself and see if I can continue to convince myself that I’ve made a smart investment.

I remain convinced that NCC has adequate capital and liquidity at the holding company. The major risk is a bank run and so far, so good. The bank has lots of crappy loans, but the capital, reserves, and earnings to work through those---if there isn’t a large deposit run.

The financial press was active Thursday and Friday talking about NCC selling themselves to PNC, BNS, or someone else. Nothing could be confirmed. If there is a deal, will it be a market oriented transaction or a FDIC forced marriage? Obviously I’m praying for the former.

NCC now seels for $2. It has a $9.50 book value per share and another .50 per share in Visa; so let’s figure on a BV of $10 per share. they have another $2 per share in their loan loss reserve. That’s $12 per share to handle bad debts. They have a $20B liquidating portfolio [ NCC’s definition for lines of business they are no longer active in ]. The entire portfolio is not poor credit although that is where the bulk of their credit risk resides. On a per share basis, they have $10 per share segregated here. They are not going to lose the entire amount of each loan. If they were to lose 1/2, and that would be 4 times what the bank thinks they will lose, that is $5 per share. That still leaves $7 per share of value, or $14 billion of capital to face the recession and any weakening of the remainder of their loans. Unless a sale is a FDIC forced shotgun wedding, the price is going to be closer to $7 than $2.

Beyond the back of the envelope math above, there are several other influences at work that encourage a deal. they are:
1.The new TARP bailout bill now allows acquiring banks to use write-downs of an acquired bank’s portfolio to eliminate taxes on the combined operation rather than just adjusting the balance sheet under “purchase accounting.” Just like Wells Fargo was able to make Wachovia work without FDIC assistance, someone can see the logic in acquiring NCC as long as the acquirer maintains a good, profitable business.
2. The Treasury is exploring its new authority to make direct investments in banks. These investments, most likely prefered stock, will give banks the strength to survive, rebuild earnings, and eventually redeem the government’s preferred securities. This option is a new one that could be attractive to NCC should it determine that it needs more help. Acquirers know that the possibility exists for Treasury money so they need to hurry and bid correctly if they want to expand their footprint.
3 Believe it or not, there are still some banks that sell at prices greater than book value. PNC and BNS are two of those. there are others. These guys could do aall stock deal, at an attractive price to NCC, and since they were paying with paper do well for their shareholders, especially with the new tax rules. If an all stock deal happened, i wouldn’t hold the stock for long. Today I’m not sure I would hold on until I hit the capital gains 12 month threshold.

I still nervously prefer for NCC to ride it out, but would thankfully accept a decently priced buyout. The past several weeks have been scary and taking a gain would be soothing in these stressful times.But I sure don’t want them to give the bank away and I don’t think they will. The Corsair group didn’t put $7 billion, at $5 per share, in for grins. They too were looking to make multiples of their investment, not a paltry return. But in these times even Corsair could be convinced that a $7+ deal makes their $5 April investment look acceptable. Plus, as part of a larger, stronger bank their stock position can still grow dramatically as the economy improves.

I’m guessing a deal happens and am hopeful that my analysis is correct on pricing. I can make a case for quite a bit more in the deal price, but I am also aware of the risks involve and the times we live in. I’d take $7 and run like I stole something.

Happy Columbus Day.

Saturday, October 4, 2008

This squirrel would buy TRN on Monday

I am anxiously awaiting the 3rd quarter reports. The market has been viscious lately and taken all companies down indiscriminately. At least I think it has been indiscriminate.

Two of my biggest losers have been ADM and TSO. Both have been killed by hedge fund deleveraging. Additionally, ADM has been punished by the commodities rout even though it is a processor, not a raw material provider. Its earnings should look good and hopefully will see some recovery in share price. Tesoro has been pushed down by fears of demand destruction. People may be driving less, but oil is costing TSO a lot less and they have dragged their feet on decreasing the price of gasoline. Earnings should be decent and hopefully I can recoup some of my money. NCC also will provide more clues to their collection efforts and future pofitability. So, I’m looking forward to the 3rd week of this month for answers.

I have opined about waiting to buy shares and then index funds when the time is right. I still believe that is the prudent course of action. But I’ve become intrigued by a company that is causing me to look in the mirror and see if my pair even meagerly compares to my squirrel friend. If the market hasn’t caused severe shrinkage, I plan to buy some shares. But, this time, I will build my position over a three month period in case the market continues to hammer even leading companies.

Trinity Industries is the vixen that has caught my eye. TRN is an American manufacturer with large operations in Mexico. Its been around since 1933. It is the largest manufacturer of railcars, barges, and highway guardrails and crash cushions.It is a leading maker of wind power towers and LPG tanks. It also has a large railcar leasing business and is in aggregates and concrete in Texas, Arkansas, and Louisiana.

Why buy a manufacturer? Because this one is very good and very cheap. It is, and will continue to, benefitting from the following trends:
1.Green power. their wind tower business is up from $11M in 2004 to $425M this year. their tower backlog is $1.5B!!
2.Barges and trains are efficient users of fuel and both fleets are old. Both are in the midst of a large replacement cycle which has many years to run. TRN has a backlog of over $3B, 4.6B total, which gives excellent visibility into 2009. Almost all railroads and barge shippers are doing well financially so they can buy and pay.
3.The movement of renewable fuels is by train and barge and is growing. Agricultural products and coal also move the same way. All of those areas remain strong and subject to government subsidy.
4. The current economic stimulus bill enhances accelerated depreciation which encourages purchases of manufactured goods.
5.Any upcoming stimulus likely will focus on highway spending which will benefit the company’s guardrail and crash cushion business as well as their concrete and aggregates business in the important state of Texas.

The current share price is attractive. At $21 you are buying the company for only 4.5 EV/EBITDA, .88 of BV, 6X forward earnings, and a PEG ratio of 60. This is a company with a ROE of 19%, only 48% of capital in debt, and paying a dividend [yield about 1.7% ] on the 10th. There $425M revolving credit agreement runs until 2012, has no usage outstanding, negating the need to access credit at this perilous time. Their 2nd quarter earnigs were excellent and they raised annual guidance at that time.

Over the past month the share price has decline from $34 to $21. Some of this was due to their largest shareholder, Jeffery Gendell [hedge fund], reducing its stake in the company. If what I’ve laid out above is accurate, then he sold to raise cash for redemptions, not dissatisfaction with TRN’s performance. He’s sold abot 3M of his 10M shares. He may continue to sell and depress the price further. Several days ago TRN bought back 2M shares, at $21.15, privately, likely from Gendell, which brings their purchases for the 3rd quarter to 2.7M shares. They spent $61M or $22.50. Book Value is $22.50! That type of repurchase is unheard of and an excellent use of corporate cash as opposed to the way most corporate managements use repurchase programs to prop stock or disguise the impact of stock option issuance. These purchases will actually help earnings per share and benefit common shareholders.

