Sorted Weekly Tweets

Sorted Weekly Tweets

Posted on by David Merkel

Rest of the World

 

  • Cyprus?s now-certain default http://t.co/H7TO0rQy Cyprus is not substantial to the EU, but it does raise issues as to precedence $$ Jan 26, 2013
  • Jobs At Al Jazeera http://t.co/HzukJDoL Hiring in the USA! Join the Wahabist Ministry of Propaganda; certainly more talented than most! $$ Jan 24, 2013
  • Mali Exposes Flaws in West’s Security Plans http://t.co/yixTdjVP Lack of proper gear, or American assistance, hinder Mali efforts $$ Jan 24, 2013
  • Manpower Sees French Labor-Deal Boon Matching Skills to Jobs http://t.co/OdD7JaGG $MAN helps sclerotic French labor find flexibility $$ Jan 24, 2013
  • Peso Beating Rupee Threatens Call Center Growth http://t.co/EkiG1wBU Phillipines will continue w/loose $$; everyone being forced2 loose $$ Jan 24, 2013
  • Cairo Slum-Dwellers Despair of Mursi on Uprising Anniversary http://t.co/5TlSMPkA What did u expect? Muslim Brotherhood best organized $$ Jan 24, 2013
  • Chavez Ally?s Once-in-Century Debt Exposes Neglect http://t.co/qpZqu0rQ Dumb2lend @ 5% 4 10yrs 2a nation has expropriated 15 companies $$ Jan 24, 2013
  • Merkel hints at European deal for Cameron http://t.co/2ugJjTzA Ever-closer union gives way 2Europe a la carte $$ UK has better deal w/US? $$ Jan 24, 2013
  • Yahoo, Dell Swell Netherlands? $13 Trillion Tax Haven http://t.co/d78DxoHN Corporations scour the globe 4 tax advantages. Wouldn’t you? $$ Jan 24, 2013
  • Spain?s Lost Generation Spends Salad Days Toiling in UK http://t.co/dBMcRGGw High bad debts & unemployment, yes Mario the worst is past $$ Jan 24, 2013
  • Suicide of Minister Turns Focus on Crash Taking Toll in Ireland http://t.co/8uXbcdNK The more severe the recession, the more suicides $$ Jan 24, 2013
  • Draghi Says ?Darkest Clouds? Over Europe Have Subsided http://t.co/hUqda4z7 Tell that2 Slovenia! http://t.co/TJDdbTyT $$ #debtdeflation Jan 24, 2013
  • Spanish Bank Bad Loans: still tending upward http://t.co/LERSIed3 Calling Mario Draghi! Another fire to douse w/your unlimited liquidity $$ Jan 24, 2013

 

China

 

  • Feeding the Dragon: Why China?s Credit System Looks Vulnerable http://t.co/9aFA9Ivk GMO analyzes the mess that is credit in China $$ #danger Jan 25, 2013
  • China Overheating Risk Resurfaces, Ex-PBOC Adviser Says http://t.co/DcjkkslU Total debt levels comparable to dev nations prior 2 crisis $$ Jan 24, 2013
  • China’s Potential growth may slow later in decade- Older population shrinks its labor force http://t.co/Sr6zsqa8 China demographic articles Jan 24, 2013
  • In China, Widening Discontent Among Communist Party Faithful http://t.co/626NiBMR Small cracks emerge in Party loyalty #interestingtimes $$ Jan 21, 2013
  • EU remains a big external challenge to China’s economy http://t.co/YvV52N5n 5-yr plan 2 dom consumption will fail: based on transfer pmts $$ Jan 21, 2013
  • “Gehnen said most crucial for a lasting strengthening of China’s domestic demand…further development of basic systems of social security” Jan 21, 2013

 

Market Dynamics

 

  • ?Don?t work on financial crises, don?t work on contagion,? they said, according to Forbes. ?There?re not going to be anymore crises.? $$ Jan 26, 2013
  • The last tweet reflected the views of Kristin Forbes’ tenure advisors 10+ years ago http://t.co/X7MhwG9b Economists were complacent $$ Jan 26, 2013
  • The Temptation of Risk http://t.co/BLjgGwye Buying any risk asset @ this juncture feels like succumbing 2 the peer pressure of the market $$ Jan 25, 2013
  • ?The fundamental law is we can?t raise debt faster than income from now on,? Dalio said. http://t.co/rTAJfFhf Dalio Sees ?Game Changer? $$ Jan 25, 2013
  • “The worst investment decisions have generally been made when dumb money is chasing yield.” Edward Chancellor and Mike Monnelly at GMO $$ Jan 25, 2013
  • Investors See a Way Forward: Buybacks http://t.co/Q8JQHwgs Organic growth is best, but companies w/cheap stock should buyback shares $$ Jan 24, 2013
  • Visual History Of The S&P 500 http://t.co/17rWiDpw 20th birthday for $SPY — Watch how the top 10 companies have varied over last 33 yrs $$ Jan 22, 2013
  • Egan-Jones Faces 18-Month Ban on Sovereign, Asset-Backed Ratings http://t.co/FzPbV2zo Should have stuck w/their expertise in corporates $$ Jan 22, 2013
  • Calpers Buy-Hold Rule Recoups $95B Recession Loss http://t.co/R7Hc02Hm Still short $87B, only 74% funded, asks CA & struggling cities 4 $$ Jan 22, 2013
  • Investors Get a ?Perpetual? Headache http://t.co/IM5Y94IM It is usually dumb to give away your principal 4a fixed rate w/no upside $$ Jan 22, 2013
  • Wrong: Money Magic: Bonds Act Like Stocks http://t.co/RNGh92EV This is little different than buying the equity of CDOs & diversifying $$ Jan 22, 2013
  • More on having technical analysis taught in financial classes in academic circles @reformedbroker @ppearlman http://t.co/WCxBcfDo $$ Jan 21, 2013
  • We must fix the broken Western state model http://t.co/L6jxLYQm Liabs, deficits & policy uncertainty lead2 economic gridlock as DC wastes $$ Jan 21, 2013

 

Companies

 

  • It Pays to Own an Energy Pipeline. Thanks, Tax Code http://t.co/2UCSALOo Almost all are set up as MLPs, which pass income to partners $$ Jan 25, 2013
  • Financial Crisis Suit Suggests Bad Behavior @ Morgan Stanley http://t.co/OkML3jhh The buyers did not do due diligence, & were yield hogs $$ Jan 24, 2013
  • Explosive Charge: Morgan Stanley Peddled Security Its Own Employee Called ?Nuclear Holocaust? http://t.co/QTelsPmK Untold story: yield hogs Jan 24, 2013
  • Microsoft Risks Strain to PC Partnerships With Dell Investment http://t.co/5t0Eok5k All of $MSFT ‘s relationship’s r strained somewhat $$ Jan 24, 2013
  • Firms Keep Stockpiles of ‘Foreign’ Cash in US http://t.co/r2MAumPL You want they should keep it elsewhere? At least it is safe here $$ Jan 24, 2013
  • #SYMC offers capital allocation program, plans to initiate company’s first cash dividend http://t.co/51H0zECN FD: + $SYMC 2.5% div, nice $$ Jan 23, 2013
  • Western Digital Hits 15-Yr Peak on Talk of Buyout http://t.co/GRk0JucB FD: + $WDC | $WDC more cyclical than $DELL, harder 2take private $$ Jan 22, 2013
  • Loan start-up Prosper raises $20 million, led by Sequoia http://t.co/SJLnKHGa Peer-2-peer lending comes of age, Prosper attracts $$ Jan 22, 2013
  • Microsoft in Talks to Help Finance Dell Buyout http://t.co/xpbAntVf Odd, indicates that $MSFT has more $$ than they know what to do with Jan 22, 2013
  • Schools Hit by Morality of Wal-Mart Guns Funding Charity http://t.co/8KgGKSQe $WMT makes <1% of its profits from guns; >1% from tobacco $$ Jan 22, 2013
  • Inside H-P’s Missed Chance to Avoid a Disastrous Deal http://t.co/tqJ6xsEx Could have walked away after firing Apotheker for ~$100M $$ Jan 22, 2013

 

Other

 

  • Senate Changes Rule on Filibusters, Keeps Supermajority http://t.co/fHOlwYmw Modest good changes made, but the filibuster stands as is $$ Jan 25, 2013
  • Facebook Friends Fronting Debt Collectors Draw US Regulation http://t.co/wZkVpdTu Debt collection harassment goes social, for now $$ Jan 24, 2013
  • Fast-changing social media makes advisers scramble http://t.co/wlZ4Py1P Note to RIAs w/LinkedIn: u may need 2turn off recommendations $$ Jan 24, 2013
  • Who Can Outgrow or Recover From Autism http://t.co/D3H2MrPO Autism is an overused word. Some males take longer to develop $$ Jan 22, 2013

 

Benefits now, Payment with Interest Later

?

  • Backs to the Future http://t.co/RuftcKsF by @agnestcrane | But as interest rates rise, asset values should fall; the gap should remain $$ Jan 24, 2013
  • Big Ben?s Big Bite Out of Corporate Pensions http://t.co/2Ez3PkUJ QE-infinity raises the costs of defined benefit pensions & other liabs $$ Jan 24, 2013
  • The RomneyCare Bill Comes Due http://t.co/eQ2wAqdn Coming soon to a nation (US) near you: pay more for health care or get less of it $$ Jan 24, 2013

 

Comments & Retweets

  • “I’ve always been skeptical of Bremmer & Roubini — too promotional.” ? David_Merkel http://t.co/FtmDU3Th $$ Also too bearish on the US. Jan 25, 2013
  • @JackHBarnes @finemrespice I would be surprised if a bunch of Hungarians have better insight than most. Jan 26, 2013
  • @finemrespice @The_Analyst I am proud to know the both of you virtually. To all my followers, please follow. #FF Jan 26, 2013
  • @finemrespice Many apologies, I get what u r going for. Clever. Jan 26, 2013
  • ‘ @finemrespice Personally, I would like 2b more perverse — they have 2 invest their wealth in companies which they have refused 2 favor $$ Jan 26, 2013
  • @jckhewitt as you will note from my last tweet, the economics profession believed in the early 2000s that we had banished financial crises Jan 26, 2013
  • An example of an ETF that buys companies that buy back stock on net $$ $TTFS RT @jvnash1: @AlephBlog $ttfs float shrink Jan 24, 2013
  • Another good example of shrinking shares outstanding $$ RT @dwk24: @AlephBlog $COH Jan 24, 2013
  • RT @DavidBCollum: @AlephBlog Indeed. They also forget the highly complex systems improve by evolution, not human fiat. FOMC suffers “Fat … Jan 24, 2013
  • @BarbarianCap I agree, though I think developed nations should try to co-ordinate tax policy, & suggest 2 tax havens NATO has other uses 😉 Jan 24, 2013
  • ‘ @DavidBCollum I think the Fed forgets that every liability is someone else’s asset, but that every asset isn’t someone else’s liability $$ Jan 24, 2013
  • @Skrisiloff You’re welcome, Scott. Keep up the good work! Jan 24, 2013
  • @flounder_MA @smartfootball It’s a valuation question. Price below 1.3x tangible book, buy back stock. Otherwise, special dividends $$ Jan 24, 2013
  • @JMucken @DanSWright I think that’s the only utility I let auto-tweet; nice utility that sums up what I did publicly on Twitter wed-to-wed Jan 24, 2013

?? @djoalpha11 This Dan Dorfman http://t.co/XlQQXj49 ? Or another one, because the famous one is dead… Jan 22, 2013

  • @GaelicTorus @danielckoontz They serve different needs. Main point: Use your specialized knowledge 2 choose ins 2 best serve yr likely needs Jan 21, 2013
  • @danielckoontz But no, I don’t have anything in the archives on LTC, except don’t buy the stock of those whose liabilities r a hi % LTC Jan 21, 2013
  • @GaelicTorus @danielckoontz LTC is for people of in-between health; likely to live but not be so healthy, eases the unpleasantness of aging Jan 21, 2013
  • @danielckoontz also look & compare all of the terms & conditions & compare different specimen policies. Get quotes from a wide # of writers Jan 21, 2013
  • @danielckoontz LTC is useful for someone who thinks they will need lots of care, but is likely to live a long time. Best bought when younger Jan 21, 2013
  • RT @ToddSullivan: RT @Convertbond: RT ?@finansakrobat: Milton Friedman (via Morgan Stanley): ?nothing is so permanent as a temporary go … Jan 21, 2013
  • “Difficulty: few people, even professionals, are good enough to go against the grain when the masses are panicking” http://t.co/MXrg8o06 $$ Jan 20, 2013

 

FWIW

?

