Yesterday the Shanghai "A" share market hit a new high, taking it above the previous peak, hit before the market dropped 8% in late February igniting a world wide equity sell off.
Apparently, after taking a few weeks to re-evaluate their positions, investors are back in the game in China.
Friday, March 23, 2007
Sunday, March 18, 2007
"Never Get Into and Argument With a Fool..."
"Never get into an argument with a fool, people from a distance may have trouble deciding who is who"
In today's Daily Reckoning Bill Bonner explains the fallout of sub-prime defaults:
"Until only a few months ago, the constant welling up of house prices gave
them some traction. When a sad-sack subprime buyer gave up and defaulted,
the lenders, and the lenders to the lenders, and the lenders to the
lenders to the lenders, could still tread confidently, secure in the
knowledge that they could sell the shacks and get their money back - and
more.
"What they didn’t seem to realize was what seemed most obvious - that house
prices wouldn’t go up forever. Indeed, some day they might even go down.
And when they went down, lenders would have neither a strong borrower to
make payments, nor decent collateral to sell, nor even a buyer with any
money to sell it to."
The problem is that originators allowed fools to buy houses they couldn't afford at prices that no reasonable man would pay by borrowing money from banks at interest rates that didn't compensate for risk. The banks would only loan at those rates because they knew they could repackage the loans and sell them at even LOWER rates to investors.
The release valve was the fact that they could resell the house to some greater fool at an even more ridiculous price if the first fool defaulted on the note. The problem is that when a lot of the original fools start to default investors start getting worried and ask for higher rates and more documentation. Well at higher rates, and if you actually make the borrower disclose their true financial status (things sensible people have demanded all along) then suddenly it gets very difficult to put all the pieces in place for a fool to buy a house he can't afford and an insane price. If fools can't buy at high prices, suddenly you can't resell a highly priced home that really doesn't have the features or location that would cause a sensible person to pay a high price.
So with the fools out of the equation all you have left are serious investors who will only buy homes and bonds at reasonable prices. This breaks the virtuous circle of higher prices and lower standards, in fact it breaks it twice.
Back to the fundamentals, a reasonable decision making process based on the facts and not on unreasonable hope that the future will be totally different from the past. Nobody wants to buy a shack for $500,000 and nobody wants to lend hundreds of thousands of dollars to a deadbeat who won't show you his pay stub or credit card balance, imagine that.
In today's Daily Reckoning Bill Bonner explains the fallout of sub-prime defaults:
"Until only a few months ago, the constant welling up of house prices gave
them some traction. When a sad-sack subprime buyer gave up and defaulted,
the lenders, and the lenders to the lenders, and the lenders to the
lenders to the lenders, could still tread confidently, secure in the
knowledge that they could sell the shacks and get their money back - and
more.
"What they didn’t seem to realize was what seemed most obvious - that house
prices wouldn’t go up forever. Indeed, some day they might even go down.
And when they went down, lenders would have neither a strong borrower to
make payments, nor decent collateral to sell, nor even a buyer with any
money to sell it to."
The problem is that originators allowed fools to buy houses they couldn't afford at prices that no reasonable man would pay by borrowing money from banks at interest rates that didn't compensate for risk. The banks would only loan at those rates because they knew they could repackage the loans and sell them at even LOWER rates to investors.
The release valve was the fact that they could resell the house to some greater fool at an even more ridiculous price if the first fool defaulted on the note. The problem is that when a lot of the original fools start to default investors start getting worried and ask for higher rates and more documentation. Well at higher rates, and if you actually make the borrower disclose their true financial status (things sensible people have demanded all along) then suddenly it gets very difficult to put all the pieces in place for a fool to buy a house he can't afford and an insane price. If fools can't buy at high prices, suddenly you can't resell a highly priced home that really doesn't have the features or location that would cause a sensible person to pay a high price.
So with the fools out of the equation all you have left are serious investors who will only buy homes and bonds at reasonable prices. This breaks the virtuous circle of higher prices and lower standards, in fact it breaks it twice.
Back to the fundamentals, a reasonable decision making process based on the facts and not on unreasonable hope that the future will be totally different from the past. Nobody wants to buy a shack for $500,000 and nobody wants to lend hundreds of thousands of dollars to a deadbeat who won't show you his pay stub or credit card balance, imagine that.
Wednesday, March 14, 2007
USG to Sell Additional Stock
According to Forbes, USG is planning to sell an additional 7.9 million shares, increasing the share count by almost 9%.