Good balance sheet, good income statement, good backlog, good customers, good industries, good government incentives, good guidance, good corporate governance, good entry price equals good investment. But I’m only going to buy a little at a time as my hands are still bleeding from some of my other well thought out blunders. It’s time for me to look in the mirror.

Wednesday, October 1, 2008

Be sure you are “comfortable” with your positions

I’ve been fixated of late with NCC, but I’ve given a lot of thought to my positioning of investable assets. WWY closes October 6th and I’ll possess more cash, but that’s a good event. The problem side of that is you can’t earn much in short term treasuries, but you can’t lose either! I continue to watch BUD, as a cash alternative, but am not convinced that it’s a cinch deal yet.

I want to buy stock. I’ve been ready with buckets of liquidity and am prepared to buy S&P 500 index funds when I feel the time is right. Usually I prefer to identify individual stocks as opposed to the use of diversified mutual funds or index funds. But since the market indescriminately rises 20% quickly after a market bottom, index fundswill make sense. But, I just don’t think the time is right, even after the bailout legislation.

Why aren’t we ready to celebrate and have stocks move upward? Here are a few, likely, probabilities:
1. A significant number of hedge funds will fail and the list of pension fund customers will affect property taxes
2. Federal Home Loan Banks will be identified as all too similiar as fannie and freddie and full of problematic real estate loans
3. Credit card delinquencies will accelerate anf losses will follow
4. Foreign banks will increasingly need additional capital
5. The safe banks, Northern Trust, State Street, and BONY Mellon will lose huge amounts on securities lending activites to hedge funds
6. All comparisons for homwe and car lending will continue poor as many of the former borrowers were not credit worthy and will not qualify going forward. This means we aren’t going back to past levels of new car sales, new home sales, furniture sales, etc.
7. Disclosure by many companes the “cash” of their balance sheet isn’t cash, but illiquid securities of dubious value which changes the conservative nature of their operation.
8.Emerging markets and commodity safe havens will continue to collapse.

Fun huh! I’ve made myself sick.

Keep your powder dry and invest very selectively. I’ve got several speculative positions and will stay with them and a few core positions that also will stay put. I’ve felt lots of pain and fear with the spec positions, but remain stubbornly convinced that i am correct in spite of 1 through 8 above.

Time to turnoff this computer, refill my cocktail, and watch some mindless TV program.

Tuesday, September 30, 2008

Where are the NCC bulls?

I usually do well in the market when I leave town. It didn’t work that way while I was in LasVegas! National City has come under extreme pressure and now sells for only about $1.40.

I’ve written why I believe the company is undervalued and won’t reiterate my investment thesis. Over the past two days 7 analysts have raised ratings for NCC. All have said NCC is in no danger of failing and not like WM and WB. The company has again stated that it has ample liquidity, capital, and is still growing deposits.

Only several days ago the company converted their newly raised preferrd stock into 1.4B shares of common stock. This stock was raised at the equivalent of $5 in April. The owners are institutions that had a look at the books. They shouldn’t be among recent sellers at under $3. Their were 700M shares outstanding before the new 1.4B. Over 500M have changed hands on Friday and Monday!! Short selling has been banned so it hasn’t been a bear attack. Who is remaining as a seller? We should be near the end of selling pressure other than index funds. I think NCC is set for a rise as their shouldn’t be any sellers left.

If they don’t have a deposit run that isn’t supported by the Fed and FDIC, this stock will go higher. We are in historic times and betting on NCC is getting dicier daily, but I believe we go higher from here as the ownership group should be supporting the stock from here on out.

I hope this is the logic of a crusty credit analyst as opposed to the views of dice roller with a Vegas system.

Saturday, September 27, 2008

I hope NCC doesn’t put me in line

I’ve forgotten about BUD and concentrated on National City this morning. Another analyst, Fox Pitt, raised the stock to Outperform before the market opened. The JPM marks on the WaMu portfolio were not terribly out of line with what NCC could handle quite easily.

However, a run was the straw that broke the camel’s back at WaMu. Now WM was only 1/2 funded by deposits and their debt was shakier than NCC’s. NCC is a net seller of fed funds and euro dollars. They also have about 3 years of cash at the holding company level to handle future years debt maturities without upstream dividends from their banks. The fed’s discount window can fund any deposit run, within limits. So everything should be ok. But investors are running for safety today and they don’t care. They don’t want to be wiped out like the WM shareholders.

You may see me on the breadline or at your doorstep if NCC does follow WM. I’ve bought 3 times so far today and it keeps going down. I’ll probably put some more money to work before the day is over. then I’m off to Vegas to visit Neil. Gambling out there will be childs play.

Friday, September 26, 2008

Bud may look this good tommorrow

A press release today announced the closing date of the WWY deal. It is set for October 6. If it closes then, and there isn’t any reason why it shouldn’t, I will have earned about a 14% return. Sure beats a money market fund or short term bills.

I’m interested in InBev”s proposed acquisition of Budweiser. The arbitrage spread is about $3.50. The deal price is $70. Tommorrow could be a terrible day in the markets. then again it could be a barnburner. If it stinks, due to the WaMu failure/takeover and the disintigration of the wall street bailout, the market may take BUD down to the $65 range. That potential $5 spread gets interesting.

The BUD deal isn’t as clean as the WWY acquisition. The FTC could come under pressure from Missouri and other stakeholders and the deal could get nixed. The Europeans shouldn’t be a problem. Financing, per InBev is committed. But, in this crazy credit market who knows. Deals can fall apart.

If I buy and the deal falls apart, the stock will retreat to the $55 range. I owned the stock before and I’d be happy to own it again at that level. If the deal closes before yearend I’ll get a return, like WWY, that is far superior to short term yields.

Lets see what tommorrow brings. I may end up with some BUD and some more NCC if it gets through into the WM rout.

Thursday, September 25, 2008

The Bailout Legislation can’t prevent recession

Bull markets don’t manifest themselves in 200-300 point moves in the Dow. they creep upward over time. 300 point moves are symptomatic of bear market rallies. Lately we’ve had seesaw movement, but we could see several big up days and that would be a good time to continue to lighten up in equities. I do not think there is any danger of missing the next bull leg any time soon. The market may discount a lot, anticipate the future, and turn upward six months before the actual economy does but we are more than six months away from prosperity. Again, we aren’t falling off a cliff, but we’ve got at least another year of bad times. So, I continue to be light on equities, look for “singles”, and keep my speculative plays to a minimum; and watch those closely as I intend to be huge index buyer when the time is right.

