Value Investing – Page 43

Missing Earnings Estimates

Posted on 28 July 201229 July 2012 by David Merkel

Missing earnings estimates hurts in the short run, but it doesn’t mean much if there is no indication that the overall earnings trend has changed.? If the overall trend in earnings has turned down watch out.? Prices can fall as for Zynga and Facebook.

Then you have something like Reinsurance Group of America [RGA].? It recently missed earnings by 12 cents. $1.77 expected, $1.65 actual.? You should want your companies to miss estimates every now and then.? It raises the probability that the accounting is honest.? With a company like RGA, earnings comes down to how many/few large value life insurance policy deaths they have in a quarter.? You are subject to the “law of small numbers” even with the second largest life reinsurance block in the world, because it is the big policies that matter.

Even this does not qualify as a bad quarter for RGA.? Can’t remember a time when they lost money, but they have missed by far more.? Often I have bought shares on such a day; I did not get any on the brief lousy open after the earnings announcement.

With RGA, I hope the price goes down.? I will buy more.? Why?

It rarely misses earnings.? The company is conservative with guidance, and usually beats.? Cumulatively, over 2 years it always beats.
Life Reinsurance is an oligopoly.? It is one of the less competitive areas of the insurance industry.
It is valued at less than 8x current earnings, which are expected to grow, and less than book value, and even book value less AOCI.
You have actuaries running the place.? Actuaries have an ethics code.? I’ve met the management; talked with them on the phone.? Occasionally been on their conference calls.? They seem honest and competent.? I have worked for dishonest and/or incompetent insurance management teams occasionally.? I know what they feel like.? One thing dishonest insurers do is always make earnings by shorting reserves, and then, when the reserving imbalance is too great, deliver a lollapalooza of a bad quarter which more than erases the seeming excess earnings.

That RGA would deliver a slight miss is encouraging to me.? The accounting is honest.? RGA is the #2 or #1 firm globally in what it does.? Unlike the deceased Scottish Re, it was conservative in M&A.? It let Scottish Re overpay for deals, while it sat back and saw an undercapitalized competitor cobble together a life reinsurance block nearly as large, but one that was unprofitable, because of the high prices paid to get it, and the opaque holding company structure (worthy of AIG in miniature).

More generally, when a company misses earnings:

Does it revise current guidance?? If it doesn’t it may be temporary, and a fluke of accounting rules.? Look at the accruals to give you a clue.
How are industry dynamics?? If everyone is missing estimates, there is a reason to mark future prospects down.
Analyze where companies in similar industries have been taken private.? That serves as a ground floor for where valuations could go.

And with that, I leave you with RGA.? I have argued for years that Buffett should buy it.? Excellent company, does not need guidance.? Could take over his inferior #5 position in life reinsurance which has lost money and become #1 … and then the life reinsurance industry will have no more pure plays.? Kind of sad, but logical, because larger P&C reinsurers benefit from the diversification.

So RGA missed earnings.? Who cares?? A little lower and I load the boat.

Full disclosure: long RGA

Sorted Weekly Tweets

Posted on 28 July 2012 by David Merkel

LIBOR

Six ways big banks screwed Grandma http://t.co/ltisCJ2P Poorly argued. It’s as if LIBOR could be manipulated without reaction. $$ Jul 28, 2012
Fidelity Joins BlackRock in Weighing Libor Action Against Banks http://t.co/9DKR48NY This isn’t as easy as it seems; much 2 prove $$ Jul 26, 2012

Eurozone

Draghi Said to Hold Talks With Weidmann on Bond Purchases http://t.co/SunXLadO If the Buba plays ball, the sky is the limit. $$ #inflation Jul 28, 2012
Draghi Says ECB Will Do What?s Needed to Preserve Euro http://t.co/xc4iQ9ji Uncertain that the ECB will buy lots of Italian & Spanish debt Jul 26, 2012
Europe Is Cheap?So Why Can?t I Pull the Trigger? http://t.co/yHGHjmoN Wait until things stop getting worse $$ Jul 25, 2012
Spanish, Italian Notes Rise on Bets for ESM Enhancement http://t.co/3CBLXOmK ?The idea of making the ESM a bank is a game changer,? $$ #no Jul 25, 2012
Spain to struggle to fund 2012 debt crunch http://t.co/iOefCfxz How long until the next last minute rescue? 10-yr yields over 7.5% $$ Jul 25, 2012
Europe Stymies Private Equity as Corporate Buyouts Stall http://t.co/QXNGEnQj If the banks won’t lend, private equity deals don’t fly $$ Jul 24, 2012
Hollande Transaction Tax Drives Investor Quest for Loopholes http://t.co/hDvZnQfL New trans tax drives investors2use contracts4difference Jul 24, 2012
Euro-Zone Government Debts Hit Record http://t.co/o9lXW7f1 Govt debt / GDP 4 whole E-Zone goes from 87.3% @ 12/11 -> 88.2% @ 3/12 $$ Jul 24, 2012
Greece Back at Center of Euro Crisis as Spain Yields Soar http://t.co/GLCWfi9e IMF/Core begins to doubt ability to hold it together $$ Jul 23, 2012
YIKES: Spanish Yields Are Surging To Record Highs http://t.co/qIQhvlUE Time 4 the Germans to buy summer homes in Spain $$ #evercloserunion Jul 23, 2012

US Politics

There. MMF reform that works, fit into a single tweet. $$ 🙂 Jul 27, 2012
Let MMFs keep a stable NAV, pass through losses thru unit reduction if real NAV<.995, reset real NAV @ 1.0025. Runs would strengthen NAV $$ Jul 27, 2012
Why Investors Are Dumping Money Market Funds For Short-Duration ETFs http://t.co/TNEpH9F9 My point: treat MMFs like modified ETFs $$ Jul 27, 2012
Maryland Governor Defends ‘Millionaires’ Tax’, Denies Job Losses http://t.co/yqfVRYCB Can bend rules, since MD is next 2 DC, which slurps $$ Jul 27, 2012
Drilling Strains Rural Roads http://t.co/2tUr6bJY Simple solution: tell energy companies you will not repair roads. They will do it $$ Jul 27, 2012
Treasury Eyes Funds Hidden Overseas http://t.co/g38s8z1c IRS goes after foreign trusts, seems 2ba piddling amount of money 2 go after $$ Jul 27, 2012
Wrong: How2Break NRA?s Grip on Politics: Michael R. Bloomberg http://t.co/I9vm6KKg The Ethanol lobby is a lot weaker than the gun lobby $$ Jul 27, 2012
Estate Tax: Ezra Klein is Wrong! http://t.co/1o5sumfN Never trust anyone whose profession starts w/an “A.” 😉 Accts, Attys, Advisors &c $$ Jul 26, 2012
Making the Rich Poorer Doesn?t Enrich the Middle Class http://t.co/fvsUgDfk The govt exists to grow itself until we die. Sad but true $$ Jul 26, 2012
The gender wage gap is a myth http://t.co/cNpTi1uZ Diana Furchtgott-Roth makes the same case that many economists have since the 70s $$ Jul 26, 2012
New Geithner disclosures further cloud his record http://t.co/heblaDAH Geithner was point man 4the Fed on derivatives. Dropped ball $$ Jul 26, 2012
Justice Scalia Disputes Accuracy Of ‘Leak’ http://t.co/OMVCtlAg Wide-ranging interview of Scalia, whose juridical impact may outlive him $$ Jul 25, 2012
Former Citigroup CEO Weill Says Banks Should Be Broken Up http://t.co/zftFGEQ6 Good, he changed his view, my view changed on that also $$ Jul 25, 2012
10 Everyday Items That Cost Way More Because of US Taxes http://t.co/KjXUu8Im Interesting list, mostly comprised of protectionist taxes $$ Jul 25, 2012
The hidden Mitt Romney http://t.co/rPVcQR7C Romney & Obama have one thing in common: the more you know about them, the less you like them $$ Jul 24, 2012
Romney to Attack Obama on Leaks, Defense Cuts http://t.co/hiCrTCtX ?the greatest force for good the world has ever known? US naivete $$ Jul 24, 2012
Scalia Offers Up 57 Varieties for Interpreting Legal Texts http://t.co/sSdqUE1m His manifesto on originalism/textualism $$ Jul 23, 2012

China

Lies, Damned Lies, and China’s Economic Statistics http://t.co/Fqpn8YMS I have some skepticism to US statistics, how much more China? $$ Jul 27, 2012
Xi Jinping Millionaire Relations Reveal Fortunes of Elite http://t.co/iFz7e6dg Communist Party members have access2loans & IPO allocations Jul 27, 2012
Capital Outflows Chime With China?s Bears http://t.co/GIaMbM8g “any currency exchange >$2,000 needs to have a prior reservation made.? $$ Jul 25, 2012

