Search Results for: rga reinsurance

Miscellaneous Notes

Miscellaneous Notes

Posted on by David Merkel

When I was writing at RealMoney.com, I would often do little posts in the Columnists Conversation, and title them “Notes and Comments,” or something like that. ?I don’t normally do that here, but I would like to tie up some loose ends.

1) I received the following e-mail six weeks ago, and I feel it is worthy to be shared with readers:

Hi David,

I follow?the Aleph blog from time to time. I run value and special situations oriented hedge fund whose goal is to purchase businesses that sell for at least 50 cents on the dollar. It seems that we are like minded in investment terms. I have an extensive investment checklist which that I believe can add value to investors. It took me a few years and I derived it by reading stacks of annual reports from Buffett, Klarman, etc?

If it adds value to your readers, more than happy to share the 90+item investment checklist.

http://www.brarifunds.com/wp-content/uploads/BIF-Checklist.pdf

Regards,

Pope

Pope Brar, Managing Partner/Founder

Brar Investment Funds

I’ve read through the checklist and it is a good one. ?It has all of the elements of my processes (though I am not as rigorous) and much more. ?His checklist is worth a read. ?Have a look at it.

2) From last night’s post, a reader asked:

Lots of insurers here.? Given your expertise in that area, I’d be curious to know if you think this screen is turning up names that are on the riskier end of the spectrum.

I wrote a seven part series on this, and here are the summary ideas, and the links:

  1. Shrinking the share count
  2. Growing Fully Convertible Book Value per Share
  3. Price Momentum and Mean-Reversion
  4. On Conservative Management & Reserving
  5. Some Things Can’t Be Underwritten
  6. Analyzing Insurance Sub-Industries and the PB-ROE model
  7. Insurance Accounting and Miscellaneous Insurance Insights?

I’ve been decreasing my insurance shareholdings lately because:

  • Pricing is weak for most P&C coverages, and
  • I don’t trust the reserving for secondary guarantees in life and annuity policies.

Here’s the insurance companies from last might’s article in decreasing order of earnings yield:

Company Ticker Industry Country B/P E/P ROE
Imperial Holdings, Inc. IFT 0709 – Insurance (Life) United States ?1.38 ?37.03 ?26.83
Greenlight Capital Re, Ltd. GLRE 0715 – Insurance (P&C) Cayman Islands ?0.90 ?19.45 ?21.61
Assured Guaranty Ltd. AGO 0715 – Insurance (P&C) Bermuda ?1.18 ?18.59 ?15.75
American Equity Investment Lif AEL 0709 – Insurance (Life) United States ?0.86 ?16.77 ?19.50
Everest Re Group Ltd RE 0715 – Insurance (P&C) Bermuda ?0.88 ?15.35 ?17.44
Validus Holdings, Ltd. VR 0715 – Insurance (P&C) Bermuda ?1.00 ?13.30 ?13.30
Axis Capital Holdings Limited AXS 0715 – Insurance (P&C) Bermuda ?1.01 ?13.20 ?13.07
Endurance Specialty Holdings L ENH 0715 – Insurance (P&C) Bermuda ?1.31 ?12.55 ?9.58
CNO Financial Group Inc CNO 0709 – Insurance (Life) United States ?1.29 ?12.39 ?9.60
American International Group I AIG 0715 – Insurance (P&C) United States ?1.34 ?12.00 ?8.96
Montpelier Re Holdings Ltd. MRH 0715 – Insurance (P&C) Bermuda ?0.99 ?11.83 ?11.95
Allied World Assurance Co Hold AWH 0715 – Insurance (P&C) Switzerland ?1.00 ?11.73 ?11.73
XL Group plc XL 0715 – Insurance (P&C) Ireland ?1.12 ?11.72 ?10.46
Argo Group International Holdi AGII 0715 – Insurance (P&C) Bermuda ?1.27 ?11.55 ?9.09
Platinum Underwriters Holdings PTP 0715 – Insurance (P&C) Bermuda ?1.02 ?11.25 ?11.03
Allianz SE (ADR) AZSEY 0715 – Insurance (P&C) Germany ?0.92 ?11.08 ?12.04
ACE Limited ACE 0715 – Insurance (P&C) Switzerland ?0.84 ?10.92 ?13.00
ProAssurance Corporation PRA 0715 – Insurance (P&C) United States ?0.87 ?10.86 ?12.48
MBIA Inc. MBI 0715 – Insurance (P&C) United States ?1.45 ?10.86 ?7.49
National Western Life Insuranc NWLI 0709 – Insurance (Life) United States ?1.63 ?10.85 ?6.66
Partnerre Ltd PRE 0715 – Insurance (P&C) Bermuda ?1.23 ?10.75 ?8.74
Old Republic International Cor ORI 0715 – Insurance (P&C) United States ?0.88 ?10.53 ?11.97
Employers Holdings, Inc. EIG 0706 – Insurance (A&H) United States ?0.93 ?10.46 ?11.25
United Fire Group, Inc. UFCS 0715 – Insurance (P&C) United States ?1.05 ?10.30 ?9.81
Maiden Holdings, Ltd. MHLD 0715 – Insurance (P&C) Bermuda ?0.93 ?10.11 ?10.87
EMC Insurance Group Inc. EMCI 0715 – Insurance (P&C) United States ?1.02 ?9.88 ?9.69
Investors Title Company ITIC 0715 – Insurance (P&C) United States ?0.86 ?9.85 ?11.45
Protective Life Corp. PL 0709 – Insurance (Life) United States ?0.92 ?9.76 ?10.61
Lincoln National Corporation LNC 0709 – Insurance (Life) United States ?1.07 ?9.76 ?9.12
FBL Financial Group FFG 0709 – Insurance (Life) United States ?0.96 ?9.73 ?10.14
Assurant, Inc. AIZ 0709 – Insurance (Life) United States ?1.00 ?9.67 ?9.67
Kemper Corp KMPR 0715 – Insurance (P&C) United States ?0.95 ?9.64 ?10.15
Aspen Insurance Holdings Limit AHL 0715 – Insurance (P&C) Bermuda ?1.12 ?9.61 ?8.58
Horace Mann Educators Corporat HMN 0715 – Insurance (P&C) United States ?0.91 ?9.60 ?10.55
Unum Group UNM 0709 – Insurance (Life) United States ?0.98 ?9.55 ?9.74
WellPoint Inc WLP 0706 – Insurance (A&H) United States ?0.89 ?9.52 ?10.70
ING Groep NV (ADR) ING 0709 – Insurance (Life) Netherlands ?1.14 ?9.46 ?8.30
Axa SA (ADR) AXAHY 0709 – Insurance (Life) France ?1.19 ?9.46 ?7.95
Hanover Insurance Group, Inc., THG 0715 – Insurance (P&C) United States ?0.99 ?9.44 ?9.54
Baldwin & Lyons Inc BWINB 0715 – Insurance (P&C) United States ?0.98 ?9.42 ?9.61
American Financial Group Inc AFG 0715 – Insurance (P&C) United States ?0.87 ?9.15 ?10.52
Alleghany Corporation Y 0715 – Insurance (P&C) United States ?1.01 ?9.15 ?9.06
American National Insurance Co ANAT 0715 – Insurance (P&C) United States ?1.40 ?8.99 ?6.42
HCC Insurance Holdings, Inc. HCC 0715 – Insurance (P&C) United States ?0.82 ?8.92 ?10.88
Allstate Corporation, The ALL 0715 – Insurance (P&C) United States ?0.82 ?8.75 ?10.67
Symetra Financial Corporation SYA 0709 – Insurance (Life) United States ?1.23 ?8.64 ?7.02
Selective Insurance Group SIGI 0715 – Insurance (P&C) United States ?0.90 ?8.51 ?9.46
White Mountains Insurance Grou WTM 0715 – Insurance (P&C) Bermuda ?1.07 ?8.49 ?7.93
Fortegra Financial Corp FRF 0712 – Insurance (Misc) United States ?1.28 ?8.18 ?6.39
Cna Financial Corp CNA 0715 – Insurance (P&C) United States ?1.10 ?8.15 ?7.41
Stewart Information Services C STC 0715 – Insurance (P&C) United States ?0.83 ?7.96 ?9.59
Navigators Group, Inc, The NAVG 0715 – Insurance (P&C) United States ?1.09 ?7.68 ?7.05
Reinsurance Group of America I RGA 0706 – Insurance (A&H) United States ?1.08 ?7.49 ?6.94
Safety Insurance Group, Inc. SAFT 0715 – Insurance (P&C) United States ?0.84 ?7.39 ?8.80
State Auto Financial Corp STFC 0715 – Insurance (P&C) United States ?0.83 ?6.92 ?8.34
Genworth Financial Inc GNW 0709 – Insurance (Life) United States ?1.72 ?6.87 ?3.99
First American Financial Corp FAF 0715 – Insurance (P&C) United States ?0.87 ?6.75 ?7.76

Now, let me list for you the companies I would avoid on this list: IFT, GLRE, AGO, AEL, CNO, AIG, XL, MBI, LNC, FBL, AHL, ING, AXAHY, AFG, GNW. ?That does not mean that I endorse the others. ?In general, those that I say to avoid have poor underwriting skills or a bad business model.

3) Another letter from a reader, on a very different topic, the FOMC:

thanks again – I always look forward to this update.

My thoughts are, they are increasing their flexibility in one direction (towards??accommodation?).? While they did move the point about??after the purchase program ends? to a spot perhaps better suited to a discussion of that point, I also took it to mean that there may be less commitment to end QE.? (Although, so long as the deficit keeps declining, they really have no choice but to dial back purchases to keep the supply and the non-Fed demand in line.? This is the overlooked reason, I believe that long rates appear to be moving independently of Fed action.? Their demand is not the only variable).