The “singles” are trades like WWY that has given me $1.50 over the past couple of days. Additionally I’ll get .35 divident about October 11th. The deal should close before yearend producing good use of cash as opposed to TBills yielding zero lately. The market will give more chances like Wrigley which I view as non-risk since I get my entire capital back soon as it isn’t dependent on Mr. Market.

I only have two, long speculative positions at present, SMBl and NCC, and I’m pleased with both. Smart Balance has moved up nicely in this bad market.They have received two new BUY recommendations over the past two days which is encouraging. I’d consider buying more if it were to pull back with the general market, but so far it has gone up. That feels good.

National City has also performed very well, up 25% over my basis.It to has been recommend as a BUY by Goldman Sachs several days ago. More importantly it wasn’t downgrade by Sandler O’Neil when they reevalueated regional banks. oppenheimer also took a look at the banks and lowered many. Those external moves are comforting.

The company’s balance sheet is also somewhat easier to understand now. Shareholders officially approved the conversion of $6B of preferred stock into 1.4B common shares. All of this was know since April, but not official. Now we can see a bank holding company with a 11B market capitalization and a book value of approximately $9, plus a Loan Loss reserve of 3% of loans outstanding.

The bailout cannot hurt NCC. If they can offload loans at prices that reflect current reserving it will be wonderful. The government will likely be more generous than the vulture buyers that have currently looked at portfolios in the marketplace. NCC has said “no thanks” to current pricing. A $3.5B LLR is huge and even though they have a huge amount of bad loans NCC is close to being fully reserved.they’ve said that they think the maximum remaining losses are about 2.5 B. If accurate, that would leave them with a clean book, normalized earnings, and a LLR of still slightly over 1% which is considered adequate for commercial banks.

The bank has a “liquidating Portfolio”, the businesses they’ve exited, of about $20B. This is where the biggest problems reside. All of the loans or loan types are not bad, but they could have issues. About half are nonprime and construction. These two are manageable as they are secured and many will pay and those that don’t will result in loss, but not total loss. They should be done with the construction portion soon and will work throgh any resultant losses over the next several quarters. the subprime portfolio will likely be sold to the government, hopefully at the reserved amount plus a little.

The big boogieman is the “national home equity” portfolio that amounts to about $10B. One-half was originated for portfolio and one-half for sale. While both are risky, the “for sale” half has performed worse. Delinquencies here lead to losses as the collateral gets “iffy” given falling property values. So far, charge-offs haven’t been gigantic. But they could get that way.

Events look positive for NCC, but the 3rd quarter credit results will start to clear up the picture. Hopefully, the past due loans and non-performers will have stabilized, the bank’s view of remaining loss will not increase, and the loan loss provision will be down significantly. If those things happen we have an over-capitalized bank that just several days ago received stockholder authority to increase its shares to 5B which means they could use stock and current excess capital to double its size through acquisitions in the resolution of the nations bank crisis.

Wednesday, September 17, 2008

Gold is your friend

The only good news seems to be gold and a nearness to the bottom. The S&P is nearing the point where it may make sense to move out of cash and into a S&P index fund. I haven’t done that yet, but I’m thinking about it.

In the meantime I keep buying WWY and the market has given me even a better deal as it now is back to $78. That’s $1.50 off the price of two days ago and $2 at closing. Financing is locked in, the Euros have approved it, and the American regulators can’t be too far behind. The deal should get done this fall. The main benefit is that it’s safe. I won’t get rich off this deal, but it won’t go down like the rest of my long portfolio.

The Bud deal has also developed a big spread, but it has more hair on it than WWY. InBev says the financing is firm, but you do have regulatory risk. I’m staying away from arbitraging this asquisition.

Every two or three minutes I reassess my position in National City. I’ve become a big believer in this bank holding company and have acquired my stake at a few pennies over $4. But it now trades for quite a bit less.

Yesterday I listened to their Chief Credit Officer on a panel discussion on loan losses and he was articulate and knowledgable. I was heartened. Today I reviewed the Q2 balance sheet and reminded myself that they have a very small amount of fed funds and repos that need rolling. The holding company has enough cash to fund all debt payments for several years. So liquidity should be fine; and the Fed is standing by in case the press scares depositors into a run on the bank. I also reconfirmed that they have a very small investment portfolio and it isn’t toxic. Their fannie/freddie preferred exposure is less than $10M. I don’t know their swaps/derivitive exposure and i worry about that.

Lower short term funding rates helps NCC and lower refinancing mortgage rates should help mortgage and heloc customers. The heloc refis could really be of benefit to NCC. If a lot of mortgages/helocs get refi’d to the government, even with a haircut, that starts putting the balance sheet in order.

Anyhow, I bought more today and continue to be either really smart or dumb as dirt.

Monday, September 15, 2008

Was it the scotch or the market?

I spent a beautiful fall day at a Prep golf outing at OCC. I played decently and felt good as I left the club after good camaraderie, tasty food, and a few cocktails. The world was good. Then I arrived home. The dog was glad to see me. Then I turned on the computer and CNBC. What a terrible day.

I am eternally grateful to be mostly in cash equivalents as my equities took a beating. The television is telling me that we will see another vomit inducing day tomorrow as AIG bites the dust. WaMu and Wachovia are in queue and they will be the subject of panic soon. The big scare will be determining the impact of all of the derivatives, swaps, and insurance contracts and guarantees written by AIG and Lehman. It’s about to get scary. capitulation can’t be too far away. it may soon be time to buy, but not yet.

In the meantime, this morning I bought more Wrigley with additional cash that i had available. WWY has been trading at $79.50 and will be bought by Mars at $80. It traded off .50 in the early mornig frenzy. We’ll get that .50 back soon and another .50 in the next 60-90 days. This isn’t exciting, but I’m not going to lose money on WWY and I want to have money for stock purchases when all the credit disasters shake out.

Saturday, September 6, 2008

A bailout shoud put a floor under housing values

All the leaks say a bailout of Fannie and Freddie is imminent. The majority of speculation affirms the Treasury’s assumption of GSE debt [ a no-brainer ], plus the leaving of preferreds protected while diluting the common with the new government equity. The common should be wiped out. I can’t find any difference between FNM common and Continental Illinois or IndyMac common. Those holders bet wrong and they should lose, not just lose almost all. The Preferreds should lose also, even if it hurts financial institutions that were allowed to use those shares as regulatory capital. But I guess that would be embarassing and inconvenient. So our leaders will say that those investments are good with a waive of the wand.

