Month: January 2014

Systemic Risk Stems from Asset-Liability Mismatches

Systemic Risk Stems from Asset-Liability Mismatches

Posted on by David Merkel

What happens when a crisis hits?? There are demands for cash payment, and the payments can’t be made because the entities have short liabilities requiring immediate payment, and long illiquid assets that no longer can be sold for a price consistent with average market conditions.? When there are many firms for which this is true, and they rely on each other’s solvency, that creates a systemic crisis.

Whether through:

  • Owning long assets, and financing short, or
  • Using the repo market to hold long assets, thus disguising it for accounting purposes as short assets
  • Taking deposits, and investing long,

it creates an imbalance.? It is almost always more profitable in the short-run to finance short and lend long.? But when there is a demand for cash, such institutions are on the ropes and might not survive.? Less than half of the major American investment banks existing in 2007 were alive in 2009 to today.

But what if you were clever as a financial institution, and had liability structures that were long, or distributed the risk of what you were doing back to clients.? You would always have adequate liquidity, and would not be in danger of default for systemic reasons.

Thus, I think the Financial Stability Oversight Commission [FSOC] is nuts to regulate insurers such as MetLife, Prudential, AIG and Berkshire Hathaway.? They do not face the risk of a run on the bank.? Look at the history of insurers: those that failed due to a run on the bank were those that:

  • Issued guaranteed investment contracts that would be immediately payable on ratings downgrade.
  • Issued P&C reinsurance contracts that would be immediately payable on ratings downgrade.

Aside from that, there were badly run companies that failed but no systemic risk.? There was also AIG, which faced a call on cash from its derivatives counterparty, but not the insurance entity.

As for investment managers, they have no systemic risk.? It does not matter if Blackrock, Pimco, Fidelity and Vanguard would all fail.? Mutual fund holders would find their funds transferred to solvent entities, and any losses? they might receive are the ordinary losses they could receive if the management? firms were still solvent.

Someone lend the FSOC a brain.? Big size does not equal systemic risk.? Systemic risk stems from a call on liquidity at financial firms that borrow short and lend long for their own accounts.? That does not include asset managers and insurers, no matter how big they are.

What this says to me is that financial reform in DC is brain-dead.? (Surprised?? Nothing new.)? They have fixated on the idea that big is bad, when the real problem is asset-liability mismatches, amplified by size and connectedness.? Big banks are a problem.? Big insurers and asset management firms are not.

Tough for Buffett to Lose this One

Tough for Buffett to Lose this One

Posted on by David Merkel

I have no idea what premium Buffett is receiving for insuring against one or more people having a perfect NCAA Tournament bracket, but it is unlikely that he will lose on this underwriting bet.? Those seeking insurance on unlikely events think the events are more likely than they actually are.? That said, for Quicken Loans, they don’t want to bet the company, and they do want publicity, so contracting with Buffett is worth their while.

Imagine for a moment that the average person submitting a bracket had a 78.6% chance of getting each game right, and the maximum 10 million people sent in their brackets.? What is the likely number of correct brackets?? One.

But does the average person get more than three out of four games right?? I don’t think so.? Are there some people that are better than others so that they get games right 90% of the time?? Well, if they are 1,163 out of the ten million, on average, one of them will have a perfect bracket.

Here’s a further problem.? Every tournament has significant upsets.? Someone who has a good understanding of how good the teams are will know how to pick the most likely team to win.? It is tough to pick the upsets, and tougher to pick all of the upsets.? There is no good model for upsets, or they wouldn’t be upsets.

=-=-=-=-=-=–=-=-

As an aside, the prize is $500 million as a lump or $25 million for 40 years.? The breakeven yield rate on that is 4.21%.? Buffett knows he can beat 4.21%.

This contest is like the lottery.? If I had one piece of advice for lottery winners it would be to take the payments over time.? The discount rates on most lotteries are far higher than 4.21%, and really, taking them over time gives you a chance to learn how to manage more money then you know what to do with.? Taking the payments over time gives you the freedom to learn from mistakes.? We all make mistakes, but when we get all the money at once, we make more.

 

Sorted Weekly Tweets

Sorted Weekly Tweets

Posted on by David Merkel

Rest of the World

 

  • Crunch Escalates as Money Funds Rival Shadow Banks http://t.co/JVU1w5ipZc Money funds in China suck liquidity away from wealth mgmt prods $$ Jan 20, 2014
  • Spain?s Worst Year for Work Leaves Rajoy Counting Cost http://t.co/KlaAGab4kY Private debts r not economically neutral. Large -> unstable $$ Jan 20, 2014
  • Richest Scandinavian Nation Extends Its Junk Boom http://t.co/ZVwwxEAdIa Norwegian financial institutions have hunger for yield in kronor $$ Jan 20, 2014
  • Bird Flu Kills Health Worker, Stokes Transmission Concern http://t.co/FVcxVhaH4L Would not b concerned, seems difficult to transmit virus $$ Jan 20, 2014
  • Rise of ‘Common Man’ in India Threatens Stability of Government Coalition http://t.co/vke6lnqM3s Things get squishy if no majority win $$ Jan 20, 2014
  • German Economic Growth Fails to Gain Impetus http://t.co/g9EQLN5HNg Depends on on the strength of those that import German goods $$ $SPY Jan 20, 2014
  • French First Lady Leaves Hospital http://t.co/hnnrYJwE2q At least *one* person cared about the behavior of Francois Hollande $$ #sad Jan 20, 2014
  • Solar Beats Gas Unlocking Middle East?s Heavy Oil, Report Says http://t.co/dmyDla2t7R Fascinating, using cheap solar energy 2 produce oil $$ Jan 20, 2014
  • Hot Demand for Emerging-Market Bonds http://t.co/LLZPDt4iyT This is puzzling , I don’t get how emerging markets r well financed $$ Jan 19, 2014
  • China encroaching on U.S. military dominance in Pacific, says top admiral http://t.co/h152VrhcEg So we can’t be global cop, good thing $$ Jan 19, 2014
  • Mobius Placing Biggest Wagers on Nigeria for Frontier Rally http://t.co/dsxt8Fft6e It is difficult to make $$ when there is a quiet war Jan 19, 2014
  • BENGHAZI WAS PREVENTABLE: Hillary Clinton cited for major security lapses http://t.co/5oCpBVlbdK Hillary will have a lot to answer for $$ Jan 19, 2014
  • Saudi King Sees Egypt Too Big to Fail Under Friendly General http://t.co/oIHo5fae5s Saudi Arabia gets pragmatic, supports Egyptian Army $$ Jan 19, 2014
  • The West Is Losing Ukraine http://t.co/GWCNb322Ss Ukraine is losing the West, as its leader strips freedoms, & fights protesters $$ $SPY Jan 19, 2014
  • Hollande?s Tryst and the End of Marriage http://t.co/EUGztMAKnq Secretly, even the French care about the stability of their leaders $$ $FXE Jan 19, 2014
  • Baltic Homes That Singed Scandinavia Banks Heating Up: Mortgages http://t.co/3KHcPllcKZ Beware large increases in indebtedness $$ $TLT $SPY Jan 19, 2014
  • China’s Indie Rockers Get Boost From Online Music Platforms http://t.co/MSbdnGFzRI Note the prominence of our friend Michael Pettis $$ $FXI Jan 19, 2014
  • Venezuela Post-Ch?vez: Hustlers’ Paradise http://t.co/ROstARpBkc Thugs run govt. Some people get cheap goods, while others get shortages $$ Jan 19, 2014

 

US Politics & Policy

 