The majority of the proceeds will be used to fund the $280 million acquisition of California Wholesale Material Supply, Inc. by USG subsidiary L&W supply.
At first look, I don't like this decision at all. USG stock is significantly undervalued, the company reported significant cash on the balance sheet at the end of the quarter, and by my estimation the company appears able to take on additional debt.
However I haven't read the covenants on USG's existing debt very closely, so perhaps they are more limited in their ability to sell debt than I thought. Hopefully USG management believes they are getting such a good deal for CALPLY that they are justified in selling the company's undervalued shares to raise the cash they need.
USG remains a core holding.
The majority of the proceeds will be used to fund the $280 million acquisition of California Wholesale Material Supply, Inc. by USG subsidiary L&W supply.
At first look, I don't like this decision at all. USG stock is significantly undervalued, the company reported significant cash on the balance sheet at the end of the quarter, and by my estimation the company appears able to take on additional debt.
However I haven't read the covenants on USG's existing debt very closely, so perhaps they are more limited in their ability to sell debt than I thought. Hopefully USG management believes they are getting such a good deal for CALPLY that they are justified in selling the company's undervalued shares to raise the cash they need.
USG remains a core holding.
Bad News on ARM Mortgages
While much of the mortgage news over the last few days has focused on the sub-prime and "low doc" loans, rumors are beginning to circulate about rising default rates on adjustable rate mortgages (ARMs).
While much of this talk may be just be the type of rumour that spreads when an investment starts to get the type of news flow sub primes have earned over the past few days, that won't keep investors from selling the product.
Apparently big banks have cut or are in the process of cutting, the lines of credit originators use to fund loans before they sell them to investors. At the same time many of these banks are trying to force originators to buy back many of the mortgages issued over the past few months that have any kind of late pay. The result is a liquidity squeeze that is killing mortgage originators.
While much of this talk may be just be the type of rumour that spreads when an investment starts to get the type of news flow sub primes have earned over the past few days, that won't keep investors from selling the product.
Apparently big banks have cut or are in the process of cutting, the lines of credit originators use to fund loans before they sell them to investors. At the same time many of these banks are trying to force originators to buy back many of the mortgages issued over the past few months that have any kind of late pay. The result is a liquidity squeeze that is killing mortgage originators.
"Poor people have a lot of ingenuity."
Apparently this is how slum lords are justifying their business:
"Mr. Barnes says he's giving such buyers what may be their only shots at home ownership. Low-income people, he says, generally know how to recognize and fix flaws. "Poor people know how to install a hot-water heater and they know how to paint" and even how to fix a foundation, he says. "Poor people have a lot of ingenuity."
"Mr. Barnes says he's giving such buyers what may be their only shots at home ownership. Low-income people, he says, generally know how to recognize and fix flaws. "Poor people know how to install a hot-water heater and they know how to paint" and even how to fix a foundation, he says. "Poor people have a lot of ingenuity."
Last September, Ola Gorby, a 35-year-old mother of four who works evenings cleaning offices, put $500 down and agreed to pay $400 a month for 15 years -- about $34,000, before interest -- for a home in Martins Ferry, Ohio. Public records show the house previously sold, in October 2003, for $44,000, then went into foreclosure in 2006 before being acquired by one of Mr. Barnes's investors for $7,875.
Ms. Gorby says she used to pay $470 a month for a three-bedroom apartment, and that banks had told her she didn't have a strong enough credit record to qualify for a home loan.
Her new place needs work. Duct tape covers a hole where a front-door lock was removed. Ms. Gorby had to replace some water pipes that had been stolen, and a bedroom wall needs patching. But she says she's happy with the home, which she figures is generally in good shape."
Sunday, March 11, 2007
Flaw #135
Niall Ferguson identifies yet another flaw in the system of relative performance measurement in this week's Barron's:
"Ferguson acknowledges this. "If we all get caught in a 1914-style crisis, we all go down together and nobody will underperform the benchmark," he says. "But if I become pessimistic too early and I'm wrong, I definitely will underperform. Therefore it's better to consign a major geopolitical crisis to the realm of uncertainty, and treat it like the risk of an asteroid hitting the earth. Common sense tells us that a major war is much more likely than an asteroid, or indeed the melting of the polar ice caps. But there are incentives for investors and financial professionals to ignore the risk of crises.""
