The Crusty Credit Analyst

What's That Sound I Hear? It's Us Eating Our Seed Corn!

2011-10-05T13:46:00.000-07:00

You can't grow crops without seeds. That's why they have always been valued. They are essential to human existence and progress. Eating those kernels wouldn't be a good plan.

Financially, we are doing the equivalent. We are eating our financial seed corn and that's not prudent. You need capital to make more capital and the western world is destroying capital. Destruction by debasing currencies, destruction by artificially lowering interest rates, destruction by algorithmic high frequency trading, destruction by greed, and destruction by over-reaction all will prolong our despair and delay our recovery.

How much capital has been destroyed since the beginning of July around the world? I haven't invested the time in determining the answer, but the number far surpasses any measure of Greece and the PIIGS. Yes, I know that "markets" have also worried about double dip recessions and European bank balance sheets, but come on, clearly we have over-reacted.

The purpose of capital markets is to funnel cash to worthy companies. No matter whether it is in the form of debt or equity, it should make sound business sense. Our current environment is more like a casino mentality than investing capital to help companies grow. Five percent intra-day swings are proof that valuation has little to do with today's markets.

Just like in Washington, if some adults don't take charge of Wall Street soon, we will have eaten a good portion of our seed corn. Pension plans, university endowments, individual 401Ks, will all be decimated as the desire to buy a piece of a profitable company will have been extinguished.

Three simple ideas worth immediate consideration are: first, much higher margin requirements on stocks, options, and commodities will require investors to risk their on capital and increase caution; second, bring back the uptick rule for short selling as it will slow down the speculation and enforce a ban against naked short selling; third, re-instate Glass-Steegle which separated commercial and investment banking and remove the investment bank's access to the Fed.

If the special interests negatively affected by the three proposals don't like it and they, and their cronies in DC, continue to play business as usual while destroying our capital formation ability, then we need a Financial Tea Party to restore sanity in our financial leaders.

Lazard Stock Trades Like An IB Without The Trading Risk

2011-09-28T08:02:00.000-07:00

Monday, Lazard was available at an all-time low. It has since bounced with the market, but remains attractive. This premier investment bank provides the investor exposure to the capital markets without the inherent risk of the typical investment bank's proprietary trading desk. Financial advise isn't going away so LAZ, with its geographic and product diversification, will continue to perform.

Lazard operates closer to the old fashioned investment bank than the model chosen by Goldman Sachs and Morgan Stanley. LAZ is the world's sixth largest advisor and, of the top ten, the third fastest growing. Their customer base appreciates not only their financial acumen, but their unconflicted advise as they don't trade for their own account. Additionally, they have the world's largest restructuring business which provides a revenue cushion when M&A is lethargic. The banking and restructuring side of the business amounts to slightly more than half of the company. Asset management for clients handles $160 billion under management. Both sides of the business are producing revenue surpassing the peak year of 2008. Their business is truly global so you get continental diversification as well as currency.

Without the risks and leverage associated with trading, Lazard has a solid, low risk balance sheet. Long term debt has decreased from $1.2B to $.7B since 2008 and there are no maturities until 2015. They have no principal trading or lending book so assets are not suspect.

Employees own 30 percent of the company and LAZ currently yields 2.7 percent. The biggest knock against the company has been the high level of compensation to their professionals. Management has been addressing the issue and is committed to bringing compensation expense as a percentage of revenue down. They succeeded in 2010 and so far in 2011.

Without the home runs available from trading, LAZ will only see earnings grow through market share gains, but I'm more comfortable with that level of risk. I seem to never tire of catching falling knives so I bought some on Monday and so far I'm not bleeding. So far.......

Crusty Hasn't Written Because All My Ideas Have Lost Money

2011-09-26T09:25:00.000-07:00

I've served all my readers faithfully by not opining about the bargains I've found over the past weeks. Lots of good companies have been pounded and could have been picked up for low valuations, even with a decent haircut to future earnings. The ones I bit on also pay a nice dividend and have low-to-reasonable pay-out ratios. However, they are all worth less today than what I paid. My vision seemed clearer when I entered the trades.

A week ago I had cataract surgery on my left eye. I can see like an eagle! Yet my vision of the future resembles the above eye chart. I'm pretty sure the stocks I buy are like the Big E, but things are kind of fuzzy. Over time, decent dividend payers should regain value and provide income. But what do you do with speculative positions that were blurry to begin with? Good question.

Most of my specs are solid, turnaround, companies. They've been killed and I think they still have value so I continue to bleed. But one company has been amazing and has actually made the past months fun, sort of. When I bought it my vision was clear: hold for five years and let management build the brand and sell out to a larger company. Three plus years into the holding period my vision is foggy, but enjoyable. The company is my old friend Smart Balance [SMBL].

Twelve months ago SMBL sold for $3.50. Today it is pushing $5.50! During the market's last leg down, it has gained about 18 percent. BB&T upgraded the stock, but, other than that, nothing has changed. Management remains competent, the niche has promise, and they are not over-leveraged. But, they also don't make much money and sell at a salty valuation. The spreads business is not growing fast and milk hasn't been a huge success. Their new gluten-free products have not juiced sales/profits yet. I'm still a believer, and extremely happy as SMBL is one of my rare performers, but I wish my vision was clearer concerning the stock performance.

Next week I get my bionic right eye and with coordinated, clear eyesight, maybe I'll be able to see exactly why Smart Balance has been making me so happy. If not, who cares as it's fun to have a security that doesn't make me feel ill and stupid.

Care About Statistics That Matter

2011-08-12T09:14:00.000-07:00

I scratch my head regularly if CNBC is droning on in the background when the chatter turns to the VIX. I suppose it is okay to track trends in market volatility, but evidently some people or machines, actually trade the index and care about it. Certainly the soothsayers of TV think it is important. I don't get it.

My eyes also glaze over when they talk about "fair value" in the early morning before the markets open. Supposedly the difference between fair value and the futures will tell where the markets will start the day. So what? It must have importance because a lot of time is devoted to discussing the subject.

While I'm on the topic of what I don't understand, I wish the television guys/gals and their gurus would learn that any single statistic or data point rarely has value. Trends are important, but a lonely piece of data is usually only a possible clue. But not on 24 hour television.

So, while it won't happen, I would like to hear more about balance sheets, income statements, costs, dividends, sales trends, and other actual business concepts that do affect actual values. Wouldn't that be nice?

When Is A Growth Stock Not A Growth Stock?

2011-08-07T09:15:00.000-07:00

I need a diagnosis and this company's stock price needs a prescription. This growth company has become a value stock and it continues to lose value! Reports out of Tel Aviv this morning show TEVA dropping another 6 percent as the world worries about the U.S. debt downgrade. The way the company's share price has performed the past couple of years, it will probably crater on Monday also in American trading.

What's wrong with this picture? The numbers presented below usually would not accompany the chart depicted below. Revenue has grown from$11B in 2008 to $16B in 2010. They will be $18.5B this year and $20.6B in 2012. Gross profit has been growing steadily and net income has grown from 600MM in 2008 to $3.3B in 2010 or $4.54 eps. Analysts have that growing to $5.06 this year and $5.63 in 2012.

Teva isn't a one drug company. They have numerous business units and a nice compliment of generic and proprietary drugs. Yet it sells at a PEG of 93 and forward earnings of 7X. Obama is scary, but can he be that scary? I thought I was picking up a steal in the high $40s but I've been wrong ever since with this growth stock. I'll probably be more wrong Monday.

Transports and Retailers Are Doing Fine

2011-08-07T08:33:00.000-07:00

Among all of our daily news doom and gloom, are two recent articles that show evidence that the world of commerce is ongoing. One only has to look a bit to be assured that the world isn't ending. First, July same store sales at the nation's retail chains, the heaviest portion of "back-to-school" buying and the second most important time period for retailers, were up impressive numbers. Almost all grew from 4 to 9 percent over last year's performance. Those statistics were from a broad range of stores, specialty to department, not just discounters. The economy may not be rosy and we have a large number of unemployed and underemployed, but the safety net cushions those unfortunate and the 85 percent are not in depression mode.

Second, those goods have to move somehow from container to shelf and my trucking friends are busy, getting good rates, and adding to fleets. Again, some owner operators are going broke as are over-leveraged fleets, but the truckload carriers are busy. The second article was about hiring at the nation's train lines. The Union Pacific is headquartered in Omaha and Omaha based Berkshire Hathaway owns the Burlington Northern and that railroad also has a large presence in Nebraska. Both are hiring in large numbers nationwide. The jobs are across all categories, white and blue collar, and are the result of increased freight demand. Many require as much as 6 months training and aren't added without thought and commitment. Both roads are back up to pre-recession employment levels and are continuing to add people. The industry pays well in both salary and benefits so that bodes well for the economy. The freight being moved in greater quantities are agricultural products, energy, and autos.

I think I may send CNBC and all Wall Street firms complementary subscriptions to the Omaha World-Herald so they can find some factual, real world economic data to talk about and react to.

Panic Crept Into My Life Twice Yesterday

2011-08-05T09:09:00.000-07:00

Twice yesterday I entered panic mode and hoped no one was watching. Several weeks ago I was ordered to buy some new underwear and I complied by picking up a nicely priced package of Calvin Klein's at Costco. Yesterday, at a public restroom urinal, I found out, after much rummaging, that there wasn't a fly opening in my new underwear. What the hell is that all about?

Later, at home, watching my computer screen, I nearly soiled my new Calvins as I observed sellers pitching stocks in full panic. Nothing new was on the horizon, but they found something to panic about and then the computers kicked in. 500 points down the drain on top of the serial drubbing we've been experiencing. Do these children really think that raising some cash, only to deploy it again in a couple of weeks is of value? I don't.

Debt ceiling, America's bond rating, Europe's problems, anemic economic growth; are any of these topics undiscussed? Soon talk will return of reasonable P/Es, attractive dividend yields, and a growing middle class worldwide; all positive for stocks. I'm pitching my new Calvins, but not my stocks.

Power-One Trumps The Debt Ceiling

2011-07-29T16:40:00.000-07:00

Power-One's quarterly earnings release Thursday evening allowed me to relax on Friday. Instead of reading news releases and fretting over what to do next, I went to the movies to see Cowboys and Aliens. My PWER investment continues to make sense.

They posted a good quarter. Revenues continued to grow both year over year and sequentially. Profits were good and also grew. Guidance was basically maintained. The company sees renewed activity in Europe and made good progress in North America, China, and India. Selling prices didn't crater and inventory isn't piling up. I believe it was the most positive solar report this quarter.

The stock rose today in spite of Obama's debt ceiling issues and I believe it will continue to inch upward as thinking returns to the market. Power-One doesn't have the "Chinese accounting" baggage, sells inverters not modules, and has a power solutions side of the business that accounts for 40 percent of the company. Because of the foregoing I'm hopeful that it starts to trade at a premium like FSLR does in the module business. Today PWER is still very cheap on a PEG, P/E, B/V, and cashflow basis. That shouldn't last.

Now if I was just as confident and vindicated on JASO! I've added to PWER and am anxiously awaiting JASO's earnings release and guidance in mid-August.

Cowboys win.

An Opportunity To Buy Annaly Capital Management

2011-07-29T16:07:00.001-07:00

I pity the fools that sold Annaly today in a panic. It might have been just market makers taking out stop losses at $14.05, but the sellers, either way, were abused as the stock immediately rebounded to the $16 level. I believe it will return to higher levels as people regain rational thought. A debt ceiling issue "may" affect the government's cashflow, but it doesn't hinder mortgage payments. People pay mortgages and GSEs only have to honor their guarantees upon default. A debt ceiling crisis isn't going to cause mortgage defaults.

If the debt ceiling or downgrade crisis affects Treasury rates and all other borrowers have to pay more, then mortgage rates will increase. Annaly will pay more for debt but so will the mortgagees that fund the bonds that Annaly buys. It's a spread business and NLY isn't a trader so they hold to maturity. They don't have to take a haircut if rates rise.

Annaly isn't overly leveraged, invests mostly in agency paper, and pays an enormous dividend which just got nicely bigger over the past couple of weeks. I've added to my position today and may do so again if the panic continues. The yield is now over 15 percent. Never bet the farm, but a few acres is warranted. I pity the fools that sold today and don't buy on Monday.

By the way, I know what I'm talking about because I brought Mr. T to Council Bluffs in the mid 1980s for the town's Pride Week Parade. Mr. T probably doesn't need the income Annaly throws off as his gold necklaces are worth a fortune today, but a retired banker can use dividend income and has thankfully increased his position.

Gimmee A Break. Do Something

2011-07-15T07:32:00.000-07:00

Much hand wringing has gone on trying to solve the nation's debt ceiling authorization. You can't avoid the posturing, political theater, and warnings on the gravity of doing nothing and having the USA default. Well I'd rather face uncertainty than follow in the footsteps of Minnesota's crack team of legislators.

Minnesota's two week government shutdown has been resolved. Minnesota's budget is now balanced. How? Trickery and slight of hand or, should I say, slight of accounting principles. The NYTs reported today "both sides agreed to balance the state's approximately $35 billion budget by finding an added $1.4 billion in revenue through accounting maneuvers, delaying payments to school districts and borrowing money against expected future payments from the tobacco industry." Brilliant!

Expect the same type of shenanigans from Washington. I hope I can continue to peddle fast enough to stay ahead of our legislative idiots and grow net worth while not becoming too cynical. Harder to remain upbeat than to increase wealth.

ADD Isn't A Stock Symbol, It's How The Market Is Functioning

2011-07-12T07:23:00.000-07:00

Attention Deficit Disorder describes the hyperactivity of children, adults, and the Market. Parents, teachers, psychologists, and bosses can deal with the former grouping, I'm affected by the Mr. Market. The inability of markets to concentrate on what is truly important is maddening, but often helpful. We are in such times.

Investors should care about earnings/cashflow and the prospects for future earnings/cashflow. Additionally, they should keep an eye on the market's earnings yield, the inverse of the P/E, in relation to available bond yields. Stocks should move when there is a likelihood of change in those variables. They shouldn't gyrate every nano second as unrelated news is announced. But that is the world we invest in today. A world dominated by children and supercomputers. It drives me crazy, but also offers opportunities in mispriced values.

The market has recovered nicely from its Greek worries selloff, lessening the number of bargain securities. One area remains. Solar. The solar companies, with the exception of First Solar, are being given away. The Chinese manufacturers are going to dominate the module business; they are not going to go away. Some may have accounting issues, others will merge, and they all may lose money for a quarter or two, but there will be winners and the market has killed them all. Choosing between them is difficult. I've chosen JASO, TSL,YGE to spread the risk, but they are all cheap at current prices. The ETF TAN gives good exposure to solar, but it has a big position in FSLR and that is the only solar stock that isn't being given away. Big Chinese solar is cheap, but not without risk. But, at some point the ADD boys and girls will like the sector again and prices will rise dramatically.

A safer solar play is Power-One, an American inverter and power management company. It also is very cheap and has a bright future, plus the safety of not being Chinese-whatever that means. The hyperactive crowd will find this one eventually also.

Time for golf, and like in golf, keep your head down and don't pay attention to the daily drivel. Watch for future earnings, earnings yields, interest rates and not much else. Act when the ADD camp is stupid.

The Market Downdraft Is Politically Bad, But Fiscally Sound

2011-06-10T08:36:00.000-07:00

The White House is probably a very uncomfortable place of employment of late. Unemployment is rising, state and local layoffs loom, two wars continue to drain the Treasury, and the stock market is behaving terrible. The loose money induced market has been, along with private sector job growth, the two bright spots of Obama's presidency. Both have changed negatively. An overly political White House cannot be happy about the situation.

But the market decline may actually be good for the country's deficit and, ultimately, Obama. After the past 18 month's performance, selling is producing capital gains that will begin showing up in quarterly tax estimates. There probably aren't a lot of losses to set the gains off against given the markets rise. Therefore, tax receipts up and deficit down. Now hopefully the Republicans can tie firm spending cuts into any debt ceiling increase before the Democrats figure out they have some increased revenue heading their way.

Once the selling stops, that cash will need to be redeployed. There aren't many good alternatives available. The economy isn't as robust as previously thought, but companies are still lean and profits good. Commodities are stretched and bonds subject to the potential effects of inflation. Cash earns nothing. The money will find its way back into equities and that pressure will elevate the indexes.

Like all investors, I haven't enjoyed the past six weeks, but the world's not coming to an end and other than a little portfolio adjusting, I believe it wise to stand pat. A bright spot in this bleak period is that none of my covered calls are going to be called away and I get to keep the premiums. As the market hopefully recovers, I haven't been sold out and won't have capital gains to pay. There's a positive aspect to bad markets, for both Crusty and Obama.

I'm In The House Of Blues

2011-06-03T12:12:00.000-07:00

I haven't enjoyed the last several days. Yard work and investment declines put me in a foul mood. More than crusty, foul. Cutting limbs and trimming bushes is bad enough, but watching the Market panic over employment numbers is numbing. That big ape is really starting to shake the tree and investor resolve is waning. So far, I remain resolved but feel low.

Before long the crusty credit analyst may be channeling Blind Lemon Jefferson and the other blues greats. Moaning and howling may be necessary to stand firm until the "market professionals" hear a random statistic that renews their faith and the buying resumes.

Here goes:

My mama ain't left me, but I still feelin low

The cookie jar gettin empty and I gots years to go

Oooow, deep cotton keeps a risin, but I don't own none

I gots stocks and day goin down

I needs a new roof, I gots bills to pay

Oooow, the market man's shakin da tree today

The dog and mama done holdin on to me

But we be staying in the tree

Oooow, I don't wantsa be poor, I just wants a roof

Mama, the dog, and me wants a new roof, woof

Oooow, it never ends.

Big Mama Thorton I'm not, so hang on as the world isn't ending.

Near Miss On Diamond

2011-05-25T15:18:00.000-07:00

Yikes! I turned on the computer a few minutes ago and Diamond Foods was up $4.61 or 6.7%. Yesterday I played golf out of town and I spent today catching up on home ownership projects. Procrastination saved me. No shorting or put positions started on Diamond. Money still in the bank.

Why the performance boost? B of A/Merrill raised DMND from Neutral to Buy and Diamond had a great day. All the ratios that encouraged me to be negative on Diamond are more extended today. There's more money to be made, but after a near miss I'll wait a few days and see if there is more buying. A reading of the Merrill research will also be in order, although I don't expect any deep insight.

Families Are Under Increasing Pressures

2011-05-19T08:41:00.000-07:00

The commercial correctly says that "depression hurts". Beyond that human tragedy is the economic toll. Galloping food costs, spiraling gasoline prices, and increasingly expensive imported products sold at Wal-Mart are pummeling the world psyche. Whether it's the Chinese, American, Greek, or Arab worker, they are all feeling the pressure of rising prices.

Several years ago, when prices were rising but at a slower pace, consumers had a few coping mechanisms. Rising home values, home equity lines of credit, and credit cards were available to minimize the pain. European and American middle class members enjoyed a life style that they couldn't afford. Those cashflow avenues have painfully shut for millions while daily living costs have accelerated annually. The world's citizens are becoming increasingly depressed.

How do you financially cope if you do not have access to credit? First, you nix any thoughts of discretionary purchases and make do with what you already own. Second, you travel less or differently and you trade down on daily product purchases. House brands will gather steam and brand names will see margins erode to compete. Third, debt payments will be stretched, defaulted, compromised, or eventually discharged in bankruptcy. Lastly, throughout the ordeal, consumers will agitate for pay increases and look for other, higher paying, employment. Even with high unemployment, employee churn will result in some wage pressure.