  • My week on twitter: 40 retweets received, 6 new listings, 81 new followers, 58 mentions. Via: http://t.co/SPrAWil0 Jan 24, 2013

?

An Echo, but not Sound

An Echo, but not Sound

Posted on by David Merkel

Time for my penny stock scoreboard:

Ticker Date of Article Price @ Article Price @ 1/24/13 Decline Annualized Splits
GTXO

5/27/2008

2.45

0.040

-98.4%

-58.6%
BONZ

10/22/2009

0.35

0.019

-94.6%

-59.2%
BONU

10/22/2009

0.89

0.074

-91.7%

-53.4%
UTOG

3/30/2011

1.55

0.009

-99.4%

-94.1%
OBJE

4/29/2011

116.00

1.780

-98.5%

-90.9%

1:40
LSTG

10/5/2011

1.12

0.061

-94.6%

-89.2%
AERN

10/5/2011

0.0770

0.0002

-99.7%

-99.0%
IRYS

3/15/2012

0.261

0.015

-94.3%

-96.4%
NVMN

3/22/2012

1.47

0.070

-95.2%

-97.3%
STVF

3/28/2012

3.24

0.600

-81.5%

-87.0%
CRCL

5/1/2012

2.22

0.350

-84.2%

-91.9%
ORYN

5/30/2012

0.93

0.280

-69.9%

-84.0%
BRFH

5/30/2012

1.16

0.316

-72.8%

-86.3%
LUXR

6/12/2012

1.59

0.018

-98.9%

-99.93%
IMSC

7/9/2012

1.5

1.480

-1.3%

-2.4%
DIDG

7/18/2012

0.65

0.085

-86.9%

-98.0%
GRPH

11/30/2012

0.8715

0.428

-50.9%

-99.1%
IMNG

12/4/2012

0.76

0.747

-1.7%

-11.6%

1/24/2013

 Median

-94.4%

-90.1%

You have to admire the consistency of capital destruction among promoted penny stocks.? Tonight’s loser-in-waiting is Echo Automotive.? Here is the bullet points to illustrate the future carnage:

  • Minimal Revenues
  • Negative net worth
  • Negative earnings and getting worse.
  • Management sucking in a lot in salaries.
  • The long list of stock promoters engaged by DH Media LLC.? This is only the email effort.? They paid $1.9 million to disseminate the shiny, colorful 10″ x 14″ “newsletter” via snail mail.??? They paid $25,000 to the tout that wrote the copy, or maybe, spiffed up DH Media’s bullet points. Add in disclaimers in 5-6 point type.
  • Risk factors list longer than you can shake a stick at.
  • Predecessor company “Canterbury Resources” was pursuing mining interests in New Zealand.
  • Predecessor acquirer company “Controlled Carbon” was working on solutions to reducing carbon emissions.? They now own 70% of the combined company, paying four cents a share for their stake. (So why does it trade at near 80 cents a share now?
  • Now the combined company has some solutions that will double fuel mileage on vehicles that use gas.? What a wonder.

If you really had a technology that could double gas mileage, you would set up a joint venture, or a licensing agreement with one of the major automakers, and divide the profits? off of their high vehicle sales.? You would make a bundle doing that.? You would not buy a shell company in a different industry and let costs get out of control.? That looks like management does not have a real technology, but is simply trying to “take something off the top” through salaries and benefits, and perhaps rewarding friends.? After all, in the stub of the third quarter, Echo blew threw virtually all of the new capital that it raised, and for what?

The company might or might not be affiliated with the promoters.? The promoters say the company is not affiliated with the promotion.? In one scam, Luxeyard [LUXR] a different set of promoters did reveal that the company was paying the promotion to facilitate sales of stock.? The proof is in the pudding.? If Echo goes and does a PIPE or a secondary IPO, maybe there was some hidden affiliation.

The promoter also says they won’t trade for 90 days.? Now, the economics of this one is tough, because the parties that owned “Controlled Carbon” own 70% of Echo Automotive.? Dilution at low prices does not favor them, and I don’t see how they could easily monetize a large portion of their stake.

That leaves the remaining 30% of the company to be traded.? The promoter has spent over 2 million to promote the stock.? Unless he owns a big chunk, and sells into this wave, I don’t see how he makes money.? And if he does sell into the wave, and a lawsuit is brought later, that would stand against them in court that they violated their disclosure.? Maybe they take that risk anyway — they are working at the edge of the law anyway.

Except, maybe a lot of scammers work together as in this example from the FBI.? I’ve posited that idea before.? Given all of the non-identifiable shell companies involved, that could be going on here also.? It would be interesting to try to prove the existence of and break a ring like that.

Anyway, steer clear.? The company is horrid, and with promoters around, those that buy and hold for any significant length of time (say 1-3 months) are 99% certain to lose money.? Don’t be one of the pockets that gets picked.

On Insurance Investing, Part 2

On Insurance Investing, Part 2

Posted on by David Merkel

If you grow book value, particularly if your liabilities are short, you will grow market value.? Many reinsurance and insurance companies aim at growing fully convertible book value per share.

Fully convertible book value per share assumes that you invest your dividends in the common stock (without taxation), and thus compound your gains through reinvestment, taking account of dilution.? Hmmm… when will someone dream up the idea of structuring an insurance company as an MLP or a REIT?? I don’t think it is likely, but maybe someone could dream it up.

It also implies that all possible dilution is factored in from convertible preferred stock or convertible bonds.? Now insurance companies tend to trade near book value over the long run, so companies that can grow their book value rapidly and pay dividends can be interesting investments.? Particularly where the liabilities of the company are short — property reinsurance or personal lines insurance, growth in book value plus dividends tends to be a reliable indicator of value creation.

If liabilities are longer, it gets more questionable, because under-reserving becomes more likely — it is very hard to be certain of the reserving of long-dated or volatile coverages.

Anyway, here is a list of insurance companies, and how they have accumulated book value plus dividends over the past seven years.? Note that this is a mathematical calculation off a limited database, and that splits and M&A can throw this calculation off.? With that caveat, here is the list:

company ticker sic img_desc mktcap Growth of FCBV
Life Partners Holdings, Inc. LPHI 6411 0712 – Insurance (Miscellaneous)

50.7

76%
Universal Insurance Holdings, UVE 6331 0715 – Insurance (Property & Casualty)

185.2

75%
CNinsure Inc. (ADR) CISG 6411 0712 – Insurance (Miscellaneous)

337.6

56%
Amtrust Financial Services, In AFSI 6331 0715 – Insurance (Property & Casualty)

2,128.7

38%
Employers Holdings, Inc. EIG 6331 0715 – Insurance (Property & Casualty)

652.6

32%
Enstar Group Ltd. ESGR 6331 0715 – Insurance (Property & Casualty)

1,951.0

26%
Tower Group Inc TWGP 6331 0715 – Insurance (Property & Casualty)

734.8

25%
Amerisafe, Inc. AMSF 6331 0715 – Insurance (Property & Casualty)

508.5

23%
Humana Inc. HUM 6324 0706 – Insurance (Accident & Health)

11,297.2

21%
Allied World Assurance Co Hold AWH 6331 0715 – Insurance (Property & Casualty)

2,856.1

21%
Arthur J. Gallagher & Co. AJG 6411 0712 – Insurance (Miscellaneous)

4,441.2

20%
Willis Group Holdings PLC WSH 6411 0712 – Insurance (Miscellaneous)

6,009.5

20%
China Life Insurance Company L LFC 6311 0709 – Insurance (Life)

94,339.3

20%
ProAssurance Corporation PRA 6331 0715 – Insurance (Property & Casualty)

2,698.5

19%
RenaissanceRe Holdings Ltd. RNR 6331 0715 – Insurance (Property & Casualty)

3,949.8

18%
National Interstate Corporatio NATL 6331 0715 – Insurance (Property & Casualty)

576.7

18%
Argo Group International Holdi AGII 6331 0715 – Insurance (Property & Casualty)

910.3

17%
Brown & Brown, Inc. BRO 6411 0712 – Insurance (Miscellaneous)

3,851.4

17%
AFLAC Incorporated AFL 6321 0706 – Insurance (Accident & Health)

24,134.6

16%
Endurance Specialty Holdings L ENH 6331 0715 – Insurance (Property & Casualty)

1,796.8

16%
W.R. Berkley Corporation WRB 6331 0715 – Insurance (Property & Casualty)

5,455.7

15%
American Financial Group AFG 6331 0715 – Insurance (Property & Casualty)

3,772.7

15%
Horace Mann Educators Corporat HMN 6331 0715 – Insurance (Property & Casualty)

830.9

15%
Eastern Insurance Holdings Inc EIHI 6311 0709 – Insurance (Life)

135.5

15%
Validus Holdings, Ltd. VR 6331 0709 – Insurance (Life)

3,296.1

15%
CIGNA Corporation CI 6324 0706 – Insurance (Accident & Health)

16,104.2

14%
Reinsurance Group of America I RGA 6321 0706 – Insurance (Accident & Health)

4,143.2

14%
Safety Insurance Group, Inc. SAFT 6331 0715 – Insurance (Property & Casualty)

715.6

14%
Chubb Corporation, The CB 6331 0715 – Insurance (Property & Casualty)

20,701.5

13%
Loews Corporation L 6331 0715 – Insurance (Property & Casualty)

16,854.0

13%
ACE Limited ACE 6351 0715 – Insurance (Property & Casualty)

28,285.6

13%
HCC Insurance Holdings, Inc. HCC 6331 0715 – Insurance (Property & Casualty)

3,937.5

13%
Travelers Companies, Inc., The TRV 6331 0715 – Insurance (Property & Casualty)

29,108.4

13%
Coventry Health Care, Inc. CVH 6324 0706 – Insurance (Accident & Health)

6,080.9

12%
Markel Corporation MKL 6331 0715 – Insurance (Property & Casualty)

4,456.4

12%
Torchmark Corporation TMK 6311 0709 – Insurance (Life)

5,103.5

12%
UnitedHealth Group Inc. UNH 6324 0706 – Insurance (Accident & Health)

55,732.6

12%
Partnerre Ltd PRE 6331 0715 – Insurance (Property & Casualty)

5,116.2

12%
Meadowbrook Insurance Group, I MIG 6331 0715 – Insurance (Property & Casualty)

311.6

12%
StanCorp Financial Group, Inc. SFG 6321 0706 – Insurance (Accident & Health)

1,704.1

12%
Prudential Financial Inc PRU 6311 0709 – Insurance (Life)

26,777.4

12%
Infinity Property and Casualty IPCC 6331 0715 – Insurance (Property & Casualty)

688.6

12%
Assurant, Inc. AIZ 6311 0709 – Insurance (Life)

2,935.0

12%
Greenlight Capital Re, Ltd. GLRE 6331 0715 – Insurance (Property & Casualty)

837.4

12%
Progressive Corporation, The PGR 6331 0715 – Insurance (Property & Casualty)

13,738.8

11%
Protective Life Corp. PL 6311 0709 – Insurance (Life)

2,451.0

11%
Axis Capital Holdings Limited AXS 6331 0715 – Insurance (Property & Casualty)

4,508.1

11%
Molina Healthcare, Inc. MOH 6324 0706 – Insurance (Accident & Health)

1,300.1

11%
American Equity Investment Lif AEL 6311 0709 – Insurance (Life)