  • Stop Obamacare?s Outrageous Bailouts http://t.co/uHYJvyRcM7 Once losses exceed 8% of premiums, taxpayers pay for 75% of excess losses $$ Jan 20, 2014
  • Questionable: Robert Gates?s Dishonorable Act http://t.co/bIEGf7o57k There r too many bad secrets in DC that we ought to know about $$ $SPY Jan 20, 2014
  • Which Fed Guidance Should We Believe? http://t.co/yqjOZX5AX6 As FOMC uses more & more words 2explain what they r doing we understand less $$ Jan 20, 2014
  • When Low Unemployment Is Bad News http://t.co/QLiWV8ocV5 Labor force participation rate continues 2 fall as punk economy creates few jobs $$ Jan 20, 2014
  • NSA Data Have No Impact on Terrorism: Report http://t.co/ug8GtnLjqz NSA is not worth the privacy risk, nor what we pay to employ them $$ Jan 20, 2014
  • Ari Fleischer: How to Fight Income Inequality: Get Married http://t.co/zz6lbDWiku Poverty rate falls 4 those who can make a marriage work $$ Jan 20, 2014
  • Obama’s Constitutional Education http://t.co/bH4jfr1rro & http://t.co/hdzNe1Blo4 Should consider unilateral actions modifying PPACA also $$ Jan 20, 2014
  • How the crash of safe assets fueled the financial crisis http://t.co/4Vlfxp7PUj When “safe” assets r found to have credit risk -> bust $$ Jan 20, 2014
  • Congress split over NSA’s domestic spying program, could just let laws expire http://t.co/mCD2pIbSl1 Divisive: left & right vs center $$ Jan 20, 2014
  • Young enrollees of Obamacare fall well short of goal http://t.co/VokUg0XFP6 When premiums rise as a result, people will b unhappy $$ $SPY Jan 20, 2014
  • Spy court judge slams proposed privacy advocate http://t.co/vkz4SyY5li We need someone arguing against spying on average people $$ $SPY $TLT Jan 19, 2014
  • What?s Net Neutrality? What Happened to Net Neutrality Yesterday? What Happens Next? A Q&A for the Rest of Us. http://t.co/xQACJvW8UC Read Jan 19, 2014
  • Volcker Rule Fix Will Aid Large and Small Banks http://t.co/nGv1TXtLT5 This is a lousy rule that allows banks to bury Trup CDO losses $$ Jan 19, 2014
  • Hillary Clinton’s political hit list of top betrayers includes Kerry, Kennedy http://t.co/33RFv63nKz This reminds me of the Nixon enemies $$ Jan 19, 2014
  • Judge Disallows Plan by Detroit to Pay Off Banks http://t.co/XQ6f1E2EZM Detroit should aim for the bast long-run outcome $$ $MUB $SPY $TLT Jan 19, 2014
  • Is Your Abortion My Free Speech?? http://t.co/kUA2XLRPB9 This is where constitutions fall apart, b/c they are limited documents $$ Jan 19, 2014
  • Reid Gives Landrieu VIP Treatment to Tip Election Odds http://t.co/UhQFIcPVt9 Democrats desperate to retain power, aid marginal members $$ Jan 19, 2014
  • Where Are the U.S.?s Millionaires? http://t.co/c8fXDEPD5S Alas, but Maryland sucks the blood of America, & creates millionaires $$ $SPY $TLT Jan 19, 2014
  • I Spent Two Hours Talking With the NSA’s Bigwigs. Here’s What Has Them Mad http://t.co/UrXexYR07k They hate Snowden’s guts $$ $thatsimple Jan 19, 2014
  • How the NSA Almost Killed the Internet | Threat Level http://t.co/1SLDuNq93O Sowing distrust in major internet utilities on privacy $$ $GOOG Jan 19, 2014
  • To enforce net neutrality, the FCC has to decide that Verizon is a common carrier http://t.co/WRb6VestAF Simple idea, simple solution $$ $VZ Jan 19, 2014
  • Student Loans, the Next Big Threat to the US Economy? http://t.co/5hXsK5SIFn Rule of Thumb: avoid lending in area w/greatest debt growth $$ Jan 19, 2014
  • ISS Open to Activists Paying Bonuses to Directors http://t.co/R1nNEkokg4 Carl Icahn wins a small victory; broader implications unclear $$ Jan 19, 2014
  • ?Wolf of Wall Street? Offspring Never Quite Die http://t.co/oXkGDZQ1Ml It’s a revolving door & FINRA doesn’t provide real access 2 data $$ Jan 19, 2014

 

Market Impact

 

  • Investor Animal Spirits Spread to Companies Worldwide http://t.co/e8pKcudzhR No such thing as animal spirits, only pursuing opportunity $$ Jan 20, 2014
  • JPMorgan Says BVG Owes $200 Million Over ?Unfortunate? CDS http://t.co/coJQm6dpD5 What’s worse is trifling yield prompting BVG’s greed $$ Jan 20, 2014
  • Hedge Funds Raise Gold Wagers as Goldman Sees Drop http://t.co/7dc9dGCUCA Hedge funds 2short-term could b forced sellers on weakness $$ $GLD Jan 20, 2014
  • Even money market funds in a crisis would have a hard time delivering a >2% loss, which would b borne by investors, & not systemic $$ Jan 20, 2014
  • How You Can Survive a New Era in the Bond Market http://t.co/BvSkibWANR Too many people banging the drum 4 higher interest rates $$ $IEF Jan 20, 2014
  • From the prior tweet, Central Bankers have drawn wrong conclusion: You can fix a bust by issuing lots of credit. $$ Jan 20, 2014
  • The correct answer is that you can avoid a bust by not running loose monetary policy as in the ’20s & ’00s. We still have pain to come $$ Jan 20, 2014
  • Where Have All the Star Fund Managers Gone? http://t.co/qwbpDyDlkU Focus on low fees, long track record, low assets & not index-like $$ $SPY Jan 20, 2014
  • Reinsurers face ratings cuts, S&P warns http://t.co/70dK590OCG Too much surplus chasing reinsurance biz; I’ve been lightening the boat $$ Jan 20, 2014
  • Interest rates don’t matter? Federal Reserve paper says so http://t.co/guAPSQ05II Sad but true, monetary policy is weaker than most think $$ Jan 19, 2014
  • Professor Puts Ideas in Practice as Reverse-Mortgage CEO http://t.co/T3Kt0cNQtc As w/most complex financial agreements, this will fail $$ Jan 19, 2014
  • Metals, Currency Rigging Is Worse Than Libor, Bafin Says http://t.co/KjDNrRVR7m Impossible 2 create benchmarks free of human gaming $$ $SPY Jan 19, 2014
  • Nobody Likes Bonds!: by @ritholtz http://t.co/FuYachZ58I But *I* like bonds, particularly short corporates, loans, & $TLT FD: + $TLT $$ Jan 18, 2014

 

Other

 

  • Comet-Chasing Spacecraft Sends First Signal in 31 Months http://t.co/mZB62QnIYm Satellite to hitch ride on Churyumov-Gerasimenko comet $$ Jan 20, 2014
  • The ‘Sharing Economy’ and Its Enemies http://t.co/Qnc4YyZrOh How Airbnb steps on the toes of hoteliers, regulators & the tax man $$ $SPY Jan 20, 2014
  • Device Thefts Fueling Rise In Larcenies http://t.co/ohZZt8q2Qh NYC larcenies fall if you exclude theft of Apple-branded devices $$ $AAPL Jan 20, 2014
  • The Right Way to Go After Big Clients http://t.co/J6hoSbcHVX Can waste a lot of time & find margins squeezed in the end $$ Jan 20, 2014
  • What Secrets Your Phone Is Sharing About You http://t.co/u7wv29tyMG Many hack your phone datato get insights into how you shop $$ $SPY $TLT Jan 19, 2014
  • Moms in ?Survival Mode? as US Trails World on Benefits http://t.co/uSPuVZztqV We can argue over any benefit, but what when US is broke $$ Jan 19, 2014
  • Tennis Quant?s System Doubles Money Without Knowing Players http://t.co/sAS5Xug7DN Small markets r often inefficient, allow 4 small wins $$ Jan 19, 2014
  • Miners Chopping $10B Search Bodes Next Price Boom http://t.co/6X7H0KAivX Miners cut exploration budgets, should lead to higher prices $$ Jan 19, 2014
  • How the Target Hackers Did It http://t.co/Z8Jc5WuBQQ Scraped RAM in POS machines grabbing all manner of data on card users $$ $TGT $SPY $TLT Jan 19, 2014
  • Another Bad Year for Religious Freedom http://t.co/3C3C5lrjCo Religion by its nature tends to invite constraint as it is a threat 2 govts $$ Jan 19, 2014
  • If Google Is a Guy, DuckDuckGo Is a Ghost http://t.co/rk9o0I3Uwx Want privacy for your searches? Consider DuckDuckGo $$ Jan 19, 2014
  • http://t.co/uPsFzsm1Tn How an intelligent lady managed to wrongfoot & destroy a website engaged in “revenge porn.” $$ Jan 19, 2014

 

Wrong

?