Is this rescue wise? Who knows? They don’t ask Crusty and without my Carnac turban on I can’t divine the future. It certainly pushes gazillions more obligations out to the future along with medicare, social security, and the normal treasury obligations. We had better remain the world’s financial bastion.

But a rescue may help NCC. I don’t think it will help the market in general, the remainder of 2008, as I don’t believe a housing bottom will take hold that quickly and, even if it did, and it can’t compensate for the tax loss selling and Obama selling that will accelerate as we head toward year end. Any rally will be sold into to harvest losses and current long term capital gain rates. But a slowing of the decline in real estate values increases the probability that NCC’s loan loss reserves are adequate and it’s capital sufficient.

The bailout will stop the foreclosure bandwagon on guaranteed loans as the new GSEs will restructure the individual loans to a level that the borrower can pay, honor the guarantee to the bondholder, and stuff the taxpayer, down the road, with the shortage. The avoided foreclosures will slow the amount of foreclosed homes on the market and start to stabilize prices. Non guaranteed homes will still be foreclosed, as will HELOCS, but the numbers will become more manageable. If the national builders don’t go bullistic, and it is up to the banks and wall street to monitor them, home inventory should start to lessen and prices stay at present levels.

Falling prices are the HELOCs worst nightmare and NCC has a boatload of home equity loans. Their subprime and builder loans are less of a problem. The HELOC book is the dangerous one and the main reason they have set aside so many reserves. If home values stabilize it gives NCC a chance to get out of lots of their bad deals with smaller losses vs complete losses if prices were to continue to decline.

So here is the new plan based upon the upcoming GSE bailout. I will make lots of money on NCC and hold the stock until a future Congress again lowers the capital gains rate and death tax which will allow my family to move to New Zealand and avoid the financial reconing that has to eventually be faced in the USA. I hope my kids like lamb.

Different subject, but I’m amazed how well SMBL has behaved this past week in face of the market’s turbulence. I don’t know what that means, but I think I will slather some on a piece of rye bread and make me a sandwich and go watch some football.

Tuesday, August 12, 2008

NCC catalysts

6/30 Adjucted capital is as follows:
Equity 18.0
LLR 3.4
Visa 1.0
AAM .4
Remaining losses [3.8]
Remaining capital 19.0B
If 2X co. est. [3.8]
Twice the loss Cap 15.2B

At 6/30/08 NCC increased their estimated remaing loss in the worst portfolios to 3.8B. The losses are 2.5 in Nat HE, .3 in SubP 1st Mtg, .5 in SubP 2nd mtg, and .5 in Const. They charged off 1.3B YTD so they have taken or identified 5.1B of losses. But they raised 7B in a terribly dilutive offering so we should expect more hits in these portfolios or significantly larger than normal losses in the core business. But, the 2X estimate of 7.6 still to come would still leave them well capitalized and with a clean balance sheet.

So what could move the stock before it becomes evident that they have enough capital? The following events could be catalysts, in no particulat order:
Sale of the Liquidating Portfolio
Reduction of NPA and LLP in upcoming quarters
Sale of Allegiant Asset Management
Large new positions by leading value money managers 6/30 or 9/30
Strong BUY recommendations by Bove or Whitney
Elimination of FDIC Memo or SEC informal investigation

Those catalysts could accelerate the stock price movement. The underlying earnings will do it by itself eventually. NCC has pre provision and pre tax earnings of $600 per quarter. A $150 M ongoing provision gets pretax earnings of $450 0r 1.8B per year. With 2.1B shares outstanding, thats .85 eps. Using a 10P/E, 12X tax effected, gets an $8.50 share price on todays earnings stream and emphasis on collections, not growth. Normal times will grow the net significantly and the share price as well.

Friday, August 8, 2008

That’s me eating the bagel smothered with Smart Balance

I am once again the crusty credit analyst, no longer crummy. The refiners are returning some of my money and National City continues to look promising. The upcoming sale of their money management arm, $30B under management, should fetch around $300B and theycan’t have it on the books for too much. A sale will add to thecapital cushion. Right now that is important and we/they will deal with any missing earnings later. For now NCC looks good. Today’s SEC investigation announcement isn’t alarming YET as most SEC probes end up with afew million dollars in shakedown fines-so likely no big deal.

I’ve been watching Smart Balance [SMBL] for quite some time and never found the right entry point. i did today as the market sold SMBL off with a 25% vengence.

SMBL is a play on management and healthy living. Steve Hughes is the driver behind the company. He created and grew ConAgra’s Healthy Choice brand to a huge business over, then moved to turning around Tropicana for Pepsi, grew Celestial Seasonings tea business, and Dean Foods branded milk business. he accomplished huge sales growth and market share in each one AND he did each quickly. Each took less than 4 years. Best is the knowledge than he didn’t leave a mess at each place as he isn’t a hotrod, growth at all cost type. He builds brands succesfully.

Smart Balance is a healthy brand. They started with buttery spreads and have extended the brand into oils, popcorn, peanut butter, creme cheese, cheese, etc. All healthy, all at premium prices.

Hughes purchased the brand, GFS Brands, in 5/07 for $491MM. In addition to the IPO money, SMBL tapped private equity to fund the GFA acquisition. The new money came in at $7.46 for the common and a preferred that has converted at $9.00. As an aside, officers and directors, and major shareholders have purchased open market shares during the past 3 months at prices higher than the present market price.

Revenues are over $200MM and gaining share. Just as at past companies, Hughes has expanded the brand, shelf space, and entered the institutional business as well. Profits are slim, but will follow with scale.

SMBL is a asset light company. They only have 52 employees, go to the web site and read the impressive bios f the management group, and do no manufacturing or distribution themselves. They control and source the materials and have multiple product manufacturers. As such, book value is $6.60 which is greater than the share price. Tangible book is much lower as they have lots of goodwill, but theybought a good brand.

Today they reported earnings that were less than expected and sales were also a little light per analysts expectations. Like many companies over the past 3 months, commodity prices have risen faster than they could raise prices. They did effect two increases and another is set to go into effect for this August. With input prices now receding, my guess is they will sandbag decreases like Tesoro and Valero will in refining. On the conference call management was confident that the second half of ’08 will see accelerated growth and earnings.

