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.
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