834.1

11%
Symetra Financial Corporation SYA 6311 0709 – Insurance (Life)

1,578.3

11%
Aon PLC AON 6411 0712 – Insurance (Miscellaneous)

18,199.1

10%
Mercury General Corporation MCY 6331 0715 – Insurance (Property & Casualty)

2,169.0

10%
Everest Re Group Ltd RE 6331 0715 – Insurance (Property & Casualty)

5,843.7

10%
American Safety Insurance Hold ASI 6331 0715 – Insurance (Property & Casualty)

197.1

10%
Prudential Public Limited Comp PUK 6311 0709 – Insurance (Life)

38,071.4

10%
Aspen Insurance Holdings Limit AHL 6331 0715 – Insurance (Property & Casualty)

2,324.9

10%
Berkshire Hathaway Inc. BRK.A 6331 0715 – Insurance (Property & Casualty)

236,577.4

9%
EMC Insurance Group Inc. EMCI 6331 0715 – Insurance (Property & Casualty)

326.3

9%
RLI Corp. RLI 6331 0715 – Insurance (Property & Casualty)

1,439.1

9%
Hanover Insurance Group, Inc., THG 6331 0715 – Insurance (Property & Casualty)

1,781.6

9%
Unico American Corporation UNAM 6331 0715 – Insurance (Property & Casualty)

66.6

9%
Montpelier Re Holdings Ltd. MRH 6331 0715 – Insurance (Property & Casualty)

1,318.1

9%
Seabright Holdings Inc SBX 6331 0715 – Insurance (Property & Casualty)

249.0

9%
Alleghany Corporation Y 6331 0715 – Insurance (Property & Casualty)

5,950.7

8%
Hallmark Financial Services, I HALL 6331 0715 – Insurance (Property & Casualty)

176.8

8%
White Mountains Insurance Grou WTM 6331 0715 – Insurance (Property & Casualty)

3,509.0

8%
Investors Title Company ITIC 6361 0715 – Insurance (Property & Casualty)

139.1

8%
Marsh & McLennan Companies, In MMC 6411 0712 – Insurance (Miscellaneous)

19,020.9

8%
FBL Financial Group FFG 6311 0709 – Insurance (Life)

869.4

8%
Erie Indemnity Company ERIE 6331 0715 – Insurance (Property & Casualty)

3,264.4

8%
Metlife Inc MET 6311 0709 – Insurance (Life)

39,615.8

8%
Aetna Inc. AET 6324 0706 – Insurance (Accident & Health)

15,698.1

8%
WellPoint, Inc. WLP 6324 0706 – Insurance (Accident & Health)

19,054.4

8%
Hilltop Holdings Inc. HTH 6331 0715 – Insurance (Property & Casualty)

773.3

8%
Citizens, Inc. CIA 6311 0709 – Insurance (Life)

485.8

7%
Donegal Group Inc. DGICA 6331 0715 – Insurance (Property & Casualty)

370.9

7%
National Western Life Insuranc NWLI 6311 0709 – Insurance (Life)

596.1

7%
Navigators Group, Inc, The NAVG 6331 0715 – Insurance (Property & Casualty)

766.0

7%
Kemper Corp KMPR 6331 0715 – Insurance (Property & Casualty)

1,842.8

7%
Allstate Corporation, The ALL 6331 0715 – Insurance (Property & Casualty)

20,817.6

7%
Cna Financial Corp CNA 6331 0715 – Insurance (Property & Casualty)

7,982.2

6%
Lincoln National Corporation LNC 6311 0709 – Insurance (Life)

7,626.2

6%
Arch Capital Group Ltd. ACGL 6331 0715 – Insurance (Property & Casualty)

6,084.7

6%
Platinum Underwriters Holdings PTP 6331 0715 – Insurance (Property & Casualty)

1,565.0

6%
Baldwin & Lyons, Inc. BWINB 6331 0715 – Insurance (Property & Casualty)

339.5

5%
Selective Insurance Group SIGI 6331 0715 – Insurance (Property & Casualty)

1,086.8

5%
United Fire Group, Inc. UFCS 6331 0715 – Insurance (Property & Casualty)

587.9

5%
Universal American Corporation UAM 6324 0706 – Insurance (Accident & Health)

793.6

5%
Principal Financial Group Inc PFG 6321 0706 – Insurance (Accident & Health)

8,663.8

5%
American National Insurance Co ANAT 6331 0715 – Insurance (Property & Casualty)

2,055.2

4%
Kansas City Life Insurance Co KCLI 6311 0709 – Insurance (Life)

416.9

4%
Cincinnati Financial Corporati CINF 6331 0715 – Insurance (Property & Casualty)

6,771.0

3%
Independence Holding Company IHC 6311 0709 – Insurance (Life)

169.1

3%
State Auto Financial STFC 6331 0715 – Insurance (Property & Casualty)

582.5

3%
Unum Group UNM 6311 0709 – Insurance (Life)

6,190.3

3%
Sun Life Financial Inc. (USA) SLF 6311 0709 – Insurance (Life)

17,283.4

3%
Alterra Capital Holdings Ltd ALTE 6331 0715 – Insurance (Property & Casualty)

2,861.2

3%
Assured Guaranty Ltd. AGO 6351 0715 – Insurance (Property & Casualty)

2,911.2

3%
Fidelity National Financial In FNF 6361 0715 – Insurance (Property & Casualty)

5,838.5

3%
Atlantic American Corporation AAME 6311 0709 – Insurance (Life)

69.2

2%
Health Net, Inc. HNT 6324 0706 – Insurance (Accident & Health)

2,140.7

2%
Hartford Financial Services Gr HIG 6331 0715 – Insurance (Property & Casualty)

10,641.6

2%
ING Groep N.V. (ADR) ING 6311 0709 – Insurance (Life)

37,878.4

2%
Manulife Financial Corporation MFC 6311 0709 – Insurance (Life)

26,357.8

2%
Genworth Financial? Inc GNW 6311 0709 – Insurance (Life)

4,500.3

2%
AEGON N.V. (ADR) AEG 6311 0709 – Insurance (Life)

13,073.0

1%
Old Republic International Cor ORI 6351 0715 – Insurance (Property & Casualty)

2,994.2

1%
OneBeacon Insurance Group, Ltd OB 6331 0715 – Insurance (Property & Casualty)

1,328.8

0%
Global Indemnity plc GBLI 6331 0715 – Insurance (Property & Casualty)

555.8

-4%
CNO Financial Group Inc CNO 6311 0709 – Insurance (Life)

2,192.9

-5%
Crawford & Company CRD.B 6411 0712 – Insurance (Miscellaneous)

326.7

-5%
Stewart Information Services C STC 6361 0715 – Insurance (Property & Casualty)

536.7

-9%
XL Group plc XL 6331 0715 – Insurance (Property & Casualty)

8,182.5

-9%
Phoenix Companies, Inc., The PNX 6311 0709 – Insurance (Life)

155.4

-14%
First Acceptance Corporation FAC 6331 0715 – Insurance (Property & Casualty)

51.2

-17%
Radian Group Inc. RDN 6351 0715 – Insurance (Property & Casualty)

820.6

-23%
MBIA Inc. MBI 6351 0715 – Insurance (Property & Casualty)

1,561.5

-24%
Kingsway Financial Services In KFS 6331 0715 – Insurance (Property & Casualty)

53.4

-25%
MGIC Investment Corp. MTG 6351 0715 – Insurance (Property & Casualty)

567.7

-28%
American International Group, AIG 6331 0715 – Insurance (Property & Casualty)

51,803.5

-32%
eHealth, Inc. EHTH 6411 0712 – Insurance (Miscellaneous)

501.2
Maiden Holdings, Ltd. MHLD 6331 0715 – Insurance (Property & Casualty)

725.7
United Insurance Holdings Corp UIHC 6331 0715 – Insurance (Property & Casualty)

92.7
Homeowners Choice, Inc. HCI 6331 0715 – Insurance (Property & Casualty)

240.0
Verisk Analytics, Inc. VRSK 6411 0712 – Insurance (Miscellaneous)

9,103.9
Primerica, Inc. PRI 6311 0709 – Insurance (Life)

1,868.1
First American Financial Corp FAF 6361 0715 – Insurance (Property & Casualty)

2,648.6
Imperial Holdings, Inc. IFT 6411 0712 – Insurance (Miscellaneous)

86.3
Fortegra Financial Corp FRF 6411 0712 – Insurance (Miscellaneous)

177.3

Now, it makes a lot of difference how dividends are set, and how buybacks are done.? Dividends should reflect a conservative estimate of how much free cash flow that a company is willing to part with.? Buybacks should only be done when it is at a discount to the intrinsic value of the firm.? If you have to distribute capital when the stock price is above fair market value, do a special dividend.

And when capital is dear, stop the buyback, maybe even reduce the dividend, or do a small secondary IPO.? When there are genuinely profitable opportunities to write business take them.

This is yet another reason why insurance stocks tend to trade near book — capital is so flexible that if capital can enter and exit easily, it should trade near book, because capital enters and exits at book, for the most part.

Ignore the extremes, but realize that companies that compound their fully converted book values can be excellent investments.

On Insurance Investing, Part 1

On Insurance Investing, Part 1

Posted on by David Merkel

Shrinking the Share Count

This post was prompted by this post from Avondale Asset Management on how the share count from The Travelers has shrunk since 2005 (two years after their merger with The St. Paul, a company that I once worked for).? Only 57% of the shares remain.? Way to go.

Now, buying back stock is not a panacea.? It is only good when the shares are trading below or not much above fair market value.? What’s fair market value, you ask?? Well, that’s not an easy question to answer in most places, but in insurance, it means around 1.3x book value, adjusting for intangibles that have no economic significance.

Now if a company has some proprietary products, technologies or methods that give it a sustainable competitive advantage, that multiple can rise — AFLAC might be an example of that.? But sustainable competitive advantages in a mature and competitive industry like insurance are rare.? Above the 1.3x book value hurdle, it would be better to do special dividends.

Avondale was spot-on to feature The Travelers.? They are in the upper end of those that bought back shares 2005-2012.? Here’s my list:

Company Ticker Industry % of shares remaining since 2005
WellPoint, Inc. WLP 0706 – Insurance (Accident & Health)

52%
Infinity Property and Casualty IPCC 0715 – Insurance (Property & Casualty)

56%
Travelers Companies, Inc., The TRV 0715 – Insurance (Property & Casualty)

57%
Aetna Inc. AET 0706 – Insurance (Accident & Health)

58%
Employers Holdings, Inc. EIG 0715 – Insurance (Property & Casualty)

59%
White Mountains Insurance Grou WTM 0715 – Insurance (Property & Casualty)

60%
Torchmark Corporation TMK 0709 – Insurance (Life)

61%
Assurant, Inc. AIZ 0709 – Insurance (Life)

61%
Chubb Corporation, The CB 0715 – Insurance (Property & Casualty)

67%
Erie Indemnity Company ERIE 0715 – Insurance (Property & Casualty)

68%
RenaissanceRe Holdings Ltd. RNR 0715 – Insurance (Property & Casualty)

69%
Endurance Specialty Holdings L ENH 0715 – Insurance (Property & Casualty)

69%
Loews Corporation L 0715 – Insurance (Property & Casualty)

71%
Allied World Assurance Co Hold AWH 0715 – Insurance (Property & Casualty)

71%
W.R. Berkley Corporation WRB 0715 – Insurance (Property & Casualty)

72%
Health Net, Inc. HNT 0706 – Insurance (Accident & Health)

72%
Platinum Underwriters Holdings PTP 0715 – Insurance (Property & Casualty)

72%
Allstate Corporation, The ALL 0715 – Insurance (Property & Casualty)

73%
CIGNA Corporation CI 0706 – Insurance (Accident & Health)

75%
UnitedHealth Group Inc. UNH 0706 – Insurance (Accident & Health)

77%
Progressive Corporation, The PGR 0715 – Insurance (Property & Casualty)

78%
Montpelier Re Holdings Ltd. MRH 0715 – Insurance (Property & Casualty)

