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.
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