The foregoing scenario is damaging to individuals, governments, companies, and the world economy. Unless consumers find more cash, problems lay ahead. Corporations, so far, aren't handing out large increases in pay as the emphasis is still on cost control and the labor pool is far from tight. The US has determined that a .7% increase in Social Security is appropriate for its senior citizens; not a lot of extra cash to help offset rising prices. We all know the problems that the European countries face attempting to bail out their member states and keeping their banks solvent, thereby leaving little to improve lifestyles. The Chinese have been raising wages, but far less than the inflation they are experiencing.

Where am I going with this rant? It's time to be very careful, but an investor will probably still be wrong. Some galloping commodities, like silver, after parabolic rises will revert to the mean. Lighten up on those parabolic performers. If inflation isn't here yet, per the Fed, it sure is developing fast. Faster than economies are recovering. Get real confident about a company's ability to sustain margins and volumes or jettison the position. Buy some protection: inverse ETFs or puts or institute some short positions.

I sold Brunswick, boats/motors/bowling, short a couple of weeks ago and am toying with doing the same to Diamond Foods. DMND has been growing by acquisition and just announced a deal for Pringles. I suspicion that P & G got the best of the deal as DMND is assuming $850MM of debt and giving P & G shareholders 57% of the resulting company. Commodity input costs are going to impact margins, the debt load will be a lot larger, the company more complex to manage, and there will be lots of selling shareholders once the stock is distributed. Diamond will also likely reduce debt by selling some additional shares. I haven't pulled the trigger yet, but I'm pretty sure i will shortly. The stock has been a darling, but it is now selling for a very extended valuation and that's before the Pringles component is added and P & G wouldn't be disposing of the division if it was a barn burner with a stellar future.

Brunswick is counting on consumers to return to the boating market and Diamond is hoping that consumers keep buying snack foods at their current pace and practice. I don't think either will happen. Someone once said " A conclusion is the place where you got tired of thinking" and I'm tired. The end.

Smart Balance Is Behaving Better

2011-05-14T08:12:00.000-07:00

Smart Balance's heart healthy regimen hasn't been a financial winner for Al and Crusty. My game-plan has been buy it and tuck it away for 5 years and let Steve Hughes do his magic. Hughes has done it several times before and the bet was that he'd build a billion dollar consumer products lineup and dispose of it profitably. I'm several years into that plan and it hasn't gone smoothly, especially 2010.

After being as low as $3.35 several months ago, its share price has marched up to $5.50. I wish I could justify the rise by significantly improved operational performance, but I can't. The country's milk leader, Dean Foods [DF] has awakened during the same period and enjoyed a similar trajectory. I don't care if SMBL rides DF's coattails as I'm elated that I'm finally in the black again.

The company's recent conference call was positive and their current advertising strategy of combining products in each ad is effective. Milk is doing well, spreads are struggling somewhat, and their Whole Foods venture is promising. They remain upbeat about extending the brand.

Since I've got a couple of years left in my original plan, I'm staying the course. $5.50 makes it easier, as does my new found environmental wacko-ness. Healthy, natural, and organic brands have been able to grow in spite of the economy and I continue to believe that Hughes and his team are on the right track. I hope I prove to be as smart as Al.

Crusty Is Turning Into A Tie-Dyed, Environmental Wacko

2011-05-14T07:23:00.000-07:00

Of late I've been listening to Dead CDs, wondering if the Fish will do a Midwestern tour this summer, and thinking about joining Nebraskans for Peace. I can trace the beginning of this behavior back to my purchase of Power-One, a leading manufacturer of solar/wind power inverters. That investment led to a position in JA Solar, a Chinese solar panel manufacturer. I'm in danger of morphing into an environmental wacko. Since I'm not a total convert yet, I hope I've bought my two alternative energy positions cheap enough to make me a prosperous wacko. Also, to keep this behavior from becoming religion, I remain very happy with my nuke related investment in Shaw Engineering and a passel of oil and gas producers.

The stock market appears to hate the alternative energy space. After a number of years as "high flyers", solar companies have fallen out of flavor. Markets are concentrating on the possibility of less governmental subsidy due to budgetary restraints and have killed valuations. Companies can be had for a couple multiples of cashflow. Even if inventory gluts, reduced margins, and falling sales do materialize and cut last years earnings in half, a purchase today represents only 5-6 times EBITDA and since solar is not going away, that's a very attractive entry point.

JASO sells for 3 X EBITDA, 1 X Book, has a 30% ROE, and very little debt. It has been around for a long time and is well respected. As a local company, it will do well as China builds out its solar plans and has facilities and joint ventures in all other areas of the globe. It has been a big player in Europe, solar's number one locale, and will be a big player as the rest of the world picks up any slack from European retrenching. They just reported 1st quarter results which were excellent and the guidance was positive as well.

Renewability, high oil prices, Mid-East tensions, and cheap valuations are all working in this wacko's favor. Peace.

Religion And Investments Don't Mix

2011-04-30T05:07:00.000-07:00

Zealotry may have a place in religion or social causes, but I prefer my beliefs to be rooted more in logic. Reason should triumph over dogma, but it won't faze the fanatic.

Investing should be driven by reason, not any other discipline. Obtaining good, consistent investment results is difficult and, over the long haul, impossible if clear thinking isn't the main driver of financial decisions. There's no place for religious zealotry in investing. Blind Faith leads to the poorhouse.

I intend on never visiting the poorhouse. That doesn't mean that bad investment decisions aren't in my future. I make them regularly, but they won't be mistakes of a major magnitude. Logic, financial analysis, and fear will keep losses to a minimum. I try hard to not turn any investment thesis into religion. I'm open to different opinions and criticism and if my thinking is proven to be flawed I'll exit. Not so for many investors.

I run across religious fervor daily for various investments. Irrational fervor and devotion for their positions. It's generally present in niche investments that have done extremely well and that performance has a missionary's impact on the converted. Nothing fazed the high-tech devotee during the bubble, the sub-prime/housing guru several years ago, the rare earth minerals fanatic, and the all-in commodities speculator of today. Logic is of little value when weighed against a continuing uptrend. Belief in continued success is paramount and that thesis is to be defended, no matter how weak the argument.

Miracles happen in connection with organized religion and they can happen also in investing. Timing is unpredictable and an irrational investment trend can go on for much longer than it should. But, investing results shouldn't be dependent on miracles and that is what is required if logic is taken out of the process.

Sell a security short, write an article detailing the reasoning, and wait for the attacks. The faithful respond with vitriol and very few facts supporting their position. They are in the investment because it has gone up, they have become converts, and they believe it will always go up. It won't and they will be in the poorhouse. Investing, long term, is about making analytical decisions, not miracles. There's no place for religion in investments.

Today I will Experience Anti-Inflation

2011-04-04T05:44:00.000-07:00

The mid-to-late 1960s were a colorful era, to say the least. Dayglo concert posters and strobe lighting symbolize that period of acid rock music. LSD was a mind expanding [per Timothy Leary], intensely color laden experience. I grew the hair, liked the music, but preferred the tamer indulgences.

My Macbook has been treating me to a late in life hallucinogenic show as it slowly dies. I've always been annoyed before as PCs crash and die after a few years. Vastly slowed performance, then a bunch of white numbers, letters, and symbols set against a black backdrop. Then I need to go to the electronics store for a replacement. Not the Mac.

My original Macbook, purchased when they came out in 1996, has been a work horse. It's been dropped twice onto hard flooring and the edges were held together by tape. But it always continued to work perfectly. The cursed colorwheel didn't even spin too often. Truly a good product and well worth the money spent.

But it now seems to be on it's last legs. Each morning it has been putting on a psychedelic light show of flickering, pastel lines. The show is so pretty that I don't even mind the inconvenience. After the performance, it lasts about 5 minutes, the Mac takes a bow and functions admirably the remainder of the day. I thought today might be the overdose as the performance lasted longer than usual, but I'm typing!

If it quits this afternoon, or the next day, I'll experience anti-inflation. We a regularly told that the USA has inflation well in check and the cost of living remains low in spite of galloping food and energy prices. In fact, since those two components are volatile, we should remove them from our core inflation calculation. How can this be? I'm about to actually benefit from anti-inflation and reduce my cost of living.

The Fed tells me that my new Macbook will have much more memory, speed, and features that its predecessor so that equates to a falling price. It won't feel like a lower cost when I write the check, but I will be able to take some solace in knowing that my personal rate of inflation isn't charging upward as it will have been tempered by all of the new Mac features. When I fill my tank I'll know that due to my buying a new computer my gas isn't really impacting me as much as it did at my last fill-up.

I'm rooting for the Macbook to survive even if it means I continue to be ravaged by food and energy costs without my electronics cost of living offset.

I Stands Corrected

2011-04-02T13:45:00.000-07:00

Some wag just informed me that my cartoon memory is faulty. Popeye used to say I can't stands no more rather than stans. Sounds plausible, but I always thought he slurred stans.

It's a good thing I'm a critically acclaimed financial blogger rather than a critically aclaimed linguist with a specialty in cartoon speech because I stands corrected after checking wikipedia.

I Can't Stans No More

2011-04-02T10:13:00.000-07:00

Popeye had it right when he used to say " I can't stans no more" and then light into Bluto. He'd be pushed to the brink and then explode. Crusty has been pushed to the brink by the stupid financial press.

I can't stans no more talk about needing a rebound in housing and new home construction. It's idiotic to hope for or expect that they work together. They pull at opposite directions. The last thing America needs is a rebound in new home construction. Now, contractors and construction workers may need a rebound in new construction, but underwater homeowners sure don't. They need a reduction in supply and you don't achieve that by building new homes [the same rant applies to strip malls and commercial flex space].

Years of over building, over speculating, and over leveraging got us into our present situation and the sooner we stop adding to supply the better. We may stop adding to supply sooner if the financial media begins to understand the situation and ceases lamenting the poor new home statistics. What's good for Lennar and Dr Horton isn't good for American home owners.

Home prices aren't going to rise, in over built parts of the country, until those parts are no longer over built. Simple! At present, in process foreclosures, vacancies, and shadow inventory remain excessive. A better economy and population growth will help. So will better reporting and conservative lending.

Since government's pump priming hasn't helped and builders continue to build, what else may be a possible solution to static home prices? It's not an original thought, but the following makes sense. We currently give green cards to immigrants that follow the rules and come to American with substantial cash to open a business. The concept isn't new. If we want to jump start home pricing we need to stimulate purchasing from new buyers. Let's expand our current program that accelerates green card ownership if the immigrant not only opens the business, but also buys a home. Greatly expand the requirements for cash invested in the country and value of the home; and most of all, the number of new, qualifying immigrants we will allow. Our housing overhang and price problems will start to mend as supply contracts.

If we can stans no more we need to quit lamenting poor new home construction until supply recedes and we should consider expanding our immigration pool as a means of reducing supply.

I Bought Shaw As A Nuke Growth Company, I'm Keeping It As A Nuke Retrofit Company

2011-03-29T13:49:00.000-07:00

Prior to the Japanese earthquake, I was very content to own Shaw Group, the big Louisiana based construction company. I built a position several years ago in the mid $20s and its price had moved up nicely to around $42 on the back of the nation's anticipated, renewed commitment to nuclear energy. Shaw, a minority owner of Westinghouse [ the owner of the latest and best nuclear reactors], and the major nuclear construction company had a half dozen plants under construction in China and the USA and another batch approved by oners and regulators. The future was looking good.

Then Japan's problems occurred and Shaw's stock price dropped to the $30 range. Fortunately for me,PWER, the renewalable energy inverter company, moved up nicely over the same timeframe reducing my pain. At its present pricing, $35, I think Shaw is a reasonable purchase. We will likely proceed will all approved plants, but with adjustments. Those adjustments will mean change orders and work to Shaw's advantage. Nuclear power supplies about 30% of our energy and it can't be replaced over night or over a decade. We have to have it, but we will try to make it safer and that benefits the contractor. Many functioning plants will be retrofited and Shaw will be selected as contractor. Not only have they built more plants than the competition, but as a 20% owner of Westinghouse, they are connected to the world's most advanced reactors, and also own specialized piping facilities. I believe Japan's issues will create a wave of business for Shaw.

Shaw has some screwy accounting and reporting due to its minority ownership on Westinghouse and some currency issues that accompany that ownership, but the company does a good job of discussing the issues. That said, Shaw is selling for about 12 X forward earnings and has a decent balance sheet. While not a screaming buy, or a "fat pitch", $35 is a good entry point for this quality engineer/contractor that also happens to do disaster remediation and major construction jobs, like all the dike rebuilding after Katrina.

Not A PWER Expert Yet, But Getting In Deeper

2011-03-11T13:40:00.000-08:00

I'm still learning about alternative energy conversion as I lose money on my initial Power-One purchases. So far I've convinced myself that I will still do well with the investment. But, it's starting to feel lonely as there are plenty of sellers and naysayers.

The three questions I constantly ask myself are: is solar/wind energy going away, is PWER a leader/survivor, and am I over-paying for the company? My recurring answers are No, Yes, No.

Economical or not, every country in the world is gravitating, to some degree, to alternative power generation. Subsidized yes, but becoming less so as oil prices increase. No one likes being hostage to oil producer states.

Alternative energy when produced needs to be converted into grid power and that's where PWER, and a slew of competitors, comes in. They also do about a $300MM business in power management for data centers and have about $200MM in cash, but evidently the market doesn't care! Power-One does about $700MM in inverter revenue and is the world's second largest inverter seller. New factories in Arizona and China are spearheading expansion into those two large markets for renewable projects. With a number two industry position, new factories, plenty of cash, and virtually no debt, I don't think PWER is facing failure. They could get acquired though by an Emerson or GE if they wanted to get serious about the market.

At a $7 share price, I can live with a poor first half of 2011 as plants are started up and inventory gluts are worked out. The company and analysts are still very upbeat about the full year performance, but if wrong, it's been priced into the share price. If margins fall dramatically and SGA gets out of control, causing net income to fall to $.50 a share, that 's only a P/E of 14 for a leading growth company.

Today I upped my ante and bought some January 2012 $5 calls. I paid about $2.85 for the options so I'll start, hopefully, breaking even at about $7.85. PWER finished the day at about $7.25. I liked the company in the $8s range, so I was happy to add to my position at an even lower price. PWER has 10 months to prove the naysayers incorrect and Crusty wise. In the meantime I continue to learn more about the industry.

Testing The Water With Power-One, Inc

2011-02-26T13:44:00.000-08:00

Power-One goy killed about two weks ago and dropped over 20 percent. It has flat lined at about $9 since the big downdraft. The cause, like so many other slaughters, wasn't a poor earnings report, they beat street earnings and revenues handily, but provided lowered guidance and mentioned the word "glut". That's how 205 can fly out the window.

PWER has two businesses: power solutions for data centers and inverters for alternative energy. They've been in the solutions business for a long time and it keeps chugging along. The sexiness is in the inverter business where they convert the energy from solar and wind generation into power that can be sold to, and used by, power companies. The reduced sales are in the latter, as is the glut. The company expects it will take a quarter or two to work excess inventory, at the distributor level, through the system. PWER doesn't sell their inverters in the US or China, Europe is their main market, but they entered those two markets at the tail end of Q4. They are the second largest inverter company so they have a reasonable shot at gaining some traction in the US and China. The more successful they are the faster the excess inventory goes away and revenues resume their trajectory. Even with the glut, the reduced guidance calls for revenues of $1.1B-1.3B, exceeding 2010 revenue of $1B. PWER made $.96 eps, including a $.14 charge, in 2010. Analysts have been taking dow estimates, but concensus is still $1.16 eps. At $9, PWER is selling very inexpensively. Its cashflow multiple is also a gift. They have several hundred million dollars of cash and almost no debt.

I've started a position and hope that I continue to gain confidence so I can build a larger holding, but what do I know about solar and wind? Believers have all sorts of sum-of-the-parts valuations that get to $20+ and a commanding market share in a growing industry. But, a glut is a glut, and why did the glut develop? I'm comfortable enough to tip my toes in, but not ready to wade out deeper. Hopefully I will be a quasi solar/wind power inverter expert within a short while and be able to know whether I should dive in or rush back to the shore.

Sold Silver Friday And Reinvested In Gold

2011-02-26T11:36:00.000-08:00

About two years ago I put on similiar sized positions in gold and silver [ GLD, SLV ]. My worry was the same as most people, rising inflation and currency debasement. Since I wasn't targeting growth, just protection, I elected to stay with physical metal in a vault, not miners or intermediaries.

To my pleasant surprise, I got growth. Gold moved very nicely and silver skyrocketed. For many years the two precious metals have traded closely, but this past year silver took off. Gold was up, I'm trusting memory here, about 25% and silver about 100%! A look at any comparative chart will show it much more dramatically than my previous statement. Was silver really undervalued, compared to gold, by that much? Are they now at parity? I've read all the literature and silver bulls still love the metal and silver short sellers are giddy with anticipation.

I tell myself that I don't care what happens to the price of silver from here forward because I only want to own the metal for protection. Additionally, those two similiar positions had changed dramatically because of silver's 4-to-1 move and needed to be rebalanced anyhow. So, I sold SLV and intend to buy back more GLD as it pulls back when some of the geopolitical issues subside. I don't believe silver has another 100% year in it, and if it did run too far, it may give much of that gain back. My chances for price appreciation are better in GLD, plus I'm getting the protection I want. Silver has a large element of speculation in it at present and I prefer the sidelines after being lucky.

Now if silver jets up another 50% I'm going to memorize the preceding paragraph and try to feel better.

The Corporate Cash Logjam May Begin To Flow

2011-02-10T05:56:00.000-08:00

For the past several years we have heard about the huge cache of corporate cash that has piled up on large companies' balance sheets. Both political pundits and financial reporters have chronicled the fact that, for various reasons, big companies were hoarding, not spending cash. The implication was clear:when the spending starts the economy will strengthen, jobs will be created, the market will rally, and all will be well with the world.

Recent days have produced two clear signals that the logjam may start flowing. First, Obama chastised the Chamber of Commerce audience to start investing that cache of corporate cash in American projects and creating American jobs. The implied threat is that Obama will be watching and corporate cash totals shouldn't continue to grow while the American economy and unemployed workers are under stress. Implied threat or not, creating jobs for Obama's sake may not be in the best interest of corporations unless they make financial sense. What is in the best interest of America's corporations is to not incur the wrath of the Government.

Yesterday Dow Chemical announced, in my opinion, their version of how can we best reduce our cash totals prudently. After deciding that they had enough cash to fund all viable business expansions, they raised their quarterly dividend by 5 percent and approved a new $7B stock buyback in addition to the $2.5B still authorized. Over the next several years they are going to return lots of money to shareholders. If they saw 10B of projects that would hit their IRR hurdles, they'd invest in those money making projects. I read DOW's decision as disciplined management that isn't going to be pushed into reckless spending just to please the President. But, they aren't going to be caught in the spotlight either with lots of cash and facing potential regulatory repercussions.

While I believe we will see many more dividend increases and stock buyback authorizations, corporate cash is going to be increasingly put to use in strategic Mergers & Acquisitions. All three actions will be beneficial to the stock market as money will be flowing. The impact on the national economy and the unemployment rate may not be dramatic, but it will raise the major stock averages this year.

Vulcan Materials' Shipments Peaked In 2005

2011-02-05T06:51:00.000-08:00

The recession and it's impact on certain industries remains far from over. The aggregates industry, forgive the play on words, is bedrock to the U.S economy. However, it hasn't been very hospitable to owners in recent years. The lesson to learn is that even industries with scarce resources, difficult permitting, and central to the economy can experience significant troubles, especially if balance sheets get stretched. Vulcan [VMC ] is the poster child for this phenomenon.

Don James, Vulcan CEO, stated in the company's recent earnings release that shipments are down over 50% from the peak in 2005! He offered some positive comments about the tide turning, but pinned 2011 shipment growth on a resumption of residential building activity, no further deterioration in non-residential construction, and a timely passage by Congress of the Federal Highway bill. Three large orders. I don't envy Mr. James as he's in the hot seat, or should be.

