Wednesday, March 25, 2009

Am I Watching CNBC OR C-SPAN?

I've never been a huge fan of CNBC, but have often kept the channel on as background noise since it was an improvement over The Price Is Right or General Hospital. Occasionally a guest was worth turning up the volume and paying attention. Lately I'm resorting to listening to music.

CNBC has become the political channel. It no longer pretends to cover business news or commentary as its sole purpose is talking about Washington. I believe it is terrible that American financial companies, investors, and the general public all are looking to the government for salvation, but worse still is listening to Congressmen, Senators, and their hearings. Coverage of endless hours of Congress droning on is brutal. Bernacke and Geithner presentations are of the same entertainment value. If I wanted to casually listen to this drivel I would turn on C-SPAN.

We will be better served if we turn off CNBC and politicians.


Monday, March 23, 2009

Good For The Gander, Not The Goose

Today is day of celebration in the market as investors take comfort in the government's latest Plan. It should be a day of outrage toward government bureaucrats and politicians that have now blessed the very actions that they demonized over the past two years and crippled the world's financial industry.

Bank earnings, capital ratios, and stability have been destroyed by mindless adherence to Mark-To-Market accounting. Despite the pleas that there was not a functioning marketplace and that the cashflow value of the securities, when held to maturity, was greater than their distress value, regulators turned a deaf ear.

Now with the financial industry in disarray, the government is performing a rescue. They are rescuing an industry that would not need rescuing had there been leniency early on. Banks asked for permission to mark illiquid assets at a value determined by likely cashflows since they would hold till maturity or until prices recovered. What is the government's plan? Buy the securities and hold till maturity or until prices rebound! The government doesn't mark-to-market because they set the rules. Banks had to reduce leverage and maintain capital ratios throughout this debacle. The Feds have embraced leverage that would make a hedge fund manager quake in his boots, but that's OK. Capital ratios also are of no importance since they are the saviors from our government.

Some serious thought and forbearance from regulators could have allowed the banks to accomplish the same thing that the Geithner Plan is attempting, but two years ago with much less pain and anguish. A half a decade ago Wall Street bankers ran into trouble and ample embarrassment when they peddled securities by "putting some lipstick on that pig." Now our government has dressed up our gander in top hat and tails two years late. It's not time to celebrate, it's time for outrage.

Sunday, March 22, 2009

Wisdom & Inspiration For Only $17

We all need heros to inspire us. Especially today immersed in negative news of Bernie Madoff, Allen Stanford, John Thain, and hordes of greedy investment, commercial, and mortgage bankers. 

In 1917, B.C. Forbes, founder and publisher of Forbes Magazine, identified 50 business heros for us. To commemorate the start of his magazine, he interviewed the business leaders of the day with the result being Men Who Are Making America. A business classic of over 400 pages can be yours for only $12 plus $5 postage and handling. $17 buys the story and wisdom of DuPont, Morgan, Frick, Vanderbilt and a host of other titans of industry. We could use these leaders today! Return to the era when business built the country, not government.

To obtain your copy of this classic, NEWLY PRINTED, reprint, email me at and let me know the number of books you would like shipped. Send no money. After you receive your book you can remit your personal check. I've never lost money on a classic book buyer and I also save the credit card company's merchant discount charge.

You will learn business history, investing wisdom, and be inspired by those that built our great country. It also makes a good, constructive, present for children and key employees. Order today. Available only through thecrustycreditanalyst.

Saturday, March 21, 2009

The Fed Is Sowing The Seeds For Our Next Banking Disaster

Banking should be conservative and rather boring. It shouldn't be a place for extraordinary returns and aggressive risk taking. There should be more thinking and less algorithms in bank credit decisions. If our current credit meltdown doesn't teach us a long term lesson our future will evolve into a very unstable, rough ride.

The old banking saw was the 3-6-3 rule: pay depositors 3%, lend the money out at 6%, and be at the golf club by 3 o'clock. That 3% net interest margin, more like 4% in recent decades, didn't allow for many lending mistakes. Significant losses were hard to make up when you only earned 3-4% NIM. Bankers knew this and behaved. Earnings came slowly and incrementally. Mistakes caused an increase in loan loss provisions, greatly reduced net profits, and several years of pain and stagnation. Bankers said NO to questionable deals.