My time horizon on SMBL is 3 years. Just as NCC has to rebuild its balance sheet and investor confidence before it hits $20, SMBL needs to build its brand and market share. Hughes seems to be historically on a 4 year exit plan and that’s my bet here. If he does what he has in the past he’ll sell to a big food company for a large price. This has multi-bagger written all over it. Both SMBL and NCC will not happen overnight, but they will happen and the annualized returns will be significant. Remember I am no longer the crummy credit anlyst, but again the crusty credit analyst.

I have bet on Steve Hughes today and gotten in at a very good price. If the market gives me lower prices I will be compelled to add to my position as I’d like Steve to make me a bunch of money over the next couple of years.

Monday, July 28, 2008

Long portfolio continues downward

Another tough day on Wall Street. I continue to kick myself for two reasons: first, I’ve been terribly negative on the market and have raised a huge amount of cash and placed a number of anti-market bets. Second, I didn’t divest myself of a long portfolio that has taken a hit and I have been swimming against the tide with Tesoro. If i was better than Carnac at devining the future I should have sold all my stocks and not bought any bottom fishing positions. I’m not worthy of a turban.

Over the last year I’ve sold a lot of stock as i worried about the market values and economy, plus a decision to take capital gains under Bush rather than Obama. Much of that I redeployed in the ‘fat pitch Wrigley and that has worked wonderfully earning me much, much more than any short term return. Other funds have been put into gold ETFs, inverse 10 year treasuries, inverse QQQs, and various short/put positions on financials, plus I’ve written coverd calls on the long portfolio names. These have all worked nicely.

i’ve written about NCC and TSO lately and I should have waited on TSO. I’, nicely ahead of the game on NCC, but TSO has eaten my lunch. Today I took losses on a portion of the TSO and bought another stand alone refiner, Valero [VLO] as I still believe in my ability to devine the future even though I suck at refiners.

But the point of this post is to talk about the future. I will list the remaining long portfolio that I have stuck with through the downturn. Mostly beccause I have large gains in all of these companies and I haven’t been ready to pay the taxes yet. I shouldn’t have worried about that consideration.

Here’s what I stayed with;
ADM, the huge agricultural processor
COST, the best discount retailer, maybe best retailer
BRK, Uncle Warren’s outfit although i have lightned up by 1/2
CVS, the largest drug store and pharmacy benefits manager
INTU, the QuickBooks and Quiken people
PEP, the large snack and soda leader
TMO, ThermoElectron, a leader in testing equipment
WMI, the largest garbage hauler that also generates a lot of electricity

These great companies have all been taken to the woodshed and paddled like bad companies. Thsi must be a bear market.

I think it is likely to stay a bear market and I’m ready to pay my taxes as soon as the calls I wrote expire over the next month or so. I’m going to stay with NCC and TSO/VLO as I believe they have seen very close to a bottom. The others, even though they are wonderful leading companies, will probably go down another 10-15% if the market does.

We face the following and while the market looks forward, I don’t think it has looked past all of this:
1. Earnings projections are coming down and will come down further.
2. Energy and Commodity companies, as well as International companies, will decline as American weakness affects the rest of the world, including the BRIC nations.
3. A likely Obama win will accelerat selling before an anticipated tax increase.
4. Less credit availability, both consumer and business, will hamper any recovery and GDP numbers in the 3rd and 4th quarters will be putrid.
5. Consumers are scared and spending will be curtailed, even if gas prices recede.

While all of the above should be known by investors I don’t think it is baked in thereby setting us up for a recovery in equities. If home prices suddenly stop going down, new home sales get strong, and banks stop adding non-accrual loans we may neutralize the five items above, but I don’t think we are there yet.

If I didn’t need a few rallies to unload my long positions, I’d almost cheer for a quick dive to 10,000 DOW so we could start picking the stocks that have over-corrected and the money making could begin again.

Time to put on my turban, get a scotch, and jump in the pool.

Saturday, July 26, 2008

Tesoro has been a painful experience

Boy, has TSO been a terrible timing mistake. I’ve averaged down to $20 and am still well under water. I keep asking myself if I should buy more or exit? I’m leanig toward adding more shares, but in VLO and SUN as all refiners have been killed and I will at least have some diversification to protect against hurricanes and bad hedges.

My thesis was that stand alone refiners were getting killed as oil rose faster than gasoline, but that would soon change and refiners would drag their feet on the way down and earnings would spike. My belief was that the balance sheet was sound and cashflow good so it was only a matter of enduring several quarters of breakeven then the bubble would burst and margins would improve.

So where are we? The balance sheet is solid, if not improved. They have reduced inventory at very high prices and reduced the revolving debt by several hundred million and anticipate being paid to zero by the end of july. The long term debt doesn’t come due for several more years. The plant is modern and several expansions are ready to come on line. Replacement value far exceeds book.

Second, they aren’t very good hedgers and have closed out all derivatives and will take a $125M hit this quarter. Sounds more like a bet rather than a hedge. That worries me.

Crack spreads, an estimate of how much finished product you can get out of a barrel of oil, have been rising. This needs to continue and accelerate.

On the 31st TSO announces earnings and holds their call. I’ll listen to discussion of the past 90 days operations and the hedging debacle, but I’ll be focused on the current quarter. What does the near future look like? I want to hear that the input price of oil is falling faster than demand destructions impact on the other side. I think we’ll hear that.

It’s all gut feeling, but it seems like the air is coming out of oil and that should bode well for refiners like TSO and investors like “the crummy credit analyst” who wants to reclaim the “crusty” moniker.

Quarterly report was excellent

The earnings report and conference call both confirmed my analysis. This bank morphed from reckless to conservative early and is well on its way to recovery. The process hasn’t been painless for old shareholders, but the outlook is kind for those that have bought in at Corsair’s price or lower. The market was very accommodating recently when they sold me a boatload of shares at the $3.70 level.

Several confirming comments from the call:
1. They have the HIGHEST Tier 1 capital of ALL regional and money center banks, 11%.
2. SupPrime delinquency is DOWN.
3. Loan Loss Provision will decline in the 2nd half.
4.LLR is at 3% of loans after large charge-offs.
5.9% tangible equity to assets.
6. 90 day past dues are down and not as many are going to non-accrual.
7. Newest loans in the SubPrime Liquidating portfolio was made in 3/06 and they are through most of their ARM rate changes.
8. Remaining Visa stake worth 1B. They could monetize it but don’t see the need at present!!!
9. Liquidating portfolio losses will flatten , then decline in next 12 months.
10. 1.5B BOLI and no problems there.
11. Feel very good about the LLR as they have “socked away” a good figure. Enough that future provisions can be smaller.
12. All banks recapitalized so no regulator issues on needing new capital at bank level.
13.Holding company has enough cash to get to 2012 and service debt without bank dividends.
14. The only negative is that the NIM is slightly below 3% due to non-accruals.