James didn't create the Subprime building bubble, but he also did a poor job of protecting the downside of his business. At the peak of the mania, Vulcan made a large acquisition of Florida Rock for a premium price. To make matters worse he leveraged the purchase. Then VMC continued to pay a healthy dividend even while its payout ratio was very elevated. By comparison, Martin Marietta Materials [MLM], avoided the large M&A deals, didn't load up the balance sheet with as much debt, kept a reasonable dividend in relation to earnings, and has remained more profitable in spite of the same type of shipment declines.

The comparison i want to make is not that MLM is run better than VMC, but that extremely bad things can happen even in wonderful industries if stupid decisions are made. The recession is over, but VMC is still plagued by its section of the economy and its leverage. The same scenario can affect any commodity based industry that is mined or drilled. New supply has been flowing into most mining, and drilling arenas and an economic slowdown can wreak havoc on those participants that use lots of debt to bring on the new capacity.

My suggestion, in addition to staying away from VMC, is reposition portfolios to only include mining and drilling companies that have pristine balance sheets and management's that are not enamored with big acquisitions. When the next downturn arrives, and shipments fall in half, you want your companies to survive ala Martin Marietta as opposed to Vulcan Industries.

Everyday You Aren't Selling You Are Buying

2011-01-29T08:57:00.001-08:00

I am often asked if I still own a security that I've opined on. If the answer happens to be "yes", I often find myself issuing a disclaimer such as "but I'm not adding to my position at present". The implication is that it is no longer a bargain, therefore I'm not adding. But, by not selling, I am making the same decision as buying. So, I must continue to like the company at its current valuation. I found it more compelling when it was cheaper, but evidently I would buy it today if I still own it. I find myself going through this circuitous logic regularly.

Two Master Limited Partnerships, DEP and EPD, have prompted my introspection. These two mid-stream oil and gas service partnerships have been stellar performers. Now, selling at all time highs I wonder if they shouldn't be sold. They aren't selling at ridiculous valuations, but they are getting extended, especially the bigger of the two, EPD. DEP's multiples are more reasonable. At today's pricing they will still yield about 5.5%, not all dividend income as some is return of capital. Both are growing, adding assets, and well managed.

Dan Duncan, the founder and force behind both companies died near the end of 2010. He left the companies with a capable cadre of management and his heirs a nice bonus, zero estate tax on his 10-20B estate! I liked him when alive, admire his timing in death, and plan to keep his two companies for the foreseeable future. I'm not selling, so I guess I remain a buyer.

Aaron Rents [AAN] Is An Auld Lang Syne Holding

2011-01-29T07:38:00.000-08:00

Yesterday I accomplished two things. That's big in retirement world! First, I bought more shares of Aaron Rents [AAN] as the market was marking them down by 7 percent and, second, the wife and I attended the annual Burns Supper.

Burns Suppers, held world-wide to commemorate the birth of Scottish poet Robert Burns are full of poetry, kilts, bagpipers, and scotch malt liquor. I appreciate all of the foregoing. There are also lots of Scots speaking with thick brogues. I missed a lot of the presentation because I couldn't catch the cadence of the brogue. Earlier in the day I believe the market was having a Scottish moment as well, because I couldn't understand why they were throwing out a solid company like Aarons.

I've written about Aaron's before, lastly in 2009, so I won't delve into any numbers today as they've continued to perform well. Last quarter was solid and future guidance acceptable. The company uses debt sparingly and sells for a modest 12 X forward earnings. In a past life I owned 25 furniture rental stores, understand the accounting, and feel confident that a growing number of customers like the rental experience. So, the sell off presented an opportunity to add to my position.

I didn't understand the market's behavior Friday anymore than I understood the Burns revelers last evening. But Robbie Burns, that cool dude in the sunglasses, would understand my toasting auld lang syne to my long-time, old friend Aaron Rents as the market presented me with a New Year's opportunity to buy some more shares at a discount.

The Cure For High Prices Is High Prices

2011-01-27T07:00:00.000-08:00

A quick, cursory glance at almost any commodity chart will lead the viewer to only one conclusion: watch out! Agricultural products, precious metals, industrial metals, rare earth minerals, energy, etc. have all experienced a steep ramp up over the past 6 months.

That increase in price has been explained by a weak dollar, upcoming inflation, emerging market growth, a rebounding economy, permitting difficulties, and the growth of commodity influenced ETFs. Given the foregoing, demand has been significant and prices have risen. Investors have taken notice, but so have producers.

Timing anything is notoriously difficult. This cycle will be no different than trying to figure out when tech stocks would peak or the last deadbeat would receive his triple subprime home equity loan. You can sense it's coming, but when?

My guess is that we're about 2 years away from the cure kicking in. The process has already begun as high prices has encouraged large numbers of new mining projects in various stages of permitting/buildout and we are beginning to see a significant number of untilled acres being planted. The cure for high prices is high prices.

To avoid the impact of increased supply, world economies need to get going and keep going. Any stutter along my 2 year guestimate and investor/speculator confidence could weaken, causing prices to start a readjustment process. ETF money isn't the same as industrial demand and if that segment of demand starts to move elsewhere, the new supply will look overwhelming!

Like the greater fool that I often am, I'm sticking with my allocation of commodity related companies and ETFs. The likes of Bunge, Cloud Peak, and Devon are likely to remain in my portfolio even after my 2 year threshold. But, the ETFs, GLD, SLV , and EWZ, are likely to be sold as months elapse and we get nearer to increased supply and weaker demand.

The recent sell off in many commodities will likely be reversed and owners will be rewarded by further moves upward, but sometime over the next couple of years, high prices will drum up supply and prices will correct. It always happens.

Rare Earth Comments Signal Inexperienced Owners

2011-01-06T07:37:00.000-08:00

My posts receive much more exposure on Seeking Alpha than they do on this site. Consequently that's where I get the most feedback; usually of little value.

The rare earth bubble article stirred the pot pretty good. My thesis was rare earths aren't rare, rising prices will attract big miners, REE companies are selling for insane valuations, and finally, if you want to be near the space, buy FCX or TC as they will benefit if the bubble doesn't explode and you'll not lose your nest egg if it does. Most commentors didn't want to get it.

I usually get this type of response when I advocate shorting a stock. All the supporters rally with inane logic and never dispute the central facts. Same thing here. The owners of REE stocks defended the price rise with all types of mineral trivia, mine location, and personal attack. Nobody bothered to re-think their investment and convince me that paying $5B for MCP, a development stage junior, that has committed most of its eventual production to W.R. Grace at a fixed price and therefore won't materially benefit by any huge run up in REE prices, is a prudent investment. That attitude and lack of discipline is how bubbles develop and one is developing, if not already present.

I did receive one comment worth reading. A person that could actually read and understand called me on my reference to Alfred Einstein, hoping it was Albert's brother. I have no idea as what I was thinking about when I typed that other than I probably had a scotch in my hand and wasn't concentrating deeply. It's better to make typing errors than investment errors.

A Tale Of Two Companies

2011-01-05T09:28:00.001-08:00

If Charles Dickens was alive and well in Omaha, instead of writing A Tale Of Two Cities, he may have tackled A Tale Of Two Companies. Omaha is home to two agricultural manufacturing companies that are both well run and in some business lines, direct competitors. Valmont Industries [VMI] and Lindsay Corporation [LNN] control the center pivot irrigation industry and also have significant operations in utility poles [VMI] and highway crash cushions [LNN]. Both are consistently profitable and financially sound; indications of sound management.

Valmont is the larger of the two and has numbers that are generally superior to LNN. VMI has a 10% operating margin to Lindsay's 9%, while producing a ROE of 11% vs LNN's 10%. Sales grew 20% last quarter at Valmont with the aid of an acquisition and only 4% at Lindsay. But the stock market views things differently.

Lindsay has been the clear winner as far as the market is concerned. Consequently, you now pay 16 X cashflow, 3.4 X book value, and 24 X forward earnings. A buyer of Valmont only pays 10.7 X cashflow, 2.7 X book, and 18 X forward earnings. Valmont is not priced cheaply. Lindsay is just priced expensively.

I expect Lindsay will revert to Valmont's level of valuation and will continue to explore put option pricing and the availability of shares to borrow. In the long run i like both of these companies, but, at present, Lindsay is clearly over valued.

Rare Earth Minerals Are Not In a Secular Bull Market. It's A Bubble

2011-01-05T07:16:00.000-08:00

Scarcity generally does lead to higher prices. But one still has to be careful. In the case of rare earth minerals, I'm afraid Alfred is going to be correct once more. Speculators are pushing any and all rare earth related stocks skyward with no regard for logic and financial analysis. All they heard was that China was no longer going to be an exporter of rare earths, leaving the rest of the world in a shortage. True to form, they've chosen the wrong companies to exploit any bull market in rare earths. As always, it is insanity and will not end well for the uninformed.

The major beneficiaries of the rare earth boom have been small, junior miners such as Molycorp [MCP] and General Moly [GMO]. However, they really don't have a business yet and are basically development stage companies. GMO has basically no revenue and a $450MM market capitalization, while MCP, also without any revenue, is valued at $5B! It's all on the come.

The problem is that rare earths are not rare! Until recently they were just by- products of other mining projects. Giants such as Freeport McMoran [FCX] are in the rare earth business and will be more so as pricing increases. So is large moly miner Thompson Creek Metals [TC].

The above chart shows where the insane money has been flowing. I own TC, for its molybdenum business and in process gold/copper project, not for any rare earth miracle. Thompson is a conservatively financed and well managed company. It has over $1B of sales, $500MM of cash, no debt, and a market cap of of only $2.5B. That's right, it has half the market capitalization of MCP!

Remain sane with proven operators, not story stocks.

Secular Bull Markets Don't Guarantee Short Term Success

2011-01-04T18:05:00.001-08:00

It's Tuesday and the wife is positively giddy as she watches Glee on television. That same giddiness and glee is also present in the commodities space of the stock market. The trend is up, the trade has worked, and the story is intact. Investors/speculators continue to pile into any and all real asset plays as an inflation hedge, a dollar hedge, and a participation in emerging markets. I've done so myself. But I worry.

"What the commodity markets are telling us is that we're living in a finite world, in which the rapid growth of emerging economies is placing pressure on limited supplies of raw materials, pushing up their prices. In other words, commodities are in a real, secular bull market, not a bubble." The forgoing quote is a sentiment that I encounter daily in articles, newsletters, and analysis. I don't disagree, but that does not mean that a nasty correction cannot happen in spite of the commodity shortages.

An example. The aggregate industry in the U.S. is a wonderful, regionalized monopoly. Supply is limited by the inability of operators to easily obtain permits for new quarries, mines, and facilities. The scarcity is real. Until 2008 the share prices of all aggregate companies marched steadily upward based upon their ability to raise prices, even in the face of declining volumes, due to limited supplies. It was a secular bull market in rock. Then as the real estate recession moved from residential real estate development to commercial development to road building, the price increases no longer stuck well enough to offset the huge volume declines. Share prices declined. I was on the right side of that trade and did well.

The aggregate business is still a good one, if your balance sheet is conservatively financed, and the permitting of new projects hasn't become any easier, but the share price declines show that shortages can become oversupply rapidly. That oversupply can affect the conservatively financed and the aggressive companies alike [MLM and VMC, respectively]. Commodities, and commodity companies, face the the same dilemma as the rock suppliers.

Should China experience a "hard landing", commodity volumes will drop drastically, prices will be slashed, and share prices will no longer enjoy a positive trend. Inflation and a weak dollar won't be able to compensate for a stalled China. Emerging markets are going to emerge and use huge amounts of raw materials, but their progress doesn't have to be in a straight line. Raw materials are in a secular bull market, but they aren't immune to dislocations caused by retrenching markets.

If China were to stall, the secular bull market in commodities goes into neutral for several years. I don't have an opinion on China's ability to manage their economy, but I do have an opinion on how my raw material/commodity investments are structured. If China craters, I only want to own companies with pristine balance sheets that can easily survive until the emerging markets bounce back. I don't own "junior" miners, rare earth hopefuls, and leveraged operations that are taking on large, debt funded, expansions to supply China.

I don't have the conviction to sell materials stocks short, like I did the aggregate operators, but that could change! In the meantime I hope the China led recovery continues, and should it not, that my conservative materials positions perform well enough to get me to a prosperous resumption of the secular bull in commodities.

Glee's over so I can quit typing.

We'll See M&I Played Over And Over

2010-12-21T13:21:00.000-08:00

I continue to dislike almost all banking stocks. The only positive they have going for them is a large short position that could trigger a short lived spurt upward on any bullish news, but I don't believe it would be sustainable.

Banking faces large earnings headwinds and those are not all credit and spread driven issues. All banks have had to change their approach to excessive overdraft fees and now they face a dramatically smaller fee stream on debitcard transactions. Any real estate refi mini-boom is nearing an end as interest rates are rising, so the non- interest income contribution to earnings is going to be putrid.

On the interest income side of the P&L, I don't think banks can build enough reserves, through earnings, to cover past lending mistakes. They just have to keep doing what the banks and government have been trying to accomplish, and have to a large degree, that is talk a good story, defer losses, and raise equity. So far so good, unless you were among the diluted. Loan demand is anemic, bond yields minimal, and trading is being curtailed. I don't look for growth in net interest income. You won't reverse those trends by what a bank can earn on excess reserves held at the Fed.

I don't think a big short position and the prospect of dividend increases are more important than the lack of earnings growth in the long run. plus the guys running the banks today are proving to be less than brilliant as some some are already treading back into past mistakes. Credit card banks are already offering credit, at higher rates, to strategic and first time defaulters! Where are the regulators and Boards of Directors?

M&I was a good case of the walking wounded and sold to Bank of Montreal for about 1/2 book. More will be forced into the arms of the world's remaining healthy banks. Regions, Suntrust, Fifth Third, Huntington,Key etc. all are some degree of toast as they probably aren't too big to fail and will be forced into a sale at some fraction of book value as earnings growth will not be adequate to keep the balance sheet sound.

A Purchase Today Of CLD Will Result In A 5% Gain Shortly

2010-12-13T07:26:00.000-08:00

I already own a full position of Cloud Peak, CLD, so I haven't added to my holdings in today's sell off. CLD is off about a dollar, 5%ish, due to an announced secondary offering by the company of most of the stock owned by the major shareholder, BHP Billiton. Cloud won't receive any of the proceeds, but it does distribute its ownership and will no longer be controlled by BHP.

Once the dust of the secondary settles, I believe the price will readjust back to Friday's level and continue upward. Cloud is a low cost producer of coal for power plants and sells for 10X forward earnings and a modest cashflow multiple. Today's price decline, anticipating a lower offering price to move the large secondary, gives a new buyer a 5 % head start.

This Loose Cannon Either Made Me Lots Of Money Or Will Be The Cause Of My Shrunken Net Worth

2010-11-28T10:13:00.000-08:00

I'd been watching Posco [PKX], the huge South Korean steel manufacturer, for several months as its stock price trended downward. Last week North Korea lobbed some artillery shells at a South Korean island and the price of Korean securities cratered. I took that opportunity to buy PKX.

Some back of the envelope calculations indicate that you can buy PKX for a hair above book value, 7ish X forward earnings, and 5 X cashflow. The balance sheet is sound with debt at about 40% of equity. The world economy is performing adequately and Posco is well positioned in Asia. Input costs are obviously rising, but so far not crippling. PKX is at a reasonable entry point for the longer haul.

I'm already in, and ahead a couple of dollars, so it is unlikely that I'll buy more, even if the little dictator puts on his uniform, stops drinking beer, and causes more problems on the Korean Peninsula which causes PKX shares to drop further. That may happen and prove to be a gift as I don't believe we are in for a repeat of the Korean War and PKX owners will be rewarded as demand for Posco's steel grows.

Life Is Good In Spite Of The Goverment

2010-11-26T09:01:00.000-08:00

I've already exercised, we have plenty of turkey for sandwiches, Nebraska football is on the television soon, and the dog is sitting next to me and thinks I'm wonderful. Could it get any better? Yes it could if our government entities would lessen their intrusion into our collective lives and businesses.

After decades of misguided government programs and policies, combined with very poor corporate leadership, we've found ourselves in a debt saturated world. No matter how the politicians, the Fed, the economists, and the opportunists spin their story, there is only one answer to our problem. I've done the research. The capital has been squandered and haircuts must be taken and losses recognized. Further, the losses must stop being assumed by tax payers.

When you invest you take risk. When you're stupid, unlucky, conned, or short on due diligence you are apt to lose some of your capital and you should. That's where discipline is learned and reinforced. Default and failure is necessary if we are to rescue ourselves from our current situation that rewards the risk taker and burdens the taxpayer for other's mistakes.

On the national level the Treasury/Fed is engaged in a weakening of the US Dollar in an attempt to lessen the pain of debt service and improve the ratio of debt to GDP. The alternative is austerity and/or default. I've done the research and they're not going to abandon "business as usual" so rule out austerity, except for tinkering around the edges then declaring victory. They won't default either, but the bond market will demand greater yields before long and that, unfortunately, will be born by all taxpayers again. What they can do to help, and the populace must insist, is to stop bailing out companies, industries, states, and foreign governments. Let the haircuts and losses commence. Investors and owners need to bear the losses from here forward.

Beyond a commitment to quit institutionalizing losses, governments, and the electorate, needs to recognize and believe that the best of all possible worlds are corporations and employees that agree to share the wealth without any capital contribution by the government. A new business agrees to commit the capital, build or lease the facility, fund the inventory, keep the lights on, make the product,pay the employee wages and benefits, AND GIVE THE VARIOUS LEVELS OF GOVERNMENT 50% OF THE PROFIT!!!! Why isn't that encouraged? I've done the research and lower levels of taxation lead to more new businesses, expansions, and hiring.

Since I'm not full of BS, who is? Don't believe their line and hold government's feet to the fire on future bailouts, regulations, and taxation. I am full of turkey.

Waste Management Is A Core Holding

2010-11-21T15:26:00.000-08:00

Mount Dora is a town with a canopy of live oaks covered with spanish moss. Consequently, acorns are always falling. Occasionally they hurt as they drop on the unsuspecting walker's head. Mostly they are just a nuisance as neighbors are always sweeping walks and street cleaners are tidying up the avenues.

On my walk today I commented to an ernest sweeper " it's a endless job isn't it?". Her response was apt : "I wish they had value and we could sell them." Alas, acorns don't have any value, they're just waste. Other than acorns and spanish moss, most waste does have a value and that brings me to a long time holding, Waste Management.

I've owned this company longer than any other and have grown accustomed to it and its yield, about 3.6% at todays share price. The market values it fairly, not cheaply, at about about 9 X cashfow, 15 X forward earnings, and 2.75 book value. WM uses debt, but isn't overly leveraged.

It, like its major competitor, Republic Services, run little monopolies in the communities they serve. Even if the monopoly comes unraveled by losing a franchise renewal on the pickup of refuse, they still control the landfill and are in an excellent negotiating position. Besides the standard garbage pickup and recycling, they have a large and growing portfolio of gas from waste and electricity from waste projects. They are the ultimate green company. They make money off of everything, including the acorns that adorn the streets of Mount Dora.

I bought WM years ago as a turnaround and both it and its share price have done nicely. I don't think there is any large underpricing here and the share price will mirror the market moves. But that's OK as I also get the 3.6% dividend yield. The payout ratio is about 60%, higher than I'd like, but the rather consistent revenue stream gives me comfort.

Waste Management is a fine company available at a reasonable price that throws off an excellent dividend. A core holding that pays much more than a CD or savings account.