78%
Verisk Analytics, Inc. VRSK 0712 – Insurance (Miscellaneous)

78%
American Financial Group AFG 0715 – Insurance (Property & Casualty)

80%
StanCorp Financial Group, Inc. SFG 0706 – Insurance (Accident & Health)

80%
Primerica, Inc. PRI 0709 – Insurance (Life)

80%
Investors Title Company ITIC 0715 – Insurance (Property & Casualty)

81%
Hanover Insurance Group, Inc., THG 0715 – Insurance (Property & Casualty)

83%
Coventry Health Care, Inc. CVH 0706 – Insurance (Accident & Health)

84%
RLI Corp. RLI 0715 – Insurance (Property & Casualty)

84%
Kemper Corp KMPR 0715 – Insurance (Property & Casualty)

84%
Axis Capital Holdings Limited AXS 0715 – Insurance (Property & Casualty)

85%
First Acceptance Corporation FAC 0715 – Insurance (Property & Casualty)

86%
Everest Re Group Ltd RE 0715 – Insurance (Property & Casualty)

89%
Eastern Insurance Holdings Inc EIHI 0709 – Insurance (Life)

90%
Prudential Financial Inc PRU 0709 – Insurance (Life)

91%
Horace Mann Educators Corporat HMN 0715 – Insurance (Property & Casualty)

92%
FBL Financial Group FFG 0709 – Insurance (Life)

92%
AFLAC Incorporated AFL 0706 – Insurance (Accident & Health)

93%
Cincinnati Financial Corporati CINF 0715 – Insurance (Property & Casualty)

93%
Kansas City Life Insurance Co KCLI 0709 – Insurance (Life)

93%
Kingsway Financial Services In KFS 0715 – Insurance (Property & Casualty)

93%
HCC Insurance Holdings, Inc. HCC 0715 – Insurance (Property & Casualty)

94%
Unum Group UNM 0709 – Insurance (Life)

94%
EMC Insurance Group Inc. EMCI 0715 – Insurance (Property & Casualty)

95%
eHealth, Inc. EHTH 0712 – Insurance (Miscellaneous)

95%
OneBeacon Insurance Group, Ltd OB 0715 – Insurance (Property & Casualty)

95%
Aspen Insurance Holdings Limit AHL 0715 – Insurance (Property & Casualty)

96%
Unico American Corporation UNAM 0715 – Insurance (Property & Casualty)

97%
Markel Corporation MKL 0715 – Insurance (Property & Casualty)

98%
Safety Insurance Group, Inc. SAFT 0715 – Insurance (Property & Casualty)

98%
Humana Inc. HUM 0706 – Insurance (Accident & Health)

99%
Atlantic American Corporation AAME 0709 – Insurance (Life)

100%
State Auto Financial STFC 0715 – Insurance (Property & Casualty)

100%
A.F.P Provida SA (ADR) PVD 0718 – Investment Services

100%
American National Insurance Co ANAT 0715 – Insurance (Property & Casualty)

101%
Baldwin & Lyons, Inc. BWINB 0715 – Insurance (Property & Casualty)

101%
Mercury General Corporation MCY 0715 – Insurance (Property & Casualty)

101%
Marsh & McLennan Companies, In MMC 0712 – Insurance (Miscellaneous)

101%
National Western Life Insuranc NWLI 0709 – Insurance (Life)

101%
Brown & Brown, Inc. BRO 0712 – Insurance (Miscellaneous)

101%
Selective Insurance Group SIGI 0715 – Insurance (Property & Casualty)

101%
Sun Life Financial Inc. (USA) SLF 0709 – Insurance (Life)

101%
Life Partners Holdings, Inc. LPHI 0712 – Insurance (Miscellaneous)

101%
Aon PLC AON 0712 – Insurance (Miscellaneous)

102%
ProAssurance Corporation PRA 0715 – Insurance (Property & Casualty)

102%
Principal Financial Group Inc PFG 0706 – Insurance (Accident & Health)

102%
First American Financial Corp FAF 0715 – Insurance (Property & Casualty)

102%
China Life Insurance Company L LFC 0709 – Insurance (Life)

103%
Genworth Financial? Inc GNW 0709 – Insurance (Life)

103%
Navigators Group, Inc, The NAVG 0715 – Insurance (Property & Casualty)

104%
National Interstate Corporatio NATL 0715 – Insurance (Property & Casualty)

104%
Amerisafe, Inc. AMSF 0715 – Insurance (Property & Casualty)

104%
Cna Financial Corp CNA 0715 – Insurance (Property & Casualty)

105%
Donegal Group Inc. DGICA 0715 – Insurance (Property & Casualty)

106%
Stewart Information Services C STC 0715 – Insurance (Property & Casualty)

106%
Berkshire Hathaway Inc. BRK.A 0715 – Insurance (Property & Casualty)

107%
Prudential Public Limited Comp PUK 0709 – Insurance (Life)

107%
Willis Group Holdings PLC WSH 0712 – Insurance (Miscellaneous)

107%
Crawford & Company CRD.B 0712 – Insurance (Miscellaneous)

111%
Old Republic International Cor ORI 0715 – Insurance (Property & Casualty)

112%
Molina Healthcare, Inc. MOH 0706 – Insurance (Accident & Health)

112%
United Fire Group, Inc. UFCS 0715 – Insurance (Property & Casualty)

113%
Partnerre Ltd PRE 0715 – Insurance (Property & Casualty)

113%
Protective Life Corp. PL 0709 – Insurance (Life)

114%
Manulife Financial Corporation MFC 0709 – Insurance (Life)

114%
Independence Holding Company IHC 0709 – Insurance (Life)

116%
ACE Limited ACE 0715 – Insurance (Property & Casualty)

116%
Reinsurance Group of America I RGA 0706 – Insurance (Accident & Health)

118%
Citizens, Inc. CIA 0709 – Insurance (Life)

119%
Universal Insurance Holdings, UVE 0715 – Insurance (Property & Casualty)

121%
Phoenix Companies, Inc., The PNX 0709 – Insurance (Life)

122%
AEGON N.V. (ADR) AEG 0709 – Insurance (Life)

124%
Symetra Financial Corporation SYA 0709 – Insurance (Life)

124%
Arch Capital Group Ltd. ACGL 0715 – Insurance (Property & Casualty)

127%
Fidelity National Financial In FNF 0715 – Insurance (Property & Casualty)

128%
Hilltop Holdings Inc. HTH 0715 – Insurance (Property & Casualty)

130%
Arthur J. Gallagher & Co. AJG 0712 – Insurance (Miscellaneous)

131%
ING Groep N.V. (ADR) ING 0709 – Insurance (Life)

135%
Argo Group International Holdi AGII 0715 – Insurance (Property & Casualty)

136%
Seabright Holdings Inc SBX 0715 – Insurance (Property & Casualty)

138%
Global Indemnity plc GBLI 0715 – Insurance (Property & Casualty)

141%
Metlife Inc MET 0709 – Insurance (Life)

143%
MBIA Inc. MBI 0715 – Insurance (Property & Casualty)

145%
Hartford Financial Services Gr HIG 0715 – Insurance (Property & Casualty)

146%
American Safety Insurance Hold ASI 0715 – Insurance (Property & Casualty)

150%
CNO Financial Group Inc CNO 0709 – Insurance (Life)

153%
Universal American Corporation UAM 0706 – Insurance (Accident & Health)

153%
Radian Group Inc. RDN 0715 – Insurance (Property & Casualty)

155%
American Equity Investment Lif AEL 0709 – Insurance (Life)

159%
Hallmark Financial Services, I HALL 0715 – Insurance (Property & Casualty)

160%
Validus Holdings, Ltd. VR 0709 – Insurance (Life)

160%
Lincoln National Corporation LNC 0709 – Insurance (Life)

161%
Enstar Group Ltd. ESGR 0715 – Insurance (Property & Casualty)

169%
Meadowbrook Insurance Group, I MIG 0715 – Insurance (Property & Casualty)

172%
Greenlight Capital Re, Ltd. GLRE 0715 – Insurance (Property & Casualty)

173%
Alleghany Corporation Y 0715 – Insurance (Property & Casualty)

191%
Tower Group Inc TWGP 0715 – Insurance (Property & Casualty)

196%
Alterra Capital Holdings Ltd ALTE 0715 – Insurance (Property & Casualty)

197%
CNinsure Inc. (ADR) CISG 0712 – Insurance (Miscellaneous)

208%
XL Group plc XL 0715 – Insurance (Property & Casualty)

215%
MGIC Investment Corp. MTG 0715 – Insurance (Property & Casualty)

220%
Amtrust Financial Services, In AFSI 0715 – Insurance (Property & Casualty)

259%
Assured Guaranty Ltd. AGO 0715 – Insurance (Property & Casualty)

262%
American International Group, AIG 0715 – Insurance (Property & Casualty)

1265%

On the top side, and I did not see any of these, be aware of reverse splits, which can reduce the share count, are a sign of a badly run company, but do nothing for the economics of a firm, aside from keeping them listed on a major exchange.

On the bottom side, factor in large mergers paid for with shares.? Most large-scale mergers don’t work out well, so I don’t mind those companies being near the bottom of the list.

On a closing note, there is a weak positive correlation in most mature industries between stock price performance and relative decreases in share count, assets, and sales.? This sounds counter-intuitive, but good management teams know when to grow and when not to grow.? They don’t do acquisitions for scale.? They don’t grow sales if the sales growth won’t justify the cost of capital.? Building the assets of the company bigger does nothing for the bottom line; selective asset sales can free up cash for more productive uses.? Good management teams do not build empires — they add when it makes sense (grow), subtract when it makes sense (shrink), divide when it makes sense (spinoffs), and multiply when it makes sense (IPOs, JVs, new projects).

PS –? What does the WSJ have today?? An article on buybacks.? Enjoy.

2012 Financial Report of the US Government

2012 Financial Report of the US Government

Posted on by David Merkel

I have written about this overlooked report for about ten years now.? I feel like a lonely warrior defending a tough location, with little assistance. If I could give a subtitle here, I would call it “Lies of the Past, Present, and Future.”? If I were more poetic, I would call it, “The end of a once Great Nation, Bedeviled with Corruption.”

This report is so despised by the US Government, that they always release it at a time where it will be buried by the news cycle.? This year is no different; they released it near the inauguration.? As an aside, I have talked with a representative from the group that puts this together, and they like me because I publicize it.? They called me to ask for advice on how they can make it better.

I may not be much, but I get 2-3 calls per year from government agencies asking for advice.? I block out at least an hour for them; it’s the least I can do for my country.? The last one from the GAO thanked me profusely.? They said they talked to many other people, but few that made the issues so clear.

Let me give you the first graph:

Excluding the times when new social entitlements were added, or added to the report, the unfunded liability of the US Government tended to increase at a rate of 9%, because less was being contributed to the social insurance programs than was necessary to keep up with the liability.? We have cheated these programs since the beginning, as a political ruse to gain favor for them, and giving a huuge subsidy to all who came before the baby boomers… now the price tag is coming due, and it ain’t pretty.

In the graph above, I attempt to explain two scams of the US government.? They stem from the same source — PPACA (Obamacare).? First, the true cost of PPACA was a lie.? Taxes were front-ended.? Benefits were back-ended.? The net benefit is gone now, and we face the black hole of insufficient taxes to meet benefits.? Second, Medicare was raided by reducing reimbursements, which C0ngress then undoes. There is no true savings, and there can’t be; government almost never produces anything as efficiently as the private sector.? It is normal for government to downplay the initial cost so that the program will be approved.? Once approved, cost overruns are the norm.

As such I expect the liability to grow until it is broken, or until it breaks us.? I am not trying to be a Scrooge, I am just trying to point at what may break the system, and produce a greater heartache.? A broken government is worse than one that does less, but survives.? One who is heartless continues to add liabilities to a system that can’t afford them, e.g., Bush 43 and Obama, rather than doing the tough work of scaling back entitlements so the past promises and the system survives.