  • Likely Wrong: A New Asset-Allocation Strategy for Investing in Retirement http://t.co/eDqaDxhFuH Stocks r risky over intermediate periods $$ Jan 20, 2014
  • Wrong: Bonds Captivate $16T of Pensions http://t.co/NEpJSjCD7p Bonds have 2 go somewhere & defined benefit pensions have long liabilities $$ Jan 20, 2014
  • Wrong: Bailout Risk, Far Beyond the Banks http://t.co/iv5eT6lhea! Asset mgmt companies can go bust, & they pose no systemic risk $$ Jan 20, 2014
  • Wrong: Stanley Fischer saved Israel from the Great Recession. Now Janet Yellen wants him to help save the US http://t.co/CPMUggr3CA $$ $TLT Jan 20, 2014
  • Wrong: Ten quotes on the question of financial bubbles http://t.co/MNwr543Vsf No one focuses on the effect of borrowing money in bubbles $$ Jan 19, 2014
  • Wrong: Wealthy CEO Is Deeply Concerned About Budget Deficits http://t.co/gTGUwSF3hS Biased article doesn’t factor in entitlements $$ $TLT Jan 19, 2014

?

 

Replies, Retweets, and Comments

 

  • @DavidBCollum Look here: http://t.co/VaqQESCdCu Value Line has a chart that goes back to the 20s though… Jan 17, 2014
  • RT @cate_long: Please add http://t.co/QHQiCxYopc RT @researchpuzzler: a guide to finding data on the cheap from @AlephBlog http://t.co/mb? Jan 15, 2014
  • RT @Pawelmorski: Great spot @toby_n : DB’s Slok quantifies how difficult the Fed finds explaining itself. http://t.co/1quahXrnJD Jan 14, 2014
Good Over-the-Counter “Pink” Stocks

Good Over-the-Counter “Pink” Stocks

Posted on by David Merkel

I really appreciate my readers.? Here’s an e-mail from one:

David,

Just read your recent blog post ?E-mails on Insurance.?

You made the comment that ?aside from non-sponsored ADRs no good companies trade on the pink sheets.?

Of course that is true in a general sense. I also am sure you have been inundated with lots of email taking exception to that comment.

One company I have loosely followed over time (that I came across just by chance many years ago) is Computer Services (CSVI) [www.csiweb.com]. There is no volume in the stock so institutional managers have no ability to take a position, but the firm has done a great job of growing the business while maintaining profitability (been an opportunistic acquirer of small bank processor companies) and is probably a candidate for consolidation by a Fiserv or someone like that. Anyhow, I think if you take a look at the firm, you will see that there is at least one solid company traded on the pinks (and I am sure there are others, I just don?t go fishing there).

My comment ?aside from non-sponsored ADRs no good companies trade on the pink sheets.? is an overstatement.? To prove that, I give you a list of 148 companies that:

  • Have been profitable for the last four fiscal years.
  • Are US companies
  • Are not ADRs

2370 companies that trade over-the-counter reduce to 148 companies — 6.24% of the whole, explaining why my overstatement is largely, but not totally correct.? I would not tell someone to look amid these companies to find good ones, but there are some good ones there.? I have listed them in declining order of market capitalization.