Pensions And Commodities Are Stiff Headwinds For Industrial And Consumer Product Companies

2010-11-18T06:02:00.000-08:00

Recent news articles on Honeywell, UPS, and General Motors have served as a reminder to pay attention to pension obligations and their corresponding impact on cashflow. Before establishing a new position I attempt to make sure that I've factored into my decision making the potential negative impact of a defined benefit pension plan. Occasionally I'll take a shortcut and that aspect is missed. Annually I scour my portfolio to make sure I'm aware of pension issues. Many multi-national industrial and consumer product companies are saddled with underfunded plans that must be addressed.

The impact on earnings isn't always negative, as in HON's case, as they may be able to change accounting treatment and lessen the impact on net profit. But they can't change the impact on cashflow. Less cashflow, less balance sheet cash, or more debt are the only real ways for a company to bring their pension plan up to snuff. None of which are positive for the cautious investor.

While the stock market's rebound is beneficial to pension funding, the bond component of pension assets remains dismal. Plan assumptions have been too optimistic, for too long and companies are addressing the issue. But the timing is far from perfect.

Not only are we in a global slowdown, commodity input prices are raging. Any company that makes a product is facing significant pressure on margins. Now, after several years of poor performance in equities and low bond yields, companies are needing to start a more aggressive refunding of their defined benefit pension plans. Unfortunately it is at the same time as sales growth is difficult to capture and input costs are soaring. Difficult headwinds.

QE2 and emerging market growth may continue to lift all stocks, but my suggestion is to cull portfolios of the weakest firms with underfunded pension plans. Battling rising costs in a tough sales environment is difficult enough.

Annaly Remains A Reasonable Position Despite Cramer's Endorsement

2010-11-13T07:03:00.000-08:00

A 15% yield is normally an omen of impending dividend suspension. Combine that yield with leverage usage and the mortgage industry and one should generally avoid the security in question. Now toss in a recommendation from Jim Cramer and it is often time to duck. I'm now worried, but I agree with Cramer that I should keep my position in Annaly Capital Management [NLY].

Annaly is a REIT that invests in agency securities, therefore it takes no credit risk assuming you view the U.S. Goverment's guarantee as solid. It leverages its capital to purchase more securities, although not like the financial time bombs of several years ago, and enhance earnings. It does take on interest rate risk, but through asset/liability management attempts to limit the impact of interest swings. It uses a barbell strategy of floating rates on the shorter durations and fixed rates on the longer holdings. How well it will work as QE2 accelerates interest rates remains to be seen, but the management team has done a credible job since its creation in 1997.

Is a dividend cut coming down the road? Don't know. As a REIT they have to distribute 90% of their net income, so it is all dependent on NLY's continued earnings ability. Clearly the current rate environment is one that is working for them. As rates rise their profitability will depend on how well they execute their A/L strategy. A sudden, sharp interest spike would be the worst scenario, but with a Fed intent on keeping rates low, NLY probably faces a slow creeping interest rate environment which is easier to navigate. Thus, several more years of attractive dividends and yields. Continued dividends and low yield alternative investments also leave room for share price appreciation.

NLY has treated me well for quite some time and I remain confident it can overcome Cramer's recent praise.

How Does The Blogosphere Function Without Me?

2010-10-25T08:06:00.000-07:00

It's been about 45 days since I last had something worthwhile to write. While that has left Crusty's readers in the lurch, my in-person buddies have remained subject to the same verbal drivel that they have become accustomed to. But, again, time has flown and I've been busy, busy, busy. Time to write.

Almost all stocks have risen with the market's recent advance. I'm only bleeding on a few short positions and my ownership of Smart Balance. A few covered calls have been taken away and several others are hovering around the strike price, but that's OK.

Crusty is feeling happy as the market and my net worth has rebounded.

But, that feeling of elation is starting to feel a bit tentative. There is quite a consensus regarding QE2, a weaker dollar, and the attraction of commodities and equities during a period of money printing. While I suspect there isn't a ten percent correction coming between now and year end, who really knows? A Democrat victory, a European melt down, or deteriorating numbers from the emerging markets, and a host of other possibilities, could cause serious problems. Celebrate, but remain wary.

Some recent purchases are INSU, the sewer replacement company, SHAW, the engineering nuclear giant, and CLD, a BHP Biliton North American coal spin-off. All have turned in good earnings performances of late, look solid going forward, and have been creamed by the market.

Time to walk the dog. It's finally turned cold in Nebraska and I can't delay any longer as she is staring at me with some extreme urgency. So no more stock talk, out the door I go.

MO: Not Altria, Not Momentum, But Molybdenum

2010-09-13T14:57:00.000-07:00

I haven't smoked since college, never owned a tobacco stock, and I generally don't think favorably of momentum investing, so I've rarely thought of "MO". But I got interested in MO this Spring and remain so. Molybdenum is atomic number 42 and periodic table symbol MO.

MO is a necessary component of steel and industrial products. It's not a precious metal, it was nearly so when it sold for $40 per pound several years ago, but an industrial metal selling at about $16 per pound today. Recently the London Metals Exchange started trading MO, but the price is mostly determined by industrial usage. That could change.

I generally don't speculate in commodity prices, but inflation and currency debasement concerns gets me thinking about protection. The best way for a value investor to participate in commodities is through a reasonably priced company. I found Thompson Creek Metals [TC] awhile ago and like the company even more now than before as it is about to go from a pure moly miner to a mining company that also has gold and copper interests. The latter come through the acquisition of Terrane Mines which should close yet this year. Terrane brings diversification and a precious metal component.

Thompson Creek is a solid operation, not some "junior" mining operation that could go away tomorrow. TC has a market cap of $1.5 B, over $600M of cash, and no debt. Before you get too excited, much of that cash and about 25MM shares will go to Terrane shareholders, but the company gets significant mining assets and a revenue stream. Pre-acquisition it is trading at a forward P/E of 7X and EV/EBITDA of 4.5X. Trailing twelve months ROE is 16%.

If the world economy plods along, TC will do well. If it craters, they won't fail. If central banks weaken international currencies like I think they will, molybdenum and other industrial commodities will explode and TC will participate. Beyond central bank mischief, MO will be in demand because China has now entered an import phase and is no longer an exporter. If China builds stocks like they have in copper and other industrial metals that should encourage LME activity and price rises. TC is an efficient miner and roaster that will certainly benefit from rising prices of their product.

Current pricing of TC is attractive and even though it will go down if the world economy slows, a several year out time horizon will be rewarded.

Tinet Kickstarts Neutral Tandem's New Growth Initiatives

2010-09-11T10:02:00.000-07:00

Maxwell Smart was an idiot that employed cutting edge communications. Mr. Market represents today's idiots that don't understand, and can't differentiate among, telecommunication companies. Intense price competition doesn't always result in Level3 [LVLT] like financial performance. Yet, that is exactly how the market is treating Neutral Tandem [TNDM].

Disruptive technologies and commodity offerings do result in revenue challenges, but all companies aren't affected equally. The downfall of LVLT and most similar companies was severe over capacity and usage of debt, two factors that do not negatively affect TNDM. Neutral Tandem is debt free and asset light, as they have taken advantage of industry over building and leased their fiber at attractive rates. They have also stayed out of the retail business of their customers and also not pursued enterprise business in competition with those same customers. They've remained wholesalers and have, consequently, be able to gain market share of carrier business.

While TNDM has gained share, total minutes are growing 20+ percent, prices are falling. Revenue is flat, but margins remain healthy. Their niche in voice switching remains solid and viable for the forseeable future. But growth is elusive and a company needs to grow. Management has pointed the company in the direction of termination of international calls and ethernet exchange. They have been expensing all of their expansion efforts and have the balance sheet to accomplish the mission.

Thursday the company jump started their international and ethernet plan. They announced the acquisition of Tinet, an Italy based IP transit and ethernet services company. TNDM is paying $95MM in cash or 6.1X post synergies EBITDA; 7X without the synergies. After the all cash transaction, TNDM will still have over $90MM of cash on hand. The balance sheet will remain strong as TNDM continues to project throwing off over $30MM of free cash next year.

Tinet, with sales of $56MM and EBITDA of $10MM, brings a strong presence in wholesale IP transit and about $5MM of ethernet revenue. The combination of TNDM's North American voice business with Tinet's international data networks offers significant new business opportunities within the customer base. The combined network will offer future ethernet customers over 100 locations worldwide, much broader than any of the fledgling ethernet providers. This growth area now looks much more promising and the CEO states that ethernet revenue should be growing nicely in 2011. Additionally, termination of international calls should ramp up revenue as TNDM solicits Tinet's customer base.

The combined company, at 6/30/10, would have had sales of $230MM and $99MM of EBITDA. After deducting $95MM of cash for the acquisition, the enterprise value of TNDM is only $236MM or 2.4X combined EBITDA. TNDM is cheap.

Maxwell Smart, I mean Mr. Market, will eventually accept that TNDM's voice market isn't near-term terminal or become ethernet exchange believers. Short sellers, over 10% of the float, have made a killing on the ride down and must be near the exit point as the bottom must be near for a company with no debt and lots of cash per share. We may be several quarters away, but at $10 Neutral Tandem is a buy. I thought so at $13 and I'm a bigger believer after yesterday's announcement. I bought more shares on Friday and harbor no thoughts that TNDM will follow the path of Level3.

I Prefer Watching A Bull Elk Rather Than The Bear Market

2010-08-22T12:54:00.000-07:00

August has been a lazy time for Crusty. More lazy than normal. The market has meandered and my portfolio decisions seem sound. Or, if not sound, void of new ideas.

A couple of weeks ago a deer jumped over my back fence and bounded towards the neighbor's yard and the lake. I'm used to pheasants and an occasional raccoon in the yard, but the deer was a first. I see them in the parkland surrounding the lake so I'm aware of their presence but, as I wrote, seeing a deer in the backyard surprised me. It also made me want to go to the mountains. So, we packed up the car with the wife and the dog and headed to Colorado.

Around Estes Park you can't miss the elk. They are everywhere. They seem to be particularly fond of yards, shade, and flowers. I sure enjoy watching those beautiful animals eat other people's flowers and shrubs. Elk, deer, aspens, pines, peaks, canyons, rivers, and mountain cabins all provided outdoor enjoyment. Why spend time thinking about investments? But I did sometimes.

Mountain forests got me thinking about Redwood Trust [RWT], a holding of mine that, at present is working fine. RWT is a REIT that invests in mortgage loans, bonds, and securitizations. It sells for about $14 and yields 7%. It actually returns more as the dividend is classified as "return of capital" since RWT has no accounting taxable income. So, the income stream is attractive and will remain so for another year or so before the dividend starts being ordinary income again, but, by then, I hope Redwood can pay a higher dividend like they once did.

RWT isn't without risk as real estate investing isn't surefire. But, they have made it through the worst of their portfolio decisions and have huge reserves put aside against their likely losses. They have plenty of cash, capital, and good credit controls. They don't take interest rate risk. They take credit risk and are good at it. Wally Weitz thinks so and so does Crusty. RWT provides both income and upside.

Another REIT that has done well by me as the Fed has held interest rates down is Annaly Capital [NLY]. Just the opposite of RWT, NLY doesn't take any credit risk as it buys agency securities, but it assumes lots of interest rate risk as it borrows short and lends long. And leverages itself about 5 times. But it does all that well so it can pay a hefty dividend. Currently 15%. It should remain a good position until rates start climbing which will obviously impact its spread and stock price. NLY is a different animal than RWT, but that's why they are both worth owning.

All REITS are not the same, so if tempted by their yield, do some homework. I hope I've done mine correctly. If I haven't, I may have to return to Colorado and live in a trailer, not a chalet.

Prepare For Disappointment

2010-08-02T10:35:00.000-07:00

I had great hopes that last Thursday would be a good stock market day for me. I was sorely disappointed. Mentally I was ready for some lousy results on three of my companies that were reporting earnings that day, but the rest of Wall Street wasn't as sanguine and brutally punished those securities.

The percentage moves were huge for a one day period. Bunge had been trading around $54 and was pummeled to $46, Neutral Tandem was taken down from $13 to $10.50, and Brunswick moved up from $14 to $17.50 [ a short put that stopped working ]. Lots of shares changed hands, probably lots were momentum driven, as the market reacted first and studied, if they did, later.

If a person's investing time horizon is longer than a nano-second, BG and TNDM were, and still are, attractive at those lower prices. The negative bet against BC will also still work, but it will work better for new money as it continues to act strongly. It will take another couple of quarters before company results start looking promising and I feel smart again. Bunge has already climbed back to $52; that's up $6 from the day of panic.

Nap time.

How Come The CPI Doesn't Equal The Rising Prices I Pay?

2010-07-16T16:44:00.000-07:00

Deflation is on the Fed's mind and pundits propose that inflation isn't possible as long as banks aren't lending and excess reserves continue to pile up at the Fed. Those worries may be valid, but I sure seem to be feeling the impact of rising prices. Aren't rising prices inflation?

Today's CPI release showed a tame inflation number, both headline and core. One of the key components of the CPI is the owners rent component, at appoximately 30 percent of the index, and that makes some sense as it is a major driver in consumer spending monthly. This number has been decreasing due to the depressed housing market, but I own my homes and see no benefit to this mythical benefit. Many other components may be statistically decreasing, but factually increasing.

I recently purchased a new car. It cost more than a few years ago because the manufacturer and dealer equip them better and the CPI calculators figure I've gotten better value, therefore, that equates to a price decrease. But I really didn't want a navigation system, super exterior and interior coating, and a sunroof. But I got them and I'm supposed to be happy that I really paid less, but my checkbook says differently.

The same is true about my favorite snacks. The prices have remained the same, but I get either fewer or smaller portions. I don't need the calories, but I'd like to have an actual lower price rather than a hypothetical one.

I had a guy out a few days ago to repair my cedar deck. He said he doesn't even bid a cedar job without calling the lumber yard to get the current quote as it has been rising consistently. Peachy! Cedar must not be in the CPI.

My mail a few weeks ago included a price increase from my health insurance carrier, American Republic Insurance, and, you guessed it, it was going to go up about $200 per month. Thank you President Obama and the non inflation calculating feds. Yesterday my car insurance went up $1200 per year because they switched a car from a Nebraska policy to a Florida policy. The non-insured driver component in Florida is out of this world and now I have to pay for it. I think I'll sell the car as we hardly use it, but none the less, that price sure didn't go down.

My nephew just told me of his tuition increases and they aren't going down. In fact, the increases in college tuition is darn near criminal and, once again. due to government mettling. If it weren't for student loans, universities would find a way to provide more affordable education in combination with parental support and part time work. No inflation here!

Take a look at all of your tax bills. Not the big ones, but the stealth ones. Cable, telephone, wheel, licensing, fees, they're all going up and governments are becoming more creative daily.

If it doesn't qualify as inflation, it surely affects my pocketbook negatively.

You get the idea, prices that real people pay are rising no matter what the CPI calculates out to be. You may get a great deal on a house or boat, but if you aren't in the market, that doesn't help. Prices are rising for day to day expenses and that continues to crimp the consumer. Don't look to Washington, or Obama, for help as they are about to make things worse by raising taxes and decreasing deductions by the elimination of the Bush tax cuts. Once again, that may not appear in the CPI, but it's a price increase and price increases don't create prosperity.

I hope I'm just old and cranky, but it sure feels like I'm paying more all the time and Washington's policies aren't helping.

52 Week And All Time Highs

2010-07-12T14:23:00.000-07:00

The path to a security's 52 week or all time high isn't always pretty. But who cares? In today's market I feel fortunate to have noticed that several of my holdings are at or very near all time highs.

None of the three, DEP, EPD, CCW, are traditional stocks. The first two are Master Limited Partnerships in the gas services industry and CCW is a "baby bond", often referred to, incorrectly, as a preferred stock of Comcast, the huge cable television operator. The common thread is steady income to the investor.

All three have distributions/yields of approximately 7 percent and, as interest rates have been decreasing, have gained value. All have good underlying fundamentals, but are no longer cheap. The old saying is "every day that I don't sell I'm a buyer" applys here. I still own them so I must think they are a reasonable place to keep money parked.

It's fun to have a few securities that are hitting new highs.

If Long On Colombian Oil, Forget HUSA and Consider GTE

2010-06-29T09:29:00.000-07:00

It's days like today that I congratulate myself on my attempts to look for value and put emotions aside. Short positions are, obviously, doing quite well and my dividend payers are falling less precipitously than the average security. Still I review my thesis to confirm that logic still prevails.

While my HUSA short is doing very nicely, it is worthwhile to compare Houston American Energy to other Colombian exploration companies. If I wanted to own a piece of Colombia's growing oil business, I'd consider an investment in Gran Tierra Energy [ GTE ], not HUSA. GTE is an actual operating company that is proving itself nicely in South America while HUSA is a hope and a prayer speculation. HUSA could turn out to be a huge winner, but I strongly doubt it. A person could earn a good return with GTE and, maybe, get a huge winner. A comparison of the two companies is worthwhile.

Today, the market values GTE at $1.3B and HUSA at $315M. Per share, you can buy GTE at 1.5X book value, but must pay up to 10X for HUSA. On a sales basis you only have to pay 4X for GTE, but must fork over 29X sales for HUSA. Clearly, on a financial valuation basis, GTE is the better buy. How about on a production basis?

GTE is running at 15,000 BOPD net. HUSA's net is only 1000 BOPD and that production is for sale as it is controlled by Hupecol, the operating partner. Gran Tierra owns 100 percent of it's wells and leases. GTE produces 15X more oil, but is only valued at 4X more than HUSA. Not only are HUSA shareholders paying more per share for each sale, they are paying a huge amount more for cashflow as EV/EBITDA is only 4X while HUSA is valued at 94X cashflow giving GTE a cashflow yield of 25% and HUSA only about 1%. So, HUSA loses on the basis of financial valuation and production metrics. How about future big oil finds?

HUSA has an interest in about 1.1 M acres in Colombia, but only at approximately a 12% ownership interest. GTE owns 100% of over 6M acres of exploration in not only Colombia, but also Peru and Argentina. With GTE you get the potential excitement of Peru as well as Coumbia. I won't delve into who has better drilling prospects due to proximity to large, producing wells since they both say they do and I don't have the expertise. Both aren't burdened by debt, but face large exploration budgets. Both sets of investors hope that big oil finds are ahead.

If I want to own a lottery ticket on South American oil, GTE has much safer odds and more upside per share. Conversely, HUSA is priced too richly and I'll continue to say short.

Ray Charles Couldn't Miss This Opportunity

2010-06-14T15:21:00.000-07:00

Since Neutral Tandem is down about a dollar since I launched my latest telecom investment, I decided to review the wisdom, or lack thereof, of that decision. I remain convinced and Ray has to be with me. He would have been able to see the value if he was still with us and I'm sure he can see this no brainer from above.

Here are the fundamentals on TNDM:

Forward P/E 10X

Earnings Yield 10%

EV/EBITDA 2.7X

P/B 1.6X

ROE 19%

Cash per share $6

$184 million cash and NO DEBT

Negatives? Revenue growth has slowed as prices are coming down, but market share is growing as minutes handled is growing by 25%. This trend will likely continue, but the company has a neutral business model, it doesn't compete with its customers like other competitors do, and an amazing stable of customers. It's service offerings are growing and customers are buying more. An ethernet exchange is the next growth area, much larger than the current switching opportunity, and it has a leg up on its competition again due to its neutral positioning and established customer base. TNDM is priced like it is going out of business, but it isn't and that's where the opportunity arises.

Neutral Tandem presents at William Blair's Growth Conference on Wednesday. Maybe Ray and the Blues Brothers will help TNDM impress the Chicago investment house's attendees and the market will start to appreciate this very cheap stock.