In the above graph, what I call alternative Medicare Scenario, is the alternative scenario in the report which is the more likely scenario, which assumes that Congress does not enforce lowered medicare reimbursement that PPACA required (a dishonest aspect of the bill).? The portion called “Obamacare and Redefinitions” is my estimate of assumption changes that reflect an effort to make things cost less that will be undone as the true costs emerge.? No one is trying to be honest here — those writing the report, and the actuaries at the Social Security Administration are doing their best, but the politicians that passed PPACA twisted the math to make it look like a win for the American people, and bit-by-bit, it will be revealed to be a loss.

One more note: I have added into my estimates the “Infinite Horizon Increment,” which adds in the present value of the net value of entitlements beyond 75 years from now.

Here’s my second graph:

Here is where the past gets cheated: as I did this graph, I noted that GDP figures had been revised down from past estimates.? This makes recent growth look better than before, which people care about today, and past growth look worse, which few care about much.? (Note: the adjusted ratio takes out the wishful thinking of the Obama Administration.)

Regardless, watch the upward march of liabilities versus GDP… this is the march of rising promises that will eventually be broken.? Maybe we need a Constitutional Convention to sort this out, because the politicians just keep adding to the problems, and we keep re-electing them.? The US was originally based on a concept of limited government, with most domestic powers granted to the states.? That has been overturned, and over the last 100 years, big government as the protector of little people who cannot fend for themselves has been the policy.

Maybe I should go back to my saying, “Bubbles are predominantly phenomena of finance.? They continue to exist until the asset in question yields less than the liability that carries it.”? We await the moment where the majority of assets no longer trust the US Dollar, which would have been sooner than this, but most major nations have compromised their currencies to satisfy politically important exporters, in this “beggar thy neighbor” world, importing asset bubbles in their wake.

Unsustainable policies are the rule of the day.? I don’t what what will come of them, whether it will inflation or deflation, higher taxes or reduction in spending.? But a day is coming where we will be forced to choose, and under conditions less favorable than if the choices were made now.

Book Review: Benjamin Graham: The Memoirs of the Dean of Wall Street

Book Review: Benjamin Graham: The Memoirs of the Dean of Wall Street

Posted on by David Merkel

I enjoyed this book, but it is not a book on investing.? Here is my rough breakdown of the book:

  • 40% Ben Graham’s childhood
  • 30% Early work experience up until the Great Depression
  • 10% His personal life with family and others.
  • 10% His late-Depression successes in investing up to 1940.
  • 10% His efforts as a playwright and as an amateur economist.

So, here’s my biggest gripe about the book: in many ways, Ben Graham’s biggest days as an investor — his greatest times of success in the 1940s & 1950s don’t get mentioned at all.? I learned more of what he was like in that era from reading Alice Schroeder’s The Snowball.

Should this surprise us?? No.? Ben Graham wanted to live the good life in modern terms.? From his time as a youth, he was hard-working, growing up amid poverty, and he never wanted to be poor as an adult.

He was a very bright guy on many topics.? He was not only studied in the humanities (which he loved more), he was exceptionally good at math.? The book does not describe him in these words, but he was the first hedge fund manager, and the first quantitative investor.

What made Graham a lot of money was realizing that convertible bonds and preferred stocks carried a valuable option that was often undervalued, and so he would buy the convertible security and short common against it.? Strategies like this, plus activist investing, where he uncovered information advantages on undervalued stocks allowed him to become wealthy.

And that was enough for him.? Unlike his more focused protege, Warren Buffett, once the game got too tough, and a pleasant retirement was attractive, he trotted into the sunset, with modest contact with his former friends in investing.

The book does not describe his time teaching at Columbia, nor any of the great investors that he influenced.? Ben Graham was interested in investing, but he was more interested in the humanities, and generally having a happy time.? Thus, if you read this book, realize that it is about a slice of the life of Ben Graham.? The first half of his life comes in great detail.? The last half of his life comes almost not at all.

But this is not an autobiography, it is a memoir.? As such, Graham tells us what he wants to tell us, and leaves the rest unsaid.? He tells us a little about his thoughts on marital infidelity, but does not tell us how his ending companion ended up being his deceased son’s wife.

All that said, we get what Graham wanted to reveal to us.? Janet Lowe’s book on his life is more comprehensive on his later days… even Alice Schroeder gives us more on his later life by accident of covering Buffett.

In summary: this isn’t primarily a book on investing.? It is a book on the thinking of one very bright man who invested and did well, and used the freedom that money brought for his own ends, both for good and for bad.

Quibbles

Already expressed.

Who would benefit from this book:? If you want to know the early life of Ben Graham, this is a great book.? Beyond that, you will be disappointed.? If you want to, you can buy it here: Benjamin Graham: The Memoirs of the Dean of Wall Street.

Full disclosure: I borrowed it from the local library.

If you enter Amazon through my site, and you buy anything, I get a small commission.? This is my main source of blog revenue.? I prefer this to a ?tip jar? because I want you to get something you want, rather than merely giving me a tip.? Book reviews take time, particularly with the reading, which most book reviewers don?t do in full, and I typically do. (When I don?t, I mention that I scanned the book.? Also, I never use the data that the PR flacks send out.)

Most people buying at Amazon do not enter via a referring website.? Thus Amazon builds an extra 1-3% into the prices to all buyers to compensate for the commissions given to the minority that come through referring sites.? Whether you buy at Amazon directly or enter via my site, your prices don?t change.

Expensive High Yield – II

Expensive High Yield – II

Posted on by David Merkel

Near this time in 2012, I wrote a piece called “Expensive High Yield.”? In it I argued that higher quality high yield bonds were overvalued, but that CCCs might still have some play.

Here was my conclusion:

Whether I look at the Merrill High Yield Master 2, BBs, or Bs, junk bonds look expensive.? CCCs look a little cheap.? The yields on the High Yield Master 2 look about 0.8% expensive in terms of yield (that?s the residual in the above graph).? I will be lightening credit bond/loan positions in the near term.? Of course this is just my opinion, so do your own due diligence.

And, please realize that movements in the stock market may swamp my observations.? If the stock market runs, high yield can run further? but there will be an eventual snap-back.?? The bond market is bigger than the stock market, eventually the stock market reacts to bond market realities.

So what happened?? The stock market ran, and all corporate bonds tightened, Investment Grade and Junk.? Yield seeking continued, as people look for ways to earn 4% without undue risk.

But tonight I want to take a slightly different approach than last year, daisy-chaining the overvaluations in the corporate bond market.? I’m using the same data as last time — the indexes are the Merrill Lynch Corporate Yield Indexes as published at FRED of the St. Louis Fed.

The baseline for corporates are the few large AAA issuers.? The first check is whether AAAs are overvalued versus history.? Here are my regression results:

Okay, what this shows is that the concept of spread over Treasuries even at the AAA level is not valid.? The odds that the true coefficient versus the 5-year Treasury is one is minuscule.

This says that spreads on AAA bonds should widen when Treasury rates are low.? It also indicates that the simple model expects AAA yields to be 0.30% higher than they are now.

Perhaps that stems from the actions of the Fed, which they are now perhaps beginning to regret.? There are real costs when you force people to take more risk to get income.

My next step is to consider BBB bond yields as a function of five-year Treasury yields, and the Merrill Lynch AAA bond index yield.

The current environment shows a great deal of desire for yield.? BBB bonds are 0.87% lower than they should be relative to history.? If I used what the earlier model said the AAA yield would be? this would look worse by maybe 0.50%.

Perhaps that reflects the effects of QE as well, but with more vigor, as higher yields get competed down more.

That brings me to the next link in the chain, where I compare Merrill High-Yield Master II versus their BBB index.

Now, relative to where BBB bonds are currently priced, junk bonds are fairly priced versus history.

I would still argue the BBBs are too tight versus history, which means the same for the High-Yield Master.

That brings me to look at the yields on the CCCs.? I played this on two ways.? First, like the way with the high yield master:

In this case, it looks like CCC bonds are still relatively cheap to BBBs.? Let’s try a slightly different specification, because CCC bonds have equity-like aspects far more than BBB bonds.

So why not add in the high yield master?

It doesn’t have much effect on the ultimate result.? CCC bonds still look relatively cheap.? Do I trust this result?? No.

All that said, all of this points to a kind of exponential effect with respect to yields on various bonds with credit ratings.? Bond categories are highly correlated to those that are near them, but often negatively correlated to those a step or two beyond, when regressors are considered as a group.

Summary

All of the corporate bond market is expensive relative to history, perhaps excluding CCC bonds.? That doesn’t mean it can’t get more expensive, particularly if stocks continue to move upward.?? But this won’t last for more than two years; the signs of speculation are here, and that should make us cautious.

As a result, I am investing my bond strategy cautiously now.? What little yield I get comes from emerging market sovereigns.? Credit risk from corporates is small.

Sorted Weekly Tweets

Sorted Weekly Tweets

Posted on by David Merkel

Central Banking

 

  • Records Show Fed Wavering in 2007 http://on.wsj.com/SgLPoG 4 all of their vaunted intelligence, the Fed was worried, but clueless in 2007 $$
  • Three Stages of Fed Grief: Key Quotes From 2007 http://t.co/X4ygwdqU Slowly realized the economy they overlevered was getting worse $$ Jan 18, 2013
  • Fed Concerned About Overheated Markets Amid Record Bond-Buying http://t.co/wDckfD77 The sourcerer’s apprentices note there is a problem $$ Jan 17, 2013
  • Paul Moreno: Gold, Greenbacks and Inflation: A History and a Warning http://t.co/75M1jNRo Ppl forget the degree the Fed has debased $$ Jan 17, 2013
  • Once you turn base money into short-term debt, can you go back? http://t.co/pG3gxBwA @interfluidity ideas getting deserved attention $$ Jan 16, 2013
  • First Shots Are Fired in Global ‘Currency War’ http://t.co/y6GJi0V5 Japan leads “race 2 the bottom.” Who will b first 2 stop sterilizing? $$ Jan 16, 2013
  • Currency Moves? & Central Bank Bravado http://t.co/zt7BI1As Posit that the yen is falling due to war risks & Japan biz risks in China $$ Jan 16, 2013
  • Abe Rocket-Start Lowers Sony Risk With Market Fuel http://t.co/J4cLgQKJ Loose monetary has spillover benefits 2 indebted corporations $$ Jan 16, 2013
  • I’ll grant this: the government always has some role in money, even commodity money like a gold standard… http://t.co/QtVI3oeC Jan 12, 2013

 

Rest of the World

 

  • Pressure Rises on China to Scrap One-Child Policy http://t.co/iDfZ0Ssl No better way 2 have a demographic crisis; change long overdue $$ Jan 18, 2013
  • Default Alarm Rings as Trust Loans Jump Sevenfold http://t.co/2tr1vFnq China is so messed up that it makes the Eurozone look good $$ Jan 17, 2013
  • Singapore Curbs Industrial Property Sales to Avert Bubble http://t.co/vZQhsdya Increases bid-ask spread; can’t fight fundamentals $$ Jan 17, 2013
  • Mongolia?s Erdenes TT Halts Coal Exports to Biggest Buyer China http://t.co/hoTHAxxZ Probably either gross malfeasance or bribery $$ Jan 17, 2013
  • European Dividends Tumble to Four-Year Low as CEOs Hoard http://t.co/D6YdzVqD Favor European Exporters over their Domestic companies $$ Jan 17, 2013
  • Euro at 10-Month High Poses Economic Threat, Juncker Says http://t.co/bk0FsVEE The #currencywars continue. Rule: Beggar thy neighbor $$ Jan 17, 2013
  • Russia Says World Is Nearing Currency War as Europe Joins http://t.co/OvVu0ZMH Accept export slowdown? Monetize debt? Stupid QE-like stuf? Jan 17, 2013
  • Rio Tinto CEO Steps Down http://t.co/lqWyRPES Every CEO should have etched on his wall: “Paying up 4 scale acquisitions is dumb” $$ $RIO Jan 17, 2013
  • China Capital Flow: Foreign Direct Dis-Investment http://t.co/V8erkuxL Foreign inv’t inflows falling, domestic inv’t outflows rising $$ Jan 17, 2013
  • China Starts Losing Edge as World’s Factory Floor http://t.co/pG7uOFqX SE Asia benefits as China becomes more expensive 2 operate in $$ Jan 16, 2013
  • Norway Sees Deeper European Job Pain as Default Fears Recede http://t.co/ztbfvp0H Rising NOK makes exports less competitive &fewer jobs $$ Jan 16, 2013
  • Often when FX vols spike it means something might break, like the SNB not able continue its EUR peg. But if… http://t.co/fydAlRSX Jan 16, 2013
  • HSBC needs 2 end its Ping An silence with simple answers http://t.co/8xVAWiHD much alleged insider deal information has been circulating $$ Jan 14, 2013
  • Mainland alchemists turn damaged zinc into solid gold http://t.co/W4zu69k7 An example of how Chinese banking system papers over bad debts $$ Jan 14, 2013
  • Rumor: large backlog of Chinese companies want to IPO, but having hard time slowing the required 2 years of rising earnings $$ Jan 14, 2013
  • Neighbors Grow More Wary of China http://t.co/aYMUvLs2 Ex-pat Chinese moving in, looking a little graspy w/respect to resources, etc $$ Jan 14, 2013
  • Mineworker Debt Mounts as South African Lending Booms http://t.co/hTkXyCTc There are few places in the world without debt overages $$ Jan 14, 2013