After a decade of behavior modification and an abandonment of the above mindset, banks should be embracing their former practices. They may see the wisdom of returning to their roots and be scared to death by the ramifications of their past actions, but the Federal Reserve is pushing them toward a encore performance.
Instead of a normalized interest rate structure, the Fed has pushed funding costs to a very low level with resulting net interest margin growth. Restraint in lending will be short lived. Net interest margins of 5-6% will induce another round of credit card, mortgage, and business lending. Exactly what the politicians and news media want to see happen. Getting the banks to lend again. But they shouldn't. However, large margins get the braintrust salivating and reinforces the belief that you can underwrite loans with an acceptable level of losses since the interest spreads are so favorable. Unfortunately, bad credit is bad credit and while a lender may be able to absorb stupid decisions for awhile, the environment can change and here we go again.

Not only is the Fed destroying the fruits of years of thrift by savers, through miniscule interest rates on deposits and money funds, they are encouraging bankers to repeat their mistakes in the name of restarting lending to energize the economy. Banks will lend if the pressure becomes intense enough and if the margins grow large enough. We shouldn't want them to.

At present there isn't huge loan demand from credit worthy individuals and businesses. However, there is considerable demand from the uncreditworthy and companies that would facilitate that lending. But, that group is at the heart of our current problems. Selling homes, cars, tvs, and vacations to those that can't afford those items is not a worthy endeavor. Especially since amazing numbers of borrowers are walking away from homes, credit cards, and home equity lines of credit. Not paying has become easy and will not be forgotten by borrowers. Lenders, and the Fed, appear willing to forget.

We may avoid the nationalization of American banks this time around, but if margins become large and banks, once again, under the influence of politicians and the Fed, rationalize the extension of credit to those that do not deserve it then we will all get our loans from the government after the next meltdown.

Saturday, March 14, 2009


The market's 10%ish run up last week was sustained by: the nation's three largest banks saying they were profitable during the first two months of the year, General Motors decision not to use the March allotment of bailout funds, and a smaller than expected decrease in retail sales in February compared to January's results. Stocks were ready for a run and they liked what they heard.

Now lets think about those three developments. Banks should be wildly profitable when funding costs are near zero. The issue that remains with us is was the loan loss provision adequate and will they still need new capital that will dilute common shareholders? The answer to the first part of the question is no, while the last portion's answer is yes. Even with boatloads of help from the Fed and Treasury, banks are going to have a rough decade ahead as they learn how to be conservative lenders again and develop a cost structure that fits their diminished earnings capacity. GM said they didn't need the money in March, they publicly said they were not saying that they no longer wanted it available. Until car sales start growing GM will be under pressure and there are no other lenders, since bankers have developed an appropriate understanding of risk, other than the Federal Government. On retail sales, one months result is not a trend. Spending is weak and will stay that way for a long time.

So why did the market's participants get excited? Because it was time and lots of short positions got covered. The good times may extend another 10%. But remember that a 20% run up only gets you back 10% of your losses. The market's decline has been brutal and I feel she isn't done torturing us. She's offering to sell us the Brooklyn Bridge right now and I suggest you take a pass.

Just say no to committing new money and use the market's euphoria to lighten up on positions. Outside of another 10% upward, the probabilities, in my view, are greater that we continue down as opposed to a sustained up trend. 

Monday, March 9, 2009

M&A, A Catalyst For The Recovery

Todays merger announcement from Merck reinforces my belief that M&A will likely be the catalyst that leads us to recovery. The market's current level of pricing is proving enticing to solvent companies seeking acquired growth and to the not so fortunate seeking to cash out and no longer fight the credit crisis.

Each acquisition helps the stock market heal. Commercial bankers are able to earn interest with loans to acquiring companies and, of course, the investment bankers will charge their advisory fees. An acquisition eliminates, say $20B, of stock from the market reducing supply, assuming a dearth of new IPOs. The acquiree's shareholders now have cash that needs to be redeployed in a shrinking market. Less supply should help to raise prices. A more robust earnings stream from quality commercial loans will also help the financials recover.

I have no idea when the market will turn, but a steady stream of completed deals will be beneficial. The deals are coming so we have a reason to be hopeful.

Thursday, March 5, 2009

Buy Waste Management. Not Now, Later

I like Waste Management [WMI]. It makes sense as a use for new money, but don't buy now. It's apt to go down like all securities. Good companies that continue to throw off good cashflow returns go down along with the poor earners. Study WMI, but be patient and buy it later. You will be rewarded.