Working The Numbers Backward Can Be Enlightening

2010-06-14T08:18:00.000-07:00

Houston American Energy [ HUSA ] has been causing me some pain lately. I'm still ahead of the game, but don't enjoy the cushion I once did. The last several days have caused me to question my thinking and consider covering my short position. OK, I've considered my options and I'll stay short. The pain may get worse, before it gets better again, as HUSA's new found market cap makes it a likely candidate for inclusion in a Russell Index at the June 30 rebalancing. Inclusion will cause some one time buying by index funds and remove a little float. But it doesn't change any of the fundamentals of the company itself and those fundamentals are very over valued.

HUSA is a three employee operation that has some small working interests in a couple of Louisiana and Texas wells that hardly produce any oil/gas. Additionally they own other minority working interets in some Colombian properties. That's right, Colombia land of the drug cartel and women that wear funny hats. Those wells are producing some oil, but not huge amounts. Basically the Colombia properties are speculative in nature, not proven reserves. They do happen to be near proven properties and that leads to the hype. And that is what I believe is in full gusher at HUSA, hype, not substance.

Here are the numbers that speculators are willing to pay:

Price/Book 12X

Price/Earnings 108X

EV/EBITDA 117X

Price/Sales 35X

Market Capitalization $434 million

Can it get better than that? Do buyers really think shares can double? Let's work some numbers backwards from the current market cap of $434 million. If HUSA was a real operating company with current production and very good future prospects, an investor might be willing to accept an earnings yield of 5%, or a 20 P/E. That would mean the $434 million market cap should be justified with $22 million of after tax earnings. HUSA has been making about $500,000 per year until last year when they lost $670,000. They did do considerably better in the 1st quarter as they made $800,000 or annualized, $3.2 million. Clearly current revenue and net income doesn't justifiy the current market cap. What does then?

In the last quarter of 2009 HUSA raised about $15 million at about $4.50 per share and used that money to buy some Colombia concessions. Magically the stock price rose and the company is now worth multiples of that equity raise. Additionally, most of their producing Colombian properties are for sale. Hupecol, the managing partner, is attempting to sell wells and leases that produced most of HUSA's $4 million of revenue in the 1st quarter. How much can $4 million of revenue be worth? The unproducing areas require lots of expense and risk, so how much can the rest be worth? The company points to a similiar, they say, sale by Hupecol, 6/08, that fetched $920 million with HUSA's share amounting to $11.5 MM. Those proceeds didn't last long as HUSA needed to raise cash in 2009 and will spend an additional $10 million in 2010, fortunately they have about $14 million on hand and no debt. Even if Hupecol can arrange a sale that, pick a number, gets HUSA twice the proceeds, they have more cash and no operating wells. What would you pay for cash today? It's still going to be a company that is valued on hype because they won't have any production after a sale.

Can 1000 barrels per day production and a bunch of leases be worth $400 million? I think there is little danger that actual business results begin to justify the current share pricing. Therefore, the price will adjust downward again as soon as the euphoria ebbs.

Not As Short As This Fellow, But Owe A Few Shares

2010-06-09T14:02:00.000-07:00

What do the following all have in common? The nation's largest boat builder awash in debt, a legacy airline hugely awash in debt and union issues, an tiny oil company with a huge market capitalization, a well regarded bank with a huge subprime portfolio, a fancy fitness club operating in a terrible industry, and a broad market index. They represent most of my short positions. They've provided a good hedge against my longer term holdings and have kept me from finding a high ledge.

Mid June is nearing and, as I mentioned in an earlier post, expect the media to feast on a California budget crisis as we near mid month. Comparisons to Greece will be rampant and requests for more Federal help will fill the front pages and cable shows. California will once again bring our over borrowing to the forefront. Sounds scary, so I would guess the markets won't like it even though they should already know its existence. I'd be surprised if my shorts didn't make me happy and my long positions cause me anguish. But I'll try to remember that I own stocks for a purpose and a long horizon. In the meantime I will borrow some more shares. Especially Brunswick as the California problems and Florida oilslick are not going to be conducive to sales of new boats.

Time to go tally today's damage and see if mama can buy new shoes.

It Never Hurts To Ask The Question

2010-06-09T07:47:00.000-07:00

Bunge is up $4 this morning, for all the wrong reasons! It's not their repositioning from fertilizer to sugar and ethanol. It isn't the valuation metrics that are much improved since the share price has come down from the lower 70s. It is due to last evenings announcement of a $700 million stock buyback program. An authorization that may, or may not, be used to its fullest authorized extent. It's a wonder I make any money at all since my thinking is sure different than many on Wall Street.

I've also been questioning myself on my Smart Balance position. I'm currently into the second year of my estimated 5 year holding program on this venture. SMBL doesn't have a fortress balance sheet or a sterling earnings performance, but it is building a great brand and someone, over time, will take it out. Management has done this same gig many times, all successfully. They will again and lots of money will be made. But it was a lot easier staying true to my thesis when the stock was several dollars higher. The market has taken the company steadily lower over the past month and I am now only slightly over my basis. SMBL is a bet on management and mangement is still on the job. I'll continue to wait even though those smarter than me continue selling. I could be wrong, but as Charles Barkley says, "I doubt it."

Natural gas companies have been more in demand lately. Devon, a company like Bunge that has largely liquified its balance sheet and changed it's emphasis from offshore oil to gas, has been doing nicely. The safer side of a Devon investment is some of the pipeline Master Limited Partnerships, guys that get paid for carrying the product. Names like EPD and DEP are down, but still yield 7%. They are a reasonable place, in this low interest rate enviroment, to have some exposure, especially as the country moves to a more natural gas environment.

Time to quit typing, get another cup of coffee, it's too early for scotch, and see what the market is doing to me. Am I smart or stupid?

Bunge Has Gone From Worthy To Compelling

2010-06-04T08:41:00.000-07:00

It's difficult to buy equities in a lousy market, but if you truly believe, and have discipline, that you will hold the securities for many years then it becomes easier. Remember I said easier, not easy, as you will kick yourself with each market swoon. But, you ought to make money. Since I think we'll stay in a difficult market for a long time, it's obviously better not to bet the farm at one time as the market will continue to give you opportunities at lower entry points, so scale into a company like Bunge.

Not too many years ago, during the great fertilizer mania, BG was selling for about $140. Today you get to buy it at about $49. That's still higher than was available at the bottom, but still an excellent entry price. Espescially since Bunge is significantly changed since that time. It has ramped up it's sugar and ethanol production in Brazil through an acquisition and, just days ago, closed the sale of its ferilizer mining operation, keeping retail.

BG will net $3.5B from the sale and use at least $1.5B to reduce debt. If they decide to use it all, they could almost be debt free. Before the sale, today's price was about 85% of book and I'm guessing that when we see the quarterly numbers, book value per share will be higher than last quarters's $55 per share. It never hurts to buy at less than book. On the earnings front, they project 2010 earnings of between $5.30-$5.70, say $5.50. At a share price of $49 you are acquiring an ag leader for less than 9 X earnings. And you get a large exposure to Brazil.

Bunge pays a dividend and has a good coverage ratio, is an excellent grain merchandiser, has some leading brands overseas, now has an ethanol component, possesses a good balance sheet, and is the best ag name to own. Much more attractive than ADM or Corn Products, a company that BG could take another run at with their new cash horde.

Buy a little here and more later and eventually you'll be happy. You can't get beat up too badly in the interim like you can, and will, on those 15-20X P/E companies.

If You Are Attracted To Brazil, Buy EWZ

2010-05-21T08:11:00.000-07:00

I happen to like Brazil and find many similiarities to an earlier time in the USA. Immense natural resources, export and internal consumption opportunities, population growth, and an expanding middle class. The government is stable, debt manageable, and the future bright. President Lula doesn't appear to be a total socialist.

EWZ is an ETF that tracks the Brazilian stock market. It had an amazing 2009. It has fallen like a rock the past several weeks as speculators have fled riskier assets, i.e. commodities and emerging markets.

If one's investment time horizon is longer than a couple of days, EWZ has merit. At present pricing, it has a distribution yield of about 4%. It is an income play as well as an emerging market bet. The 4ish percent distribution evolves from the portfolio composition. About 60% of the portfolio is invested in preferred stocks. These yielders not only throw off dividends, but are higher up the priority ladder should Brazilian companies start to falter.

The stock price may decrease further from here, but you get 4 percent to wait for Brazil to prosper. And prosper it will. There's too much oil, agriculture, steel, and consuming citizens to avoid growth. Yesterday was the best day in quite awhile to buy Brazil, today wouldn't be bad either. Expect it to go down, be happy if it doesn't, enjoy the distribution, and reap the benefits down the road. In the mean time sit back and enjoy the precision flag twirling half-time show on Brazilian soccer.

Book Rooms For The IMF In Sacramento this June

2010-05-15T14:12:00.000-07:00

What do you do when you have time on your hands and don't get your way? Ask the Greeks. Ask our illegal alien population. Soon you will be able to ask those with their hands out in Portugal and Spain. Why riot of course. Tell the news media the world will end and children will be harmed. Threaten not to vote for anyone that cuts your entitlements. Why would you vote for the SOBs that cut your six weeks of vacation? Riots, riots, riots and we're going to see more. Right here in the good old USA.

California is supposed to have their budget approved in mid June for the 2010-2011 fiscal year. The Governor and the legislature are miles apart. Arnold says all the low hanging fruit has been picked as well as the medium hangers and the high hanging fruit as well. All the easy cuts are history. Republicans refuse to enact tax increases or new levies/fees. Cutting programs that have loud constituencies is all that remains. What do loud constituencies do? Complain to the media and riot.

June ought to be a difficult month for the markets. California's problems aren't new or surprising, neither were those of the PIIGS. But no one worried until they were upon us, then panic set in. First with traders, then politicians. Expect the same to occur this coming month as California deals with its budget and angry recipients and taxpayers. Arnold & Co will hit close to home. It's not some foreign land, it's part of us and it will remind us of all of our own unsolved problems.

If markets don't like uncertainty, then we ought to see some significant downward pressure on stocks as the drama unfolds. Here's the sequence of events: talk of program cuts, recognition of huge deficits and debt, riots, pleading to Washington for help, panic and stock plunge, buckets of money from DC, promises to cut and tax enough to get California's house in order, equities rebound significantly. Bet I'm right.

So, even though they will go down in value also, I'll stick with my income stocks and MLPs, gold and silver positions, long-term hold speculations, and short positions. On the first big bounce back day from last weeks decline, I am going to pitch my index funds and buy a few more puts. I should do more, but I'm often wrong, especially with timing so I always have to hedge my bets. But the future sure looks clear and the picture isn't pretty short, nor long term. Too much debt everywhere and an investor class that has started to recognize that fact and is becoming more fearful daily.

Invest in Sacramento hotel rooms as they will have high occupancy as the media and Obama's henchmen come to town.

The Circus Starts Anew Monday

2010-05-09T14:18:00.000-07:00

The circus comes to town again tomorrow morning. Possibly this evening if the Asian markets get flustered. Later the Europeans will be celebrating a Greek bailout or stewing over the next candidate and the taxpayer footing the bill for the shiftless. The day's stage may be set by the time the U.S. markets open.

What will we fear or celebrate on Monday?

Greek stalemate? A strong Eurozone plan? Contagion? Volcanic ash clouds disrupting air travel? A gigantic oil slick that can't be contained? American bank exposure to Europe? Goldman Sachs? A slowing Chinese economy? IMF funding of the Euro plan with 40% contribution from the USA? Riots in Greece? Riots in Arizona? The latest, mind numbing statistic?

Will I be happier with my Brunswick short or my new Neutral Tandem position? We'll find out shortly as volatility has returned and markets are being swayed by the concern of the day. It isn't investing, it's speculation and fear that are driving the day to day pricing of the stock market. The actual value of the underlying companies cannot gyrate to the extent their stock prices do. But the prices do gyrate. So wait for a return of sanity, sell into declines, or a little of both.

Who will have control of the bigtop in the morning?

I Need My Head Examined

2010-05-08T08:36:00.000-07:00

Be cautious, look over your shoulder, lighten up on rallies, all make sense and generally describe my investment behavior. But it gets boring staying with the same long term holds, dividend plays, and anti-inflation stocks. So, in the midst of the recent melt down, I opened a new position that will either do extremely well, as everyone seems to hate the company, or limp on as another Level3. In fact, it is a Level3 competitor. I invested long in the telecom field. I need my head examined.

The latest proof of my increasing dementia is my purchase of Neutral Tandem, TNDM. This is a relatively young company that went public in the Fall of 2007 and has grown rapidly in sales and profits. 2010 revenue is projected to be $180M and analysts predict earnings per share of $1.11. TNDM currently sells for $13; a PE of 11. It went public at about $17 and was in the mid 30's as recently as 6 months ago. It's gone the opposite way of the market.

The company is performing wonderfully. May 5th TNDM announced 1st quarter results and revenue grew 17% due to a 26% increased in minutes billed. EPS was flat for the quarter. They have $171M of cash and no debt- a rock solid balance sheet.

So why doesn't anyone like the company and why has the stock price been cut by nearly 2/3rds? I wish I knew for sure. The concerns that have been discussed are a patent battle with competitor Peerless [ since they already compete, and the company has other competitors, the worst outcome is high attorney fees], recent competition from both Peerless and Level3 [ revenue growth shows the company is holding its own, but flat earnings on a 26% increase in billable minutes the indicates pricing pressure of competition], and finally more direct traffic between carriers that doesn't require tandem switching.

Neutral Tandem's business is the switching of calls between new carriers [Sprint, cable, etc] and telecoms majors. TNDM doesn't compete with their customers like other carriers do and their tandem system is state of the art. They are the big player in this subset of telecom. Competitive pressure and the future of IP switching will not decimate revenue and earnings overnight. They are also expanding into ethernet switching which should add new revenue streams.

The stock price trend is down and it sure could continue, especially if the market continues to hemorrhage, but I think $13 is a good entry point. At an EV/EBITDA ratio of 3, you usually do well with a position, especially if the balance sheet is sound.

I've pulled the trigger so lets see how it turns out.

Yessiree, Crowded Exits Are Painful

2010-05-06T14:19:00.000-07:00

It might have been caused by a trading error at Citibank, executed by a computer, and compounded by mechanized sell programs, but it was still illustrative of fear. Investors have been staying far too invested, even when they knew they were in the danger zone, because prices keep climbing and they had a false confidence in their ability to exit before trouble was recognized. Today's market action proved them wrong. Everyone wanted out at the same time. Fear was in charge.

While the market was crashing today, I was at a memorial service for a friend that had passed away. It was a beautiful service and the family was comforted. I was enjoying the ride home until the phone rang and a distraught friend told me the Dow was down 1000 points. Now I was sad again. I was short a few positions and owned gold ETFs, but my long portfolio would suffer more than the negative bets would help. Intellectually, buying stock then would have been scary, but proper. I was a long way from a computer, so I went to lunch. By the time I got home the Dow had gained back 600 points and ended as just a crummy day, not a disaster. Tomorrow is not a day to pick up bargains. If the market does rebound, enjoy it and consider lightening up some positions. Fear has raised its ugly head and she isn't pretty. The exit is also real small. Getting through is difficult.

Bet Against Brunswick

2010-04-29T13:28:00.000-07:00

Everyone likes a ten-bagger and speculators have become giddy over the future prospects of Brunswick. The company was being given away at about $2 twelve months ago. Today it was up 27% to $22.69. Quarterly earnings handily beat analysts' expectations, but the company still lost .15 cents per share or $13 million. BC doesn't plan to make money in 2010 and is hopeful it can return to profitability in 2011.

Revenue is running about 1/2 of its 2007 level, but it did grow quarter over quarter for the first time in several years. Like housing, since the boating/recreation industry was also supercharged with home equity funny money, former revenue levels aren't coming back for a decade. The company is forecasting that industry retail sales will decline 20% this year and sales at BC are reflecting that pace in January and February. March was much better at the wholesale level, but the company is cautiously optimistic about the boating/marine outlook.

In 2007 when the company recorded sales of $5.7 billion, they dropped $111 million to the bottom line, or 2 percent. Analysts are forecasting sales of 3.7 B for 2011 and earnings of 2 cents per share. With 90 million shares outstanding, that $.02 is net income of about $1.8M. Not the stuff of legitimate ten-baggers. If by a miracle they were to get back to the 2007 earnings level of $100M, today's price would still be valuing BC at almost 20 X peak earnings. Management isn't even close to thinking about returning to peak earnings. But speculators and financial illiterates have become devotees.

Their marine business may be seeing some uptick in business with replacement mercury engines, but all 16 boat lines have to be suffering. My marina and reports from the lake of the Ozarks say that sales are slim as they have to compete with repo boats and inventories are slimmer as floorplan financing is difficult to obtain and afford. In exercise equipment, most individual sales are New Year related and health club chains have cut back new openings-not a lot of growth potential here. Pool tables flourished with easy home equity financing and newly purchased McMansions. We know the state of real estate. Finally bowling isn't a hot market, but may be the best BC has available to it at present. The more I talk about their prospects, the more I consider increasing my bet!

The last over-valued company that I wrote about, Valmont, was a well run, solid operation that had just run too far. I never did sell any shares short as the upward momentum was too great and the company too good. BC may have momentum, and that can be dangerous and costly, but it isn't a great company. It has about $900M of debt and, even after significant cost cutting, doesn't have the revenues to start making money. I'm not predicting bankruptcy, but I don't think the market should be valuing it, today, at 20 X peak earnings when those earnings are years away. The price may run further, but it isn't sustainable.

This afternoon I sold BC short and intend to sell some more, especially if it continues to run. There isn't a big dividend involved so the margin interest should be easily covered assuming I'm correct. Additionally, if I'm wrong and the market takes it upward then the rest of my long positions will do well, reduced by the BC short. If it tanks, by itself or with a market swoon, the gain will soften the pain of the decrease in value of my stock ownership.

The world is starting to understand that government debt is a huge problem and that realization can't end well. The swoon yesterday, on big volume, shows that there are lots of very, very nervous investors that are playing a game of chicken or musical chairs. Fear in the government arena will negatively affect the equity markets. All of those ten baggers are at significant risk.

No one go out and buy an exercise bike, new SeaRay, or open a bowling alley. It's okay to bowl a few frames, I won't be mad.

Sleeping At Night Is Superior To Yield

2010-04-27T06:30:00.000-07:00

All my adult life I've secretly, and sometimes openly, sneered at goldbugs. The world wasn't going to end and gold didn't yield anything. There were better places to put my money. I put gold accumulation in the same camp as bombshelters and canned rations. Fools thought that way and ended up without any net worth.

While those people were fools, I'm aging and my world has definitely changed. The aging part may have made me more cautious, but I still prefer yield and growth to precious metal safety. The changed world part continues to scare me towards gold. Government deficits and debts worldwide are past out of control and, worst of all, we are now beginning to understand the situation. The potential resolution of governmental malfeasance is frightening.

Our world isn't going to end, but we're facing a decade of sovereign defaults and devaluation of currencies. I can't envision that helping the equity markets and it has to be a killer to the bond markets. Broad market index funds aren't going to perform well, most diversified mutual funds will underperform, and balanced funds won't be the conservative place to park money due to their bond and stock components both being out of favor. Picking the right sectors or individual companies will continue to be profitable, but, as always, that is extremely hard to accomplish. Hence, the need for metals.

A recent GAO report says that by 2020, 93 percent of U.S. Government receipts will be committed to entitlement programs and interest on the national debt. Ninety-three percent! Virtually no money left for the military, education, etc. Certainly no bailout funds available. I'm not talking about Portugal, I'm talking USA! And Obama's not done. Our future is uncertain at best and maintaining wealth, let alone earning some, is going to be difficult. I only hope it plays out slowly, not rapidly, like the subprime/banking meltdown of 2008. Another European banking/sovereign collapse would take stock and bond markets much lower.

Last year I weakened and bought some gold ETFs, but sold at a gain since i still hadn't had my conversion. This year I am convinced that there is a place for gold in all portfolios. The ETFs have become a part of mine as has a Vanguard mutual fund of miners.