 

Market Impact

 

  • Deutsche Bank Derivative Helped Monte Paschi Mask Losses http://t.co/PeqTdPBT Bad investing led to losses 2 hide. Enter Deutsche Bank $$ Jan 17, 2013
  • reaching for yield http://t.co/zFaWCA7h @researchpuzzler notes tight junk spreads, but + Ed Meigs & Dan Fuss r ?naysayers on junk credit $$ Jan 17, 2013
  • Short-term Debt and Financial Crises: What we can learn from US Treasury Supply http://t.co/UG1RvuHm Qty issue ST fin’l sector debt->crisis Jan 17, 2013
  • 22 Insights From The Most Successful Investors In History http://t.co/4u3QVRJL Very nice assemblage of quotes from the best investors $$ Jan 16, 2013
  • [Will] the Bond Bubble Finally Burst? http://t.co/1c7hOX4W Synthesis of a variety of views: Yes, but not in the short-run… $$ Jan 16, 2013
  • FINRA to brokers: know your high-yield securities http://t.co/DJHC5NvT Intelligent words from FINRA; b able2show clients all possibilities Jan 16, 2013
  • The High Yield Market is “Completely Out of Control.” http://t.co/GBUfGOa9 Watch risky debt buyers; c if they need things 2go right2survive Jan 16, 2013
  • Gold Forecasters Splitting on Peak for Bull Market http://t.co/EIEgk2Al Most-accurate gold forecasters>price will probably peak in 2013 $$ Jan 16, 2013
  • Whatever Happened 2 Good, Old-Fashioned Accountants? http://t.co/aFofQ4Mv @retheauditors explains y basic blocking&tackling go a long way $$ Jan 17, 2013
  • Yale May Buy More Hedge Fund Assets After Favoring Cash http://t.co/D0cP9LDV Timing feels wrong here w/credit spreads tight & vol low $$ Jan 16, 2013
  • Baupost Group Sitting On 116% Return From Madoff Claims http://t.co/u4MYuhJI Bankruptcy judge said ?seller?s remorse,? denied his effort $$ Jan 16, 2013
  • Leeway on Repo Rules Is Cut Back http://t.co/B16EXZfR “…we’re basically saying all repos should be accounted for as borrowings,” $$ Jan 16, 2013
  • Inside the Self-Driving Index Funds That Finish First http://t.co/XPEfHyE4 @jasonzweigwsj $BLK low fees, shares sec lending revenue $$ Jan 15, 2013
  • How2use Twitter & Facebook 2 make $$ from shares http://t.co/lXXw321E Just watch: this causes the next ‘flash crash’ h/t: @abnormalreturns Jan 14, 2013
  • KRS Spin Machine Is Smearing The Truth Again http://t.co/VGGSkxHX Kentucky Retirement Systems does not use RFPs -> “pay to play” @ KRS $$ Jan 14, 2013
  • US Not So High Yield Bonds : “It’s Starting To Feel A Lot Like 2007” http://t.co/QUGhAMqC Will supply grow, or will misfinancing start? $$ Jan 14, 2013
  • SP500 Revisited – Testing 1484/1500 zone and reversal after? http://t.co/8TMktTjD Argues for a correction in stocks in the near term $$ Jan 14, 2013
  • Hedge-Fund Leverage Rises to Most Since 2004 in New Year http://t.co/rwFVhRmz H0: flexible $$ overallocated to stocks now> correction due Jan 14, 2013
  • 39% of Fund Managers Beat the S&P in 2012 http://t.co/xRx3Juik It was a growth year & not a value year. 48% would b the 10-yr average $$ Jan 13, 2013

 

Billionaires

 

  • I suppose Bloomberg could write a book about hidden billionaires, and call it “The Billionaire Next Door.” http://bloom.bg/WN9Jo8 ?#yeah $$
  • Erie Billionaire Hagen Revealed as Car Premiums Surge http://t.co/BsMEp8gu $ERIE interesting company w/a unique asset-lite biz model $$ Jan 17, 2013
  • Hidden Billionaire Milking Saudi Dairy Fortune in Desert http://t.co/XAoRKBRp Bloomberg likes ‘outing’ obscure billionaires like this $$ Jan 14, 2013

 

Personal Finance

 

  • Why you can?t avoid dumb 401(k) mistakes http://t.co/fffPsn0k Plan sponsors chase hot managers & avoid passive options $$ Jan 16, 2013
  • Behind the indexed annuity curtain http://t.co/Qo7RdSX9 Avoid. Surrender charges r long & high 2pay commission; opaque int crediting $$ Jan 16, 2013
  • One in four savers has 401(k) ?leakage? http://t.co/TRBsFfwx Retirement seems far away, but $$ needs r near, so ppl tap their 401(k)s Jan 16, 2013
  • Seven Resolutions to Get Your Nest Egg in Shape http://t.co/cqNqpxJF Good basic advice 4 ordinary people taking care of the nest egg $$ Jan 16, 2013
  • E-Filing and the Explosion in Tax-Return Fraud http://t.co/9SAE6oPL Identity theft; 1 reason y I do it myself & file on paper $$ Jan 14, 2013
  • Housing Problems: Where To Get Help http://t.co/3hrCyQFy @retheauditors gives advice to those having issues with foreclosures $$ #goodstuff Jan 13, 2013

 

Banks and Investment Banks

 

  • More Ideological Excuse Making for Bad Banks http://t.co/0wjkQq3n It takes two to tango; it takes two to make a loan. Both deserve blame $$ Jan 17, 2013
  • A tempest in a spreadsheet http://t.co/W2mwYeHO A reason y having robust “smell tests” r needed when mathematical models get complex $$ Jan 17, 2013
  • Mortgage Nanny Added to Lender Job Description http://t.co/nRRonPBL Caveat Emptor:May make probs worse by creating illusion of safety $$ Jan 17, 2013
  • Wells Fargo to Start Jet-Leasing Venture http://t.co/a0FwgcNn FD: + $WFC | I like the fact that theyr starting small #organicgrowth $$ Jan 17, 2013
  • Jefferies Sets Table in Pay Clash http://t.co/s6utAuEy Or, they could jump 2 $JEF soon 2b $LUK. $$ motivates better, but conflicts occur Jan 16, 2013
  • Bankers Get IOUs Instead of Bonus Cash http://t.co/fKrpWXZL Will tie employees more tightly, unless they jump to related industries $$ Jan 16, 2013
  • Report of $JPM Management Task Force Regarding 2012 CIO Losses http://t.co/i7x0Ifi4 [132pp PDF] If interested in $JPM, summary in 17 pgs $$ Jan 16, 2013
  • Municipalities Should Ditch Wall Street Derivatives Deals http://t.co/Jqmgjllk If Wall St is on other side of table, watch your wallet $$ Jan 16, 2013
  • Banks say new agency’s oversight is slow, costly http://t.co/aHIGFRUh Banks pine away over the regulatory laxity they had 6-10 years ago $$ Jan 16, 2013
  • Goldman?s ?Secret? Team Shows Volcker?s Folly http://t.co/fovIyDRf Difficult to stop prop trading, better 2 remake I-banks partnerships $$ Jan 14, 2013
  • Bank Deal Ends Flawed Reviews of Foreclosures http://t.co/7DoTN8yA absurd, $$ will b distributed w/little regard 2 who was actually harmed Jan 13, 2013

 

Economic Policy

 

  • Portfolio Manager Creates Dazzlingly Deep Presentation On What’s Really Going On With The US Economy http://t.co/vcRHWwEe Long but good $$ Jan 17, 2013
  • Obama Finds Path to Congress Deals Goes Through McConnell http://t.co/B763HV1u Give him his due; has a nose that can sniff out deals $$ Jan 16, 2013
  • The Next Tax Increase http://t.co/7beI2QUO What the US Govt has belongs 2 the US Govt. What belongs 2u is subject 2 negotiation $$ Jan 16, 2013
  • Swap the Debt Ceiling for a Rule That Makes Sense http://t.co/NVYjvTD8 Maybe limit total liabilities of US Gov’t to 2x GDP? Way past that Jan 16, 2013
  • Why U.S. might be ?a nation of deadbeats? http://t.co/UuOHrKlt Consumers have been paying down debt, but walking away from more $$ Jan 16, 2013
  • A Credit Downgrade Warning Both Sides Should Listen To http://t.co/TbB3Gbdn Rating agencies r more honest than US Govt. Fitch may d/g US $$ Jan 16, 2013
  • Treasury Bill Rate Curve Inverts Amid Debt-Ceiling Showdown http://t.co/0KOQqC7A Bill curve showing some inversion due 2 debt ceiling $$ Jan 16, 2013
  • Money-Printing Will Lead to an Inflation in Another Guise http://t.co/erqP71P7 Debt overload & slack capacity short circuit credit growth $$ Jan 16, 2013
  • Two Warning Signs for Treasuries http://t.co/BdAcNkHE “yield curve btw 2&10 years is starting to steepen” Resistance 2 neg real rates up $$ Jan 16, 2013
  • TIPS Implied Inflation 4 2018-22 rose over 2012; flat now http://t.co/R28O77bX 2014 Inflation rising http://t.co/VCfupYLT $$ Fed target 2.5% Jan 16, 2013
  • US states flirt with major tax changes http://t.co/EnZmtggx Red states moving toward sales & away from personal/corporate income taxes $$ Jan 14, 2013

 

States & Municipalities

 

  • California, Unsaved, Speeds Toward a Wall of Debt http://t.co/pyrObgbr Constants in life that r not comforting: gimmicks in CA budget $$ Jan 17, 2013
  • California Could Be the Next Shale Boom State http://t.co/r0QChYDh Energy could flow from the Land of Squandered Advantages $$ Jan 16, 2013
  • Pension Funding Gap Widens for Big Cities http://t.co/a76JAJT0 Expect 2c many fights where bens cut 4 new, active & retired employees $$ Jan 16, 2013

 

Companies

 

  • Suitors Interested in H-P’s Autonomy, EDS Units http://t.co/AXdvxjei Wouldn’t put 2 much into this; $HPQ won’t get good prices $$ Jan 16, 2013
  • Genworth Shares Soar Amid Plan for Mortgage Insurer http://t.co/Jqmgjllk $GNW moves deck chairs on the Titanic; rewarded for now $$ Jan 16, 2013
  • Chevron Signs Deal for More Oil Exploration Acres Off China http://t.co/Yqb7yY7g FD: + $CVX smiles as it rides the tiger $$ #risks Jan 16, 2013
  • My Favorite Tobacco Stock Is Intel? http://t.co/Wupvh1qk @CharlesSizemore explains y it should deliver returns, amid hatred $$ FD: + $INTC Jan 16, 2013
  • TNT Left at Altar Gets No Immediate FedEx Deal http://t.co/QSdDHarC “FedEx in a good position to wait this out & let TNT come to them.” $$ Jan 16, 2013
  • Latest IPOs Arrive In The Form of New MLPs http://t.co/cq7XuIKv All of the new MLPs r energy-related $$ Jan 14, 2013
  • ARM CEO East Says Phooey to the ?Transistor Cliff? http://t.co/wfiIeQau Cost, speed, & power use r the key factors 4 logic chips $$ Jan 14, 2013