Company Ticker Sector Industry Mkt Cap Dollar Volume P/E P/B P/S
Belk Inc BLKIA 09 – Services 0951 – Retail (Department & Discount) ?? 2,057.80 ??????????? – ?? 12.40 ???? 1.66 ???? 0.51
First National Bank Alaska FBAK 07 – Financial 0727 – Regional Banks ????? 604.00 ??????????? – ?? 14.90 ???? 1.23 ???? 5.45
First Citizens Bancorporation, FCBN 07 – Financial 0727 – Regional Banks ????? 572.70 ???? 33.20 ???? 9.60 ???? 0.64 ???? 1.87
Computer Services, Inc. CSVI 10 – Technology 1036 – Software & Programming ????? 476.10 ?? 146.81 ?? 18.20 ???? 3.80 ???? 2.31
Hills Bancorporation HBIA 07 – Financial 0727 – Regional Banks ????? 345.00 ?????? 3.65 ?? 13.30 ???? 1.29 ???? 4.03
Farmers & Merchants Bancorp FMCB 07 – Financial 0727 – Regional Banks ????? 324.40 ???? 20.85 ?? 13.60 ???? 1.54 ???? 4.27
FRMO Corp. FRMO 07 – Financial 0721 – Misc. Financial Services ????? 302.80 ???? 23.45 ?? 26.90 ???? 3.66 ?? 16.64
HomeFed Corporation HOFD 02 – Capital Goods 0215 – Construction Services ????? 299.80 ???? 22.83 ?? 62.40 ???? 1.79 ???? 7.93
First Opportunity Fund, Inc. FOFI 07 – Financial 0721 – Misc. Financial Services ????? 262.10 ?? 269.95 ???? 7.20 ???? 0.86 ?? 58.25
International Wire Group Holdi ITWG 01 – Basic Materials 0127 – Misc. Fabricated Products ????? 255.40 ?????? 2.61 ?? 19.60 ???? 6.69 ???? 0.21
Canandaigua National Corporati CNND 07 – Financial 0724 – Money Center Banks ????? 249.90 ?????? 6.65 ?? 12.20 ???? 1.66 ???? 3.41
Viskase Companies, Inc. VKSC 01 – Basic Materials 0109 – Containters & Packaging ????? 237.90 ?? 214.50 ?? 24.10 ???? 0.67
Conrad Industries, Inc. CNRD 11 – Transportation 1118 – Water Transportation ????? 226.80 ?? 249.58 ???? 9.10 ???? 1.95 ???? 0.86
United Capital Corp. UCAP 10 – Technology 1024 – Electronic Instruments & Controls ????? 187.40 ?????? 4.80 ?? 13.40 ???? 1.34 ???? 1.58
Isabella Bank Corp ISBA 07 – Financial 0727 – Regional Banks ????? 184.70 ???? 52.67 ?? 15.50 ???? 1.14 ???? 3.39
Profire Energy, Inc. PFIE 02 – Capital Goods 0209 – Construction – Supplies and Fixtures ????? 160.20 ???? 98.83 ?? 41.90 ?? 10.81 ???? 5.97
Cambridge Bancorp CATC 07 – Financial 0727 – Regional Banks ????? 150.50 ???? 59.33 ?? 11.50 ???? 1.47 ???? 3.20
Citizens Financial Services In CZFS 07 – Financial 0718 – Investment Services ????? 148.30 ???? 24.55 ?? 10.90 ???? 1.64 ???? 4.06
Mestek, Inc. MCCK 02 – Capital Goods 0218 – Misc. Capital Goods ????? 144.40 ?????? 0.86 ???? 8.80 ???? 1.03 ???? 0.41
Webco Industries, Inc. WEBC 01 – Basic Materials 0127 – Misc. Fabricated Products ????? 143.50 ???? 16.95 ?? 15.50 ???? 0.57 ???? 0.22
First Keystone Corp. FKYS 07 – Financial 0727 – Regional Banks ????? 137.80 ???? 18.75 ?? 12.80 ???? 1.42 ???? 4.32
MVB Financial Corp MVBF 07 – Financial 0724 – Money Center Banks ????? 135.30 ???? 14.40 ?? 22.10 ???? 1.67 ???? 5.34
First Mid-Illinois Bancshares, FMBH 07 – Financial 0727 – Regional Banks ????? 130.30 ?????? 4.40 ?? 12.90 ???? 1.32 ???? 2.43
First Real Estate Investment T FREVS 09 – Services 0933 – Real Estate Operations ????? 126.70 ???? 13.69 ?? 42.40 ???? 7.73 ???? 3.08
First Manitowoc Bancorp, Inc. BFNC 07 – Financial 0730 – S&Ls/Savings Banks ????? 120.80 ???? 33.30 ?? 11.30 ???? 1.19 ???? 3.07
Peoples Financial Services Cor PFIS 07 – Financial 0727 – Regional Banks ????? 120.40 ???? 62.40 ?? 14.60 ???? 1.90 ???? 4.37
First Farmers & Merchants Corp FFMH 07 – Financial 0727 – Regional Banks ? ????111.20 ?????? 3.30 ?? 13.30 ???? 1.05 ???? 3.05
Yasheng Group HERB 05 – Consumer Non-Cyclical 0509 – Crops ????? 105.50 ?????? 3.88 ???? 0.80 ???? 0.05 ???? 0.11
Farmers & Merchants Bancorp In FMAO 07 – Financial 0727 – Regional Banks ???? ?105.10 ???? 62.01 ?? 11.40 ???? 0.98 ???? 3.37
Nova Lifestyle Inc STVS 04 – Consumer Cyclical 0421 – Furniture & Fixtures ???????? 89.20 ???? 93.77 ?? 16.80 ???? 2.50 ???? 1.17
Golden Growers Coop GGROU 05 – Consumer Non-Cyclical 0509 – Crops ???????? 89.10 ?????? 1.44 ?? 18.50 ???? 2.30 ???? 0.93
First Guaranty Bancshares, Inc FGBI 07 – Financial 0727 – Regional Banks ???????? 88.20 ?????? 7.01 ?? 10.50 ???? 1.03 ???? 1.72
QNB Corp QNBC 07 – Financial 0730 – S&Ls/Savings Banks ??? ?????83.40 ???? 49.82 ???? 9.70 ???? 1.12 ???? 2.62
CCFNB Bancorp Inc CCFN 07 – Financial 0727 – Regional Banks ???????? 78.40 ???? 26.99 ?? 12.00 ???? 1.05 ???? 3.75
Calvin B. Taylor Bankshares, I TYCB 07 – Financial 0727 – Regional Banks ??? ?????75.70 ?????? 3.84 ?? 17.80 ???? 0.95 ???? 5.11
Juniata Valley Financial Corp JUVF 07 – Financial 0730 – S&Ls/Savings Banks ???????? 73.20 ?????? 7.85 ?? 18.80 ???? 1.50 ???? 4.35
Northwest Indiana Bancorp NWIN 07 – Financial 0730 – S&Ls/Savings Banks ???????? 72.70 ?????? 7.68 ???? 9.80 ???? 1.08 ???? 2.76
Franklin Financial Services Co FRAF 07 – Financial 0727 – Regional Banks ???????? 71.80 ???? 36.33 ?? 13.10 ???? 0.77 ???? 1.97
Rand Worldwide Inc RWWI 10 – Technology 1036 – Software & Programming ???????? 67.60 ???? 24.38 ?? 41.70 ???? 2.05 ???? 0.85
Centrix Bank & Trust CXBT 07 – Financial 0727 – Regional Banks ???????? 67.40 ?????? 7.17 ?? 12.00 ???? 1.29 ???? 2.26
Peoples Bancorp PBNI 07 – Financial 0730 – S&Ls/Savings Banks ???????? 66.80 ?????? 7.20 ?? 21.60 ???? 0.88 ???? 3.59
Reserve Petroleum Co RSRV 06 – Energy 0609 – Oil & Gas Operations ???????? 66.20 ???? 20.75 ?? 10.90 ???? 2.05 ???? 3.49
Harleysville Savings Financial HARL 07 – Financial 0730 – S&Ls/Savings Banks ???????? 65.60 ???? 19.95 ?? 13.90 ???? 1.10 ???? 2.09
William Penn Bancorp Inc WMPN 07 – Financial 0730 – S&Ls/Savings Banks ???????? 65.50 ???? 28.80 ?? 23.40 ???? 1.15 ???? 4.86
Kentucky Bancshares, Inc. KTYB 07 – Financial 0727 – Regional Banks ???????? 65.30 ?????? 6.00 ???? 9.10 ???? 0.92 ???? 2.36
Community Bancorp Vermont CMTV 07 – Financial 0727 – Regional Banks ???????? 64.50 ?????? 5.31 ?? 13.70 ???? 1.50 ???? 2.82
Hennessy Advisors Inc HNNA 07 – Financial 0718 – Investment Services ???????? 64.30 ?????? 9.81 ?? 13.10 ???? 2.23 ???? 2.74
Monarch Cement Co MCEM 02 – Capital Goods 0212 – Construction – Raw Materials ???????? 63.40 ???? 13.42 ?? 21.00 ???? 0.96 ???? 0.69
Armanino Foods Of Distinction AMNF 05 – Consumer Non-Cyclical 0515 – Food Processing ???????? 63.10 ???? 47.48 ?? 21.90 ???? 9.85 ???? 2.25