Number 14 is where they need to make progress. They’ve established that they aren’t going to fail, now they need to show they can earn money again. Obviously, they can improve earnings by collecting bad loans and getting them back into the earning category, but theyalso need to reduce expenses. A lower provision will help, but they need to cut people and non-essential expenditures.

Until they show a sustainable earnings stream we may have a $5-6 share price. However, we could get a sustained move up as there is 25% of the float sold short. Should that happen and we see a larger number soon, I ‘m planning on selling as eps is going to be week for quite awhile and with a soon to be 2.1B shares outstanding the per share eps at modest p/e won’t justify much price appreciation until earnings really improve. I’m content to stay for the long haul unless there is a big bump. Then I’ll exit and buy back in as it resettles lower.

Monday, July 21, 2008

NCC still looks good

The market hates NCC. It seems to be regarded more poorly than WAMU and Wachovia! It has bounced back nicely since its low, but is still universally feared and loathed by investors. The analyst buy ratings haven’t translated into a rising share price and over 20% of the shares are still sold short.
My work shows NCC having more than enough capital and reserves to charge off their losses and still be adequately capitalized. The bank has about 24B of capital and high risk portfolios of approximately the same amount. Of course, a bank doesn’t lose on every loan and they don’t lose 100% on each loss. Collateral backstops most loans. Myassumptions result in about 5B of potential losses, an amount about twice what the company says. If you doubled my estimates, NCC would still survive and be adequately capitalized. Regulators are not going to close this bank and a “run” should not occur either.
If anyone cares, I can email my work. It’s too much to retype and for some reason, I can’t cut and paste the spreadsheet.
The numbers come out Thursday and I hope the conference call is positive.

Tuesday, July 8, 2008

Too early and my hands are bleeding

I recently convinced myself that I had found two worthwhile investments among the worst performing segments of the market: regional banks and refineries. I picked National City and Tesoro and they have both continued to drop. I was too early. I won’t add to those positions until I have proof the market is upward sloping.My entry prices will prove to be profitable, but they don’t feel good at the moment.

There are some bargains in this market which makes it a more difficult environment to operate in. This past year or so was easy as most stocks didn’t make any sense so they were easy to sell into or bet against. Raising cash was good. Now you can find compelling stocks, but they will still probably go down if the overall market trades down another 10%.
I’m going to rest for awhile and see what the market does as I felt smarter earlier in the year and I prefer that feeling.

Sunday, June 22, 2008

Oops, I goofed on the # of new shares issued & book value

I took a shortcut and made a mistake. I had the wrong number of additional shares that were issued for the $7 billion. The company has 2.1 billion shares outstanding and about 21 billion in capital including some preferred. Book value is about $10 per common share. The LLR is said to be adequate, but bound to be light. But the dividend cut and expense reductions will help self fund additional losses. Either way I’m betting that you can buy the common for 50-75% of a solid book value. The price should rise as that is confirmed.

I haven’t done all the work yet, but NCC has a series F preferred that is yielding about 12%. If I’m willing to buy the common because of the new capital and dividend cut, I should be very comfortable with the preferred. Especially a preferred yielding 12% and the dividend should be secure. I don’t know how readily available this series is and if it can be bought in smaller lots.

I hope this week is more fun than last week.

Friday, June 20, 2008

I could be too early, but I’m in after the dilution.

For over a year TV types have thought it was a good time to buy financials. They’ve all been too early and had their collective asses handed to them. I’ve taken some contrary positions and been lucky enough to make money over the same timeframe. I don’t think the group is done suffering. I think there will be more dividend cuts, capital raising, and failures.

I’ve recently bought NCC because I think it has a chance to be a 4 bagger over the next couple of years if it doesn’t FAIL!!! Obviously I think they won’t fail, but it could be worse than I believe.

Why am I willing to go where no one should? Mainly it’s because NCC has recognized much of the negatives that are still coming for other large regional banks. They were among the first to sell their sub-prime subsidiaries, stop dealing with brokers, and recognize lots of related losses. However they still have lots of exposure in real estate. They have already mostly eliminated the dividend and raised 7 billion of new equity to shore up the balance sheet. So dilution has already occurred and the downward pressure on share price that accompanies dilution and dividend cuts has already happened. Loan loss reserves are huge and hopefully close to adequate with quarterly provisioning. Finally they are under a Memo of Understanding with the regulators and that will keep their feet to the fire.

At present NCC has the highest capital of all large regionals and a very large loss reserve. They certainly have losses to take, but the new $7 B gives them some leeway with regulators. At $5ish share price you are buying the company for less than 1/4 book!!! If the reserves are still way inadequate you may be paying less than 1/2 book. The new equity has put Tier 1 capital at over 11%.

Already being a NCC shareholder pre-disaster would have been terrible, but it is a reasonable bet at the present price. It is also a price that is the same as the private equity got when they agreed to save them. Now the big question is... did JP Morgan [ actually Corsair Capital ] do a good job of due diligence and then sandbag a good price? Well who knows. But, JPM bought Bear Stearns for $2 per share and then were intimidated into raising the price to $10 before closing. Several days ago JPM officially stated that they got a tremendous bargain in the deal. Did they price this one similiarly? I hope so.

While I won’t ever know what the new equity thought, I do know that I won’t get diluted as NCC won’t be able to go back to the well for more capital, they can’t meaningly cut my dividend as they have nixed most of it already, and the market already knows they are under close scrutiny from the regulators. If they’ve done a good job of provisioning, and they started earlier than others, then I’ve bought a well capitalized bank that is the country’s 10th largest and will eventually earn reasonable money again. As that starts to be known the stock price should start to return to book value, or greater, which would be a very nice investment.

Lets hope I’m right.

Sunday, June 8, 2008

TSO, ADM, and RMIX updates

I last wrote about non-integrated oil refiners as being attractive as margins would widen when either the price of oil decreases or the rate of change slows. I felt brilliant until Thursday and Friday when I gave most of my profit back as oil surged. The good news is that TSO is still attractive on a cashflow basis and their margins, pre Friday have been steadily rising. If TSO falls further I intend to buy more as I still like their earning power as some of the froth comes out of crude oil.

That froth is going to come out. No, oil isn’t going to fall like a rock, but it is going to retreat. It may climb to $150 before the retreat starts but retreat it will. Demand has grown, but nowhere near the percentage price increases we’ve seen in crude. The catalyst for a lowering of the barrel price will be commodity market reporting and classification changes that will limit positions. The investment bank swaps exemption will be curtailed also.These changes will dampen unlimited buying opportunities that currently discourage short selling.

