We'll See M&I Played Over And Over

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

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

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

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

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

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

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?

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

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

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.