Q.E.P. Co., Inc. QEPC 02 – Capital Goods 0209 – Construction – Supplies and Fixtures ???????? 62.10 ???? 17.14 ???? 5.80 ???? 1.08 ???? 0.21
Commercial National Financial CNAF 07 – Financial 0727 – Regional Banks ???????? 60.10 ???? 17.85 ?? 12.10 ???? 1.33 ???? 4.17
Croghan Bancshares, Inc. CHBH 07 – Financial 0727 – Regional Banks ???????? 57.90 ?????? 8.63 ?? 12.80 ???? 0.86 ???? 2.72
Burnham Holdings Inc BURCA 02 – Capital Goods 0209 – Construction – Supplies and Fixtures ???????? 57.20 ?????? 6.66 ?? 12.80 ???? 1.29 ???? 0.42
Standard Financial Corp. STND 07 – Financial 0727 – Regional Banks ???????? 56.10 ???? 51.56 ?? 19.30 ???? 0.71 ???? 3.39
Choiceone Financial Services I COFS 07 – Financial 0727 – Regional Banks ???????? 54.90 ???? 13.34 ?? 11.30 ???? 0.90 ???? 2.85
LICT Corporation LICT 09 – Services 0915 – Communications Services ?????? ??54.00 ??????????? – ???? 6.70
Capital Properties Inc CPTP 09 – Services 0939 – Rental & Leasing ???????? 52.80 ?????? 4.80 ?? 34.80 ?? 34.78 ???? 6.86
Middlefield Banc Corp MBCN 07 – Financial 0727 – Regional Banks ???????? 52.70 ?? 101.40 ???? 8.10 ???? 1.00 ???? 1.87
CSB Bancorp Inc (Ohio) CSBB 07 – Financial 0730 – S&Ls/Savings Banks ???????? 52.00 ???? 20.90 ?? 10.10 ???? 1.00 ???? 2.49
Jeffersonville Bancorp JFBC 07 – Financial 0727 – Regional Banks ???????? 51.70 ???? 17.69 ?? 11.80 ???? 1.03 ???? 2.71
Georgia-Carolina Bancshares In GECR 07 – Financial 0727 – Regional Banks ???????? 51.70 ???? 59.45 ???? 7.80 ???? 0.90 ???? 2.78
PSB Holdings Inc (Wisconsin) PSBQ 07 – Financial 0727 – Regional Banks ???????? 50.60 ???? 10.72 ???? 8.30 ???? 0.90 ???? 1.86
Consumers Bancorp, Inc. CBKM 07 – Financial 0730 – S&Ls/Savings Banks ???????? 49.30 ?????? 2.72 ?? 14.00 ???? 1.33 ???? 2.86
Quality Products, Inc. QPDC 02 – Capital Goods 0218 – Misc. Capital Goods ? ???????47.70 ?????? 3.78 ???? 8.30 ???? 4.84 ???? 1.63
Northway Financial, Inc. NWYF 07 – Financial 0727 – Regional Banks ???????? 47.10 ???? 10.26 ???? 6.70 ???? 1.03 ???? 1.41
Granite Falls Energy LLC GFGY 01 – Basic Materials 0103 – Chemical Manufacturing ???????? 45.90 ??????????? – ?? 15.30
George Risk Industries Inc RSKIA 09 – Services 0972 – Security Systems & Services ???????? 45.20 ?????? 9.89 ?? 11.40 ???? 1.40 ???? 4.27
F&M Bank Corp FMBM 07 – Financial 0727 – Regional Banks ???????? 43.30 ???? 11.21 ???? 9.00 ???? 0.84 ???? 1.63
Southern Michigan Bancorp SOMC 07 – Financial 0727 – Regional Banks ???????? 42.50 ?????? 5.33 ???? 9.40 ???? 0.77 ???? 2.15
Noble Roman’s, Inc. NROM 09 – Services 0942 – Restaurants ???????? 42.30 ???? 69.62 ?? 30.90 ???? 3.28 ???? 5.63
Minden Bancorp Inc MDNB 07 – Financial 0730 – S&Ls/Savings Banks ???????? 41.60 ?????? 3.50 ?? 12.80 ???? 0.98 ???? 4.07
Surrey Bancorp SRYB 07 – Financial 0727 – Regional Banks ???????? 41.50 ?????? 4.68 ?? 16.50 ???? 1.36 ???? 3.91
Corning Natural Gas Holding Co CNIG 12 – Utilities 1206 – Natural Gas Utilities ???????? 40.20 ?????? 7.99 ?? 20.40 ???? 1.78 ???? 1.74
Pioneer Railcorp PRRR 11 – Transportation 1112 – Railroads ??? ?????37.00 ?????? 6.72 ?? 21.30 ???? 2.80 ???? 1.77
Ziegler Companies, Inc., The ZGCO 07 – Financial 0718 – Investment Services ???????? 35.70 ???? 27.00 ?? 17.60 ???? 1.10 ???? 0.45
XCel Brands Inc XELB 07 – Financial 0721 – Misc. Financial Services ???????? 35.60 ?????? 0.35 ???? 5.70 ???? 1.04 ???? 2.33
Security Federal Corporation ( SFDL 07 – Financial 0730 – S&Ls/Savings Banks ???????? 35.40 ?????? 8.42 ?? 13.20 ???? 0.63 ???? 1.14
Regency Affiliates Inc RAFI 12 – Utilities 1203 – Electric Utilities ???????? 33.90 ?????? 1.44 ???? 9.00 ???? 1.05
New Ulm Telecom Inc NULM 09 – Services 0915 – Communications Services ???????? 33.50 ?????? 5.90 ???? 8.90 ???? 0.59 ???? 0.90
Heritage Bankshares, Inc. HBKS 07 – Financial 0727 – Regional Banks ???????? 29.60 ?????? 8.45 ?? 14.10 ???? 1.00 ???? 2.79
Home Loan Financial Corporatio HLFN 07 – Financial 0730 – S&Ls/Savings Banks ???????? 29.50 ?????? 2.60 ???? 8.60 ???? 1.17 ???? 2.82
High Country Bancorp, Inc. HCBC 07 – Financial 0730 – S&Ls/Savings Banks ???????? 29.50 ?????? 9.90 ?? 15.20 ???? 1.24 ???? 3.15
Commercial Bancshares, Inc. \O CMOH 07 – Financial 0727 – Regional Banks ???????? 29.10 ???? 14.76 ?? 10.30 ???? 0.95 ???? 2.06
South Street Financial Corp. SSFC 07 – Financial 0730 – S&Ls/Savings Banks ???????? 28.70 ?? 121.25 ?? 28.50 ???? 1.05 ???? 2.29
CreditRiskMonitor.Com Inc CRMZ 10 – Technology 1018 – Computer Services ???????? 27.90 ?????? 1.75 ?? 87.50 ???? 6.48 ???? 2.38
Smtp Inc SMTPD 10 – Technology 1018 – Computer Services ???????? 25.80 ???? 27.23 ?? 20.60 ?? 15.57 ???? 4.46
West End Indiana Bancshares In WEIN 07 – Financial 0730 – S&Ls/Savings Banks ???????? 25.70 ?????? 7.40 ?? 18.30 ???? 0.80 ???? 2.10
Northeast Indiana Bancorp NIDB 07 – Financial 0730 – S&Ls/Savings Banks ???????? 25.50 ?????? 6.21 ???? 9.30 ???? 0.92 ???? 2.55
Summit Financial Services Grou SFNS 07 – Financial 0718 – Investment Services ???????? 25.20 ???? 23.80 ?? 15.40 ???? 2.51 ?? ??0.31
First Bancorp of Indiana, Inc. FBPI 07 – Financial 0730 – S&Ls/Savings Banks ???????? 24.90 ?????? 2.85 ?? 16.00 ???? 0.86 ???? 1.88
Spindletop Oil & Gas Co SPND 06 – Energy 0609 – Oil & Gas Operations ???????? 24.40 ?????? 3.17 ???? 7.30 ???? 1.28 ???? 1.89
Frederick County Bancorp (MD) FCBI 07 – Financial 0727 – Regional Banks ???????? 24.10 ?????? 7.20 ?? 15.80 ???? 0.91 ???? 1.90
Meritage Hospitality Group Inc MHGU 09 – Services 0942 – Restaurants ???????? 24.00 ?????? 3.26 ???? 6.60 ???? 2.35 ???? 0.21
Pinnacle Bankshares Corp PPBN 07 – Financial 0727 – Regional Banks ???????? 24.00 ?????? 7.95 ?? 17.90 ???? 0.85 ???? 1.54
CNB Financial Services Inc CBFC 07 – Financial 0727 – Regional Banks ???????? 23.60 ??????? ????- ?? 15.10 ???? 0.83 ???? 1.97
Investors Heritage Capital Cor IHRC 07 – Financial 0709 – Insurance (Life) ???????? 23.50 ?????? 8.28 ?? 11.70 ???? 0.44 ???? 0.29
Trans World Corporation TWOC 09 – Services 0912 – Casinos & Gaming ???????? 22.50 ?????? 3.32 ?? 12.80 ???? 0.53 ???? 0.63
Pinnacle Bancshares, Inc. PCLB 07 – Financial 0727 – Regional Banks ???????? 21.70 ?????? 4.46 ???? 9.10 ???? 0.82 ???? 2.33
FFW Corporation FFWC 07 – Financial 0730 – S&Ls/Savings Banks ???????? 21.40 ?????? 6.74 ???? 9.10 ???? 0.93 ???? 1.66