 

Miscellaneous

 

  • Davos Pitch for Dynamism Rams Into End-of-Growth Debate http://t.co/1bNvkwD7 I don’t think growth is ended, but bad finances interfere $$ Jan 17, 2013
  • Global Piracy @ 5-Yr Low http://t.co/YgJlRQSh 2012: Pirates boarded 174 ships globally v 439 in 2011, people taken hostage 585<-802 $$ Jan 16, 2013
  • NRA Labels Obama Hypocrite on Guns for Child Protection http://t.co/DqIsubsA Administration doesn’t like the argument; hits close 2home $$ Jan 16, 2013
  • Kidnap insurers eye sales as euro crisis bites http://t.co/w5CfiwOe Stable rates: More competition, & armed guards 4 sea transport $$ Jan 16, 2013
  • Mathematicians coming of age to become the most sought after professionals http://t.co/thXJdgsS Nerds of the world unite! Big data 2analyze! Jan 16, 2013
  • The Margin Debate http://t.co/zE6p5oO1 Labor share of US GDP has fallen because growth in the global capitalist labor force, wages fall $$ Jan 13, 2013

 

Financial Blogging

 

  • Your guide 2the financial blogosphere http://t.co/9mkoln2n Comprehensive list of finance bloggers. I’m listed under “Trading & Investing” $$ Jan 14, 2013
  • What are the 100 Top (Anglo-Saxon) Finance Blogs? A Pseudo-Scientific Study http://t.co/I9UU32zP I ranked higher than I expected 🙂 $$ Jan 14, 2013
  • The purpose of this site http://t.co/Bp4sqw5o @reformedbroker ‘s excellent piece on how his blogging helps him think & invest better $$ Jan 14, 2013

?

Painting Kate Middleton

 

  • @judehere Perhaps this then? http://t.co/hstcUqPq Jan 16, 2013
  • @judehere That’s okay. You say he painted the Queen? That’s interesting. Is there an image of that out on the web? Jan 16, 2013
  • ‘ @judehere She seems to be a nice lady, so I wouldn’t be a fan of that. But Freud died in 2011, so the possibility is not there. Jan 16, 2013
  • But this portrait of Kate Middleton is worse in my opinion http://t.co/LBMKplpo No wonder only 19% like it. (2/2) $$ Jan 16, 2013
  • Learning to draw, I copied a photo of a friend w/pencil. Another friend said “You took a very pretty girl, & turned her in2 pretty girl” 1/2 Jan 16, 2013

 

 

Michael Pettis

 

  • Pettis: What I will watch in 2013: 10 things: hard commodity prices, trade numbers, Spanish Bonds, Target 2, & Japan (2/2) $$ Jan 14, 2013
  • Pettis: What I will watch in 2013: 10 things: China growth, Debt trajectory, financial scandals, bank activities, inflation (1/2) $$ Jan 14, 2013
  • Pettis: Imbalances can continue for many years, I argue, but at some point they become unsustainable & the world must adjust by reversing $$ Jan 14, 2013
  • Pettis: Policymakers do this by shortening their time horizons &managing from crisis2crisis, rather than sorting out the underlying problems Jan 14, 2013
  • Pettis: policymakers… taking steps that protect them from the consequences of the crisis but that also make the crisis worse. $$ Jan 14, 2013
  • Pettis: It is interesting that policymakers are so pleased by an end (temporarily, I assume) to the financing crisis. $$ Jan 14, 2013
  • Pettis:We ended 2012 in a burst of optimism for Europe, w/everyone cheering Mario Draghi 4having ?saved? the euro, but I am deeply skeptical Jan 14, 2013

 

Wrong

?

  • Wrong: How to Find a Fund Manager Who Can Beat the Market http://t.co/2Nq1Z9b2 Doesn’t understand difference btw correlation & beta $$ Jan 15, 2013
  • Wrong: US Budget : Federal finances continue to improve http://t.co/HKzv6pLK It is a *spending* problem that started w/Bush 43, not revenue Jan 15, 2013
  • Wrong: Municipal Bonds May Not Be Safe From Income Taxes http://t.co/MnIQIdor Would be a big shift, hit blue states hard. Won’t happen $$ Jan 14, 2013
  • Wrong: Chris Hayes’ Brilliant Explanation Of Money Is One Of The Best Things We’ve Ever Seen On TV http://t.co/e0kxN5oZ #goldstandard $$ Jan 13, 2013

 

Comments and Retweets

?

  • Good night. Blessings to all. Jan 18, 2013
  • @cogent_rambling Think of judges in a court. No one will forgive a man for doing wrong in one area, because he has done good in others Jan 18, 2013
  • @cogent_rambling It’s not a question of weakness but wrong. Divorce your wife for no good reason, cheat at your craft, all amounts 2 wrong Jan 18, 2013
  • @cogent_rambling Good question. God created Lance with a weakness. If Lance had trusted God, he could have overcome it, but he didn’t. Jan 18, 2013
  • @cogent_rambling Not those that are God-given. Mt 5:48: “Therefore you shall be perfect, just as your Father in heaven is perfect.” Jan 18, 2013
  • @cogent_rambling One last point: in the view of Jesus is there is no balancing. The least amount of evil poisons any good. Jan 18, 2013
  • @cogent_rambling Read some of the writings of Kahneman & Tversky. Bad things have 3 times the force of good things. Good doesn’t erase bad Jan 18, 2013
  • @cogent_rambling Okay, I get it. But doing good things does not erase bad things. Doing things that are notably bad tarnishes anything good. Jan 18, 2013
  • @cogent_rambling I have heard the word as a part of popular culture, but have no idea what it is beyond a phrase. Jan 18, 2013
  • @cogent_rambling Okay, I’ll bite. His charitable endeavors, but what else? Jan 18, 2013
  • @sallyeastman1 Well said Jan 18, 2013
  • My view: Lance Armstrong is best ignored. Close the browser window, change the channel on the TV, he will go away. I don’t care about him $$ Jan 18, 2013
  • @AboveAvgOdds Off to meet w/u & Chris Mayer in downtown Baltimore Jan 17, 2013
  • Endorse. I have read over half of these $$ RT @TheStalwart: The 22 books that Dylan Grice says you must read. http://t.co/QSOWvuBc Jan 17, 2013
  • @graemehein good point, but most simple models have obv intuition. Complex models have more potential 4 error b/c of 2nd+ order effects $$ Jan 17, 2013
  • @cate_long Others that did the same in 1994: Piper Jaffray’s Institutional Gov’t Income & FPA’s Fundamental US Gov’t Strategic Income funds Jan 17, 2013
  • @cate_long Combined w/levering them, and not having the mathematical savvy to price them right http://t.co/5vkUxgO6 Story near the bottom Jan 17, 2013
  • @cate_long Cate, you’re right, I’m wrong. At the time, David Askin & those like him were notable. W/Citron it was mostly structured notes Jan 17, 2013
  • @kirstensalyer Sorry, that honor belongs to the first quantitative hedge fund manager, Ben Graham, who was doing that in the 1920s Jan 17, 2013
  • @cate_long Also used complex RMBS. There was kind of a contest 2c how much negative convexity one could absorb in exchange 4 yield Jan 17, 2013
  • RT @maxrudolph: #unintendedconsequences when pension regs set up EA designation cut off practitioners from ALM development. Still catchi … Jan 17, 2013
  • Well done $$ RT @LaurenLaCapra: Jim Chanos talks to @Reuters about Herbalife & whether Ackman or Loeb will win out: http://t.co/sV7B604o Jan 17, 2013
  • @finsovet @prieur @vitaliyk Honored 2b included in such a group Jan 17, 2013
  • Think this analysis is correct, but uncertain $$ RT @mickwe: 3D printing is a lot of hype and it’ll never go mainstream http://t.co/8wkr5oxp Jan 17, 2013
  • I just left a comment in “7 gut checks before the stock market?s opening bell” http://t.co/MrSqVXZF Jan 17, 2013
  • @niubi If so, good for him. He revolutionized my economic thinking with his last book. Looking forward to the next one. Review copy coming Jan 17, 2013
  • +1 RT @dpinsen: Paging @TomFriedman: comment on How a ‘model’ employee got away with outsourcing his work to China http://t.co/wukYAV8T $$ Jan 17, 2013
  • +2, scrap IFRS RT @Alea_: +1 Britain should scrap IFRS accounting standards, MPs told http://t.co/woWmyC2v Jan 16, 2013
  • @oddballstocks very different mindsets; marketing and operations r different from finance, which is still different from investing Jan 16, 2013
  • @oddballstocks I did that as well from 1992-1998. Tried very hard to select non-name-brand mgrs w/durable competitive advantages Jan 16, 2013
  • ‘ @ClayNickel It depends on how equitylike the bonds r, & the financing composition of the holders. If the bonds r financed w/sig debt.. $$ Jan 16, 2013
  • RT @Matthew_C_Klein: The big deal about the German gold story isn’t that they’re taking some of it out of NY but that they’re moving *al … Jan 16, 2013
  • RT @Matthew_C_Klein: @izakaminska has a thoughtful take on the base money debate between @interfluidity and @NYTimeskrugman http://t.co/ … Jan 16, 2013
  • ‘ @joshuademasi Good point. After all, most nations would love to swap for Norway’s economic situation. $$ Jan 16, 2013
  • @earwulf Good insights both. We live in “interesting times” in the full meaning of the Chinese curse Jan 16, 2013
  • @ReformedBroker Rieder is a bright guy, as is my friend Ed Meigs at First Eagle; HY is okay for the short run, but 2 years out… $$ #Boom! Jan 16, 2013
  • @earwulf Yes Jan 16, 2013
  • @earwulf No, I don’t really find them persuasive. I do think that some Central Bank will stop sterilizing asset purchases, start new phase Jan 16, 2013
  • @JacPatterson I thought about that too, & think he really meant “English Language” Finance Blogs Jan 15, 2013
  • “But that also means you have to keep more $$ around if the puts get exercised, which Buffett had & many don’t.” http://t.co/uEIRn5i3 Jan 15, 2013
  • @joelight @spbaines the paragraph that starts ‘To screen out such “closet indexers,”‘ is factually wrong, does not understand statistics Jan 15, 2013
  • @joelight @spbaines I’m not arguing w/R2 as a proxy for active share, though there r better measures; article says correlation, means beta Jan 15, 2013
  • +10 Mmmmm… RT @dpinsen: Bresaola, lemon, olive oil, Parmesan, and basil joining forces for a great sandwich. http://t.co/pMMVmoI5 Jan 14, 2013
  • @abnormalreturns I’ve run into a *lot* of people trying to do this. Some are cleverer; not sure how it will work out… Jan 14, 2013
  • @JayLeonard but gold does control inflation and limits the government’s ability to use monetary policy for its own ends Jan 13, 2013
  • @JayLeonard Much of the difficulty is not gold vs not gold, but how banks were regulated — short liabs carrying long assets Jan 13, 2013
  • @GuldbergPeter Thanks, though I have heard that Canada *may* have issues. Jan 12, 2013
  • RT @GuldbergPeter: “@AlephBlog: Is there anyplace in the world that hasn’t overlent on real estate? Sweden, Canada and actually to some … Jan 12, 2013

?

FWIW

?