"Ferguson acknowledges this. "If we all get caught in a 1914-style crisis, we all go down together and nobody will underperform the benchmark," he says. "But if I become pessimistic too early and I'm wrong, I definitely will underperform. Therefore it's better to consign a major geopolitical crisis to the realm of uncertainty, and treat it like the risk of an asteroid hitting the earth. Common sense tells us that a major war is much more likely than an asteroid, or indeed the melting of the polar ice caps. But there are incentives for investors and financial professionals to ignore the risk of crises.""
Friday, March 09, 2007
If You Are Looking for Opportunity...
Many investors, notably proponents of fundamentally weighted indexing, contend that index funds that follow capitalization weighted indexes systematically put more money into over valued stocks and systematically under invest in undervalued stocks.
Additionally many investors believe that small cap stocks are inherently not as efficiently priced due to the fact that they garner less sell side research coverage and less investor interest in general
With that in mind:
"According to research from Prudential Equity Group LLC, three ETFs that track small-company stock indexes now account for 20% to 40% of the trading of certain smaller stocks in the popular Russell 2000 small-cap index. The three ETFs are Barclays Global Investors' iShares Russell 2000 Index Fund, iShares Russell 2000 Value Index Fund and iShares Russell 2000 Growth Index Fund." (Source WSJ)
Additionally many investors believe that small cap stocks are inherently not as efficiently priced due to the fact that they garner less sell side research coverage and less investor interest in general
With that in mind:
"According to research from Prudential Equity Group LLC, three ETFs that track small-company stock indexes now account for 20% to 40% of the trading of certain smaller stocks in the popular Russell 2000 small-cap index. The three ETFs are Barclays Global Investors' iShares Russell 2000 Index Fund, iShares Russell 2000 Value Index Fund and iShares Russell 2000 Growth Index Fund." (Source WSJ)
Thursday, March 08, 2007
USG Write Up
I recently completed a discount cash flow analysis of USG. Many of you may know that Berkshire Hathaway owns 19% of USG, which was the catalyst that triggered by initial interest (and purchase of USG last year).
At the time I did a quick DCF and determined that USG was almost 20% undervalued. The recent release of USG's 10K provided a good opportunity to review my DCF and revise my write up.
The stock was also the subject of a presentation by Whitney Tilson at last fall's Value Investor Conference in New York. Tilson's enthusiasm surpasses mine, primarily due to the fact that my valuation model prices in a large decline in the gypsum wallboard market due to a decline in housing construction that Tilson's USG model does not.
That's right, USG's primary product is Sheetrock, the top wallboard brand in the world and the biggest use of that product (45% of revenue) goes into new home construction and yes, new home construction is going to be weak. However the fear this decline inspires in investors, coupled with USG's messy financial statements (due to a recent asbestos and bankruptcy settlement) have lead to a cheap price for the stock, so cheap that I am willing to tough out a housing decline.
Take a look at my write up and model and let me know your thoughts, USG is currently my largest stock holding and I'm interested in feedback.
USG Write Up
USG Valuation Model
Timothy Burger
timothyburger(at) gmail.com
At the time I did a quick DCF and determined that USG was almost 20% undervalued. The recent release of USG's 10K provided a good opportunity to review my DCF and revise my write up.
The stock was also the subject of a presentation by Whitney Tilson at last fall's Value Investor Conference in New York. Tilson's enthusiasm surpasses mine, primarily due to the fact that my valuation model prices in a large decline in the gypsum wallboard market due to a decline in housing construction that Tilson's USG model does not.
That's right, USG's primary product is Sheetrock, the top wallboard brand in the world and the biggest use of that product (45% of revenue) goes into new home construction and yes, new home construction is going to be weak. However the fear this decline inspires in investors, coupled with USG's messy financial statements (due to a recent asbestos and bankruptcy settlement) have lead to a cheap price for the stock, so cheap that I am willing to tough out a housing decline.
Take a look at my write up and model and let me know your thoughts, USG is currently my largest stock holding and I'm interested in feedback.
USG Write Up
USG Valuation Model
Timothy Burger
timothyburger(at) gmail.com
Sunday, March 04, 2007
What a Difference a Week Makes
According to Barron's Up and Down Wall Street Column:
"Nothing better illustrates how vivid an impression Tuesday made on ordinary Janes and Joes than the marked change in their sentiment as registered by the American Association of Individual Investors: to 39.6% bearish and 36.6% bullish, from 53.9% bullish and 22.3% bearish the previous week."