ASB Financial Corp. (OH) ASBN 07 – Financial 0730 – S&Ls/Savings Banks ???????? 20.70 ?????? 5.85 ?? 13.40 ???? 0.98 ???? 1.96
SBT Bancorp Inc SBTB 07 – Financial 0727 – Regional Banks ???????? 20.50 ???? 21.95 ?? 13.50 ???? 1.06 ???? 1.72
Seychelle Environmental Techno SYEV 02 – Capital Goods 0218 – Misc. Capital Goods ???????? 20.40 ???? 20.22 ?? 19.80 ???? 4.65 ???? 3.46
Great American Bancorp GTPS 07 – Financial 0727 – Regional Banks ???????? 19.80 ?????? 2.70 ?? 13.40 ???? 0.80 ???? 2.26
Sierra Monitor Corporation SRMC 10 – Technology 1030 – Scientific & Technical Instruments ???????? 19.70 ???? 12.68 ?? 15.00 ???? 2.41 ???? 1.10
Logansport Financial Corp. LOGN 07 – Financial 0724 – Money Center Banks ???????? 19.60 ?????? 2.50 ???? 9.00 ???? 0.86 ???? 2.30
Seneca-Cayuga Bancorp Inc SCAY 07 – Financial 0724 – Money Center Banks ???????? 19.60 ?????? 1.24 ???? 9.50 ???? 1.00 ???? 1.64
Micropac Industries, Inc. MPAD 10 – Technology 1033 – Semiconductors ???????? 18.90 ?????? 3.67 ?? 20.90 ???? 0.96 ???? 0.97
Texas Vanguard Oil Co TVOC 06 – Energy 0609 – Oil & Gas Operations ???????? 18.60 ?????? 1.31 ?? 22.60 ???? 1.40 ???? 3.04
Issuer Direct Corp ISDR 09 – Services 0909 – Business Services ???????? 18.30 ???? 46.92 ?? 20.90 ???? 7.19 ???? 3.26
Environmental Tectonics Corpor ETCC 02 – Capital Goods 0203 – Aerospace and Defense ???????? 17.90 ?????? 3.22 ?? 21.70 ???? 2.47 ???? 0.55
Wells Financial Corp. WEFP 07 – Financial 0730 – S&Ls/Savings Banks ???????? 17.80 ???? 13.50 ?? 13.60 ???? 0.67 ???? 1.99
Sono-Tek Corporation SOTK 02 – Capital Goods 0218 – Misc. Capital Goods ???????? 17.40 ???? 37.68 ?? 60.00 ???? 2.79 ???? 1.89
DynTek, Inc DYNE 10 – Technology 1036 – Software & Programming ???????? 17.00 ?????? 0.80 ???? 5.00 ???? 2.23 ???? 0.13
Riverview Financial Corporatio RIVE 07 – Financial 0727 – Regional Banks ???????? 16.90 ???? 12.81 ?? 12.00 ???? 0.63 ???? 1.30
Paradise, Inc. PARF 05 – Consumer Non-Cyclical 0515 – Food Processing ???????? 16.60 ?????? 3.20 ?? 18.80 ???? 0.78 ???? 0.66
Bank McKenney (VA) BOMK 07 – Financial 0727 – Regional Banks ???????? 16.60 ?????? 4.30 ???? 9.10 ???? 0.73 ???? 1.55
Quaint Oak Bancorp Inc QNTO 07 – Financial 0730 – S&Ls/Savings Banks ???????? 15.60 ???? 30.88 ?? 23.60 ???? 0.85 ???? 2.38
Greenville Federal Financial C GVFF 07 – Financial 0730 – S&Ls/Savings Banks ???????? 15.40 ?????? 2.20 ?? 17.50 ???? 0.82 ???? 2.55
BV Financial Inc BVFL 07 – Financial 0730 – S&Ls/Savings Banks ???????? 14.40 ?????? 1.20 ?? 30.00 ???? 1.15 ???? 2.49
Jaclyn, Inc. JCLY 04 – Consumer Cyclical 0403 – Apparel/Accessories ???????? 13.70 ?????? 2.70 ?? 15.40 ???? 0.62 ???? 0.08
OPT-Sciences Corp OPST 10 – Technology 1030 – Scientific & Technical Instruments ???????? 13.50 ?????? 1.74 ?? 12.90 ???? 1.05 ???? 2.04
Citizens Bancshares Corporatio CZBS 07 – Financial 0727 – Regional Banks ???????? 13.30 ?????? 1.94 ?? 11.40 ???? 0.40 ???? 1.02
Chino Commercial Bancorp (CA) CCBC 07 – Financial 0727 – Regional Banks ???????? 13.20 ?????? 2.39 ?? 19.20 ???? 1.45 ???? 3.09
IEH Corporation IEHC 10 – Technology 1024 – Electronic Instruments & Controls ???????? 12.10 ???? 20.74 ???? 8.50 ???? 1.26 ???? 0.82
ITEX Corporation ITEX 07 – Financial 0718 – Investment Services ???????? 11.60 ???? 15.20 ?? 10.50 ???? 0.88 ???? 0.72
Zynex Inc. ZYXI 08 – Health Care 0812 – Medical Equipment & Supplies ???????? 11.20 ?????? 9.67 ???? 1.20 ???? 0.39
Great Lakes Aviation, Ltd. GLUX 11 – Transportation 1106 – Airline ???????? 10.50 ?????? 8.07 ???? 0.27 ???? 0.08
Fairmount Bancorp Inc FMTB 07 – Financial 0727 – Regional Banks ?????????? 9.80 ?????? 1.01 ?? 49.40 ???? 0.70 ???? 2.58
Solitron Devices, Inc. SODI 10 – Technology 1033 – Semiconductors ?????????? 9.50 ???? 32.63 ?? 11.20 ???? 0.85 ???? 1.10
Repro-Med Systems, Inc. REPR 08 – Health Care 0812 – Medical Equipment & Supplies ?????????? 7.70 ?????? 3.80 ?? 21.00 ???? 1.62 ???? 0.96
Union Electric Company UELMO 12 – Utilities 1203 – Electric Utilities ?????????? 7.60 ?????? 4.70 ?? 25.40 ???? 2.39 ???? 2.78
Surge Components, Inc. SPRS 10 – Technology 1024 – Electronic Instruments & Controls ?????????? 7.50 ???? 10.84 ???? 4.10 ???? 0.74 ???? 0.32
Home Financial Bancorp HWEN 07 – Financial 0730 – S&Ls/Savings Banks ?????????? 7.50 ?????? 1.68 ?? 13.30 ???? 0.92 ???? 2.21
Alliance Distributors Holding, ADTR 10 – Technology 1015 – Computer Peripherals ?????????? 7.50 ?????? 2.70 ???? 5.70 ???? 1.31 ???? 0.11
Community Investors Bancorp In CIBN 07 – Financial 0730 – S&Ls/Savings Banks ?????????? 7.10 ?????? 6.48 ?? 73.60 ???? 0.57 ???? 1.15
M&F Bancorp, Inc. MFBP 07 – Financial 0727 – Regional Banks ?????????? 7.10 ?????? 4.38 ???? 0.30 ???? 0.65
China Industrial Steel Inc CDNN 01 – Basic Materials 0121 – Iron & Steel ?????????? 6.60 ?????? 1.38 ???? 4.50 ???? 0.03
FPB Financial Corp. FPBF 07 – Financial 0730 – S&Ls/Savings Banks ?????????? 5.20 ??????????? – ???? 8.90 ???? 0.97 ???? 1.78
NexCore Healthcare Capital Cor NXCR 08 – Health Care 0806 – Healthcare Facilities ?????????? 5.10 ?????? 0.02 ???? 2.00 ???? 0.45 ???? 0.37
Precision Auto Care PACI 09 – Services 0909 – Business Services ?????????? 5.00 ?????? 0.17 ???? 7.30 ???? 0.26 ???? 0.19
Scientific Industries, Inc. SCND 10 – Technology 1030 – Scientific & Technical Instruments ?????????? 4.80 ?????? 2.34 ?? 12.40 ???? 0.89 ???? 0.68
Tidelands Royalty Trust B TIRTZ 07 – Financial 0721 – Misc. Financial Services ?????????? 4.70 ?????? 9.01 ???? 9.20 ???? 7.91 ???? 6.73
Foxby Corp FXBY 07 – Financial 0721 – Misc. Financial Services ?????????? 4.70 ?????? 1.09 ???? 6.50 ???? 0.77 ?? 23.62
TNR Technical, Inc. TNRK 10 – Technology 1024 – Electronic Instruments & Controls ?????????? 3.80 ?????? 4.31 ?? 12.30 ???? 0.99 ???? 0.41
Information Analysis Incorpora IAIC 10 – Technology 1036 – Software & Programming ?????????? 2.40 ?????? 1.97 ???? 1.19 ???? 0.44
Microwave Filter Co., Inc MFCO 10 – Technology 1024 – Electronic Instruments & Controls ?????????? 1.70 ?????? 1.50 ???? 1.03 ???? 0.53
Bayou City Exploration, Inc. BYCX 06 – Energy 0609 – Oil & Gas Operations ?????????? 1.50 ?????? 0.81 ???? 2.70 ???? 0.73 ???? 0.44
Tongli Pharmaceuticals (USA) I TGLP 08 – Health Care 0803 – Biotechnology & Drugs ?????????? 0.90 ?????? 0.01 ???? 0.40 ???? 0.04 ???? 0.07