Additionally, the Fed is likely to attempt to talk up the dollar as the dollar decline has been a major player in the assent of commodity prices and resultant inflation. If the Fed doesn’t get its arms around oil and commodity prices soon it will have a huge inflation fight on its hands. I think the boat has already sailed and we will start to see increased rhetoric from the CFTC, the Fed, and the treasury all aimed at a stronger dollar and lower commodity pricing. While the ECB surely didn’t help matters Friday with the comment about maybe raising rates, and thereby srengthening the Euro vs the dollar, it would not surprise me to see some coordination between central banks to tackle commodity induced inflation as both continents will pay the price if inflation surges out of control. So far it is only raging on inputs, payrolls will soon follow if progress isn’t made.

Therefore I continue to think crude oil will start coming down after the jawboning/rule changing starts and I think refiners will drag their heels on the price of fuels and margins will expand. Along with the expanding margins will be the price of their stock.

The market has pounded ADM lately and another of my profitable positions has eroded. The company has done very well financially so the decrease is due to the dissatisfaction with ethanol producers , a projected smaller crush spread for soybeans, and a planned equity offering. I like the minor initial dilution of the equity offering as it gives them flexibility in bad times, think the ethanol concerns will lessen, and analysts are not great predictors of crop yields and pricing. But if the world is short of food, ADM is going to participate and I plan to add more shares.

RMIX, the little concrete company that I originally bought as a hedge against my MLM puts but fell in love with, has risen to the point that I’m gone. The shares moved up from the 2’s to 6 and I was happy to capture the gain. I was ready to go to the darkside again on MLM at about $118 but I procrastinated and never got around to it. It has since fallen and I’ll watch the price action.

My fingers are tired so adios amigos.

Sunday, June 1, 2008

Non-Integrated refiners look promising!

People are always asking me if I’m finding anything interesting to buy. Their inquiry is always aimed at owning stocks that will increase in value. My answer has mostly been, NO. I continue to believe the economy is weak, the rest of the world will follow, and either inflation or credit concerns will push bond prices lower and yields higher. I don’t see a broad stock market rally that lasts. To believe that, you have to believe that governments solve problems. I don’t, so my view is government meddling will prolong the malaise that we will endure. As I’ve opined before, we aren’t going into a depression, but it will be a period where a person is satisfied with holding a net worth together and the accepted view of a good return is much, much lower than the one we learned to expect in the 1990s. That’s why I viewed the Wrigley opportunity as such a great gift. A “riskless”, above market return!

Before I write about the one long position that has interested me, besides Wrigley, I’ll spend a paragraph confessing my losses in Flowers Industries [FLO]. I may have written about this, I didn’t bother to check, as I thought the company was a worthy negative bet. To set the scene, FLO makes bread and is a heavy user of flour, veg oils, and diesel fuel among other commodities. All of their competitors had been selling well off their 52 week highs and were reporting lousy earnings for the latest quarter due to the above. FLO continued to trade at an all-time high. My bet was that rapidly rising commodity prices would affect this baker as well as its competitors and like companies. I bought a largeish number of puts the day before earnings were to be announced and would either make a nice profit if their results tanked or would suffer a small loss if they managed to do better than the prior year. Well they blew away the analysts expectations, raised guidance significantly, and then increased the dividend by 20%. A trifecta of pain! The stock went up so fast I couldn’t get out of my puts with only minor suffering and am now hoping for a major miracle befor mid June when they expire. In essence, based upon current pricing, I will lose all of my premium. I was too smart for my own britches. The wallet now fits into the back pocket of those britches better as it is lighter.

Now, after that confession, I’ll mention the stock that has earned back my FLO losses plus a decent amount in the past several weeks. Tesoro [TSO] is a refiner with some service stations. It trades like a refiner, not an integrated oil company. It was killed by the spike in crude oil as it couldn’t raise gas prices as fast as oil was jumping. Earnings were terrible and the stock dropped like a rock, as did all refiners. It has made a nice move, but can still be bought today at very reasonable multiples of cashflow.

I liken non-integrated refiners to commercial banks. Banks make more money when rates fall than they do when they rise as they are able to lag the market downward. Refiners will react the same way. As the price of their crude inputs decrease, they will sandbag the price of gas. The result is exploding profits which are fair as they have sure had exploding losses as crude raced upward. Those margins are already expanding and that has driven the share prices upward. The obvious bet here is that oil has stopped spiking and will either decrease more or increase at a slower pace. Either will be favorable to TSO. If we get rapid spikes again then refining will be no better than a bakery.

As I continue to evaluate the wiseness of this long position, Wrigley and inverse bonds are earning me good returns and, as of late, negative bets have been good-but that seems to always change.

I’ve been working on a list of stocks that I want to buy a year or so from now, but that may be another post.

Thursday, May 1, 2008

Wrigley is a fat pitch-swing hard

It has been one month since I last wrote in this blog. I’ve a bad cold, the flu, and travelled back to Nebraska for the Summer. I also was constantly reassessing my view of the stock. Was it correct or was I just another pompous idiot that would lose a lot of money.

I’ve convinced myself that my negative view of the economy and the market is correct and not the product of my flu delusions. The deleveraging of thefinance system and the reduced spending capacity of the consumer will not disappear with a few hundred dollars in rebates. We are not set for a Vee shaped turnaround in the economy or market. My view is correct and I’ll continue to march that way. Keep in mind that I’ve never gone 100% to cash and the darkside. I’ve held a long-term portfolio of companies like Wrigley that have performed well during this bear market rally and I continue to do nicely in either direction.

Speaking of Wrigley, the market is giving us a wonderful present. I happen to hold a pile of cash. Goldman Sachs is giving me 3ish percent and I’ve been happy. Wrigley will give me 6.5%-13% over the next 12 months and it will return to cashwithin a year at a time that is more likely to offer stock market values. I feel I’m increasing my return without deviating from my strategy of being able to capitalize on low stock prices.

Mars is buying Wrigley for $80 cash. They’ve said it will close in 6-12 months. The biggest risk is the EU. They like to mix it up on all big mergers. I believe the companies will get all regulators to approve and it is a slam dunk approval from the shareholders. Financing is in place from the world’s three biggest, and best, financial firms: Berkshire Hathaway, JP Morgan, and Goldman Sachs. The financing is set. It isn’t a “term sheet.” Mars is confident in its due diligence as the breakup fee is 1 Billion! All the participants are quality operations; not the suspect deal-doer types. Mars will soon own Wrigley and WWY shareholders will have $80. cash.