Companies

Alierta Abandons Dividend Penchant to Save Telefonica http://t.co/AHhbFucX Now more interested in $TEF, good cashflow, div shld resume $$ Jul 26, 2012
Unilever Warns of Worsening Economy http://t.co/wscXplAV Global economy is weak, even for staple goods. $$ Jul 26, 2012
Zynga?s ?Draw Something? Isn?t a Pretty Picture http://t.co/nSrHWTG3 Always be wary of fads that have no balance sheet $$ Jul 26, 2012
Sanofi Dengue Vaccine Is Promising http://t.co/7EFL5ioC Good news. Perhaps Dengue Fever may be conquered for the good of mankind $$ Jul 26, 2012
Industrias Bachoco Announces Second Quarter 2012 Results http://t.co/n0amblWp Tough read, Q looks good, US acq prob paying off FD:+ $IBA $$ Jul 25, 2012
Assurant Reports Second Quarter 2012 Financial Results http://t.co/jdaB09Kh FIring on all cylinders, & shrinking share count FD: + $AIZ $$ Jul 25, 2012
Warren Buffett: Great Investor, Lousy Insurance Salesman? http://t.co/4KfZNNP3 Poor article; Buffett is very intelligent insurance exec $$ Jul 25, 2012
link 4 last tweet: http://t.co/sj75tC5q You could short the 2.6% bonds and go long default protection for an almost risk-free profit. $$ Jul 25, 2012
Someone Is Getting Really Nervous About HP?s Debt http://t.co/Zqj1xEhp If you look at bonds vs CDS, bonds aren’t panicking. FD: + $HPQ $$ Jul 25, 2012
Contra: Campbell Chases Millennials With Lentils Madras Curry http://t.co/MBdpXGsJ @ $3/pouch I don’t c a mkt 4 gourmet instant soup $$ Jul 24, 2012
Google buys Sparrow for ‘new Gmail project’ http://t.co/q0i3TfZv Sell your company 2 $GOOG 4 $$ . Get new tasks while old technology dies Jul 24, 2012
Iraq blacklists Chevron for Kurdish oil deals http://t.co/23opiYYs Not as big as it seems $CVX has no biz in Arab Iraq $$ FD: +CVX Jul 24, 2012

Rest of the World

North Korean Mystery Woman Is Leader Kim Jong Un?s Wife http://t.co/CK8seZPc I find it optimistic that he wants to live a normal life $$ Jul 26, 2012
Global economy?s cure is worse than the disease http://t.co/isJuL3rn Indirectly suggests the best policy would be benign neglect $$ Jul 25, 2012
Cyber Attacks on Activists Traced to FinFisher Spyware of Gamma http://t.co/ZITxw1bu Practice safe computing; scan for rogue processes $$ Jul 25, 2012

Public Radio

Public Radio International acquired by Boston public broadcaster WGBH http://t.co/Mck9Gx0n Interesting when a non-profit corp gets bought $$ Jul 26, 2012
If it is the same, could NPR or the Corporation 4 Public Broadcasting sell out also? Buffett could give them a good home. Or the Kochs 😉 $$ Jul 26, 2012
Grew up in the insurance world, so I’ve seen non-profit (mutuals) buy another mutual or stock company, but is it the same w/WBGH buying PRI? Jul 26, 2012
Renaming 2 Private Radio International 😉 RT @timjeby: Big Public Radio News: WGBH in Boston to acquire Public Radio International #pubmedia Jul 26, 2012

Municipal Bonds

For further reading consider: Some perspective on the recent California bankruptcies by @munilass aka Bond Girl $$ http://t.co/2jwUeNOX Jul 26, 2012
Muni Blues Worry Investors http://t.co/r4VvKP4g Municipalities aiming4 strategic default face challenges in courts; favor bondholders $$ Jul 26, 2012
Some perspective on the recent California bankruptcies http://t.co/RFAgUt5u @munilass on how unusual wud b4 muni bonds 2not pay principal $$ Jul 24, 2012

Federal Reserve

Bernanke the unready http://t.co/6ppUDOMl Fed is impotent, but can’t admit it. Bernanke is wrong on monetary policy near 0%. $$ Jul 26, 2012
Fed strives to replenish depleted toolkit http://t.co/Yhy4pMy2 Doing the same thing, over & over again, but expecting different results $$ Jul 25, 2012
Fed Sees Action if Growth Doesn’t Pick Up Soon http://t.co/2TddWIZz Doing the same thing over&over again&expecting different results $$ Jul 24, 2012
Coming: The End of Fiat Money http://t.co/jHhnlPs0 Nice try. Lot of good stuff 2 read here, but no clincher 4 the return of gold $$ Jul 23, 2012

US Housing

By October of 2005 the prices of residential real estate peaked, which led to most of the leverage unwind that was about to happen. $$ Jul 25, 2012
Office of Financial Research Annual Report http://t.co/w9Xm4i9J Pp 8-9, first difficulty: by 2005 it was too late to stop the crisis $$ Jul 25, 2012
Is This What a Housing Bottom Looks Like? http://t.co/pSwtryX4 Lazy recovery, as people sell when they can avoid losses $$ Jul 27, 2012
Wrong: Reverse mortgages as popular as IRAs in 10 years http://t.co/pp7qoG63 Must have equity & creditworthy rev mtge lenders. Complex 2 $$ Jul 25, 2012
Home Values Post First Year-Over-Year Increase Since 2007 http://t.co/VHFnG83k Prices rising on the low end; higher priced problematic $$ Jul 24, 2012
Subprime Rally Building as Dealers Sop Up Supply http://t.co/s7BVK0v2 Combination of yield lust & rising housing prices drive up bonds $$ Jul 24, 2012

Miscellaneous

Pig Tissue Seen Fixing Injury That Sidelined Lin http://t.co/ys0kWDNb New tech uses pig tissue undoes painful damage from torn meniscus $$ Jul 27, 2012
Can a Food for Cows Make Healthier Snickerdoodles? http://t.co/o8vF4h5e Adding some DDG 2baked goods adds protein & fiber, good yes? $$ Jul 26, 2012
Closing In on a Cure for Vision Loss http://t.co/QCNZohN7 Testing “gene therapy, stem-cell therapy & a modified version of vitamin A” $$ Jul 24, 2012
Will the world’s greatest startup machine ever stall? http://t.co/R1wFzGsM Long interview w/President of Stanford re Silicon Valley ties $$ Jul 24, 2012
Breadbaskets of Last Resort See Once-in-a-Lifetime Prices http://t.co/A0AePuJx Focuses on upper Midwest; great time to have good corn $$ Jul 24, 2012
MIT Researchers’ `Cool’ Idea http://t.co/SMPitSjO Way cool, allowing 4 cheaper, better milk in rural areas where power is spotty. $$ Jul 24, 2012
Contra: The One Capitalism That Dare Not Speak Its Name http://t.co/jaZfeluf State Capitalism more prone 2 bubbles than laissez-faire $$ Jul 24, 2012
America’s Energy Situation In 15 Maps http://t.co/lw0vOwnc Refining, production, prices, intl concerns, natgas, crude, coal, solar, wind $$ Jul 23, 2012
THE DEFINING DECADE: Why You Can’t Afford To Waste Your Twenties http://t.co/8gl9RqGG Early success compounds; so does early failure $$ Jul 23, 2012
Lobbying Works! Big Spenders Reap Big Stock Gains Says Trennert http://t.co/2vsJyEXB But what happens if the US Government has to shrink $$ Jul 23, 2012
Who Really Invented the Internet? http://t.co/LkvW1xwM Many did, & they were standing on the shoulders of giants. $$ #ittakesavillage 😉 Jul 23, 2012

Market Dynamics

Fidelity Targets Securities Lending http://t.co/stEvATII The buyside is beginning to fight back against the trust & investment banks $$ Jul 27, 2012
Study: High-Speed Trading Hurts Long-term Investors http://t.co/ZhMhkiCG This probably affects those w/higher turnover more $$ Jul 27, 2012
Currencies: from Nullifying to Negative http://t.co/lxqwZZKw What is the game? To make money, or avoid losing a lot? Neg int rates a pain $$ Jul 25, 2012
Bond Trading Loses Some Swagger Amid Upheaval http://t.co/l93Vp7xL Except 4 the most liquid corporates, need broker2find liquidity/bonds $$ Jul 25, 2012