Waste Management is a great company with a huge moat around its franchise. It is the nation's largest garbage company and now operates as almost a douopoly now that Republic Services has acquired Allied Waste . These two companies now control over 40% of the country's waste business. They have the ability to influence prices and I anticipate that they will, to the stockholders advantage.

WMI throws off significant amounts of cash and has been buying stock and increasing the dividend. The current dividend rate equates to a yield of 4.9% and a 49% payout ratio. Available cashflow is large and growing. Cashflow for 2008 was $2.5B with about $1.2B spent on capital expenditures. The company expects cashflow to grow in 2009 and intends to lessen capex to only $5ooM as they've upgraded vehicles and equipment aggressively in prior years. That will leave around $2B of discretionary money. Most of their debt is long term and not at onerous rates so I expect the dividend to be increased again as it was recently. At the present stock price, the company will also likely repurchase shares.

 Increasing cash generation, an increased dividend, and less shares are what investors usually like to hear. Especially if the company is in a relatively recession resistant industry and has a reasonable debt load. The 4.9% dividend yield should be safe.

WMI has been willing to lose business to maintain pricing and margins have improved. Waste hauling is a capital intensive business so it doesn't move to new operators easily when credit is tight. I expect WMI and RSG to both work on margins to offset the weakness in recycling pricing and construction rubble volume. The bulk of the business is residential and commercial trash hauling and that business is stable. Energy generation, both methane and trash-to-energy, are growing businesses. The company is expected to earn about $2.10 in 2009 and some estimates have been RAISED recently. A 12 P/E for a company that will perform well in a recession and better when we emerge is attractive. If they use their free cashflow to increase the dividend and buy back shares, their performance will look even better. Plus you get 5% as you wait for the market to respond and move the shares upward.

I already own shares and will buy more, but I'm content to wait as my hands look like a stigmata from catching falling knives, not religious virtue. 

Buy Gold. Save Your Hair & Liver

Sunday, March 1, 2009

The Market Is Relentless Like An Angry Lake

In stark contrast to the tropical picture that accompanied my last post, today's weather was gray, cooler, and very windy. The lake was gray/brown with large whitecaps. Burgees and flags flew straight out. No one was out for a leisurely stroll even when the sun emerged in the afternoon. But we had guests and the guests wanted a boat ride. So we braved an angry Lake Dora.

Ordinarily I'd accelerate past the sights [old hotels, boat houses, golf courses, and large homes] and head to my destination. Today, following that pattern, I would have had a boat full of water and needed a kidney transplant. I wouldn't be able to boat as usual until the wind and swells lessened. But I still needed to make progress so I motored on slowly toward my destination.

The stock market we've experienced the past 18 months is like an angry Lake Dora. You can't make progress or even tread water with a passive buy and hold strategy unless you have the staying power of a Warren Buffett and an iron stomach. You need to modify your approach until the old one works again.

If you believe that we aren't going to experience a bull market or a significant, lasting, bear market rally anytime soon, as I do, then the combination of a solid stock paying a good dividend and writing covered calls can be a desirable strategy. I've been doing this over the past year and a half to great success. This approach will work better in a market that is falling 50%, but it will still work in a flat market, so consider it.

You have to assume that any stock that is currently owned is loved and will be held through the entire down cycle. If it was going to be pitched, there were better times and prices. My explanation of writing covered calls will be simplistic, so if you become intrigued you will need to do some basic research before you act. 

I happen to like garbage companies and I recently wrote calls on Waste Management, WMI, as I have every 30-60 days for months. My total investment in WMI is down over the period, but much less than the stock's decline since I've received the call premiums and the stock dividends. They make a bad situation less bad.

Toward the last part of February the stock was selling at $28.50 and I sold the right to buy the stock from me at $30 on March 20th for $.30. My decision was would I accept a $1.50 price increase, plus a $.30 premium, plus a $.29 dividend on March 20th and be happy. I decided I would be happy to get a 6.3% move in less than 30 days [ it would be 7.4% if the dividend is included] so I wrote the call. The brokerage cost was minor. If WMI is less than $30 I keep all the premium and write another call. If it made a larger move upward I will be forced to sell for $30 or buy back the call. When I've bet wrong and incurred an opportunity cost I've accepted my fate and made the sale. Frankly, I've saved myself a lot of grief by having some stocks called away from me that would be worth a lot less now. 

Covered calls, inverse bonds, gold, and some defensive stocks have helped me negotiate an angry lake until the sun comes out, the wind dies down, and the burgees go limp.
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