Ethics – Page 20 – The Aleph Blog

Vote Your Proxies!

Posted on 11 April 200712 April 2007 by David Merkel

I had a pretty good day in relative terms today. Leading the charge were Premium Standard, Patterson-UTI, YRC Worldwide and Jones Apparel. Trailing the pack were Cemex, Lithia Automotive, Group 1 Automotive and Komag.

My main intent in this post is to encourage everyone to vote their proxies. We have a responsibility as capitalists to watch over the firms that we own to the greatest extent possible, and to encourage them to foster greater shareholder friendliness. I don’t want shareholder votes to be like ballot initiatives in California, where one becomes an amateur legislator, but I do want the ability to vote down directors, and for 5% of the shareholders to be able to propose binding rules to the company, for the shareholders as a whole to vote on.

In my own voting, I vote against management when they have not provided an adequate relative return, and vote with them when they have, aside from the principles listed above. If all mutual funds voted this way, corporate America would clean up its act, and rapidly.
Full Disclosure: long PORK, PTEN, YRCW, JNY, CX, LAD, GPI, KOMG

Your Money or Your Job! (Or Both!)

Posted on 4 April 20074 April 2007 by David Merkel

I must admit to being unimpressed with Sam Zell’s bid for Tribune. I can’t remember the last time someone put up so little money for so great an asset, aside for when I was the juniormost member of the AIG team considering whether to take over The Equitable. (AXA walked away with it, and the untold story is how AIG botched the whole thing.)

The skinny is this: Tribune the company borrows money, and gives it to the ESOP [employee stock ownership plan] to buy up the shares of Tribune. Sam Zell provides a small amount of subordinated financing ($325 million) to Tribune to help make this happen, and receives a warrant to purchase 40% of the company for $500 million. If the true value of the company is $8 billion, this is one sweet deal for Zell. Imagine getting interests in a company worth $3.2 billion, and only having to put up $825 million for that right.

Now, Tribune in its soon to be levered state might not be worth that much, to Zell, or to the employees. This deal presumes a lot in terms of the future profitability of Tribune. Will they be able to carry the debt load?Those that have read me for a while (at RealMoney) know that I am a bear on the newspapers, and most non-internet media businesses. The internet is destroying the margins that support newspapers in three ways:

Classified ads are more effective over the web
Advertising on the web is more targeted
Why subscribe to a paper, when the data is freely available online?

Now in each area a newspaper is still useful, but enough erosion occurs to ruin the economics. I doubt you can turn around a newspaper; perhaps you can create ancillary businesses off of proprietary content, but try to get people to pay for it, or stream a ton of traffic to get ad revenue.

As for the use of the ESOP to finance the takeover, it puts a gun to the heads of employees, who can only vaguely affect firm performance. Any value that they had built up in the ESOP is now at greater risk. If they succeed, they could make quite a bit (while Sam Zell makes proportionately more. If Tribune fails, the ESOP will be worthless, for any who were relying on it. (I realize some older workers can diversify some, but that’s not enough.) Sam Zell would lose his investment, but he can afford that easily. The proportionate impact to workers whose largest asset might be the ESOP would be much worse.

If I were a Tribune worker, I would urge the ESOP to vote down the deal. The downside is more significant than the upside.

SFAS 159

Posted on 24 March 200722 June 2017 by David Merkel

I’m not an accountant.? I have never taken an accounting course in my life.? Yet as an actuary and a financial analyst, I have had to use accounting rules to understand financial statements, both in the production of them, and the interpretation of them.? (I even remember writing a paper explaining the effect of the then-current FAS 52 on foreign exchange when I was a grad student.)

There are a number of Statements of Financial Accounting Standards that I think have been mistakes.? We are between paradigms.? The central question is this: how often do we want to re-estimate the value of balance sheet items, and if they change, how should they be reflected in the income statement?

There are two consistent ways to do this.? Other methods are a kludge in my opinion.? Method one is amortized cost on both sides of the balance sheet.? Method two is the estimation of fair market value on both sides of the balance sheet.

But SFAS 159 allows companies to elect which assets and liabilities (with some restrictions, and subject to SFAS 115) they can value at amortized cost or at fair market value, together with disclosure on how the assets/liabilities are valued.

Now, I know that the FASB is trying to create standards that will be more consistent with international accounting standards, but what they are doing here will make accounting less comparable across US companies, particularly given that adherence to SFAS 159 is optional.

For companies with no long term agreements, SFAS 159 will not have any major impacts, but as for me, given that I follow the insurance industry, this will make my life more complex, without any equivalent increase in understanding.

As I said once to a panel of the IASB and FASB, create two consistent financial statements, one amortized cost, and one fair market value.? This would mean two income? statements and two balance sheets, and one cash flow statement.? They though that was too much work, but I disagree; companies are doing that work now, but they are not reporting it.? Better they should disclose what they know.

What a Week!

Posted on 3 March 20075 March 2007 by David Merkel

Family responsibilities have kept me from posting. As a father of eight (five adopted), I found the WSJ article on how much children cost fascinating. Fascinating, and hooey. It doesn’t take that much to raise children properly. In a large family, particularly, one of the benefits is that the children like having so many siblings (even as the parents go nuts). It restricts the number of extra activities that any child can take on, particularly as older children must help to make the family work.

It is very easy to be too indulgent with children. Children respect and love strict parents, if the parents are rational and communicate why they are that way.

But I digress. Last week was tough. I did 60 bp better than the S&P 500, and considerably better than small cap indexes. That’s cold comfort when you’re losing money.

Last week, some oddball names helped me. I sold some Fresh Del Monte Produce to rebalance my positions, because it had run so much. I will do the same with Grupo Casa Saba if it runs another 5%. Much as I think the stock is undervalued, on any stock I own I still take a modest amount of profits after every run of 20%.

Anyone looking at my broad market portfolio would see a decent amount of economic sensitivity in the names there. I am not trying to overdo it; I am aiming at cheap names in sectors that I like. That’s how I invest. I let industry selection and cheapness limit my risks, rather than exiting the equity market altogether.

More to come next week as I look at my indicators, and see how the market responds after the weekend. Personally, I would be neutral-to-positive over the next week.

Long SAB FDP