"Nothing better illustrates how vivid an impression Tuesday made on ordinary Janes and Joes than the marked change in their sentiment as registered by the American Association of Individual Investors: to 39.6% bearish and 36.6% bullish, from 53.9% bullish and 22.3% bearish the previous week."
Friday, March 02, 2007
Best Job Ever
Warren Buffett has announced he will be hiring an understudy to learn from him and eventually take over as CIO of Berkshire:
From the recently released Berkshire Annual Letter to Shareholders:
"I have told you that Berkshire has three outstanding candidates to replace me as CEO and that the Board knows exactly who should take over if I should die tonight. Each of the three is much younger than I. The directors believe it’s important that my successor have the prospect of a long tenure. Frankly, we are not as well-prepared on the investment side of our business. There’s a history here: At one time, Charlie was my potential replacement for investing, and more recently Lou Simpson has filled that slot. Lou is a top-notch investor with an outstanding long-term record of managing GEICO’s equity portfolio. But he is only six years younger than I. If I were to die soon, he would fill in magnificently for a short period. For the long-term, though, we need a different answer.
At our October board meeting, we discussed that subject fully. And we emerged with a plan,which I will carry out with the help of Charlie and Lou. Under this plan, I intend to hire a younger man or woman with the potential to manage a very large portfolio, who we hope will succeed me as Berkshire’s chief investment officer when the need for someone to do that arises. As part of the selection process, we may in fact take on several candidates.
Picking the right person(s) will not be an easy task. It’s not hard, of course, to find smart people, among them individuals who have impressive investment records. But there is far more to successful long term investing than brains and performance that has recently been good.
Over time, markets will do extraordinary, even bizarre, things. A single, big mistake could wipe out a long string of successes. We therefore need someone genetically programmed to recognize and avoid serious risks, including those never before encountered. Certain perils that lurk in investment strategies cannot be spotted by use of the models commonly employed today by financial institutions.
Temperament is also important. Independent thinking, emotional stability, and a keen understanding of both human and institutional behavior is vital to long-term investment success. I’ve seen a lot of very smart people who have lacked these virtues.
Finally, we have a special problem to consider: our ability to keep the person we hire. Being able to list Berkshire on a resume would materially enhance the marketability of an investment manager. We will need, therefore, to be sure we can retain our choice, even though he or she could leave and make much more money elsewhere.
From the recently released Berkshire Annual Letter to Shareholders:
"I have told you that Berkshire has three outstanding candidates to replace me as CEO and that the Board knows exactly who should take over if I should die tonight. Each of the three is much younger than I. The directors believe it’s important that my successor have the prospect of a long tenure. Frankly, we are not as well-prepared on the investment side of our business. There’s a history here: At one time, Charlie was my potential replacement for investing, and more recently Lou Simpson has filled that slot. Lou is a top-notch investor with an outstanding long-term record of managing GEICO’s equity portfolio. But he is only six years younger than I. If I were to die soon, he would fill in magnificently for a short period. For the long-term, though, we need a different answer.
At our October board meeting, we discussed that subject fully. And we emerged with a plan,which I will carry out with the help of Charlie and Lou. Under this plan, I intend to hire a younger man or woman with the potential to manage a very large portfolio, who we hope will succeed me as Berkshire’s chief investment officer when the need for someone to do that arises. As part of the selection process, we may in fact take on several candidates.
Picking the right person(s) will not be an easy task. It’s not hard, of course, to find smart people, among them individuals who have impressive investment records. But there is far more to successful long term investing than brains and performance that has recently been good.
Over time, markets will do extraordinary, even bizarre, things. A single, big mistake could wipe out a long string of successes. We therefore need someone genetically programmed to recognize and avoid serious risks, including those never before encountered. Certain perils that lurk in investment strategies cannot be spotted by use of the models commonly employed today by financial institutions.
Temperament is also important. Independent thinking, emotional stability, and a keen understanding of both human and institutional behavior is vital to long-term investment success. I’ve seen a lot of very smart people who have lacked these virtues.
Finally, we have a special problem to consider: our ability to keep the person we hire. Being able to list Berkshire on a resume would materially enhance the marketability of an investment manager. We will need, therefore, to be sure we can retain our choice, even though he or she could leave and make much more money elsewhere.
Thursday, March 01, 2007
Washington Post Net Income Down
Today the Washington Post announced a plunge in net income:
(From Seeking Alpha)
"Another quarter, another decline in revenue at the Washington Post's print media division. The Post reported a net income loss of 6.7% in its most recent quarter as continued weakness at its newspaper and magazine publishing divisions hurt strong results in other segments.