A testament to my true conversion is my belief that physically possessing the metal is also appropriate. Rather than owning just a share of ore in the mountain or bars in a depository, coins in my safe deposit box now makes sense. I'm, going to need a larger size safe deposit box. maybe I'll need two larger ones in both Nebraska and Florida. I don't know where I might be when the world starts to end.

I haven't stooped to filling my downstairs with MREs yet, or buying small plots of ground where I could, at least intellectually, grow my own food, but I have become convinced that the next ten years isn't going to be like the prior decades that I've lived through and prospered in. Real change is afoot and it isn't going to be easy or pretty. I intend to continue to prosper, but I'll have to change some of my investment patterns.

The Broken Record of Omaha

2010-04-14T08:49:00.000-07:00

I haven't written lately because nothing has changed. I continue to fear for the future, but am enjoying the increased value of my equities. My cash assets continue to under-earn, but provide an Ambien effect at nights.

I haven't followed through on any short, or put, positions except AMR. Valmont and a few other serious candidates have risen steadily since I considered betting against them. Once again, either procrastination or fear saved me some money. I keep my negative list nearby incase my gonads grow.

Given the stock market's current pricing, the economic negatives far outweigh the potential positives. Last summer the negatives were out manuvered by the economic rebound. But after a 75 percent run, reflecting the improved economy, the negatives remain and there can't be much left that is sustainable.

The market goes up, but on relatively light volume. Conviction, or mania, is lacking. That means there are lots of investors that know they should be selling, but are enjoying the present ride up. At the first sign of trouble the exits are going to get congested. We could see a large decrease in valuation. But when? And how much further will the averages rise before the descent? I don't have the foggiest on the timing.

Markets like to inflict the maximum pain on the maximum amount of people, so with light volume we probably aren't really close yet. I just deleted my guesstimate for the downturn as I really have no conviction in my ability to predict macro economic timetables. I'm the Crusty Credut Analyst, not the Crusty Forecaster.

Keep Looking Over Your Shoulder

2010-03-28T07:06:00.000-07:00

The stock market has performed nicely over the past few weeks. Confidence appears to be growing and investors have been piling in. However , confidence can be fleeting. When it changes, damage can be severe. Making money is exhilarating, but losing is traumatic.

I hate trauma. That's why it's prudent to always look over your shoulder and see if investor psychology is changing. And change it will. Every professional investor knows that debt as a percentage of GDP is at an all-time high, far exceeding the Depressions ratio, and rapidly growing. Not just in the USA, but worldwide. They are all exhilarated and will continue to ride the momentum until they are shocked. Then the exits will become crowded and trauma pricing will set in. A forward looking stock market will soon see issues that government can't solve because government is a large part of the debt problem.

2011 is coming. Bush era tax cuts will soon be expiring. Quarterly estimated tax payments will hit the psyche of businessmen between the eyes. The realization of higher taxes will be here. Higher taxes stunt growth, hiring, and investment.Will the market actually anticipate the upcoming damage of rising taxes? I think it will.

Will we lose confidence prior to the tax increases for other reasons? I think so. State and Soverign debt is a smoldering problem. Central banks and governments can't bail them all out. Taxpayers, eventually, won't stand for all the debt forgiveness being placed on their shoulders. If debt will no longer be able to be transfered to taxpayers, banks, bond funds, and pension plans will need to start eating losses. Confidence and markets will erode. Everyone will look for safety and the exits will get crowded.

Our debt binge hasn't been solved so keep looking over your shoulder, better yet, shoulders.

Valmont's Rise Is Overdone

2010-03-04T15:09:00.000-08:00

February 17, 2010 seems lightyears away. On that day Valmont Industries [ VMI ] reported earnings and offered 2010 guidance. The good news was that net income grew 5% on expense control success. The bad news was that revenue declined 19% due to weakness in the utility and construction business. The company sees a 25% decline in net income for 2010! VMI stock fell several dollars to about $69.

Today, Valmont announced the acquisition of Delta, PLC, a similiar company in the galvanization business and manufacturer of utility poles and highway products. Delta is strong in Asia and Australia. The price is $430 million, including $350 million of Delta debt. The debt component elicited a warning from S & P that the company could be downgraded should deal terms or market conditions change negatively. VMI sees the transaction as accretive to earnings in 2011. The stock was up $8.12, 11%, to $81.63.

VMI is up $13 in 14 days. The company's recent guidance for 2010 has dropped concensus earnings to $4.26 resulting in a forward P/E of 19. A 19 multiple is fairly stout for a company with declining sales, a 25 % decrease in net income, and the likelihood of higher interest rates, thus lower P/Es.

Valmont is a solid company. It has generally earned a good ROE and hasn't over leveraged itself. It builds quality products and is a leader in each of its businesses. International business provides access to the faster growth of emerging markets. VMI is a company that is hard to bet against, but I think I will.

At 19 times 2010 earnings there isn't a lot of logical share price growth ahead. Poor earnings comparisons and potential merger integration issues, as well as the specter of a S & P downgrade, could cause pressure on the shares.

I haven't pulled the trigger yet, but I'm seriously thinking about selling shares short.

Structured Products Are Alive And Well, Not Dead, Thanks To "Too Big To Fail"

2010-02-25T12:29:00.000-08:00

After the demise of Lehman Brothers I recall reading an article about the end of structured products on Wall Street. The author's premise sounded logical given that the purchasers of Lehman structured products were considered unsecured creditors in Lehman's bankruptcy. Who would line up to "lend" money to a bank without either FDIC insurance or as part of the FDIC's Temporary Liquidity Guarantee Program? Hence, the end of structured finance. The end of a lucrative line of business for banks and, hopefully, less ways to lose money for investors.

Well, wrong. Structured products are alive and well. They may not be quite as daring as a few years back, but they are being sold with abandon and playing to investors quest for a deal too good to be true. Want a 10+ percent return with a relatively short maturity, plus the possibility to earn even more yield if underlying security does well? Would you like it even better if you were given ten percent downside protection? These are the kinds of deals that a proliferating in todays market satisfying investors desire for yield, growth, and safety. But it takes about 170 pages of disclosure to protect the issuer.

The main components of the typical deal aren't terribly complicated. To varying degrees, the bank buys the index or security, sells a call, buys some downside protection, collects their fee and uses the excess, if any, money. An investor could do the same thing for a lot less cost AND WITHOUT ANY CREDIT RISK! Plus, it can be done more tax efficiently than structured as all ordinary income.

What I find offensive is the credit risk. In these structured products you are making an unsecured loan to the issuer! You aren't making an investment in the S&P500 Index or Ford or a commodity. The issuer owns the securities. All the buyer has is the issuer's promise to pay. An investor should substitute Lehman for Bank of America or Citigroup when considering a structured product. Do you want to be an unsecured creditor? If you buy, you are.

Government bailouts have kept these types of investments alive. "Too Big To Fail" takes some of the risk out of making big banks unsecured loans. But government policies can change. There isn't a law that says the government will protect all stakeholders the next time a big bank self destructs. And sales pitches that sound too good to be true, usually are.

Time To Tax Non-Profits

2010-02-18T08:44:00.000-08:00

Politicians will resort to off balance sheet tricks such as Greece's recent admission, celebrate the Fed's "earnings" and dividend to the Treasury, and defer reality until retirement. If they admit that we face problems, more time will be spent blaming someone else than is devoted to solving the dilemma. Serious cost cutting will stay off the table until near the brink.

What can Washington do now that is politically palatable? Raise taxes on the rich is the likely answer. But if taxes are to be raised it should be on the untaxed. I'm not talking about the poor and undocumented immigrants. I'm suggesting the non-profit world. There is a huge swath of American business that isn't taxed due to their form of organization.

Credit Unions used to be mom and pop operations that served factory workers and were manned by volunteers. Now they represent a huge, untaxed portion of our financial system. It's not fair and doesn't generate tax revenue. Bankers would provide cover for the administration on this revenue enhancer. Goodwill Industries does worthy work training the handicapped, but they run an untaxed retail business of significant size. Non-profit hospitals compete with tax paying hospital companies. The list can go on longer than my typing stamina.

If tax increases are required, tax the untaxed. Cuts in spending, not in the rate of growth, are the best idea, but our elected officials don't have the gumption to do what is right. Next best is the tax changes I've proposed.

Copper Defies Supply And Demand

2010-02-16T15:51:00.000-08:00

The rule of supply and demand states that as a commodity becomes scarser the price should rise. Conversely, as inventories grow, prices should weaken. The rule doesn't say how soon the price should rise or fall. You can go broke waiting for the rule to kick in. But, eventually people won't pay a lot for a commodity that is abundant.

Copper seems to be defying the rule. Inventories have been increasing dramatically and so has price. London Metal Exchange physical inventory has doubled since August!

Now let's look at the rise in copper prices.

The copper bull market corresponded with a reduction in inventories. But as stocks of copper have grown, the price of copper has decoupled. Instead of going down, price has been rapidly rising. Why and for how long?

China is the reason most often mentioned.That and the weak US Dollar. Many believe that China was hoarding copper as an alternative to buying Treasuries, plus their lending and building boom would make good use of the metal. In fact China did buy over 40% of ALL copper in 2009. It's economy is no where near 40% of the world's economic output. Many feel that the Chinese have a huge inventory in addition to the LME and Shanghai warehoused inventories. Odds are that China will not be a 40% buyer in 2010. And the dollar has been anything but weak lately. Yet copper continues to rocket upward.

If the Chinese have slowed their purchasing and the dollar has strengthened, what keeps copper up? Pure momentum and speculation. Some of the same economic recovery belief that the stock market sees. In fact, copper has been fairly well correlated with the S&P500 lately.

Even speculators can read charts and when you read the inventory chart you should get scared. When producers like FCX say they aren't seeing enough pick up in demand to warrant capital investment that should be a warning that production is exceeding demand. As inventories continue to grow the price of copper will need to adjust downward.

I haven't figured out how, or if, to profit from copper's mis-pricing. Shorting high beta stocks like FCX could get painful as could buying an inverse ETF. I'm going to keep thinking and exploring as I think copper is overblown.

Are Longleaf and Fairfax Visionaries Or Just Stuck?

2010-02-15T08:06:00.000-08:00

Years ago, like nearly everyone else who resided in Omaha, Nebraska, I drank the Level3 Kool-Aid. Level3 was an offshoot of Kiewit Construction and everything the Kiewit guys touched turned to gold. They built roads, tunnels, big buildings and mined coal and aggregates. They bought the failed Continental Can Company, stripped it and came out with huge profits. They started a fiber optic company that became the forerunner of MCI and sold it to WorldCom. Level3 was a do-over of a business that they had already made billions in and directed by the same management team that led the former success. Additionally, the managers and accountants of Kiewit would once again make sure the venture was run soundly. But Kiewit was a private company. You could only envy, you couldn't participate unless you worked there.

Level3 eventually went public. We could all get in and become Kiewit millionaires. Omaha did. In the dot-com bubble it hit $158 per share. It became not only the darling of Omaha, but the high tech investing world. It has been all downhill from there. Paper fortunes have been lost and many margined fortunes sunk real fortunes. The devastation has been significant on Omaha Kiewit wannabes. I thank my lucky stars that I wasn't a pig as I often am. I made a few dollars and have watched the saga from the sidelines.

Walter Scott, Level3's Chairman and former Kiewit CEO, has a great business reputation, in spite of Level3's performance. He has an engineers mind, a businessman's nose, and integrity. Those qualities have attracted some quality associates: Warren Buffett, Leucadia Financial, Mason Hawkins of Longleaf, and Prem Watsa of Fairfax Financial Holdings. The first two have done bond financings while the latter two have done both bonds/convertibles and common stock. To the best of my knowledge Berkshire and Leucadia are not involved with Level3 at the present time.

Southeastern Asset Management, Hawkins' company owns 429 million shares and Watsa's Fairfax owns 139 million shares. Both Fairfax and Southeastern each own about a $100 million in a convertible issue paying 15%! I'm not sure if the potential convertible shares are factored into the ownership totals and it really doesn't matter. Included or not, these two guru investors have placed a huge bet on Level3's future. They own approximately 35% of the company, possibly more. While respected value investors, they must be betting on the company's franchise value and moat. LVLT sells at over 4 X Book and has virtually no tangible book value, it's $6 Billion of debt dwarfs it's equity, interest charges gobble up over $1/2 Billion per year, and net earnings have been rare over it's lifespan. It doesn't fare well under almost any value investing metrics. Yet, two guys smarter than me have parked lots of money here. Additionally, both have the bulk of their net worth tied up in their companies, so they aren't some Wall Street hotshot playing with other peoples money while skimming large fees. They must believe.

It's obvious that they too have drunk the LVLT Kool-Aid. Will the result be different from the losses sustained by many of the Omaha faithful? Buffett and Leucadia were attracted by the generous terms offered by LVLT, made a well calculated investment and have exited. Hawkins and Watsa have the bulk of their money at risk in common stock. Their 15% yields on the convertibles is attractive, but the majority of their investment pays no interest. Whether they are under or above water on their positions, they are believers. They still own a ton of LVLT shares.

None of the other security companies are even close in their devotion to Level3, in fact, many other holders are indexers and smaller institutional positions. Analysts aren't impressed. The stock is the province of penny stock speculators and two, well respected value investors. Not the usual bedfellows. When the share price moves it is the result of rumors touting a Google or Sprint acquisition, not any improvement in financial condition. Why do Hawkins and Watsa stay and should I join them?

I think I'm going to keep watching this drama from the sidelines. I had a taste of the Kool-Aid, but have been able to kick the habit. With $6 Billion of junk debt, declining revenue, and poor operating results, I see lots of dilution ahead. LVLT has been masterful at balance sheet management as they have restructured, refunded, converted, and issued securities along their route to telecom survival. But, more of their debt will get turned into equity. Even at a discount, more shares equals dilution.

If Level3 doesn't work out well for Fairfax and Longleaf it won't sink their funds, but individual investors would be better off staying away from dilution prone balance sheets.

The Pension Bubble

2010-02-13T05:52:00.000-08:00

The United States faces a ticking time bomb that needs to be defused. The threat is government pensions, almost all of which are seriously underfunded and poorly designed. Taxpayers are at risk of large tax increases, or significant cuts in services, unless changes are made. The problem exists at the federal, state, county, and city levels. It encompasses the general employee base as well as first responders. It's a large problem given the growth in government employment.

Private business has moved away from defined benefit pension plans about 25 years ago. Defined contribution plans, such as the 401K, have become the norm for business. They need to become the norm for government as well.

The following email was sent to my local newspaper and it's easier to cut and paste it than to re-type and make it fit this post. It serves the purpose nicely. Just transpose your city, county, state, federal government for Mount Dora. The plans are all similiar and almost all in trouble. If they aren't fixed, add a tax increase to the one's we will be getting for the stimulus and bailouts.

Here's my letter:

Lauren, I appreciate your desire to see Mount Dora not only retain it’s charm, but improve as the economy recovers. I share that vision. However, as a resident, and healthy taxpayer, I also expect my city to operate efficiently and show fiscal responsibility.

A major area of fiscal irresponsibility is the pension benefits currently offered to employees in the General Employee Pension Plan. I think it is entirely appropriate that the city council examines the Plan and, after study, makes changes. The current plan is not sustainable, for employees or taxpayers. Employees have not had a raise in pay for two years because the city could not afford it, largely due to an accelerating pension contribution. Not only the absolute dollars contributed to the plan, but the percentage of total payroll have skyrocketed. Additionally, investment performance has been poor. The combination of overly generous benefits and poor investment results has left the Plan in a seriously under funded position. A continued acceleration of this situation will affect all city services, as Plan contributions will take up larger and larger portions of the annual budget.

The goal of pension reform is not to harm employees. Some, however, would not have such a sweet deal. Others, the rank and file, could see paychecks actually increase as they currently pay up to 7% toward their pension plus 6% for social security. And, due to budget constraints, haven’t been receiving pay raises. Some employees may very well welcome a 401K Plan that allows them to keep a few more dollars of net pay and gives the city the flexibility to offer pay increases.

Let’s look at the Plan. It uses a .03 multiplier, and is generous on vesting, early retirement, final year income adjustments, and other components. What that means is that a long-term employee can retire with an income that exceeds his final pay level! For life! Mostly funded by taxpayers. An example: Multiplier [ .03 ] X years of service [30 years] X Final Pay. So, .03 X 30 =. 9 then, .9 X Final Pay, say, 80,000 =$72,000 PLUS Social Security of, lets say $25,000. resulting in a city/employee funded retirement income of $97,000. Remember, both city and employee pay 6% of income into social security. Most plans deduct that benefit from the pension, but the Mount Dora Plan doesn’t!

The over-riding question is should the taxpayer continue an employee’s income for life? Is 30 years of work worthy of that amount of compensation? In the past possibly as government salaries were not as generous as in private business, but for a long time city employees have enjoyed comparable pay scales.

The Council should solve the pension situation and also look at any other areas that affect the fiscal soundness of the city. Luckily for our community, the city isn’t burdened with a large debt load and if the Council acts diligently, it won’t become so.

Thanks for listening. Bill Kabourek

Are Central Bankers Throwing Life Preservers or Anchors?

2010-02-10T07:10:00.000-08:00

Central banking 101 seems to view "financial rescue" as a virtuous deed. We saw this tenet put into action in the subprime crisis and it is about to emerge again in the coming European sovereign debt bailout. The problems are kicked down the road rather than addressed. CB101 states that it is better for all taxpayers to suffer later, so that creditors and investors don't feel immediate pain. It was put into effect to rescue Fannie and Freddie, and, it appears, the Germans and IMF are about to do an encore with troubled Euro zone borrowers.

Belt tightening is the solution. But, as proven by the recent strikes in Greece, politicians, and their constituants, don't have the stomach for actual solutions. Anchors disguised as life preservers are more palatable. Loan guarantees and public ownership do not solve problems, they only transfer and redistribute the problem. More debt doesn't cure a debt induced ailment. But it does if you are a central banker.

If failure isn't an option and if entitlement cutting isn't viable, what is left in the CB101 playbook. First, defer as long as possible. Put as much lipstick on the debt pig as possible. When she is no longer pretty to anyone, inflate the debt repayment to a manageable level. The bond market is starting to get it "a little" as yields have been moving upward. The Chinese get it "a lot" as they are diversifing their holdings and attempting to minimize the impact of upcoming reflation. There is no other option and smart creditors see the future clearly. The process to protect buying power has begun and will continue.

What might be done to counteract CB101? Equities should do better over time as businessmen tend to be nimble. But, my bet is that markets will offer a much lower entry point prior to reflation in ernest. Midwestern farm ground, even though prices have increased, should hold capital together and produce a modest return. Municipal bonds are going to get very risky as they carry not only interest rate risk, but, increasingly, default risk. Cities, states, and special improvement districts have serious problems, on balance sheet and off. A short term government bond ladder has merit only if one can stomach book losses and hold until maturity. Byron Wein, strategist at Blackstone, opined yesterday that fed funds would go from zero to two percent by yearend 2010. If his view is correct, I'd be patient till later this year and then build that ladder. But, consider quality corporate bonds for additional yield, and if you believe my statement that businessmen are nimble, and safety. Finally, gold, even though it doesn't produce any income and supply never goes away, should gain luster in face of bond inflation.

The next time you see Jean Claude Trichot or Ben Bernancke toss a life preserver, don't get giddy and think good times are here again, get wary and think capital preservation.

$30B For Small Business Lending A Boon To Banks

2010-02-02T06:16:00.000-08:00

Jobs, Jobs, Jobs is the new mantra. One conventional way to create jobs is t0 foster a healthier small business climate as it is accepted that job growth begins with mom and pop companies. Since the administration has decided that small business job creation will not be encouraged by lower taxes, and instead will let the Bush tax cuts expire, the next best initiative would be to rev up small business lending.

