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.
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