Lotsa little banks and tech companies.? Hey, I’m going to throw those with over $100 million of market cap into my next portfolio reshaping.? I’m still small enough as a manager to deal with small companies if they are well-managed.? This can bring me back to my microcap value days, where I invested 1992-1998.? Once I made an offer to buy more than 5% of a company, and I asked my bosses if they would have any problems if I had to make a 13F filing.? They gave me the go ahead; I made my offer and it was turned down.? Pity, because if it had worked, it would have been a great investment.

The table above is a beginning for due diligence.? I do not recommend any of the stocks there.? I do note that my reader’s stock is high on the list.

Some of these stocks could be good investments, but you would have to do the research to figure out which ones are good.? On the bright side, almost no one is analyzing these companies, so your analysis has more punch relative to company outsiders.? Insiders will still do better.

All that said, I suspect that these stocks will do well on average.

E-mails on Insurance

E-mails on Insurance

Posted on by David Merkel

Here we go.? E-mail #1:

You truly have one of the great blogs out there!

I was wondering, have you ever had to evaluate a company that had set up a captive insurance company to self insure? How did you get comfortable with it?

As an example, ZCL composites on the TSXV. I looked at them awhile back and disqualified it as I could not get comfortable with the environmental liability. They manufacture fuel storage tanks, so insurance is a large component of their cost of doing business.

If they did have a reputable outside insurer, you could at least count on the insurer for doing some audit work in their manufacturing and installation processes. But they have set up a captive, and self insure.?

So, how would you calculate whether they have enough reserves?

I threw the company in the too difficult pile and moved on, but it has irked me as I like them.

Good toss into the too difficult pile.? Environmental liabilities are difficult even for actuaries inside the insurance companies? to analyze.? Those of us outside have no chance.? I cannot validate reserves from outside, and particularly not on long-tail lines.? I will not invest in any insurer that has a large part of its underwriting in asbestos/environmental — it is too risky.

That aside, using a captive is a negative sign.? No one uses a captive, except to weaken reserving, taxation, or other rules.

Next e-mail:

David,

I stumbled across Gainsco, Inc. (OTCPK:GANS), a very small nonstandard auto insurer (you may be familiar). It’s trading around 0.6x book value, seems to be well capitalized, and has had OK growth barring FY2012. It also has a pretty impressive 12.5% dividend yield.

I guess my questions are:

1) Would you expect this trade at such a discount to book because: its nonstandard insurance, it’s on the pink sheets (not regularly filing with the SEC), it’s too small, or some combination or other reason?

2) given that its nonstandard, I assume it’s riskier? What’s the best way to determine whether the company is adequately reserved/capitalized? 24.5% equity / assets seems pretty conservative, but I suppose if they’re not adequately reserved that could be meaningless.

Thanks so much, look forward to hearing from you.

I have run across Gainsco in the past, when they were bigger, and I avoided them.? Subprime insurers tend to lose money on underwriting over time.? There is a kind of cycle where a few make money for a few years, and then competition surges, and more money is lost than was previously made.? From the time I started as a buyside analyst of insurance stocks in 2003, until now, no subprime insurer has made money for a buy-and-hold investor.

Aside from that, Gainsco has gone dark.? You can see financials at their website, but do you trust them?? Aside from nonsponsored ADRs no good companies trade on the pink sheets.

Margin of safety — this does not meet my safety requirements.

Final E-mail:

Hi David,

I really enjoy your blog.? Have seen the recent news surrounding AmTrust Financial (AFSI) and short sellers?? I’d like to hear the thoughts of an actuary on the company and specifically the items that GeoInvesting points to.? To me, their financial structure appears extremely (perhaps, unnecessarily) complicated.?

Yes, and they fail my test of having conservative reserves.? They have had to strengthen reserves on prior year’s business for the past three years.? That is a bad sign, and would keep me away.? I think GeoInvesting is correct here, but this is not an endorsement of them generally.

It is very rare that an insurer should be valued near 2x book value.? Though I am rarely so bold, this one strikes me as a short sale, if you can get the borrow with confidence.

 

A More Robust Career in Investment Banking

A More Robust Career in Investment Banking

Posted on by David Merkel

Another letter from a reader:

Hey David,

I am an avid follower of your blog and find your insights tremendously helpful in aiding my own decision-making framework.

An opportunity was recently offered to me, and I hope you can provide some guidance, given your vast experience in both the fixed income and equity fields.

As background, I am 29 and have been in the finance-investment industry for just over seven years.?The first couple of years were spent at a discount brokerage, primarily in a trading role. After that I joined a group called the ZZZZZZZ, which provides advice to the 1,500 investment advisors in the YYYYYYY channel. Over the last several years, I have worked as an associate on the NNNNNNN Equity Team and later moved on to a role that provides coverage for ETFs, mostly from a product perspective but also increasingly from an asset allocation standpoint (i.e. portfolio construction, macro commentaries on major and sub-asset classes).

Several positions have recently opened up on the Fixed Income Desk. My understanding is that the job will involve a lot of relative value analysis of individual securities, including preferred shares. I have spoken to several people regarding the potential opportunity, and the main theme that has emerged is that fixed income is generally less exciting and more technical, whereas equities is more of an “art”, which I don’t necessarily disagree with. Having said that, the fixed income position would offer what I would consider valuable?experience in looking at debt instruments and some exposure to bond trading, which are areas that I have close to zero knowledge.

In any case,?you probably have fielded similar questions in the past, and with your experience, likely have some invaluable insights to share.?Any guidance on the potential switch from equities/ETFs to fixed income would be much appreciated.

Dear Friend,

It is easier to move from bonds to equities than vice-versa.? The mindset that embraces risk does not easily embrace a more risk-constrained setting.

That said, I would encourage you to pursue the opportunities on the fixed-income desk.? It will broaden you.? My years in fixed income prepared me for what I do now.? Understanding fixed claims and variable claims creates a robust investor.

Think of it as a 3-5 year stint in fixed income, which will make you a richer candidate for other roles in investment banking.

Sincerely,

David

Avoid Selling Stocks When You Are Old, Maybe?

Avoid Selling Stocks When You Are Old, Maybe?

Posted on by David Merkel

The Wall Street Journal recent had an article, What You Know About Retirement Investing Is Wrong, where it recommended that elderly people invest more in stocks as they get older.? I think the advice is wrong, unless you understand it this way:

Stocks are longer assets than bonds.? Use your bonds to pay for your spending in the early years of your retirement, and don’t sell your stocks.? Once you run out of bonds, start selling your stocks, if the dividend income isn’t enough to live on.

But even this idea is weak.? If a person followed this in 1997 with a 10-year horizon, their stocks would be worth less in 2008-9, even if they rocket back out to 2014.

Asset allocation is more difficult than it is in the textbooks, or in the syllabuses for the CFA Institute or for CFPs.? It is a blend of two things — when does the investor need the money, and what asset classes offer decent risk adjusted returns looking forward?

If long-dated, volatile asset classes offer great returns looking forward, but the client has a short time horizon, he can’t invest much in risk assets.

If long-dated, volatile asset classes offer great returns looking forward, but the client has a long time horizon, he can invest a lot in risk assets.

If long-dated, volatile asset classes offer poor returns looking forward, but the client has a short time horizon, he should stay in safe assets.

If long-dated, volatile asset classes offer poor returns looking forward, but the client has a long time horizon, he should stay in safe assets.

Stocks do tend to do well over the long run, but few of us live in environments where that growth is uniform.? The stock market zigs, zags, booms, and busts.? What if it busts when your are old?

Personally, I think it is wiser to maintain a more balanced investment posture in retirement, because the future is not predictable.

Serve Client Needs, or Die

Serve Client Needs, or Die

Posted on by David Merkel

Another letter from a reader:

Hi David:

Happy new year!

I’ve been reading the blog for about six months now and can’t thank you enough.? I have found so many of the post to be extremely thought provoking and helpful.? I also appreciate your openness about your faith.? As a young Christian man in the finance world I find it very encouraging.