This new program is unlikely to produce the intended results. Whether the funding is doled out directly from government agencies or through bank SBA [ Small Business Administration ] lending, it will help banks more than small business. Why? Because the banks have the collateral already pledged and assigned and stand in a first lien position. Any new lending would be junior to the banker and that would only make the bank loans more secure, thereby helping bank balance sheets and loss reserves. If a bank would agree to additional lending, it would likely be with a government SBA guarantee. That would likely lessen their exposure. Again, that helps the lender. Finally, should another lender appear, government or financial, that wanted the entire business then they would need to payoff the bank's first lien.

We are not going to get a big bang for our bucks here if the goal is job creation. The Administration will get publicity for their claim that they are stoking the engine of growth, small business, but, in reality, they are again helping lenders and taxpayers will be footing the bill through either additional government borrowing or guarantees. The unintended consequence here is not totally bad as the financial firms do need to reduce poorer quality assets if they are going to regain a firm footing for the future.

This $30 Billion will improve bank credit quality, lessen the need for loan loss reserve growth, and future FDIC assessments as the FDIC may end up as the biggest winner since fewer community banks may fail. But don't look for job growth as businesses don't add jobs until they see demand and banks don't release collateral until they see cash or a guarantee.

Shameless Plug Time--Buy Men Who Are Making America

2010-02-01T07:45:00.000-08:00

Technology is passing me by. Not only has Amazon's Kindle been very successful, the wife is buying one to avoid touching the lousy newsprint newspapers now use, but Apple has announced the debut of their new ITablet. Holding a book in one's hand will soon be reserved for us dinosauers. I hope assimilation takes awhile as I still have inventory in the basement!

Sales have slowed, so it's time to plug Men Who Are Making America again. The economy may be bad, but that isn't the reason my email inbox, bkabourek@gmail.com, isn't full of orders. The reason is that the books are downstairs and I rarely think about promoting the book. Apple has now reminded me.

So, if you like real books, order Men Who Are Making America by B.C. Forbes. It's a good read and can be put on a bookshelf. Try that with a Kindle. As always, you can send a personal check after you've received the book. Just send an email and tell me the number you want and the mailing address.

Read about the Business Titans that the book covers, and cost, on the leftmost column of this blog as I don't feel like typing it again.

End of shamless plug. Almost. Let's start a crusade: send a check to Haitian relief and

an order to the crustycreditanalyst for Men Who Are Making America. Now I'm done.

Mama Fortuna's Crystal Ball Is Getting Clearer

2010-01-29T09:32:00.000-08:00

We all know two givens: the economy is lousy and, at some point, it will get better. Prognosticators, from CNBC talking heads to Mama Fortuna, have all been seeing blurry images of the future. Is the crystal ball half full or half empty? Since March, fueled by government largesse, investors thought they were seeing a return to better times. But they weren't peering deep enough into the ball. They saw what they wanted to see, became believers, and stopped gazing.

There are a few other givens that you don't need a crystal ball to devine. A massive, debt induced recession will not be cured in two years; stocks will not go straight back down; interest rates are going to continue to rise; and no one knows how to effectively time markets, certainly not the CNBC folks and not even Mama Fortuna.

If rates are going up and we're going to be battling the effects of excess debt for years, it's not wise to own leveraged companies even if they were the stars of 2009. A declining market doesn't make short selling a riskless endeavor. Market bouncebacks can be violent to the upside and make borrowing stock a lousy investment. M&A will be big this year and being on the wrong side of a large buyout premium can be painful. Long positions should be in quality, dividend paying, low debt companies. I'd write covered calls against those securities.

As uncle Warren says:" the first rule of investing is don't lose the investment." My crystal ball is telling me to be very cautious the next few years, take advantage of rising interest rates, and don't fully commit to equities unless we see a huge downdraft, and then continue to be wary.

Mama Fortuna's crystal ball is now clearly telling me to quit typing as there is an angry lady on the veranda who has been waiting to play gin.

Finally Something I Can Agree With Obama On- I like The Dog In The Picture

2010-01-28T13:04:00.000-08:00

The title and the picture have nothing to do with this posting. I just liked the dog since it looks like our Gertie. Gertie, by the way, is proving to be smarter than our President as she has no dilusions about who she is, or what she wants. She doesn't confuse herself with Hugo Chavez' dog while Barrack does seem to be channeling Hugo in his quest to turn the USA into a South American economy. Enough about dogs. As far as Obama, he may not be the cause of the market sell off, but his rhetoric and posturing sure are not helping the situation.

A brief review of my last several posts makes me look pretty prescient. While I said start getting ready for another slide, I didn't really expect it to occur immediately. Any brilliance I possessed is luck. I was confident in the direction and very lucky on the timing. Happily I took my own advise and haven't been beaten up.

The big question is how long and how deep will the sell off be? Wish I knew. I listened to an hour presentation yesterday by Bob Doll, Chief Investment Officer of Blackrock, who was coherent and logical, as he always is, and made a good case for 2010 being a positive year for equities. I can't fault his logic, but my stomach thinks otherwise. He gets paid better than me, has better data at his disposal, and has spent more time thinking through various scenarios, but if he is right, it will be one helluva roller coaster ride getting there. He named all the headwinds that we will face, but thought that massive stimulus and inventory rebuilding will lead stocks higher. It could happen, but I don't think it will.

In a nutshell, you don't need inventory if people don't buy. Sales tax receipts say the consumer isn't buying. Business won't replenish inventory, again, unless the consumer starts to step up and feel better. That won't happen without a much more robust job market. That appears years away. All of the bailouts,stimulus and jobs spending has spooked the public and ultimately it will spook the bond market. Visions of the future are presented daily from Greece, Iceland, Ireland, Portugal, and Spain. These evolving problems will translate into higher US interest rates and compete with equities. Higher bond yields mean that equities will need higher earnings yields, the inverse of the P/E, and earnings will not grow enough to compensate for declining P/Es.

I have no confidence in Obama being a positive in our recovery. He's ideologically opposed to being business friendly. Therefore, I don't think the consumer, nor business, is going to start gaining confidence and our economy will remain weak. China and Brazil will not grow at levels to ignite our economy. The only potential bright spot for 2010 is the same one i identified last year and that is M&A as solvent companies need to grow somehow and when organic growth isn't available, you do acquisitions. Lazard remains the purest play in M&A and is huge in restructurings which we will see lots of as the world sputters.

Mr. President, for popularity purposes, you need to be seen more with dogs. I like dogs, especially little white dogs.

What Will Monday Bring?

2010-01-22T16:48:00.000-08:00

After three days of misery, caused by a combination of potential Chinese fiscal restraint and Obama political expediency regarding bank and Fed bashing, investors are recooperating and wondering what Monday will bring. I believe we will see more selling as everyone knew stock prices were too high, but were playing a game of musical chairs as they wanted to continue to make money while momentum was pushing equities upward. Everyone thought they could exit before the downdraft.

Just as Massachusetts changed the political landscape, the past three days have reinforced what investors knew, but didn't want to accept. Stock valuations had been too high and everything was not improving. We aren't in for a quick bounce back. Gains should be protected and speculations reduced. Selling will continue, causing a significant sell off until prices reflect a more reasonable multiple of earnings growth.

As I laid out a few days ago, my positions have been lightened with only about 25 percent in stocks. The remaining 25 percent still hurts. I feel lousy. Recently opened short positions in DFS and COF have paid handsomely. A large long position in K-12 has been reduced to only 5000 shares as I wanted to capture the gain and I felt the company would tread water till next September when school districts and parents decide on internet education decisions. Luckily LRN hasn't gone down in the downdraft and I've been able to sell at good gains. My remaining positions are largely concentrated in emerging markets and international companies. I haven't decided what to do with those.

While the past three days have been painful, the percentage decrease has been minimal. I'll look for more vulnerable companies over the weekend and sell them on Monday. Some up days will present themselves, but the tide has changed and investors are starting to treasure capital which means selling. My suggestion is to lessen long positions and add negative positions. As Charles Barkley says " I could be wrong, but I doubt it."

Sales Tax Receipts Reveal A False Recovery

2010-01-11T07:01:00.000-08:00

The concensus view is that the Recession is over and the economy will grow at a 2-3% pace in 2010. All prognosticators hedge their bets by reminding the public that the recovery may not feel good and employment may not grow robustly, but GDP will be increasing so we are on the way to prosperity again.

I haven't joined that camp. You cannot solve a debt crisis by simply swapping the obligor of the debt. Instead of over-extended consumers and real estate developers, we now have the US government, ultimately the taxpayer, on the hook. The big question is how long before we must face the music.

The stock market's current game of musical chairs is about to end. Everyone, including myself, thinks they will be able to find an available chair as the music stops. That's not reality. A significant test is coming soon. While 4th quarter earning reports are likely to look good when compared to a vile 4th quarter in 2008, that will only mask the state of the economy. The Liscio Report has noted recently that preliminary sales tax receipts for the current period are down dramatically. They have not been bouncing back as the job losses shrink, the GDP rises, and the stock market flourishes. Real money that the states receive, from consumers, is shrinking. Hence, the market has gotten ahead of itself. This will be an eye opener for all playing the musical chairs game.

My ultimate goal, as a retiree, has been to transition from a heavy dose of equities to a more conventional fixed income strategy. That hasn't been easy as yields have been so low on bonds and the government's spending ultimately will cause current holdings to lose value as rates rise. And rise they will. While I've admitted to playing the musical chairs game, I've started to lessen positions as of last Friday. When it becomes well known that sales tax revenues, about the only calculation available that isn't an estimate, are not improving, the stock market "should" pull back. Timing is difficult, if not impossible, so if the music plays for much longer I will rue my decision. But, I'll be well rested and still have my principal and rates have been rising. Even if you are old life is a journey.

So Cold I Might As Well Write

2010-01-05T16:34:00.000-08:00

The nipples on my man-boobs are hard, but you can't tell as I'm wearing three layers of clothes and have a fire in the fireplace. As a "snowbird", I'm in Florida for six months and it shouldn't be this cold. I know I won't receive any consolation back home in Nebraska, so I might as well gripe to readers. The weather sucks so lets talk investments.

I'm having trouble concentrating on my typing as I'm powerfully drawn to the set of real tatas to my left. Unfortunately, of late, you won't see any of those either in Florida as they too are clothed in three or four layers. What does this have to do with investing money? Not a thing.

Everyone that is in the stock market has ben enjoying themselves. retirees and those that are sitting out the rally are miserable and going broke. Those straddling the fence need to be nimble as the game of musical chairs is in full swing. How long will the music continue to play? Warren Buffett once said that you can go broke waiting to be right and he's not only the guru, he's correct. This party could go on for quite awhile with the Fed's cheap money and support. But the rest of the world's central banks aren't as accomodative.

The wheels are starting to fall off in Europe and a German led bailout doesn't seem imminent, so the weak sisters will have to pay higher interest rates to roll over their debt. That thought process will be catchy and investors will look askance at other countries that are spiralling out of control besides Greece, Ireland, Iceland, Italy, and Dubai. U.S. rates are going up and they will continue to march upward much to Obama's chagrin and the retirees glee. At some point in the process the stock market starts to look not as attractive as we still have all of our economic problems and, finally, an alternative investment. Remain nimble with equity investments as problems lie ahead. I just don't know when the tipping point will occur. One thing I do know is that it is easier to concentrate with the nipple image at the top of the page and out of sight!

My portolio is about 50% invested in equities at present. I wish it was fully invested, but I like sleeping at night and as an oldster, I don't have the ability to rebound over a long period of years. I continue to write covered calls and gather dividends during the march of the music. Those types of stocks will decrease less and at a slower pace than the market in general, but even conservative stocks will go down when the market swoons.

Watch bond yields and lighten up as they rise. Ten year yields have been on a march and should continue to increase, but concentrate on the shorter maturities. As they move, exit or lessen your equity positions unless you have long time horizons and no need for cash.

Cabela's Remains Inexpensive

2009-12-18T08:37:00.000-08:00

I opened a position in Cabela's about two weeks ago at $12.00. At the time it was selling for about 3.5Xebitda and less than book value. I didn't catch the bottom, but CAB has moved up about $2.50 quickly.

Besides being a retailer, CAB has a large credit card bank, World's Foremost Bank, that not only confuses the numbers, but scares investors. Cabela's runs a conservative book of credit and has experienced better deliquencies and charge-offs than it's industry peers. It also securitizes asset backed bonds and, like other banks, faces the prospect of putting those assets back on their balance sheet and having capital available for support. There was a dilution worry.

The company addressed the new accounting issue that causes the securitizations to come back on the balance sheet by increasing their line of credit and making allowances to contribute enough capital to its subsidiary, WFB, so there won't be any dilution. At 4Xebitda[ttm] CAB sells at a discount to competitor DKS and most other retailers. Earnings have been decent even during the past year so, with the credit card concerns waning, the stock could march upward to 6Xcashflow which would be $20. It hasn't been at that price in the past several years, but I'm hoping.

Since I was becoming light headed and buying retailers, I also bought PSMT. It is the reincarnation of Price Club. When Price Club sold out to Costco, the owners opened up a Central American operation that now has 25 warehouse clubs. I've convinced myself that this is an international diversification investment, not another retailer.

I'm attempting to stay nimble as I still do not see a lot of sustainable signs of prosperity.

Waiting For The Next Shoe To Drop

2009-12-01T12:22:00.000-08:00

Everyone feels better after the market's spectacular rally in 2009. Almost everyone is leery of the sustainability of such a rapid rebound. The investment world continues to play financial musical chairs even though they collectively know better. The Fed's zero interest rate policy has taken safer investments off the table and the Government's spending will ensure future inflation that will harm bond holdings. So, equities continue to march upward. But, for how much longer?

At some point, even the brave and foolish will become fearful. Since everyone is playing the same game, investing in stocks since there isn't an alternative, the rush out the door, when the time comes, will be crowded and painful. What might cause that panic? Here are some guesses.

So far Australia has raised rates twice lately and a Scandinavian country also increased short term rates and has signaled that they were starting to take stimulus funds out of the system. Other countries are starting to talk the talk. A rate increase trend could signal that the U.S. won't be too far behind.

Iran's latest announcement, that they will build another ten enrichment facilities, was not the news that Israel and Obama peacemakers had hoped for. The deadline nears. When the Israelis attack, Iran will retaliate somehow. The markets won't like it and prices will tumble during the panic stage.

Soft demand has held oil prices down. Middle East turmoil would accelerate price spiking and have an immediate, negative impact on the economy. Even without war, the declining dollar and flight to commodities may drive oil higher with the same result.

A failed Treasury auction where buyers demand significantly higher yields than anticipated, would signal to the world that the world views the U.S. as a weakened credit and not worthy of cheap interest rates.

Dubai's debacle is being softened by the UAE's potential willingness to help. Greece, Ireland, Spain, Italy and a few other Euro zone countries are also having significant problems with their sovereign debt chewing up a high percentage of GDP. Will the Germans come to their aid? A major country default or restructuring would not be pretty.

Jobs, jobs,jobs are on everyones mind. We've all heard that job growth is a lagging indicator and that we will start to see job creation in 2010 as the recession has officially ended. A stubborn jobs number; one that continues to stay negative well into 2010, could ruin any rebound in confidence and affect the market.

After passage of a healthcare bill, immediate work on Cap & Trade could cause further concern as the impact on the economy from both of those gigantic, negative pieces of legislation will tax both business and the consumer.

Finally, maybe we'll wake up and realize that the "new normal' doesn't justify current stock prices. My bet is that won't happen, but one of the other scenarios, or one I didn't anticipate, I've listed will cause stocks to find a lower level. Cash will feel comfortable, even if it earns little, if the market tumbles during the first half of 2010.

Archipelago Learning Off To a Fast Start

2009-11-20T08:37:00.000-08:00

The marketcap lines may soon intersect and with the upstart becoming more valueable. K12 has revenues of $350MMish and a marketcap of $523MM this morning. Archipelago, in its first day after its IPO debut, has convinced investors that its $40MM of revenue is worth $469MM. Shares are up about 13 percent since yesterday's IPO.

I'm hopeful that some of the luster associated with ARCL will rub off on LRN, a similiar story and, I believe, a better investment.

More Bank Dilution Looms

2009-11-19T12:02:00.000-08:00

Investors in financial shares have fared well this year as almost all are significantly higher than their March lows. Those that bought shares near the lows have obviously fared better than the original owners. But the time has come to be wary. Dilution looms, again, on the horizon.

Banks have had ready access to capital this year as they attempt to work through their myriad mistakes. First, the Government provided needed support, then hungry investors started lining up to buy financial secondary offerings. The result was the same: loans were written off, capital depleted, new capital acquired, and original investors diluted. Painful only for the original owners.

While mortgage and credit card loan delinquencies are still at record levels, commercial real estate lending was poorly underwritten and is now showing serious weakness, another capital consuming issue is raising its head. On January 1, 2010, FAS167 will take effect unless delayed. The effect will be that banks must set aside additional capital to support off balance sheet credit card receivables and other securitizations. Whether or not the assets are brought back on the balance sheet or not, more capital must be found to support the potential risk of implied recourse. The big credit card issurers, JPM,C,WFC,BAC,COF, to varing degrees, will be affected. Since current capital isn't plentiful, they will sell more shares and dilute the current base.

Several days ago, First National Nebraska, a moderate sized regional bank with a large credit card operation, filed to sell $250 million of new common and preferred securities. The major reason given for the decision was the need to support off balance sheet credit card securitizations. The decision to sell new shares was a difficult one for First National as it is owned, almost exclusively, by one family. They felt the need, and pressure, to dilute themselves to comply with FAS167. What do you think the professional, non-owner, managers will do? Yes, sell new shares to whom ever will buy them, Government or public.

Setting aside concerns about the remaining potential loan losses and adequacy of loan loss reserves, capital raising is coming again to the banks courtesy of the accountants and transparency. Bank shares will be worth less in 2010.

I'm Rooting For The Oprah Effect

2009-11-17T18:14:00.000-08:00

This past week has been an excellent news period for Smart Balance. The price of a share of its stock reflects the improved news flow. What's new? Here are the announcements:

1. A new credit agreement with relaxed covenants. The company stated they still expect to comply with the old covenant thresholds, but they don't have to. they now have added flexibility to grow. Moody's upgrades to stable.

2. The national roll out of their new milk product. After test marketing in Florida and the Northeast this year, SMBL will go nationwide in 2010. The milk business is considerably larger than the spreads market and provides the opportunity to grow sales, market share in the dairy isle, and profits.

3.Today the company announced an agreement with Bob Greene, Oprah's health and fitness guru, to develop and market Bestlife products. These healthy foods and drinks will carry the endorsement of Greene and, implicitly Oprah. Smart Balance will remain the premium products, with Bestlife a more affordable product line.

4. Steve Hughes, SMBL CEO purchased several thousand shares in the open market. A few days earlier a director did likewise.

All this news is nice and may move the stock upward, which makes me feel good, but Smart Balance is a five year play. If you have patience, I think we'll earn multiples of our investment when Hughes sells his then billion dollar company to a major food company for a considerable sum. I'm willing to wait.

Archipelago Learning's IPO Valuation Favors K12

2009-11-17T13:41:00.000-08:00

Archipelago goes public on Thursday. The company intends to raise $100 Million, with shares coming approximately one-half from the company and the remainder from selling private equity companies. At the mid point of the anticipated offering, ARCL will be valued at $400 Million.

Providence Equity Partners bought the company in January, 2007 for approximately $85 million and owns 77 percent. Founded in 2000, the company had sales of $42 Million over the past 12 months. Earnings for the nine months ended September 30 were $6.9 Million while the net profit for the prior year was $1 million. ARCL has been growing their student enrollment and has recently enterd the high school market. Their business is basically internet based test preparation.