Comments

Our Olympic Gold in Wit $$ RT @TheLondonWhale: RT take a bow @ReformedBroker: Switzerland tough to beat in gold vaulting Jul 28, 2012
“Cultural change cannot be achieved by outsiders, in 1 generation, no matter how much $$ gets spent.” ? David_Merkel http://t.co/5eBdsBlO Jul 27, 2012
@brettsimonson Think the direction I would have headed was public policy, which involves a finer view of asset/liab mgmt, run avoidance etc Jul 27, 2012
@brettsimonson Hi Brett, no part 2 from what I can see. Very disorganized that week — no power for a week Jul 27, 2012
Ditto, well-deserved $$ RT @ReformedBroker: we love you, simone RT @SimoneFoxman: Yay, 5K! Thanks for following, everyone!! Jul 27, 2012
@munilass Also, if a kid was disconsolate for a while, before 2AM it was mine. After, it was hers. Jul 27, 2012
@munilass When the family was young, my wife & I had a deal. I took midnight feedings, she took the early morning feedings. Jul 27, 2012
@munilass My house works like this: I work late b/c it is quiet. My wife who homeschools the kids gets up early b/c it is quiet. Jul 27, 2012
@munilass I know many classes of bonds and other fixed income instruments. But I only know enough about munis to be dangerous. Thus I ask. Jul 27, 2012
@munilass Decided to review the book “Investing in the High Yield Municipal Market” by Triet Nguyen. If I have Qs, can I ask you? Jul 27, 2012
@e_d_sanders Both parties stand for different shades of nothing. They give rhetoric to their bases, do little, and cling to power. $$ Jul 27, 2012
RT @Convertbond: Sell the US equity rally hard when Spain’s 2s \ 10s curve starts to re-flatten #Government #Bonds 2 year & 10 year … Jul 26, 2012
“”Of course this food is organic. We used Organic Chemistry to create it.”” ? David_Merkel http://t.co/CvYhIQ7p $$ $DF Jul 26, 2012
Happy 2b your 1st subscriber $$ RT @SNLFinancial: Follow SNL Financial reporters so you?re always in the know: http://t.co/Rbwi9Jn3 Jul 26, 2012
“Why we need to dismantle the Democrat & Republican parties: the national budget slaves for local interests” Merkel http://t.co/gllFMcec $$ Jul 26, 2012
A weather forecaster for either WBAL or WTOP said that Maryland gets a derecho once every 5-10 years. Two in one year? Hope not. $$ Jul 26, 2012
Just what we need, another derecho $$ RT @BloombergNews: Severe storms, possible derecho forecast for Northeast US http://t.co/XPGdJQoC Jul 26, 2012
RE: @bloombergview Not worthy to be read $$ http://t.co/TsRQZdTI Jul 26, 2012
RE: Loads of 12% coming out mean that only 88% of the money is going to work for the investor.? Doesn’t matter where ? http://t.co/hJgSPGrT Jul 26, 2012
Commented on The Economist | Monetary policy: Bernanke the unready http://t.co/rsqLZm7A Jul 26, 2012
“Marriage civilizes, & gives us some hope that he will normalize N. Korea. He lived outside NK 4?” ? David_Merkel http://t.co/uxDl62iM $$ Jul 26, 2012
RT @ReformedBroker: RT @jamielissette: *MOODY’S CHANGES OUTLOOK ON 17 GERMAN BANKING GROUPS TO NEGATIVE Jul 25, 2012
“For what it is worth, that’s the way Canada does it. Income taxed @ FMV @ death. No estate tax.” ? David_Merkel http://t.co/lQx4RjYN $$ Jul 25, 2012
RE: @CSMonitor The book “Hungry Ghosts” documents The Great Leap Forward very well. Worth a read. $$ http://t.co/LQ5dChjQ Jul 25, 2012
“It would be cleaner to tax unrealized capital gains at death, and eliminate the estate tax.” ? David_Merkel http://t.co/GqPiMZ5r $$ Jul 25, 2012
“Rating agencies are supposed to be behind the curve. They rate over the full credit cycle?” ? David_Merkel http://t.co/z80RTQCv $$ Jul 25, 2012
@e_d_sanders He could have included 1 or 2 more words & it would have been crystal clear. I think the ambiguity was deliberate. I cud bwrong Jul 25, 2012
“Don’t open suspicious attachments. Use procexp to review processes. Disable processes you can’t?” ? David_Merkel http://t.co/PUaCZKOf $$ Jul 25, 2012
“When computers screen applicants, a skills shortage emerges. Computers seek current perfection, not?” David_Merkel http://t.co/HVRm6HOP $$ Jul 25, 2012
“A case where so many things went wrong, it is amazing that they almost won. Really, they were?” ? David_Merkel http://t.co/hJcw4tCX $$ Jul 25, 2012
@e_d_sanders I’m voting third party; I don’t like the GOP either; it’s obvious that no one man builds infrastructure; not a point 2 make Jul 25, 2012
@e_d_sanders It’s not a misquote. Read the two paragraphs in context; he is downplaying individual initiative. Jul 25, 2012
@havocp I copied the quote from the WH website. Given what O said in the above that, both interpretations are legitimate. Could b clearer. Jul 25, 2012
@havocp and I appreciate your comment. I like those that comment, and even those that disagree with me highly. Jul 25, 2012
@havocp Doesn’t matter to me. Concentrating effort is significant and deserves a reward, not condescension. $$ Jul 25, 2012
RT @pdacosta: Crisis contained, to inhabited areas. RT @SJosephBurns: “The Subprime Crisis will not affect the economy overall.” – Ben B … Jul 25, 2012
RT @ritholtz: WSJ reporting ?Federal Reserve moving closer to action to spur growth” Bond buying, rate guidance, lower reserve rate amon … Jul 24, 2012
RE: @bloombergview You’re still going to need LIBOR, however calculated, for existing contracts. Replacement will be ? http://t.co/smOdgXbd Jul 24, 2012
“Ethics comes before competence. Doesn’t matter how good you are, if you are unethical. The?” ? David_Merkel http://t.co/6bgcT6nT $$ Jul 23, 2012
RT @AmityShlaes: “The post office ought to be self supporting. At present business men are deluged with useless mail.” — Calvin Coolidg … Jul 22, 2012
@niubi No, b/c many babies do not sleep through the night @ 3 months Jul 21, 2012
If I could ship the rain in Maryland 2 the Midwest, I would. But Maryland farmers r having a good year. Corn looks normal & prices r high $$ Jul 21, 2012

On Bond Investing

Posted on 26 July 2012 by David Merkel

When it comes to bonds I have four main ideas.

Those are my strategies and simple enough.? But what do I do when they are disagreeing with each other?? I play for time.? I play my best ideas, and wait for the market to make a big move that I can ride.

I have owned long duration Treasury bonds for the past year, but have not owned them only, but other ideas as well.? Being long credit has worked, whether in:

Floating rate loans,
Long duration corporates, or
Bank preferred stocks

That does not mean I did not have my failures.? I lost a decent amount of money expecting that the Swiss National Bank [SNB] would eventually break its peg versus the euro.? I still have a small bet on that, and still expect that I will make money on the trade, as the position of the SNB is becoming more difficult by the day.

My goal as a fixed income investor is to make money.? Unlike most fixed income investors, my goal is to make a lot of money when it is favorable to do so, and tread water the rest of the time.? I?m treading water now.? Rates are low; yields are low ? there aren?t that many distortions to take advantage of.

I await an environment with more opportunities.? I wonder if this is how Seth Klarman feels toward the end of a bull market.? I?m just schnitzeling, and waiting for some real opportunities to show up.

As it is, I use two proxies to guide me: AGG and CSJ.? My performance over the last year was between the two.? In the short run, I look to exceed CSJ.? In the long run, I look to exceed AGG.

Full disclosure: long CSJ

Lonely Puppies, or Abandoned Mutts

Posted on 25 July 2012 by David Merkel

I have often owned companies with little to no sell-side analyst coverage.? Ask yourself this, how many companies trading on US exchanges are there:

That have no analyst coverage
That are US-based
That have a Market Cap over $250 million
That aren’t passthrough vehicles
And have pitiful liquidity at least

I made the following list by using a Media General database, and cross-checking it with Yahoo Finance.? Yeah, I live on the cheap.? Here we go:

Company	Industry	Ticker	Market Cap $M
Terra Nitrogen Company, L.P.	0103 – Chemical Manufacturing	TNH	??????????? 4,235
Icahn Enterprises, L.P.	0963 – Retail (Specialty Non-Apparel)	IEP	?????????? ?4,065
Valhi, Inc.	0103 – Chemical Manufacturing	VHI	??????????? 3,856
Seaboard Corporation	0515 – Food Processing	SEB	??????????? 2,619
EQT Midstream Partners LP	1206 – Natural Gas Utilities	EQM	??????????????? 908
Contango Oil & Gas Company	0609 – Oil & Gas Operations	MCF	??????????????? 901
Nortek Inc	0406 – Appliances & Tools	NTK	??????????????? 797
Sabine Royalty Trust	0609 – Oil & Gas Operations	SBR	??????????????? 781
Dorchester Minerals LP	0609 – Oil & Gas Operations	DMLP	??????????????? 695
Rouse Properties Inc	0933 – Real Estate Operations	RSE	??????????????? 681
Star Scientific, Inc.	0524 – Tobacco	CIGX	??????????????? 590
NL Industries, Inc.	0103 – Chemical Manufacturing	NL	??????????????? 578
1st Source Corporation	0727 – Regional Banks	SRCE	??????????????? 547
Apco Oil & Gas International I	0609 – Oil & Gas Operations	APAGF	??????????????? 546
CorVel Corporation	0806 – Healthcare Facilities	CRVL	??????????????? 518
National Western Life Insuranc	0709 – Insurance (Life)	NWLI	??????????????? 513
Village Super Market, Inc.	0957 – Retail (Grocery)	VLGEA	??????????????? 468
Atrion Corporation	0812 – Medical Equipment & Supplies	ATRI	??????????????? 416
Presidential Life Corp	0709 – Insurance (Life)	PLFE	??????????????? 411
PHI Inc.	0612 – Oil Well Services & Equipment	PHII	??????????????? 409
Seneca Foods Corp	0515 – Food Processing	SENEA	??????????????? 324
Lifevantage Corporation	0809 – Major Drugs	LFVN	??????????????? 306
Preformed Line Products Compan	0127 – Misc. Fabricated Products	PLPC	??????????????? 300
Westwood Holdings Group, Inc.	0718 – Investment Services	WHG	??????????????? 294
Ladenburg Thalmann Financial S	0718 – Investment Services	LTS	??????????????? 287
Camden National Corporation	0727 – Regional Banks	CAC	??????????? ????281
Federal National Mortgage Asso	0703 – Consumer Financial Services	FNMA	??????????????? 278
Fisher Communications, Inc.	0906 – Broadcasting & Cable TV	FSCI	??????????????? 278
Pendrell Corp	0718 – Investment Services	PCO	??????????????? 277
U.S. Lime & Minerals Inc.	0212 – Construction – Raw Materials	USLM	??????????????? 271
Winmark Corporation	0963 – Retail (Specialty Non-Apparel)	WINA	??????????????? 264
Arden Group, Inc.	0957 – Retail (Grocery)	ARDNA	??????????????? 263
Clifton Savings Bancorp, Inc.	0727 – Regional Banks	CSBK	??????????????? 262

Not so surprising, there are:

A lot of limited partnerships and royalty trusts.
Many financial firms.
Many companies where there is a controlling shareholder, and liquidity is scarce relative to size.