  • My week on twitter: 40 retweets received, 1 new listings, 67 new followers, 65 mentions. Via: http://t.co/SPrAWil0 Jan 17, 2013
Penny Wise, Pound Foolish

Penny Wise, Pound Foolish

Posted on by David Merkel

Some of the dumbest things I have seen in my life inside corporations revolve around incompetent managers, who don’t have the foggiest idea how to grow value organically, and use a variety of shortcuts or cheats to give an illusion of creating value by doing nothing.? I have given a few examples in these two articles:

Here are some more examples:

Some acquirers tend to despise the employees of firms that they acquire, and assume there is a lot of fat to be cut.? So it was that a client that I managed assets for that was acquired by a British company.? A few months after the acquisition the client firm announced that they were firing half of the accountants, and all of the accountants dealing with investing.? I went to the management of the firm that was a new client of ours and expressed my concerns, saying that they would lose all customization and control of results by outsourcing investment accounting — it could never be as responsive as retaining “in-house” staff.? Also, firing half of the remaining accountants would lose a lot of local knowledge where systems are deficient and need “hand holding’ with regular adjusting entries to make sure the accounting was correct.

In this example, the investment accountants were actually quite good, though their leader did not present well.? I had a good relationship with him and his staff, and helped them find new jobs, much as I hated to see them go.? I did the same for some of the other accountants that were let go, since I interacted with some of them as well.? It almost seemed like the new client wanted to eliminate all of the accountants with special long-term knowledge of the business, and retain the cheaper ones with less institutional knowledge/tenure.

As it was, my dealings with the new heads of financial reporting left me scratching my head, wondering why the new guys were a “trade up.”? They seemed to understand the issues less well than those they replaced, but were advertised to be really bright.? Okay, lost on me.

I relayed my concerns to my bosses, and they said, “Not much we can do.? We have the same ultimate parent company, but they’re not geared toward taking feedback at what would be such a micro level for them.? Let’s just watch and see what happens — if it is as bad as you think, it should materialize in six months or so.”

As it was, my bosses were right, and so was I.? For the first six months after the accounting change, profits were astounding.? The new management team was patting itself on the back, certain that their decisions were leading to greatly improved profitability.? (As an aside, I remember sitting through interminable meetings where new accounting software was being introduced. The old stuff was not good enough.)

Then came the year end audit, and new internal auditor plus new external auditors questioned accruals produced by the new outsourced investment accountants.? I was asked what the right approach was for accruing income on some obscure fixed income security.? Belying their cheap cost, the new investment accountants did not make the correcting entries into the system that the old accountants had, leading to a massive over-reporting of income.? Far from being more profitable than the past, it was far less profitable, despite all of the firings in accounting.

This was the first comeuppance of many for an untalented management team that eventually all got fired, as well as the ultimate CEO of the firm that trusted them, and invested a lot of money into that subsidiary.

Warnings to the wise: always analyze your profit margins in a competitive industry, and if results seem too good to be true, don’t accept them, push back and look at all of the squishier accrual items to see if there is an error.? Bad management teams accept good results without question, and criticize bad results always.? Good management teams criticize unusual results, whether good or bad, but bias income to the low side of fair, allowing small positive surprises to emerge.

Then there was the time where an insurance company that I worked for bought out a smaller company, and the hidden price of the deal was that the new CEO would be the CEO of the acquired company in a year.? Bad move.? The guy was an accountant, and his only means of “adding value” were cutting employees, and skimping on squishy accrual items.? While he was CEO, I kept track of how mach GAAP income outpaced my adjusted Statutory income, which should have been close to GAAP.

The CEO had a fragile personality as he did this, emphasizing that the team he had assembled (loyal, but less competent) was highly ethical.? As it was, the CFO tried to find ways to convert capital gains into regular income for GAAP but not tax purposes, which maximized ROE, which was the largest contributor to management bonuses.? They were even the first ones to try an unusual derivative marketed by Morgan Stanley — bull/bear notes, as they were called. It was a bond that would split in two after a certain trigger, leading to two bonds — one with a premium income that would be held, and one with a discount income that would be sold for a capital loss.

Sadly, the company had a hard time evaluating the offer, until they approached me.? (Here is where ability conflicts with ethics.)? The chief actuary (via the Peter Principle, but true of all of that management team) showed me the derivative, and I said, “Oh, that’s easy.”? I told him I would have results by the next morning, and it was 4PM already.? I took it home, worked on it through the evening, and the next day presented the result.

I told him that the math worked mostly, but that if the US Treasury applied anti-abuse rules, it would be invalidated.? I also told him that I didn’t think the transaction was ethical, because restructuring merely to avoid tax, and change the GAAP statement impact had no economic substance.

He ignored my warnings, and so I found myself a week later presenting before all of the leading managers of the company the details of the transaction to be.? (Before that, I talked to the instigator of the idea at Morgan Stanley, and showed him errors in his spreadsheet.? Do not assume that investment banks are infallible.? Also, don’t assume that actuaries or any quants are infallible.? They are human too, and subject to their own biases.? People often shout the word “science” when they are the most weak.)

I told them that I thought the idea was not ethical, but that it would do what was promised.? They were happy with that.? I was already known to be opinionated, though my results were very good.? That poisoned me with senior management which prized loyalty over truthfulness.

Two months later, I was working with a new firm, and the boss came to me and said, have you ever heard of bull/bear notes?? I roared with laughter, and puzzled, he looked at me and I said, “Heard of them?? I corrected their models!”

It should have been a warning sign because our client (the same as mentioned in the first story prior to the acquisition) was willing to consider such garbage in order to increase operating income.? Good managements don’t go for gimmicks.? Going for gimmicks means you aren’t focused on real organic growth.

So, we started in on a new transaction.? The rep from Morgan Stanley was surprised to talk to me again.? Very easy to do, because I knew the model as well as he did, or maybe better, much as I did not like it.

I went through the same schtick with the new client, but they were determined to do it no matter what.? I still remember being in a dim conference room with my boss, when FASB’s EITF [Emerging Issues Task Force] disallowed the transaction going forward, and required all of those that had done it do disclose the results in a footnote.? (Only one company had done it, my prior employer.)

-==-=–=-=-=-==-=–==-=-

The company that actually executed the bull/bear note eventually sold itself to another firm.? While I was working as a buy-side insurance company investment analyst, I got to meet the CFO of the company that bought them.? I said to him, “Would you like me to tell you the history of how this came to be?”? With a grim face he told me no.? It was a thing of pain, but he did not want to know the truth.? He kinda knew it already, and simply absorbed the loss.

With Epictetus, I can tell you that the truth will set you free.? Lies always constrain.? With Jesus, I can say, “You will know the truth, and the truth will set you free.”? This is far more personal, and useful, because Jesus himself lives to teach and protect his own. He is the Truth.

To all, I say, be wary of management teams that control results overly — this seems to be more common in finance, where results are harder to judge.? Finance is all accruals, which makes results ephemeral.

But good managers of financials are conservative.? That is the thing to look for in financials.? If my two examples above are not enough, it is not wise to buy financials that offer growth, because it often stems from scams, not real growth.

I have seen my share of fakers in this life in financial company management.? Be wary when you invest in financials; there is a reason why they are separate from industrials and utilities.? They are less reliable, particularly in time of stress.

So, to investors that care about what they invest in:

  • Analyze acquisitions — most aren’t good
  • Scrutinize accounting — most of the devils lie in accrual entries
  • Analyze management, if you can — understand their ethics, or lack thereof

I’ve written too long, but consider what I have said for your own good.? It will help you.

Hit the “Defer” Button, Thanks…

Hit the “Defer” Button, Thanks…

Posted on by David Merkel

Long-time readers know that I am a fan of Michael Pettis.? I learned a ton from his book, “The Volatility Machine.”? (I have the top review of his first book at Amazon.)

I am quoting from his recent email, “What I will watch in 2013.”

Quoting what I can legally do from his recent e-mail, Michael Pettis says (my emphases are in bold italic):

We ended 2012 in a burst of optimism for Europe, with everyone cheering Mario Draghi for having ?saved? the euro, but I am deeply skeptical. As far as I can tell nothing substantial has changed, and if countries like Spain are a little more able today to roll over their debts than they had been during the summer, so what?

It is interesting that policymakers are so pleased by an end (temporarily, I assume) to the financing crisis. One of the regular features of sovereign debt crises, and one amply revealed in Beth Simmons book on the 1930s crisis in Europe, Who Adjusts?, is that one of the complicating factors in a crisis is the tendency of policymakers (along with workers, creditors, small businesses, and middle class savers) to change their behavior in response to a crisis by taking steps that protect them from the consequences of the crisis but that also make the crisis worse. Policymakers do this by shortening their time horizons and managing from crisis to crisis, rather than by sorting out the underlying problems. The fact that Spanish policymakers are so relieved by their ability to
access near-term financing may be a case in point. It is easy to see why the worry so much about getting through the next bond auction, but at the end of the day this is not Spain?s real problem.

….

One way or the other, in other words, the world will rebalance. But there are worse ways and better ways it can do so. Large trade surpluses can decline, for example, because exports fall, or they can decline because imports rise. Large trade deficits can contract under conditions of high unemployment, but they can also contract under conditions of low unemployment. Low savings rates can rise with declining household income or with rising household income. Repressed consumption rates can reverse through collapsing growth or through surging consumption. Excessive debt can be resolved by default or by growth.

Any policy that does not clearly result in a reversal of the deep debt, trade and capital imbalances of the past decade is a policy that cannot be sustained. The goal of policymakers must be to work out what rebalancing requires and then to design and implement the least painful way of getting there.? International cooperation, of course, will reduce the pain.

For this reason I have no doubt that over the next few years we will see the imbalances I have identified over the years in this newsletter reverse themselves, but whether they reverse in more orderly or less orderly ways will depend on policy decisions. It is likely to be political considerations that determine how quickly the rebalancing processes take place and whether they do so in ways that set the stages for future growth or future stagnation.

When there is too much debt, and things aren’t going wrong it could be an unusual perching on a mesa.? The room to adjust is limited, and the cliffs are steep.? China, as much as the US, has a tangled financial system. Too much much lending from banks to nonbanks.? Too much lending to Party Members.? Too much creation of Wealth Management Products, which threaten the legitimacy of financial capitalism inside China.? I would rather be in the US than China if I were an average person — the protections in the US are much better.

As it is, central bank bureaucrats can lower interest rates for the banks, but it does not really cure the bad debt problem, because after a bout over overlending, there will be some that could not repay even if interest were reduced to zero.? In one sense, that is the reality behind the zero bound.? After a bull market in credit, the bear market will involve some companies/people who borrowed so much that the principal cannot be repaid even at zero interest.

The action of central banks at the zero bound may allow those that are well-off to become better-off and increase their well-being.? But monetary policy cannot help those that can’t refinance.

This is why I believe that the biggest issue in restoring prosperity globally, is finding ways to have creditors and stressed debtors settle for less than par on debts owed.? Move back to more of an equity culture from what has become a debt culture.? A key aspect of that would be making interest paid non-tax-deductible for corporations, housing, etc., while making dividend payments similar to REITs, while not requiring payouts equal to 90% of taxable income.? Maybe a floor of 50% would work, with the simplifying idea that companies get taxed on their GAAP income — no separate tax income base.? Would certainly reduce the games that get played.

Anyway, those are my opinions.? The world yearns for debt relief, but governments and central banks argue with that, and in the short-run try to paper over gaps with additional short-term debt that they think they can roll over forever. They just keep trying to hit the ?defer? button, avoiding any significant reforms, in an effort to preserve the ?status quo.?

My fear is that at some point, some significant player will follow a discordant approach which changes the terms of the tenuous equilibrium, leading to global inflation (monetize the debts for real; do not sterilize) or insist on fair payments at par (adopt a gold or other commodity-based currency standard).? I think the former is more likely than the latter, but who can say?? It is possible to end up with a bipolar world where both exist, or we could muddle along with the present “race to the bottom” for some time.? “Crabs in a basket,” and no one ever gets out, always pulling each other down.

Time to hit publish.? I am indebted to Michael Pettis, but do not write as well as he does.? Get on his mailing list if you can.

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