At $42 Million of revenue, and a market capitaization of $400 Million, the company is being valued at 10 times sales! The P/E of last year's earnings is 400! Interim results are up considerably, however I haven't delved into the makeup of the improved earnings.

K12 is a similar internet based marketer of lessons and test prep. Its market cap is a mere $550 Million and has trailing 12 month revenue of $330 Million or a P/S of 1.6, not 10. LRN trades at a forward P/E of 24, high but not the 400 or 40, depending on the time period, of ARCL. Both feature the cost savings of the internet, face state education cost pressures, but appear to be able to outgrow the reimbursement reductions. K12 projects earnings growth of 20 percent for 2010.

Today, after the ARCL IPO announcement, K12 increased $.71. I believe it will continue to move upward as investors compare the two companies. An investment in LRN garners a company that has more scale than Archipelago and excellent growth opportunities for a lesser, comparable valuation.

William Kabourek owns shares of K12

All We'll Hear In 2010 Is Jobs, Jobs, Jobs

2009-11-10T09:15:00.000-08:00

Soon the Democrats will have their healthcare victory. It may be a hollow victory that barely resembles their initial goals, but it will be declared momentous and beneficial to all Americans. We will have more laws and taxes for the sake of illusive healthcare improvements. Any consequences of the legislation, such as debt, increased taxation and job losses, will be several years away, so the celebration can begin.

With some sort of a healthcare victory behind Obama and the Democrats, they can turn their attention to what Americans are really concerned about. That is the economy and job creation. The party in power has been slow to realize that healthcare reform is not the voters number one priority. In 2010 the Democrats will innundate us with job creation legislation.

Just like healthcare costs and coverage, job creation can either be nurtured simply and effectively, or politicians can talk big, tinker, and accomplish little. Rest assured, Obama will get a jobs bill and victory will be declared. No, he won't accomplish an improvement in employment by simply lowering corporate income taxes or the highest personal, marginal rates paid by business owners of Sub Ss or LLCs. That would never happen as it would make sense. Jobs legislation will need to be targeted so social goals and constituencies can be served. Power must be preserved. The mid-term elections must maintain the Democratic majority and 10+ percent unemployment will not accomplish that. So, let the jobs tinkering begin.

What private sector growth can Democrats tolerate? The list is short: green jobs in sustainable energy, unionized workforces in manufacturing, the entertainment industry, design and construction of government building projects, data processing that consolidates and improves medical recordkeeping, and agriculture. These constituencies are apt to receive extra assistance.

We will see a general investment tax credit for the purchase of capital goods or additional employment. Capital goods purchases and employment growth in targeted industries will see an expanded tax incentive. Wind and solar projects, energy efficient appliances and transportation, almost any item manufactured and exported by a union member, will attain special status in the name of job creation. Rebuilding the construction industry with unionized labor by funding more school and transportation projects. None of this will be called stimulus as that has become synonymous with wasteful spending. In 2010 we will have job creation. Democrats will attempt to sound like Republicans.

Capital goods manufacturers that export will see an ITC driven sales boom on top of the weak dollar benefit.The likes of Cat, Deere,Trinity and Valmont, among others, will see revenue growth. Even in a "U" recovery some stocks will appreciate and select American manufacturing companies may benefit from Obama's next victory. Forget about the additional debt and taxation that will accompany, like healthcare reform, the job creation "success"as it won't cause credit and inflationary problems for several years. It will be a "victory" or the Republicans will get a chance to get change correct.

Back to stocks, Deere, while certainly not cheaply priced, is an unionized exporter that serves the agriculture and construction industries and might be a place to park a few dollars while Obama creates jobs,jobs,jobs.

SMART BALANCE REVISITED

2009-11-03T11:52:00.000-08:00

Last month I wrote a positive article on why I liked Smart balance. At that time SMBL was selling for $5.90 and I found that figure a reasonable entry point. Two important things have happened since that time. First, the price declined steadily to a low of around $5 and change, making it nearly 20 percent cheaper. Second, today the company announced that it was rolling out its milk products nationwide beginning in January, 2010.

I liked the company at $5.90, so I was very happy to see it go lower. I now own more shares. The milk rollout is exciting. The company says the results of their test market this year in Florida was very favorable. That's good news as milk is a bigger market than spreads. Second, it's good to have feedback that some consumers are still willing to buy premium products in a very difficult economy.

The rollout will eat up some cash, but the company's structure lets them tackle nationwide distribution relatively conservative. Remember, SMBL doesn't own manufacturing or packaging plants. It's all contracted and they announced that they have assembled their dairy partners for the milk venture. The success of the spreads assures shelf space in the milk case.

Nationwide milk distribution and consumer acceptance positions the company well in its quest to become a billion dollar organization. Steve Hughes and his team have the expertise and nads to take on a major, although calculated, expansion in the midst of a difficult economy. They continue to execute their well thought out plan.

I remain encouraged by SMBL's progress and can't wait for 5 years to elapse. Shareholders will be nicely rewarded.

THIS FEELS FAMILIAR AND LOUSY

2009-10-28T13:48:00.000-07:00

The past 5 or 6 trading days have been miserable. If I was fully invested my nausea would resemble the swine flu. While I've taken my inoculation of holding cash, writing calls, and shorting a few names, the sick feeling still overwhelms me as I watch the equities that I own crater.

The sweaty brow, clammy hands, and ache in the pit of my stomach are symptomatic of my feelings last Spring as the market plummeted. Is this downward move just a minor, sideways adjustment or the onset of a major correction that will again test men's nerves?

We've only slid down to 9750 on the Dow and 1042 on the S&P so the bulk of the market's recovery is intact. Yet it feels as if we've fallen off a cliff. Rebounding equities have felt so good after the misery of the recession and credit crisis. Will investors panic and attempt to avoid a repeat of the March lows by selling out or will they view a 10-15% correction as a buying opportunity and start pushing prices upward again?

My guess, and it is obviously just a guess, is that the bias is still positive and after some of the gains are protected and taken off the table, the buying will resume. But the names will be different. The crappiest of stocks have done the best in the rally, and even the boldest investor should sense that it is time to become more cautious. Speculative names will be replaced with reasonable investments.

Over the next 6 months I still believe we will head lower, but not yet. So, use upcoming rallies to lighten up so that when the swine flu of investments hits us the nausea, chills, and aching won't become terminal.

Mister Market Is Laughing At Me

2009-10-14T08:21:00.000-07:00

I will never be a great investor because I never follow my convictions and place all my marbles on my view of the future. My hedged bets tend to minimize being right and being wrong. That approach suits me as I sleep well and am still solvent. In the current rally, my stock positions have grown nicely and make me feel good. My cash position, on the other hand, makes me want to go sit in the corner.

As I stare into the corner I calculate how much I could have made had I put all my cash to work in equities. That bothers me. Then I remember how horrible it feels when stock prices tick downward and net worth sinks. An especially sick feeling if you are retired and no longer earn any replenishing investable cash. That's why I attempt to stay cautiously invested. Home runs aren't worth the risks involved.

Within the next six months I'll be happy that I'm not fully invested and I hope that I recognize an appropriate time to pull back from my long positions. I probably won't and that is why market timing is difficult.

JP Morgan is instructive. I should have bought it six months ago. Now it sells at almost its ALL TIME HIGH! Even after the dilution that came from issuing lots of new shares to repay TARP loans. You'd think that all the problems are finished. No, they remain. Now JPM is the best of the big banks, but they are still loaded down with non-performing consumer loans and accelerating losses. Loss Reserves have been built, but they will need further provisioning. The market has been celebrating the slowing of JPM's rate of losses. Losses are still growing, just not as fast! Is that worthy of a stock price that is very near its all time high? I don't think so, but I wish I had bought some six months ago. Now sure isn't the time to buy, but traders are.

Goldman Sachs is a similar story, as are the BRIC and commodity stocks. Their recent results have been astounding. They make me green with envy and feel like donning a dunce cap. Until I think about the likelihood of them remaining at current levels, then I regain some comfort in my liquidity.

A review of a DOW chart of the Great Depression depicts a strong bounce back before returning to lower levels. We've had our bounce back, and it may go higher, but I suggest preparing for a return to bleaker times. I will sleep peacefully, even though I will wish I had made some easy money when Mister Market taunts me.

An Unscientific Examination Of Our Financial Future

2009-10-12T15:55:00.000-07:00

Economic and financial education, the financial press, and prayer have failed me. No matter how crusty and savvy I think I am, my results don't equal the image I have of my abilities. While far from prescient, thank God I tend to eke out better results than the professional investment sages. Still, I'm about ready to take up the Maharishi Yogi's Flying Yoga and look for enlightened answers to our investment future.

Where are we headed? Television's talking heads swear it is upward, even though they hedge their verbal bets with a few negatives that could pose problems. Sideline money that needs to be invested, a weak dollar and strong commodities, and momentum are forces that are too strong to stop. The market marches on. Or does it? That's where I wish prayer or Yogi flying would work. Where are we going, because Mama needs new shoes.

Did we overshoot by 50 percent at the nadir? Is cost cutting and an inventory correction worth a 50 percent retracement? Can decent growth in China, Brazil, and India compensate for anemic economic activity in the US and Eurozone? Is deleveraging over or the impact exaggerated? Who knows?

After bouncing up and down on my ass and attempting to fly into meditation, I've come to the following conclusions. We over indulged for too long and we're going to deleverage and suffer for a long time. Our 50% party is overblown and will not last. After a quarter or two of easy comparables fueled by inventory replenishment and cost cutting, we are going to flat line for quite some time. Select companies, in select industries, will do well but the "market" will struggle. Deleveraging is brutal and we haven't experienced brutal yet. Government may slow the process, but they can't stop it, especially since they are attempting to with DEBT!

So, I'm keeping lots of cash and only investing in select stocks that "may" do well despite the upcoming economy. I've kept some emerging markets ETFs and international mutual funds. I've added some short positions and will probably add more, but I scare easily. I'd like clarity, but I can't find any. OM, OM, OM. Off to Fairfield.

TAKE A HEALTHY BITE OF SMART BALANCE

2009-10-12T08:53:00.000-07:00

I've owned SMBL on and off over the past several years. The story hasn't changed, but the share price is inching lower. An opportunity is at hand if you can wait five years. Regardless of the "markets" results, Smart Balance will reach $1 Billion, control a significant share of the dairy case, and sell out for a very nice price.

The "story" is one of smart management that has built brands successfully before. Steve Hughes, SMBL CEO, has been the architect of tremendous brand growth at ConAgra, Dean Foods, and Celestial Seasonings. His team has years of experience and the goal of building SMBL into a billion dollar foods concern. They are currently at the $250MM level after several years of business.

Smart Balance is a BRAND. It doesn't own manufacturing or research facilities. It is product, marketing, and people. It makes a little money and generates cash. Enough to paydown it's acquisition debt to $65MM. They should be debt free in a year or so. The lack of manufacturing is an advantage in our current tough times.

At its current share price of $5.90 the stock can be gathered in at a price that is significantly lower than the IPO price, employee options, and the entry points of some of their largest private equity investors. While it isn't at its 2 years low point, it is well off its highs and hasn't participated in the market's run up.

A reasonable plan is to buy some and tuck it away for 5 years. Forget about what the market price is and let Steve Hughes do his magic. Within that timeframe he'll sell the company and you'll end up with a boatload of ConAgra, Kraft, or Heinz shares. That's my bet anyhow.

Banks Require Zero Cost of Funds

2009-10-01T11:03:00.000-07:00

It's well known that commercial banks have faced strong headwinds for the past several years. While banking commentators acknowledge that all of the problem mortgage loans haven't been foreclosed yet and commercial real estate problems loom, the industry has been saved by the combined action of the Fed and the Treasury. Share prices have moved dramatically upward off the fear induced bottom. Many seem inclined to believe that there is more upside to be had as long as the Fed keeps interest rates near zero.

Even with a very accommodative Federal Reserve, bank share prices will not stabilize at higher prices. Earnings power is becoming an issue. Where investors were once willing to celebrate the lack of failure and push shares up, they will shortly start to concentrate on what can banks earn with more capital, less leverage, a changed fee and expense structure, and examiners breathing down their backs. The answer is going to be that banks will earn substantially less than at their peak earnings.

Zero interest cost for overnight funds is necessary to offset the following:

1. Continued Loan Loss Reserve funding so mortgages can be foreclosed, HELOCs and credit cards can be written off, and commercial real estate loans restructured. Cummulative LLRs are not adequate to avoid future provisons on a grand scale.

2.Reflecting the above, the FDIC must be refunded and the two year advance premium payment the banks are now required to pay, even with the funny accounting treatment, will impact the banks ability to lend.

3.Regulatory changes in credit card rate changes will start to impact P&Ls.

4.The same will be true for Overdraft Fees, a major source of income for banks.

5.With quality loan demand slack, investment alternatives are not carrying high yields.

Treasuries and Agencies barely exceed overnight funding costs which has pushed bankers into GinnieMaes to find yield.

6.Finally, Regulators are behaving excessively tough on existing portfolios and requiring more reserves for a growing number of loans that are being classified as "substandard". Pressure is not inducive to extending new credit.

Earnings are apt to be "substandard" for banks for the next several years.

Vulcan Appears Vulnerable Again

2009-09-28T09:31:00.000-07:00

Vulcan, and other similiar companies, has nearly doubled in the past several months as infrastructure rebuilding and stimulus mania has taken hold. The thesis holds that stimulus funding will fill the hole that developed in residential, commercial, and state road budgets. It won't. At best, it will halt the decline in volume, but it won't get the company on a fast growth track. The price surge reflects the beginning of good times being here again.

In 2007/2008/2009 I rode puts and shorts on both VMC and MLM. It's time to start nibbling at negative bets again as these companies are priced too richly.

AIRLINE SURVIVAL EQUALS DILUTION

2009-09-25T09:39:00.000-07:00

Earlier posts have detailed my adventure in owning airline stock. I knew airlines were probably the worst industry to invest in, but Southwest, the best of the worst, was offered at a very attractive price. Rather than thinking, I bought and immediately started losing money. It took about six months of regret before the price returned to my basis. About 90 days after my exit, airline shares started moving upward. Have they ever. The airline ETF, FAA, is up over 100 percent in the last six months!

Does a 100% move mean the industry must be attractive? No, it means that the industry won't go bankrupt in the near term. New equity offerings and sale/leasebacks have raised cash for struggling carriers. Cheesey fees for bags, seat selection, and pets have juiced occupied seat revenue. But it is still a lousy industry. It requires too much capital, has unionized workforces, is subject to large fuel swings, and, mostly, faces pricing pressure from both leisure and business travelers. As usual, the optimists have gotten ahead of themselves and run prices up too fast.

I hope that I've got it right this time. Recently I borrowed some AMR shares and sold them short. American has enough money to continue to bleed for the next year and won't go toes up anytime soon. But it still must service a huge amount of debt, about 10Billion, with terrible operating margins. A difficult task. AMR recently sold equity and diluted the common shareholder, and issued debt at 10.5% for 3 years! They are staying alive, but at an expensive cost.

I think airline shares will go down; I know they won't go up another 100 percent. AMR is about as weak as they get. This time I picked the lousiest company in the lousiest industry and time is on my side.

THE 80/20 RULE MUST NO LONGER APPLY

2009-09-05T08:28:00.000-07:00

Awhile back I wrote, in Crusty's How It Ought To Be blog, about two disruptive products that I was using to my advantage. One was a 4.01% checking account from a local credit union. Yes the rate is correct, 4.01% up to $25,000 and still 1% for excess balances. Virtually no difficult requirements attached. only one ACH and 12 debits monthly. My wife is easily up to that task.

My gameplan was to look for other credit unions to replicate the account and put more money to work at 4+%, government insured. I knew of a credit union in eastern Iowa using the same gambit, but paying 5%. But, I haven't gotten around to it yet. Now I won't have to as banking has changed in Omaha.

For the last twenty years most community commercial banks have followed the 80/20 Rule which shows that 2o% of the customers provide 80% of the profit, so raise prices on the 80% to increase their profitability. If they leave, so what as they were not as valuable as the important 20 percent. Bankers catered to the better off and sent the smaller balance accounts off to the savings & loans and credit unions.

The result was increased profitability and chest pounding. But now, twenty yeaars later, lobbies and drive thru lanes are empty and bankers have found customer numbers hard to increase. Not so at the financial institutions that enjoyed the customer traffic. Account balances were small and activity high, but they pay fees and take out loans. Bankers have started to take notice.

Proof of a changed approach is a new account from my local bank. IT'S THE SAME PACKAGE AS THE CREDIT UNION! Except that they are paying 4.05%. Other banks won't be far behind and I won't have to open an account in eastern Iowa. Since my wife is up to making sure we use our debit card enough times to keep the banks happy, we'll be opening accounts whenever the banks change their attitude. When we head to Florida for the winter I'm hopeful of finding a similiar banking climate.

4 percent, FDIC insured, is an attractive yield as it certainly beats by a large margin normal bank rates on money market savings and certificates of deposit. It also yields more than a 10 year Treasury and other bonds, plus you don't risk loss of face value due to rising rates. You can earn a 3% dividend on some solid common stocks, but not without the risk that the stock price will go lower with the next correction.

Moderation and balance is always the right plan and these accounts are attractive. Add them to dividend paying stocks along with some bonds and you have a good cushion for a stock portfolio.

Everybody Has A Coupon

2009-08-30T08:06:00.000-07:00

Friday evening the wife and I ventured out for dinner, coupon in hand. Besides the usual question I pose, what do you feel like eating tonight, I now add another, what coupons do we have? We chose Olive Garden because the local Italian eateries didn't stick a coupon in front of us this week. As we finished ordering, my wife announced to the waiter "we have a coupon." "Everyone has a coupon tonight" was the response.

Americans are becoming their grandparents and it is about time! We are finally saving more and spending less. What is being spent is being spent wiser. This is a nationwide phenomenom. My Oliver Garden meal was in Omaha, Nebraska, an area minimally affected by the national real estate meltdown. But everyone needed a coupon to part with their cash. The prior weekend I was at our winter home in Florida and not only did all diners and shoppers carry coupons, there were not very many people in the restaurants and stores. Wal-Mart's parking lot was packed, but strip centers were empty. America is changing for the better, but it is going to be a miserable transition.

The transition from easy credit and spending future income to saving before you spend will be a difficult process as we won't need as much retail space or manufacturing facilities. Slower growth for our companies will mean lower valuations for stocks. Less spending means less sales tax revenue for the always voracious government entities. Goverments will attempt to tax away our frugality so they can continue their spending habits.

Just as our forefathers survived the Depression years, Americans will come through our current malaise. It has begun to sink in that good times are not just around the corner. Change in behavior is necessary and our society as starting to adapt and take personal responsibility. Our governments need to be forced to accept that same reality. Deficits need to be reduced through cost and program cutting, not tax increases. It is no longer business as usual in the American family and "tax and spend" cannot continue at any government level.

Our coupon society will lead to lower valuations as growth will be hard to come by. Cost cutting can't result in increased net income beyond an initial burst and flat earnings aren't worth much of a P/E. All companies will not fall victim to lackluster sales, but those with heavy debt loads will. Except for companies with exceptional niches, the only ones with growth potential will be the debt free that are still generating lots of free cashflow and can become larger through acquisitions. Now is the time to shed companies with debt. Not only will they not be able to participate in M&A, they will likely have difficulty rolling over maturities as bankers become more cautious.

The stock market has rebounded nicely over the past several months and may go higher as vacations end and investors return. But, the "new normal" would suggest that equity positions be trimmed in companies with diminished growth opportunity and significant debt levels. If an investor has an appetite to stay long, own the acquirers as they are the only ones with a chance of P/E stability.