All that said, this is an area of the market where few tread, and there may be some values to be had.

Now, there were some companies that were far less liquid, and with less disclosure,? that fit the above criteria, and I list them here.

Extremely Limited Liquidity
Company	Industry	Ticker	Market Cap $M
Belk Inc	0951 – Retail (Department & Discount)	BLKIA	??????????? 1,839
SunGame Corporation	1036 – Software & Programming	SGMZ	??????????????? 746
First National Bank Alaska	0727 – Regional Banks	FBAK	??????????????? 555
Computer Services, Inc.	1036 – Software & Programming	CSVI	??????????????? 463
First Citizens Bancorporation,	0727 – Regional Banks	FCBN	??????????????? 410
TherapeuticsMD Inc	0921 – Motion Pictures	TXMD	??????????????? 311
Hills Bancorporation	0727 – Regional Banks	HBIA	??????????????? 304
Farmers & Merchants Bancorp	0727 – Regional Banks	FMCB	??????????????? 284

Some of these look promising as longs, if you can get shares. Others look promising as shorts, if you can get a borrow.? Remember that the illiquid end of the market is the place where promoters play, creating their own internal version of the “bucket shop,” getting people to buy in at higher valuations, while they sell out for a profit.

These are companies where personal research can pay off, because few others are analyzing them.? I own one of them, and it is:

Full Disclosure: long NWLI

Packages! Packages!

Posted on 21 July 201223 July 2012 by David Merkel

When I started doing stock investing, I began sending off information requests to 70-120 companies at a time via mail.? In those days, I would print off the letters at my computer, and mailing labels as well.? I would generate the addresses from the AAII Stock Investor program that I still use.

But I got my kids into the game:

One kid would put the stamp on the envelope.
The next would put on the address label.
I would sign the letter, and compare the addresses hand the letter and envelope to the next kid.
The letter would be folded and stuffed by the next kid.
The next kid would seal the envelope, and drop it in a box.

It was fun to do that, but it was even more fun when the flood of “packages” came.? When I got home from work, I would grab the mail from the mailbox, and would call the children to me.

“Packages! Packages!” they would say.? I would sit on the floor, my back against the couch, and the kids would sit in a U around me.? I would open each package, and tell them:

Where the company is.
What the company does.

In this case, the annual report was a help, because the pictures aided the understanding of the children.? At the end, I would point to the “stuffed shirt board of directors.”? I have never thought much about directors, because they are mostly lapdogs of the management.? I also have thought that directors are a waste of resources, and should be eliminated.? Let the shareholders elect the CEO directly.? Yes, I know this would be awkward, but maybe we should pursue the idea that boards aren’t that useful.

After I answered questions from my children, I would analyze the data that the companies sent me.? I found the comparison across companies to be useful.

But later I found that I could submit the data requests over the internet.? So, no more paper letters.? But for some time, I would still ask via e-mail for companies to mail me physical data, which I would share with my kids.

Today, I read everything online.? There are no more packages in my mailbox, and I wonder if that is not a loss.? When I got physical mail, I would spend more time reading it than now, when I read it online.? There is more leisure in reading the physical text, than reading the online version.? Online, we all tend to move more quickly, and we ignore things that we shouldn’t.? I am reconsidering getting paper data from companies.? It is much easier to curl up with and analyze, with fewer distractions.

Sorted Weekly Tweets

Posted on 13 July 2012 by David Merkel

Bond Markets

TIPS 20-Year 3.375 04/15/2032 166-21? / 0.00 -0-02+ / 0.002 15:09; They are trading flat to CPI 4 next 20 years http://t.co/2sJ5NEDK $$s Jul 13, 2012
Buffett Says Muni Bankruptcies Set to Climb as Stigma Lifts http://t.co/WBYjoUW1 Buffett’s claim is modest, but current trend is down $$ Jul 13, 2012
Indeed excellent RT @munilass: Excellent discussion of CA bankruptcies from @randalljensen http://t.co/iSEudKw5 Jul 13, 2012
Big Dealers Sweat as Swaps Face Reckoning http://t.co/iAmp2p4X Interest rate swaps should be vanilla enough to clear on exchanges $$ Jul 10, 2012

Politics

Financial Advice for Presidential Candidates http://t.co/MUqMOWNv Tips from Brett Arends for politicians on how to handle money. $$ Jul 14, 2012
Too clever $$ RT @hblodget Here’s One Of The Clever Financial Tricks That Mitt Romney Used To Become Dynastically Rich http://t.co/frz1hkxP Jul 13, 2012
Condi for VP? Mitt’s Done It Before http://t.co/ns1Kj6s7 Article makes a good case that MR could pick someone unexpected, as before $$ Jul 13, 2012
Chavez Hits Campaign Trail in Bid to Prove He?s Cancer-Free http://t.co/dQCPHEU2 Dream, Hugo; ur dying as your goals on Earth r dying $$ Jul 13, 2012
In Kansas, Stronger Mix of Ethanol http://t.co/Iv7LrQpA Economically and environmentally, corn-based ethanol is one big boondoggle $$ Jul 12, 2012
Peugeot to Close Plant http://t.co/uUvm4vNK If u make it difficult 4 employers 2 terminate workers, they will hesitate 2 create jobs $$ Jul 12, 2012
Social Security Hole Overwhelms Taxes, Cuts http://t.co/DLbk9MgD Analysis right, prescription wrong. Dumb comments by innumerate readers Jul 12, 2012
Company to acquire part of Marcus Hook refinery http://t.co/VTXySbbv Spending $75,000/job saved is dumb, even if you lock Braskem in. $$ Jul 12, 2012
A New, Improved Draft? No Thanks http://t.co/wH8fcpHx Conscripted labor of youths would be a false economy; work would b poorly done $$ Jul 11, 2012
And that leaves aside the constitutional & legal aspects of conscription in peacetime; I do not favor reviving the draft. $$ Jul 11, 2012
FBI warned Labor Department data might be leaked http://t.co/KpsZplxo Until DC pays up 4 some good quants, lots of games won’t b caught $$ Jul 11, 2012
Helpless President, Hopeless Congress http://t.co/aVq8gq5d Becomes difficult as the # of factions expands. t-party fractures consensus $$ Jul 11, 2012
No Sign of Voter Polarization Waning http://t.co/7FXzckao Good smile from Obama; dee red, dey get redder, dee bloo, dey get blooer $$ Jul 10, 2012
Obama Intensifies Tax Fight http://t.co/GG0C1Eo5 Looks like a recipe 4 gridlock. BTW, Obama needs2work on his smile, very pouty pics $$ Jul 10, 2012
“It is the regulators who require ratings, largely for purposes of measuring risk at financial institutions.” $$ http://t.co/nPGJNhjy Jul 10, 2012
America Already Is Europe http://t.co/BCK8nfnI similarities: growing government & equalizing incomes, cronyism, Uninformed electorate $$ Jul 10, 2012
LBJ?s Lessons for Obama http://t.co/ILtH9ZH9 Politics is the art of avoiding making permanent enemies & Obama is aloof 2 his enemies $$ Jul 09, 2012
States Interpret Ruling to Cut Medicaid Now http://t.co/ArPTMDPp File this under “unintended consequences;” some poor lose some care $$ Jul 09, 2012

LIBOR

NY Fed does not deserve much credit here. They only began investigating after leverage began collapsing… http://t.co/5WHt8Rrt Jul 13, 2012
They only began investigating after leverage began collapsing with bank off-balance sheet vehicles. $$ Jul 13, 2012
They were more concerned w/LIBOR being viewed as2high as primarily a systemic risk issue, & secondarily as a “is LIBOR accurate” issue. $$ Jul 13, 2012
In Libor Scandal, a Push For Criminal Charges http://t.co/eBkV0926 Outside the mainstream here; I don’t think criminal charges will work $$ Jul 13, 2012
Fed knew of Libor issue in 2007-08, proposed reforms http://t.co/hHUdUXnP The Fed moves slowly on regulatory issues. Very slowly. $$ Jul 11, 2012
Exactly & few say that $$ RT @carney: Running the numbers on March 13, 2006 Libor. I don’t see how Barclays could have manipulated it. Jul 11, 2012
So I Need To “Be An Adult” About Fraud Eh? http://t.co/t8owUMbU Yes Karl, being adult means waiting until fraud is proven b4 rash speech $$ Jul 10, 2012