You can buy WWY for $76. When the deal closes you will get $80. You make $4 plus the dividends that you collect. At $.33 a quarter and a 9-12 month close you’ll get another $1 or $5. Depending on how fast they jump through the regulatory hoops, you will earn between 6.5 and 13%. I believe thsi is the proverbial “fat pitch.” Plus a 2009 closing moves the gains many months away.

On the darkside I think Flowers Foods is headed lowerwhen it preannounces or reports on May 22nd. FLO is basically a bread manufacturer.It sells at an all-time high! It is a good company, but is facing headwinds. Nobody else in its industry has avoided those winds. The big guy, Interste Bakeries is in bankruptcy and continuing to do poorly. In the past several days a host of similar companies have reported and all did horrible.JJSF had eps down 25% due to rising costs, especially flour.LANC was a disaster; about a third of the company is bread. Same reasons.LNCE saw eps down 90% due to flour and vegetable oil price increases. TSTY did twice as bas compared to ’07 for the same reasons.

Unless FLO has a lot of long term contracts, or they are much better than their competitors in passing on price increases, they will have problems. Flour, oils, sugar, electricity, and diesel for the delivery trucks all have been on a rampage. BUD had problems. Those commodities have been damaging.All of the prementioned companies were selling well off their 52 week highs before earnings. Not FLO. It keeps going up. I think it will fall pretty hard.

I’m tired of typing and feel the coctail hour is near so happy trails to you.

Tuesday, April 1, 2008

It's hard being "Mr. Know-it-all"

I should be happy because I am effectively hedged and have done well since the market peaked in October. I’m only down a few bucks, am sitting on lots of liquidity, and am ready for any buy signal that makes sense. But being hedged and keeping money isn’t the same as making money. Making money is exciting, breaking even is dull.

Given today’s large move, should an investor put cash to work and ride equities upward? Today’s catalyst was UBS’ loss of billions and their decision to dilute their shareholders by issuing replacement capital! To top that decision, they got rid of the offending CEO and made their General Counsel the new chief! So on that wonderful news the markets took off. We’ve seen this numerous times and they have always backed off. Will this time be different?

Let’s look at what could cause the markets to move upward and stay up.
1. Earnings are good for the 1st quarter and guidance isn’t depressing, merely cautionary.
2. Commodities take a dramatic and sustained move down, easing cost pressures on businesses and consumers.
3. The current disconnect between bonds and stocks is corrected by yields lowering still and allowing P/Es to expand.
4. Europe and Asia show that they truly are decoupled from the US economy and US exporters provide vigorous guidance.
5. Companies regain confidence and decide to continue to support their stock price by using their cash and new debt to repurchase shares as opposed to conserving cash in tough times.
6. Hedge Funds and Private Equity find a way to continue to employ huge amounts of leverage to continue business as usual.
7. The consumer proves to be resilient, continues to find credit and uses it, rather than taking a breather and foregoing un-necessary purchases.
8. The Fed’s rate cuts and the President’s stimulus package work perfectly and banks continue to lend and consumers continue to spend.
9. The Fed announces that all banks, investment banks, insurance companes, and large pools of capital have taken all their losses and remain well capitalized.
10. Housing starts drop to a level that inventory starts dropping and
the glut starts clearing, leading to a potential rebound in building and employment.
11. Commercial real estate doesn’t slow and CMDOs don’t develop into a problem area.
12. The consumer is able to handle his home equity line and credit cards without the ability to refinance.

If all twelve occur we are off to the races. If half develop we will continue to tread water as we have lately. If only a few of the above items materialize the market will go lower, for a longer period and breaking-even will feel wonderful, not like kissing your sister.

Since I write these missives to myself to see if I’m thinking logically, let’s go through the twelve for my take on the odds.

1. Freight is down, housing is down, recreation is down, financials are cutting back, costs are sky rocketing. S & P earnings will be poor, analysts’ estimates will be reduced and there will be lots of hedging on guidance, very few clear views of the next 9 months.
2. Recessions usually take care of cost pressures through lack of demand, but with a weak dollar and many commodities in unstable lands we may see pricing stay high longer than in the past. Agricultural pricing looks fixed for the next several years putting pressure on food prices. Any admission that inflation is higher than the CPI and commodities will soar.
3. Yields are going to increase as the credit crisis wanes and investors see that we are just in a slowdown, not disaster. Then they will demand greater rates to compensate for inflation.
4. This will help, but the UK is slowing now and Europe won’t be far behind. Guidance from multi-nationals will not be robust.
5. These guys aren’t stupid, they will conserve cash as they’ve seen companies like Bear Stearns go down overnight when credit gets pulled. The days of huge stock buybacks to disguise option grants, juice eps, and keep share price up are over. Conserving cash and reducing debt is the tactic du jour for the time being.
6. The banks won’t let them and the Fed will be watching the banks. The days of huge leverage are behind us. Margin requirements will be tightened and covenants strengthened at any opportunity. Steely-eyed bankers will return.
7. The consumer is tapped. Wages haven’t kept pace with costs and consumers have made ends meet by refinanceing and borrowing. Those days are over because securitization is over. The car business may be next as they were writing 8 year loans and that phenomenom may be close to over as those credits won’t be allowed on balance sheets and nobody wants to buy them in this climate. Credit card delinquencies and losses have been OK, but they will come under pressure also as lenders tighten up.
8. Banks are collecting, not lending and consumers will send their stimulus checks to credit card companies giving them and the creditors some respite. There won’t be many goods purchased with the money.
9. There are more losses to come and huge amounts of loan loss provisioning resulting in continued pressure on bank earnings and capital.We are not in the 8th inning of bank problems.
10. Inventory is still growing as builders haven’t reduced starts enough yet. House prices are still unaffordable for many in this country. Therefore prices need to come down further or wages need to increase. The spill over of depressed housing will continue to affect many other industries.
11. Commercial real estate growth will taper off, but probably won’t fall off a cliff like housing. Thus the CMDOs will be mostly OK.
12. Credit cards will be the next bad area after we get through mortgages and HELOCs. The stimulus payments will postpone this reconing till mid- summer.

I’ve convinced myself that things aren’t going to get better quickly. We are in a consumer led problem and this will not be solved by government programs. The problem developed as wages didn’t keep up with expectations and that shortfall was made up with borrowing, mostly against real estate. Now the ability to borrow has diminished significantly and the consumer’s spending patterns will change as a result. The consumer is a huge portion of our GNP and the reduced spending will have a dramatic impact on corporate earnings.
The problem that bubbled up through subprime will be with us for quite some time and stock prices will not march upward quickly.
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