I’m contacting you to ask a few questions but before I do that, let me give you some context.? This past April I started in sales on the fixed income trading desk at XXXXXXX.? My desk in particular is more “middle market” focused and has a strong tax exempt muni bias.? Although there is an effort to grow our mortgage business, most of our taxable business would be considered more “retail”.? That said, I have spent my last 10 months or so traveling YYYYYYY visiting with all sorts of institutional investors trying develop relationships that will eventually result in a trading relationship.? I’ve met with anywhere from small community banks, to a larger insurance company, and even sat down with a few portfolio managers at a state pension fund.

What I’ve learned from this experience is that one, we don’t have much of a “call” into some of these folks.? One example is the pension fund.? They really aren’t gonna care on any of our exempt positions and we dont bring any large taxable deals for there to be a great fit.? Ive also learned that there are many internal hurdles I am going to have to endure in order to develop a sustainable network of individuals to call on. (Account assignment, crm software, trader skill

All this considered, I’m wondering if you have any words of wisdom for a young aspiring fixed income sales person?? Any dos and dont’s from the coverage you’ve had over they years?? What can I do to set myself apart from my competition?

I realize you probably get inundated with emails so no rush on my end.? Just thought I’d reach out.?

Dear Friend,

I get a lot of emails, but I am not inundated.? Let me give you the perspective of a former corporate bond manager.? I divided my coverage into three groups: those who produced value every day, those who could help me occasionally, and those who could help me rarely, if at all.? I was not like those at the company that acquired my firm.? I would do business with anyone, so long as they offered value.

Yes, that is more difficult to deal with than limiting coverage, but I was aiming to do the best for my client.

You are in a difficult spot.? Your company needs to align itself with the market; it needs to seek a niche where it can add value for clients in a way that fits their tax status, yield needs and liabilities.? Look for niche areas where intelligent investors could provide adequate yields with safety.? I had several brokers that specialized in niches, and I used them to a high degree.

This would require a research effort from your firm that would reveal values to clients and potential clients.? But with most business efforts, client needs come first.? Re-orient the business to serve client needs, or die.

As for you, individually study your clients and potential clients to see what they need.? See if your firm can deliver that.? If it can’t, you may have to find another firm.? Big clients won’t deal with anything but the main office of the big firms, unless the regional coverage is particularly clever.? Medium and small clients are often happy to work with a local or regional firm, or the regional office of one of the big firms.

As coverage, you can be:

  • Prompt
  • Attentive
  • Knowledgeable about how to help your clients (if you can within your firm)
  • Empathetic, Friendly
  • Honest (that goes a long way)
  • Reliable
  • The guy who knows how to find the other side of a trade.

That last one is important: I’ve known coverage that could pry illiquid, hard-to-find bonds out of the hands of parties who don’t know what they are worth.? That’s a valuable skill, but difficult to do, except with insurance companies and mutual funds, which have to report their holdings at the security level by CUSIP.

But if your firm can’t deliver what your clients need, you will likely just be a nice guy on the phone who eats up the time of clients.? I knew a number of those, and I never got much business done with them.? You would be better off with another firm, if you can make the jump.

Where to Find Data

Where to Find Data

Posted on by David Merkel

Here’s another letter from a reader:

Hi David,

I have been a long time reader of your blog but writing for the first time. To me a key part of the investment process for a generalist investor has to be a way to efficiently screen stocks to generate? investment ideas and also measure historical returns and fundametals for various industry groups under various economic conditions. I am curious as to what data sources you use in your own work for historical stock market and fundamental data? Do you pull this into your own database and do you use Excel or? a statistical package for any quantitative backtests for your screens?

In a previous job I used FactSet to pull historical monthly pricing and quarterly fundamental data for a universe of over 100 regulated utility stocks (both current and past public firms). I also taught myself a fair bit of statistics along the way including logistic regressions and discriminant analysis in order to backtest different models for identifying outperformers, dividend growth/cuts etc. Unfortunately I had to do this all in Excel, which made the whole process pretty painful right on from cleaning up outliers, sorting etc. I guess for simple queries of stock performance and tracking various fundamental metrics over time it would work touse Excel.

One motivation for asking is that I hope to one day become an investing blogger myself, and am wondering if there are low cost ways of accesing this kind of data. Additionally I am always interest in real world methods people follow to prune the thousands of possible stocks to invest in to a smaller more promising subset that people can invest more time analyzing on a fundamental basis. To me the hallmark of a successful investor is the willingness to unturn many investing stones until a promising idea is found.

I am a tightwad when it comes to paying up for data or software.? I use the following:

  • FRED
  • Yahoo Finance
  • Value Line via my local library
  • AAII Stock Investor (A screening package, but more than that)
  • The Wall Street Journal
  • Bloomberg.com
  • FINRA TRACE — bond data
  • Bureau of Labor Statistics
  • Federal Reserve (but not FRED)
  • Microsoft Excel
  • If I need to do something complex, I can use the open source statistics package R.

AAII Stock Investor and Value Line are my main screeners.? I pay $100/year for AAII, and nothing for Value Line.? Oh, my library gives me Morningstar for free as well.? Both subscriptions are very full, and very useful as well.

Now all that said, though it is important to be able to access the data, developing the ability to interpret it is far more important.? There can be too much rigor in trying to analyze quantitative data.? You need to identify the three most significant variables that affect the result being analyzed and focus on analyzing them.? Most investment questions can be analyzed through the three most important variables.

Though I do backtests occasionally, I am happier to stick with theory, and base my actions off that.? Backtests are fraught with all sorts of bias, and basically say that the future will be like the past, only more so.

It would be great to have Bloomberg, FactSet, and some off-the-shelf statistics/programming package that integrates with them.? But life is tough, and we don’t always have that luxury, so we have to seek out data on the cheap, and analyze it cheaply also.

That’s how I do it now, but if I get more clients, I will start paying up for data and software.

An Internship at a Hedge Fund

An Internship at a Hedge Fund

Posted on by David Merkel

Here’s a letter from a reader:

Hi David,

Hope all is well.

I will be starting an internship with a hedge fund soon and want to contribute;. Any advice?. Are there any skills that I should learn/ brush up on so I ?can be productive.?

Thanks a lot.

In one sense, an internship at a hedge fund is like an internship at any job.? Here’s the easy stuff:

  • Be on time.
  • Dress like those you work with, or just a little better.
  • Listen carefully, and keep a notebook, so that you can remember things, or write down questions to ask later.
  • You are new to the social hierarchy, and sorry, you are at the bottom of it.? You may get garbage jobs that the junior analysts don’t want to do.? Do those garbage jobs with as much flair as you can.
  • Don’t waste time.
  • Do ask questions, particularly intelligent ones.? If you are not sure, ask.? If it is still not clear, ask.
  • Spend extra time if you need to research something for the business outside of business hours.
  • If you can program, and there are projects that could benefit from programming, offer to write some code now to aid processes after you are gone.
  • Don’t look down on anyone.
  • Be willing to speak up in meetings, but only when you have something of high quality to say.? If they ask you your opinion, and you don’t know, say that you don’t know.
  • Try to find some friendly mid-level person who can give you advice.

Now for things that are hedge-fund specific:

  • Make an effort to understand how the hedge fund intends to make money.? Once you know that, try to read up on their particular strategy.? Ask those with experience where you can learn more.
  • Realize that they are doing you a favor, and not vice-versa.? At the hedge fund I once worked at, we always paid interns, but only one intern out of many was ever worth the cost of paying and training.? So be grateful, and do what they ask, so long as it is not illegal or unethical.
  • Show interest in what others do, and learn from them.? People like to talk about their work, so when you have the opportunity, ask good questions.
  • It’s possible that they may play some practical jokes on you; bear with that in a graceful way.
  • Hedge funds are entrepreneurial, so if you do well, they will throw harder tasks at you.? Don’t be shy; do your best.

So what is the payoff for your hard efforts?

  • References for a real job, so impress those that you intern for.
  • Advisers on how to find a job if you did a good job for them, but there are no openings.
  • Also, they might rather hire privately, rather than expose the firm to risks from advertising a job publicly.? As such, if you showed that you could do great work for them, they very well might hire you.? Stay in touch with them.

That’s what I think you should do.? The comments section is open for more advice to the young man.

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