Eurozone

Spanish Bank Borrowing from ECB Surges http://t.co/3cIvgaZu Feel sorry for the ECB; politicians do little so they try2do it alone $$ Jul 13, 2012
Euro-Zone Banks Still Hoarding http://t.co/3cIvgaZu The ECB can solve it all; just ask them they’ll tell you $$ Jul 13, 2012
Euro-Split Case Drives Danish Krone Appeal in Binary Bet http://t.co/tgPPZgKW People r willing to lock in losses 2 avoid bigger losses $$ Jul 11, 2012
Euro zone fragmenting faster than EU can act http://t.co/GpqSfYht “Deposit flight from Spanish banks has been gaining pace” $$ Jul 09, 2012
German anti-euro backlash gathers pace http://t.co/ZK57rBp3 The compromises hammered together r starting to come apart at the seams $$ Jul 09, 2012
Hollande Urged to Deliver Competitive Shock By Executives http://t.co/oZj9D7Jt Strange brew. Socialist pushes labor productivity rise $$ Jul 09, 2012
Spain Braces for Renewed Austerity as Tax Take Hemorrhages http://t.co/EIhmTfja I don’t suppose reducing govt size is an option here? $$ Jul 09, 2012
Spanish Yield Hits 7%, Stocks Slip http://t.co/QD7icJSX Okay, what new “baby step” toward mutualizing debts will the EZone try now? $$ Jul 09, 2012

Residential Housing

Blackstone, Hovnanian in Land Banking Deal http://t.co/KGx60uQs Too much $$ on the sidelines waiting to play in residential real estate Jul 13, 2012
Americans Living Larger As New-Home Sizes Defy Economy http://t.co/KjPRALro 1st ping I’ve seen on improvement for high-end home demand $$ Jul 13, 2012
Shadow inventory should also include those inverted on their mortgages, and will sell when prices are high enough. $$ http://t.co/HMT2rdci Jul 13, 2012
Housing Passes a Milestone http://t.co/x1rch8KR Lows seen in some areas, in low-end housing, look4those who waited4better prices2sell $$ Jul 12, 2012

Market Impact

Hedge Funds Trail Vanguard as Elliott Returns Atypical http://t.co/y91Uboqf Hedge funds seek yield & shun volatility, need fair weather $$ Jul 13, 2012
Watch income producing investments w/care RT @stockspot2000: $$ A Big Captain Hook in DividendLand http://t.co/mF9i6wnX $DVY $FED $PCEF Jul 12, 2012
Contra: Financial conditions are actually quite normal http://t.co/zSHolTk2 W/long Tsys yielding little, conditions r anything but normal $$ Jul 11, 2012
Not surprising in a time of debt deflation $$ RT @sm_sears: Finding a reliable counter party on Wall Street is becoming a rare commodity. Jul 11, 2012
Wall Streeters Lose $2 Billion in 401(k) Bet on Own Firms http://t.co/68BGLh8l They should know better $$ Suffering from proximity bias… Jul 09, 2012

Pensions

Common when low funded RT @BobBrinker: “San Bernardino has seen its workers? pension costs more than double since 2006” http://t.co/CLX7jhkC Jul 13, 2012
The new retirement age: 70 http://t.co/SdIVhjwE That is, if it isn’t 70+. Too few years to accrue savings vs many to spend over $$ Jul 11, 2012

Companies

Activist Investor Sets Sights on P&G http://t.co/5kGN1m5W $PG too big; Ackman bites off more than he can chew, IMO. $$ Jul 13, 2012
What went wrong at Supervalu (plenty) and who could buy it? (um?) http://t.co/9GfsQZZ6 Wonder what $SVU bulls @ Seeking Alpha r saying? $$ Jul 12, 2012
Apple Quitting Green Registry Leads to Purchasing Fallout http://t.co/Y4vOZ9Vm Interesting article, but the comments section is rabid $$ Jul 12, 2012
Silicon Valley’s Biggest Secret Technology Company — 7 Clues http://t.co/35rQYQuy One more clue: Its name starts with a “V.” $$ $V Jul 11, 2012
Billionaire Forrest Leads BlackRock Buying Iron Ore http://t.co/XNP3FGXv Only invest what u can afford2lose 4 an industry in oversupply $$ Jul 11, 2012
Patriot Bankruptcy May Leave Peabody Liable for Expense http://t.co/S0Upoai8 W/low natural gas prices, many coal companies suffer $$ Jul 11, 2012
Chesapeake retreat ends American energy land grab http://t.co/k7TsqNz3 Fracking creates new energy ecology, lower prices, less coal use $$ Jul 10, 2012

Central Banking

That’s what I thought also $$ RT @Alea_: so employee of Markets Group of the New York Fed doesn’t know how to use bloomberg #brilliant Jul 13, 2012
John B. Taylor: Monetary Policy and the Next Crisis http://t.co/9ajScehv Argues Fed kept rates2low in 2000s, leading2current crisis $$ Jul 11, 2012
What’s Wrong With the Federal Reserve? http://t.co/JxFpBArR ALLAN H. MELTZER explains y activist monetary & fiscal policies r failing $$ Jul 10, 2012
What if the Fed Throws a QE3 and Nobody Comes? http://t.co/kU3N83aX Hussman:”The way out is2restructure bad debt instead of rescuing it.” $$ Jul 09, 2012
Dealers Declining Bernanke Twist Invitation http://t.co/ZGVObmE1 Fed eats large % of long Tsys, dealers get into act front-running them $$ Jul 09, 2012
Fed Weighs Revamped Monetary Report as Guide to Policy http://t.co/PXGKNfSv No, @federalreserve, ur not unclear 2 us; just bad $$ policy Jul 09, 2012

Miscellaneous

Anne-Marie Slaughter on having it all http://t.co/bz7oQly4 No one can have it all; life is a series of choices 4 men & women $$ Jul 13, 2012
The death of cash http://t.co/aCoVfmsP Few technologies die totally; we have phonographs, tube mikes, AM radio. $$ will continue smaller Jul 12, 2012
Agreed, cash is a form of freedom RT @DavidBCollum: @AlephBlog Cashless society should be feared. Jul 12, 2012
Cocoa Grader: Hard Job, Sweet Perks http://t.co/wn8YXGVt Becoming a cocoa beans grader is ~4x harder than passing the NY State Bar exam Jul 12, 2012
A Cut Above: In These Knife Fights, Only Pride Gets Wounded http://t.co/xPvWlxA9 Very American & weird. Very, very weird. $$ #enjoy Jul 12, 2012
Wall Street’s Secret Weapon for Getting an Edge http://t.co/UJtMPEJu Testosterone injections to feel great & b dumb as a teenage boy $$ Jul 11, 2012
Climate was HOTTER in Roman, medieval times than now http://t.co/cc5fNyyI “cooling effect of orbital shifting on the climate” $$ Jul 11, 2012
Congratulations to one of the best financial bloggers still active $$ RT @EddyElfenbein: Crossing Wall Street turns seven years old today. Jul 11, 2012
Does This Smell Clean to You? http://t.co/pT1qlfxg There r many new scents giving sense of clean: ginger, hibiscus, greens, jasmine.. $$ Jul 11, 2012
Air Conditioning, Blessed Invention http://t.co/TSvTonfJ A most significant invention; no server farms w/o air conditioning $$ Jul 11, 2012
Interesting posts at Pepsico blogs in how $PEP is trying to sell snacks in China http://t.co/U6S3rGoT & http://t.co/IpkmsmKL $$ Jul 11, 2012
Last Amateur Bannister Is No LeBron Chasing Olympic Ideal http://t.co/Nwi4173U Last of the true amateurs, he breaks the 4-minute mile $$ Jul 11, 2012
Living Cells Show How to Fix the Financial System http://t.co/li0tmyHJ Healthy biological systems inspire economics systems $$ Jul 11, 2012
How the Mormons Make Money http://t.co/BAi5CF9W Really about how the Mormon “church” has significant businesses that make lots of money $$ Jul 11, 2012
Game Written by a 14-Year-Old Passes Angry Birds as Top Free iPhone App http://t.co/fAGtex2A Bubble Ball popular & Mom helps out $$ Jul 09, 2012

Rest of the World

Banks play cat-and-mouse with Beijing to comply with rules http://t.co/Nin3k8xH Banks are the weak link of the Chinese economy $$ Jul 12, 2012
Hit at home, China’s ghost fleet sails high seas http://t.co/aGSF13Ue Are there any more ways to increase oversupply of shipping? $$ Jul 11, 2012
Canadian Banks Seen Superior by Regulator Surviving Global Shock http://t.co/rKNfUc2M When housing prices fall in Canada will b tested $$ Jul 11, 2012
Eric Schmidt: The Great Firewall of China will fall http://t.co/N3vm0IuL You can’t build a sophisticated economy… w/active censorship $$ Jul 10, 2012
Norway Banks Under Pressure as Asset-Bubble Risks Swell http://t.co/BcHyayIQ Norwegians have never had such a high % of debt/net income $$ Jul 09, 2012
Tokyo Considers Buying Islands China Claims http://t.co/vWUmR6Zr Another potentialflashpoint in Asia, though war is impossible 😉 $$ Jul 09, 2012