"Revenue at its educational division which includes the Kaplan Test Preparatory service rose 18% (43% of total revenue) while revenue from its affiliated cable television channels grew by 14%.
"On the other hand, revenue from newspaper (Washington Post) and magazine (Newsweek) publishing fell 2% and 3% respectively. Post shares fell $3.24, or 0.42%, to $766 on the earnings report. In other news, the company set its regular quarterly dividend at $2.05 a share."
As a current Kaplan customer and former Newsweek subscriber, I can attest that there is a big difference between the two. The difference is that Kaplan is focused on the core needs of its clients (passing tests) and does that well. A few years ago Newsweek decided that its customers (who subscribed to a news magazine) were probably more interested in having a smart ass celebrity infotainment magazine mailed to them every week rather than a magazine about news. I'm sure that a lot of other people like me canceled their subscription to "News"week.
Unfortunately now the infotainment trend is in full force, much of the space that isn't taken up by ads in the Journal is filled with silly cartoons, pictures and graphs a la USA Today. The typical reason given is that the papers are trying to "update" to compete with online news sources.
Ironically, if you look at most news, politics or finance sites on the Internet they have a smaller percent of their overall space filled with ads and probably have fewer silly graphics than most major papers.
Instead these sites have...text...news...analysis, you know, the things people used to read NEWS papers for.
The simple fact is that most people are kind of stupid and would rather look at a cartoon or a picture of Paris Hilton than read anything. It is a tough sell to convince those people to pay for a newspaper, because no matter how many graphs you have, you can't compete with US Weekly or TMZ.com of that is what people are looking for.
For many years the Journal's circulation numbers held strong because they didn't play the USA Today game. While people canceled Newsweek and their local Knight Ridder paper, they kept their Journal subscription because every day they could count on five columns of hard news text and one column of feature on the front page and a whole lot of news in the middle. Now the Journal has shrunk the paper, cut a column and made 75% of the paper colorful ads, not what they typical Journal reader is looking for.
The Post's number's today were bad, and the sad thing is that nobody in the media is going to learn anything from them.
(From Seeking Alpha)
"Another quarter, another decline in revenue at the Washington Post's print media division. The Post reported a net income loss of 6.7% in its most recent quarter as continued weakness at its newspaper and magazine publishing divisions hurt strong results in other segments.
"Revenue at its educational division which includes the Kaplan Test Preparatory service rose 18% (43% of total revenue) while revenue from its affiliated cable television channels grew by 14%.
"On the other hand, revenue from newspaper (Washington Post) and magazine (Newsweek) publishing fell 2% and 3% respectively. Post shares fell $3.24, or 0.42%, to $766 on the earnings report. In other news, the company set its regular quarterly dividend at $2.05 a share."
As a current Kaplan customer and former Newsweek subscriber, I can attest that there is a big difference between the two. The difference is that Kaplan is focused on the core needs of its clients (passing tests) and does that well. A few years ago Newsweek decided that its customers (who subscribed to a news magazine) were probably more interested in having a smart ass celebrity infotainment magazine mailed to them every week rather than a magazine about news. I'm sure that a lot of other people like me canceled their subscription to "News"week.
Unfortunately now the infotainment trend is in full force, much of the space that isn't taken up by ads in the Journal is filled with silly cartoons, pictures and graphs a la USA Today. The typical reason given is that the papers are trying to "update" to compete with online news sources.
Ironically, if you look at most news, politics or finance sites on the Internet they have a smaller percent of their overall space filled with ads and probably have fewer silly graphics than most major papers.
Instead these sites have...text...news...analysis, you know, the things people used to read NEWS papers for.
The simple fact is that most people are kind of stupid and would rather look at a cartoon or a picture of Paris Hilton than read anything. It is a tough sell to convince those people to pay for a newspaper, because no matter how many graphs you have, you can't compete with US Weekly or TMZ.com of that is what people are looking for.
For many years the Journal's circulation numbers held strong because they didn't play the USA Today game. While people canceled Newsweek and their local Knight Ridder paper, they kept their Journal subscription because every day they could count on five columns of hard news text and one column of feature on the front page and a whole lot of news in the middle. Now the Journal has shrunk the paper, cut a column and made 75% of the paper colorful ads, not what they typical Journal reader is looking for.
The Post's number's today were bad, and the sad thing is that nobody in the media is going to learn anything from them.
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