Economics

Contra: The problem with ?structural? explanations for U.S. unemployment http://t.co/32zfqXyW Foreign competition limits job creation $$ Jul 11, 2012
Low-Paid Grads On Tight Budgets Switching to Discounters http://t.co/v4kEfPMq B4 going to college, ask what future employers might like $$ Jul 10, 2012
Murdoch, Moguls Head to Sun Valley as Mobile Shapes Media http://t.co/YFVQcQwm Content is King, can u squeeze dat onto my dinky device? $$ Jul 10, 2012
Fracking claims an unusual victim $PCX $$ RT @BloombergNews: BREAKING: Patriot Coal Bankruptcy Filing Said To Come as Soon as Today Jul 09, 2012
Patent ‘Troll’ Tactics Spread http://t.co/MECQeMFO Tour through grand diversity of games companies play w/patents 4 offense & defense $$ Jul 09, 2012

Finance Companies

SAC?s Cohen Joins Loeb Starting Reinsurer for Capital http://t.co/8aSjsa3w Adv: Captive $$. Disadv: Can lose $$ if underwriting is poor 🙁 Jul 10, 2012
JPMorgan Silence on Risk Model Spurs Calls for Disclosure http://t.co/btmeSkbM Banks should share their risk modelsw/regulators yearly $$ Jul 10, 2012
Indentured Students Rise as Loans Corrode College Ticket http://t.co/VvNosGcC Students tricked into debt-slavery “pursuing their bliss” $$ Jul 09, 2012
Price of Plastic Going Up? Merchants May Get Surcharge Rights http://t.co/e2wXuCC5 Will make4interesting competition & ppl hold more $$ Jul 09, 2012

Comments

Commented on Banks Defend Against Libor Lawsuits By Asking “Libor? Who Uses Libor, Anyway?” / Dealbreaker http://t.co/oIRzvh72 Jul 13, 2012
Fun fact: Take the current $VIX, divide it by the square root of 52. That’s the market’s one standard deviation forecast for the next week Jul 12, 2012
RT @EddyElfenbein: Fun fact: Take the current $VIX, divide it by the square root of 12. That’s the market’s one standard deviation forec … Jul 12, 2012
“Very low value analysis. Did a computer write this?” ? David_Merkel http://t.co/pUs2DJaj http://t.co/zmt4cMgf $$ Jul 12, 2012
“Banks feel more confident to foreclose when they can sell the property for a small loss at worst.” ? David_Merkel http://t.co/z3EUOoRk $$ Jul 12, 2012
“?Everyone needs to lighten up.? No, everyone needs to *tighten* up, and respect the rights of the?” ? David_Merkel http://t.co/yVrsu4jc $$ Jul 12, 2012
“On the new highs list, look at all the bond CEFs, ETFs, preferreds, etc. Everyone is grabbing income!” ? David_Merkel http://t.co/8ek4vm4E Jul 11, 2012
@Royal_Arse @LDrogen definitely think it doesn’t make sense LT, but long Tsy yields could go lower b4 a rather nasty whippy reversal $$ Jul 11, 2012
low quality $$ RT @jsphctrl: It’s unconventional, certainly. (Bloomberg:) *Urpilainen: One Collateral Option Is Shares From Spanish Banks Jul 11, 2012
@LDrogen with interest, even $JNK made $$, I’m not saying it is the only signal, but $TLT shows a demand4long certain cash flow FD: +TLT Jul 11, 2012
@LDrogen 1 yr price return only $JNK -2%, $LQD +7%, $TLT +32%. I would argue that indicates economic weakness FD: +LQD, +TLT 4 me&clients $$ Jul 11, 2012
“I think they are dreaming. China overbuilt its steel industry & they are losing $$ now.” ? David_Merkel http://t.co/RyQOw5tD Jul 11, 2012
@izakaminska @TheStalwart Problem happening w/Danish bonds also http://t.co/tgPPZgKW Ppl willing 2 lock in a loss 2 prevent larger loss $$ Jul 11, 2012
“Because those that are politically powerful in Europe have their own Swiss Bank accounts. Can’t?” ? David_Merkel http://t.co/8F93WNQm $$ Jul 11, 2012
+1, we r starved 4 news $$ RT @Fullcarry: FED minutes today probably not that important since BB had a presser after the meeting. Jul 11, 2012
Cat bond sales double in H1http://reut.rs/Nm0whV More alternative reinsurance capacity. Diversifies junk portfolios; invites catastrophes $$ Jul 10, 2012
@historysquared trouble is, few cat bonds have ever triggered, looks like free $$ to many HY bond mgrs, terms will tighten 2deliver losses Jul 10, 2012
When I look at the data for 3/13/06, Barclays actions had no effect on 3M LIBOR. It was excluded from the… http://t.co/gbEPYIXN Jul 10, 2012
“Life actuaries reveal their models annually to the regulators, though not to the public. The same?” ? David_Merkel http://t.co/pTqT1F2L $$ Jul 10, 2012
@randomroger Congratulations on the AdvisorShares Global Alpha & Beta, Roger! $RRGR $$ Jul 09, 2012
‘ @Nonrelatedsense 4 mkt val measures: Q-ratio, CAPE10, Price-Resources (Michael Alexander), & @eddyelfenbein ‘s stocks as a bond measure $$ Jul 09, 2012
“P/E has been an unreliable measure of value for the market as a whole. Why rely on it?” ? David_Merkel http://t.co/B4ZuMOLz $$ Jul 09, 2012
Commented on The Economist | The LIBOR scandal: The rotten heart of finance http://t.co/qvSysBKt Jul 08, 2012
Commented on The Economist | The LIBOR scandal: The rotten heart of finance http://t.co/Y7JVFkDP Jul 08, 2012

What to do on Bonds?

Posted on 13 July 2012 by David Merkel

I’ve had good returns on bonds over the last year, largely because I invested in long deflation investment grade bonds.? I took on a lot of duration risk by investing long, and it paid off.? I’ve reduced the size of my duration bet, but it is still large relative to the consensus.? That said, momentum tends to persist.

But what to do now?? Yes, rates could still go lower on the long end.? Credit spreads could still tighten on the long end and elsewhere.? Most of my credit related positions have done well, including preferred stocks of banks.

I have a positive view on conforming mortgages, though I have no position there now.

On illiquidity I have a negative view because things are volatile enough that you need flexibility.

On FX, I am long the Swiss Franc, and it has been a loser.? I suspect that with weakness in the euro, the Swissie will not break its link with the Euro.? At present, the US Dollar seems ascendant.? What can stand in its way?

I am tempted to put money into emerging markets debt, because their economies are run in a more orthodox manner than the developed economies, but not by much.

Really, I am scratching my head over all the various risks, and thinking that short-term investment grade credit is the only thing that I like.? Beyond that, I am open to suggestions.

New Highs, New Lows, Yield Greed

Posted on 12 July 201212 July 2012 by David Merkel

When I read this post by Ivan Hoff, I decided to look at the new high and new lows lists, which I never do now, but used to do regularly back in the days when I read a paper Wall Street Journal every day.? Now our philosophies for doing so differ.? He is looking for buy high, sell higher, and I am looking for misunderstood companies that are first safe, then cheap.

So after the close, I copied the new highs and new lows for the NYSE, NASDAQ, and Amex as a group.? There were 203 highs and 89 lows.

But then I noticed something funny: a large number (53) of the new highs came from preferred stock, hybrid debt, and bonds — yieldy stuff.? With the lows, there was some weird stuff, but 7 companies had rights and warrants, hitting new lows, and one new muni bond fund, NKGD, which was just noise.

Then I looked at the industries that they were in, mostly to separate out the ETPs and CEFs from everything else.? Here are the tables:

New Highs

	Values
Row Labels	Sum of mktcap	Count of ticker
0715 – Insurance (Property & Casualty)	205,242	2
0524 – Tobacco	97,162	2
0803 – Biotechnology & Drugs	62,010	8
0521 – Personal & Household Products	40,837	2
0963 – Retail (Specialty Non-Apparel)	38,396	1
1203 – Electric Utilities	20,944	7
0515 – Food Processing	17,571	1
0721 – Misc. Financial Services	15,158	57
0115 – Forestry & Wood Products	11,980	1
0727 – Regional Banks	6,434	22
0806 – Healthcare Facilities	5,358	3
1209 – Water Utilities	4,356	2
1106 – Airline	3,595	2
1206 – Natural Gas Utilities	3,363	2
0812 – Medical Equipment & Supplies	3,209	4
0957 – Retail (Grocery)	2,472	3
0951 – Retail (Department & Discount)	2,356	1
1018 – Computer Services	2,039	1
1024 – Electronic Instruments & Controls	1,790	1
0612 – Oil Well Services & Equipment	1,335	1
0730 – S&Ls/Savings Banks	1,290	9
0915 – Communications Services	1,007	2
1036 – Software & Programming	832	2
0718 – Investment Services	548	2
0209 – Construction – Supplies and Fixtures	494	2
0712 – Insurance (Miscellaneous)	347	1
0942 – Restaurants	333	1
0703 – Consumer Financial Services	322	2
1033 – Semiconductors	316	1
0421 – Furniture & Fixtures	120	1
0909 – Business Services	33	1
1003 – Communications Equipment	31	1
0133 – Paper & Paper Products	17	1
0912 – Casinos & Gaming	0	1
Grand Total	551,295	150

Exclude Misc Fin Svcs	536,137	93

New Lows

	Values
Row Labels	Sum of mktcap	Count of ticker
0118 – Gold & Silver	41,488	9
1036 – Software & Programming	16,268	7
1003 – Communications Equipment	14,856	7
0515 – Food Processing	12,732	2
1033 – Semiconductors	10,351	2
1109 – Misc. Transportation	8,131	1
0206 – Construction & Agricultural Machinery	5,849	1
0948 – Retail (Catalog & Mail Order)	5,451	1
0951 – Retail (Department & Discount)	4,837	1
0603 – Coal	4,479	2
0424 – Jewelry & Silverware	4,243	1
0103 – Chemical Manufacturing	3,933	3
0203 – Aerospace and Defense	2,995	1
1018 – Computer Services	2,851	3
0218 – Misc. Capital Goods	2,300	2
0924 – Personal Services	2,292	1
0927 – Printing & Publishing	2,043	1
0124 – Metal Mining	2,024	2
0721 – Misc. Financial Services	1,903	2
0215 – Construction Services	1,802	1
0939 – Rental & Leasing	1,760	1
0915 – Communications Services	1,616	1
0418 – Footwear	1,439	1
1024 – Electronic Instruments & Controls	1,384	2
0909 – Business Services	1,223	1
0812 – Medical Equipment & Supplies	1,077	5
0612 – Oil Well Services & Equipment	1,075	1
0918 – Hotels & Motels	937	1
0969 – Schools	836	1
0609 – Oil & Gas Operations	820	1
0933 – Real Estate Operations	731	1
0415 – Auto & Truck Parts	703	2
0127 – Misc. Fabricated Products	693	2
1021 – Computer Storage Devices	512	2
0966 – Retail (Technology)	418	1
0703 – Consumer Financial Services	195	1
0806 – Healthcare Facilities	64	1
0727 – Regional Banks	61	1
0803 – Biotechnology & Drugs	54	2
0930 – Printing Services	6	1
0942 – Restaurants	5	1
0421 – Furniture & Fixtures	4	1
Grand Total	166,437	81

Exclude Misc Fin Svcs	164,534	79

By the time you are done separating out the passive vehicles, because one is miscategorized in the new highs, you have for regular stocks 92 highs versus 79 lows.? The market cap spread favors the highs because of Berkshire Hathaway, Altria, Amgen, Target, Kimberly Clark, Reynolds American, and H.J. Heinz.? The only large company among the lows was Barrick Gold.

I should add that all of the ETPs and CEFs making new highs were all fixed income funds.? ALL!

Then I looked at the yields of the common stocks that were making new highs and new lows.? For new highs, 35 out of 92 (38%) have yields over 2%.? For new lows, 10 out of 79 (13%) have yields over 2%.

This is a market that is driven by yield and safety/non-cyclicality.? The new highs are predominantly in stable industries, and the new lows in cyclical industries.

I’ve said it before, but I’ll say it again, yield is not real.? It is a residual of a larger economic process.? If you own a bond, preferred stock, or common stock that pays dividends, your future well-being relies on the economic success of that company.? With stocks, that connection is direct, with bonds it means avoiding default.? Other securities face similar limits.? Yields cease to exist when companies fail; chasing yield as a main strategy will fail, because fund shareholders will give up during the hard times when capital gets marked down, and sell.

Though the portfolio that I manage for clients has an above average dividend yield, I do not look for dividend yields; I look for solid companies, and the dividend yields find me.? (Buybacks too.)? I do not reach for yield.? There are many investors that are reaching for yield in this environment, and I think they will eventually get burned.

So be wary over yield.? It may not pop for a year or two; it might pop tomorrow.? I identify risks, and risks typically don’t come with dates.? Just be wary.? When everyone is scrambling for yield, it is probably best to not aim for a yieldy portfolio.

PS — note all the banks and S&Ls on the new highs list, and they are almost all small firms.

Full Disclosure: long AMGN

Grow Embedded Value

Posted on 7 July 20128 July 2012 by David Merkel

One of my rules of thumb in equity investing is that if I buy companies trading below tangible book value,? with earnings yields over 10%, it is difficult to lose value, and the odds favor gaining value.

But there are some caveats:

Analyze the balance sheet, highly indebted companies are not to be trusted, but that varies by industry.
Longer dated assets, like property, plant & equipment should be discounted.
Banks and REITs must be scrutinized carefully, because of their weak liability structures.
Foreign companies need extra scrutiny, because the disclosures are often not as good.? This goes triple for Chinese companies.
Make sure you are not investing in a “buggy whip” industry, particularly in the era of the internet.? How can your company be disrupted?

The idea is a simple one.? Buy companies below their tangible book value when they have good earnings, and good earnings prospects. Over a long enough period of time, the growth in tangible book value will help drive growth in the stock price.

For companies with over $100 million in market capitalization, here are the companies that fit this description:

company	ticker	img_desc	country	exchg_desc	P / TB	P / E	Expected P/E	Mkt cap	LT Debt/ Equity
AerCap Holdings N.V.	AER	0939 – Rental & Leasing	Netherlands	N – New York	0.66	7.6	5.2	1524.4	263.6
Aircastle Limited	AYR	0939 – Rental & Leasing	United States	N – New York	0.64	8.4	8.1	931.2	202.1
American International Group,	AIG	0715 – Insurance (Property & Casualty)	United States	N – New York	0.55	2.9	9.8	56637	73.6
Anworth Mortgage Asset Corpora	ANH	0933 – Real Estate Operations	United States	N – New York	0.94	7.8	7.9	917.8	3.8
Assurant, Inc.	AIZ	0709 – Insurance (Life)	United States	N – New York	0.74	5.7	6	2992.7	19.6
AXA (ADR)	AXAHY	0709 – Insurance (Life)	France	O – Over the counter	0.88	7.6	5.8	29204.3	21.5
Axis Capital Holdings Limited	AXS	0715 – Insurance (Property & Casualty)	Bermuda	N – New York	0.86	8.3	8.8	4325.9	19.3
AXT, Inc.	AXTI	1033 – Semiconductors	United States	M – Nasdaq	0.94	7.5	9.9	129	2.8
Banco Bilbao Vizcaya Argentari	BBVA	0724 – Money Center Banks	Spain	N – New York	0.9	8.7	6	34554.8	250.4
Barclays PLC (ADR)	BCS	0727 – Regional Banks	United Kingdom	N – New York	0.42	6.9	3.6	31291.9	44.7
Callon Petroleum Company	CPE	0609 – Oil & Gas Operations	United States	N – New York	0.86	1.7	5.8	171.6	62.6
Chimera Investment Corporation	CIM	0703 – Consumer Financial Services	United States	N – New York	0.73	4.6	5.3	2434.6	59.2
China Gerui Adv Mtals Grp Ltd	CHOP	0121 – Iron & Steel	China	M – Nasdaq	0.55	2.3	1.7	157.4	0
China Zenix Auto International	ZX	0415 – Auto & Truck Parts	China	N – New York	0.49	1.8	1.4	127.3	0
Citigroup Inc.	C	0724 – Money Center Banks	United States	N – New York	0.53	7.4	5.8	77291.7	165.3
Corning Incorporated	GLW	1024 – Electronic Instruments & Controls	United States	N – New York	0.95	8	8.4	19410	14.7
Crexus Investment Corp	CXS	0933 – Real Estate Operations	United States	N – New York	0.85	6.6	9.4	779.2	0
Deutsche Bank AG (USA)	DB	0727 – Regional Banks	Germany	N – New York	0.65	7.6	4.7	31543.1	318.7
GeoEye Inc.	GEOY	0909 – Business Services	United States	M – Nasdaq	0.8	7.3	8.7	358.5	97.6
Hardinge Inc.	HDNG	0218 – Misc. Capital Goods	United States	M – Nasdaq	0.74	8	7.4	105.1	4.3
Homex Development Corp. (ADR)	HXM	0215 – Construction Services	Mexico	N – New York	0.91	8.6	5.5	846.4	85.4
Ingles Markets, Incorporated	IMKTA	0957 – Retail (Grocery)	United States	M – Nasdaq	0.91	9.9	8.2	400	183.1
Ingram Micro Inc.	IM	1006 – Computer Hardware	United States	N – New York	0.77	9.6	7.6	2591.2	8.7
Jinpan International Limited	JST	1024 – Electronic Instruments & Controls	China	M – Nasdaq	0.85	5.3	4.7	132	0.8
Kelly Services, Inc.	KELYA	0909 – Business Services	United States	M – Nasdaq	0.77	6.4	7.4	462.9	0
KeyCorp	KEY	0727 – Regional Banks	United States	N – New York	0.83	8.4	9.5	7339.2	90.7
KKR Financial Holdings LLC	KFN	0718 – Investment Services	United States	N – New York	0.89	5.1	4.7	1557.4	0
Knightsbridge Tankers Limited	VLCCF	1118 – Water Transportation	Bermuda	M – Nasdaq	0.61	6.9	9.4	215.2	42
KT Corporation (ADR)	KT	0915 – Communications Services	South Korea	N – New York	0.89	9	7	7041.3	72.6
Le Gaga Holdings Ltd ADR	GAGA	0509 – Crops	Hong Kong	M – Nasdaq	0.89	8.1	4.1	200.3	5.3
Lihua International Inc	LIWA	0127 – Misc. Fabricated Products	China	M – Nasdaq	0.7	3.1	2.1	161.3	0
LUKOIL (ADR)	LUKOY	0606 – Oil & Gas – Integrated	Russia	O – Over the counter	0.68	4.2	4	47753.8	10.4
Mechel OAO (ADR)	MTL	0124 – Metal Mining	Russia	N – New York	0.8	4.6	3.5	3322.6	139.6
Metlife Inc	MET	0709 – Insurance (Life)	United States	N – New York	0.69	5.7	5.4	32402.5	45.3
Mizuho Financial Group Inc. (A	MFG	0727 – Regional Banks	Japan	N – New York	0.9	3.5	8.5	40165.5	236.3
Navios Maritime Holdings Inc.	NM	1118 – Water Transportation	Greece	N – New York	0.53	4.6	7.6	350.3	131.3
Newfield Exploration Co.	NFX	0609 – Oil & Gas Operations	United States	N – New York	0.98	5.9	8.8	3943.1	72.2
Olympic Steel, Inc.	ZEUS	0127 – Misc. Fabricated Products	United States	M – Nasdaq	0.86	8.8	6.4	181.8	95.4
Orbotech Ltd.	ORBK	1033 – Semiconductors	Israel	M – Nasdaq	0.78	6.3	9.7	329.7	13.1
Patterson-UTI Energy, Inc.	PTEN	0612 – Oil Well Services & Equipment	United States	M – Nasdaq	0.93	6.6	8.3	2276.5	18.7
Petroleo Brasileiro SA (ADR)	PBR	0606 – Oil & Gas – Integrated	Brazil	N – New York	0.9	6.8	6.3	126006.1	43.5
Phoenix Companies, Inc., The	PNX	0709 – Insurance (Life)	United States	N – New York	0.21	3.6	3.7	203.5	45
Popular, Inc.	BPOP	0727 – Regional Banks	Puerto Rico	M – Nasdaq	0.52	8.9	6.1	1664	47.1
Protective Life Corp.	PL	0709 – Insurance (Life)	United States	N – New York	0.7	7.2	8	2557	53
Reinsurance Group of America I	RGA	0706 – Insurance (Accident & Health)	United States	N – New York	0.68	7.8	7.2	4059.3	34.9
Republic Bancorp, Inc. KY	RBCAA	0727 – Regional Banks	United States	M – Nasdaq	0.94	4.7	8.7	489.6	7.7
REX American Resources Corp	REX	0103 – Chemical Manufacturing	United States	N – New York	0.65	7.8	6.8	163.9	41
Royal Caribbean Cruises Ltd.	RCL	1118 – Water Transportation	United States	N – New York	0.71	9.7	9.5	5542.1	91.9
Societe Generale SA (ADR)	SCGLY	0724 – Money Center Banks	France	O – Over the counter	0.29	5.8	3.8	16945.2	20.7
StanCorp Financial Group, Inc.	SFG	0706 – Insurance (Accident & Health)	United States	N – New York	0.84	2.5	8.7	1676.1	14.8
StealthGas Inc.	GASS	1118 – Water Transportation	Greece	M – Nasdaq	0.38	8.5	5	122.1	98.5
Symetra Financial Corporation	SYA	0709 – Insurance (Life)	United States	N – New York	0.47	7.8	8.5	1494.6	0
Tech Data Corp	TECD	1006 – Computer Hardware	United States	M – Nasdaq	0.96	9.8	8	1918.9	2.9
Ternium S.A. (ADR)	TX	0121 – Iron & Steel	Luxembourg	N – New York	0.81	8.3	5.8	3993.4	26.2
Thompson Creek Metals Company,	TC	0124 – Metal Mining	United States	N – New York	0.33	3.5	5.7	563.9	20.8
Transportadora de Gas del Sur	TGS	0609 – Oil & Gas Operations	Argentina	N – New York	0.43	5.6	7.5	191.7	80.6
TravelCenters of America LLC	TA	0963 – Retail (Specialty Non-Apparel)	United States	A – American	0.51	4	3.7	145	31.9
Triple-S Management Corp.	GTS	0806 – Healthcare Facilities	Puerto Rico	N – New York	0.76	9.4	8.6	510.6	18.2
Unit Corporation	UNT	0612 – Oil Well Services & Equipment	United States	N – New York	0.94	8.7	9	1819.7	15.8
Valero Energy Corporation	VLO	0609 – Oil & Gas Operations	United States	N – New York	0.86	9.1	5.6	13578.5	40.5
Vishay Intertechnology	VSH	1033 – Semiconductors	United States	N – New York	0.97	7.7	7.1	1433.8	23.4
Woori Finance Holdings Co., Lt	WF	0727 – Regional Banks	South Korea	N – New York	0.57	4.5	4.8	8482.1	0
Xinyuan Real Estate Co., Ltd.	XIN	0215 – Construction Services	China	N – New York	0.33	2	2.1	215.1	8.8
Yongye International Inc	YONG	0103 – Chemical Manufacturing	China	M – Nasdaq	0.55	1.9	1.3	163.7	2.8
ZHONGPIN INC.	HOGS	0515 – Food Processing	China	M – Nasdaq	0.89	6.6	5.5	371.9	18.1
Zuoan Fashion Ltd (ADR)	ZA	0403 – Apparel/Accessories	China	N – New York	0.6	2.4	1.8	102.1	0

Full disclosure: long AIZ, PBR, RGA, SFG, VLO

PS — be wary of Chinese companies, I mean it…? Also, use the Ctrl-Minus key to view this in entire.

Do Insurance Stocks Do Better than Average Over the Long-Run?

Posted on 27 June 201227 June 2012 by David Merkel

Why should insurance companies be such a good place to invest?? That’s a great question, and I will try to outline an answer.? Before I do, let me draw a few distinctions:

I’m not talking about life companies, they are far more capital encumbered then P&C companies.
I am also not talking about title, mortgage, or finance insurers.? They are too risky, and that was my opinion in the early 2000s.
Health insurers have a different model, much more subject to regulation.
Many insurance companies that don’t survive 10 years as a public company do poorly.? They did not underwrite well.
Small companies tend to fail disproportionately.
We aren’t talking about specialty companies.

What I am talking about are non-microcap companies with stable P&C liability structures and conservative reserving.? Boring, maybe.? Simple, somewhat, but you try setting up a competitor to them.? It takes some doing.? That is the competitive advantage; it is the barrier to entry.? Few companies have diversified liabilities; fewer reserve conservatively.

Thus I highlight P&C companies with ten year track records.? Here are the good ones: ACE, Chubb, Cincinnati Financial, Donegal Group, HCC Insurance, Markel, ProAssurance, RLI, Selective Insurance, Travelers, United Fire Group, W.R. Berkley, Arch Capital, Alterra Capital Holdings, PartnerRe, Everest Re, Renaissance Re, White Mountains, Progressive, State Auto Financial, and Erie Indemnity.

And here are the trailing ones: American Financial Group, Baldwin & Lyons, EMC Insurance, Navigators Group, XL Group, Allegheny Corporation, American National, Allstate, and Horace Mann.

And two really lousy ones: CNA Insurance and Meadowbrook Insurance Group.

On the whole, the outperformers more than absorb the underperformers, though I can’t prove that, for these reasons:

Hasn’t happened much in a while, but P&C insurance companies do occasionally die & disappear.? Think of Reliance Insurance Company.
Sometimes P&C companies make very bad underwriting decisions, lose a dramatic amount of money, and their stock prices fall enough that they get taken over, e.g., PXRe would be an example.
I may be guilty of selection and survivor bias by sticking with diversified bigger firms that are at least 10 years old.? I know of a lot of smaller firms that flame out because they take too much underwriting risk due to hubris and/or inexperience.

To do a complete study, we would have to use the CRSP database, which has all of the data for stocks not currently living.? We would see the losses from insolvencies, and the losses/gains fhereof.? It would take place at the halfway point for US efforts, which would be 4 seconds ahead of the Greeks as they hurried to compete/complete at constant speeds.

That’s what would happen.? Now before I go, I want to leave charts behind for the stocks mentioned:

Above

Below

Well Below

So though I know many value investors think a lot of P&C insurers, my answer on whether they are a generally good industry to invest in is “possibly,” but not “certainly.”? There are advantages for sophisticated investors that can understand complex accounting and its limitations, as well as those that can sense whether a management team is conservative or not.? That may be part of the reason for how I limited the selection of companies above; I was trying to mimic what sort of companies tended to last a long time; they tend to be conservative.

That’s all for now; criticism is welcome.

Full disclosure: Long HCC , TRV

PS — I will be gone the next three days, and posting will be irregular, as it has been recently.