?Final thought -?to what extent do you think that the Fed?s great misunderstanding is their inherent bias towards lowest rates possible under any economic conditions: i.e. for any given level of inflation, that Fed policy is best that reflects the lowest level of non-inflationary?interest rates [because this presumably encourages credit expansion and therefore economic growth]?

?To my way of thinking, the difficulty with this is that it assumes that credit always has to expand FASTER than the economy overall.? I don?t mean that credit expansion is not important, it is a big component of growth, just that credit can?t grow faster than income forever and at some point, we have to find a model that enables income to grow fast enough to increase living standards without overleverage.

?To me, this is the central policy challenge of the 21st century, because a) globally, credit has surged relative to national income and has reached a limit, b) populations are aging and must therefore favor lower levels of credit – and consumption – overall and c) the bills associated with 1 and 2 are now coming due.

?The Fed, however, seems stuck on the idea that their job should be to inflate rapid credit expansion regardless of the creditworthiness of the borrowers.? This strikes me as dumb, or perhaps more like wishful thinking that if credit expands, growth will drive incomes higher and somehow these will catch up (with some acceptable lag).

?Notice that no one at the Fed talks about things like the household savings rate any more?? I would be ok with QE if the Fed could explain that they were facilitating an orderly deleveraging: in which case Household Debt/Equity (which indicates potential for end-consumer final demand) would be a better metric than unemployment.

?As it is, I believe that what they are really targeting (large) bank balance sheets, and that QE is really a massive backdoor subsidy to money center banks to guarantee enough operating income to allow them to write off bad loans while increasing capital reserves to comply with Basel III.? (Full disclosure, I have a significant portion of my assets in a large US bank that was trading well?below the strike price of the warrants issued against its shares to Berkshire Hathaway at the time I purchased the shares, which bank shall remain nameless).

?Politically, I suppose, saying,??well, we need to ensure banks are profitable so as to ensure the solvency of the payments system? looks disturbingly like a bailout for the 1% and is out of touch with a more populist America.

?Anyway, sorry for the diatribe, but curious to get your thoughts.? I think I am less reflexively sceptical about the efficacy of the Fed?s policy (but I fully agree with your view that they are not supporting employment with it).

?Thanks again for all the work you do.

The central idea I would like to comment on is that incremental easing has had less and less effect on the economy, at least in the short-run. ?Aside from energy companies, willingness to invest in the business has been light, while willingness to buy back stock has been high. ?That doesn’t produce growth in the economy.

The Fed doesn’t realize that it can’t stimulate the economy at the zero bound. ?QE is ineffective, and may become fuel for high inflation if the banks start to lend aggressively. ?Inflation is not the goal, and I think many policymakers are confused — the goal is real growth.

We can protect the payments systems by protecting the regulated subsidiaries of banks, and letting the holding companies bear the losses, which is what we failed to do in 2008-2009.

All that said, we have a punk economy, but what will happen if we get a large increase in bank lending, leading to inflation. ?What will the Fed do then?

An Idea for When the Market is High

An Idea for When the Market is High

Posted on by David Merkel

Last night I was at the Towson University?International Markets Summit. ?I’m grateful to the students for inviting me, as it is an honor. ?During the presentation, I mentioned the book “Accounting for Value” by Stephen Penman. ?I reviewed the book two years ago. ?A great book, and one that should lead readers to modify their views on value investing.

But one aspect of the book was easy to implement, he cited his paper that you can read here,?Returns to Buying Earnings and Book Value: Accounting for Growth and Risk. ?Buy the stocks that are the cheapest as measured by the highest quintiles of book value to price, and trailing twelve month earnings per share to price.

I ran this analysis for all US-traded stocks with over $100 million of market capitalization. ?Here are the results:

Company Ticker Industry Country B/P E/P
Petrobras Argentina SA ADR PZE 0606 – Oil & Gas – Integrated Argentina

1.26

7.95
Pampa Energia S.A. (ADR) PAM 1203 – Electric Utilities Argentina

0.83

11.41
OMV AG (ADR) OMVKY 0609 – Oil & Gas Operations Austria

1.13

11.33
Validus Holdings, Ltd. VR 0709 – Insurance (Life) Bermuda

1

13.3
Everest Re Group Ltd RE 0715 – Insurance (Property & Casualty) Bermuda

0.88

15.35
Maiden Holdings, Ltd. MHLD 0715 – Insurance (Property & Casualty) Bermuda

0.93

10.11
Montpelier Re Holdings Ltd. MRH 0715 – Insurance (Property & Casualty) Bermuda

0.99

11.83
Axis Capital Holdings Limited AXS 0715 – Insurance (Property & Casualty) Bermuda

1.01

13.2
Platinum Underwriters Holdings PTP 0715 – Insurance (Property & Casualty) Bermuda

1.02

11.25
White Mountains Insurance Grou WTM 0715 – Insurance (Property & Casualty) Bermuda

1.07

8.49
Aspen Insurance Holdings Limit AHL 0715 – Insurance (Property & Casualty) Bermuda

1.12

9.61
Assured Guaranty Ltd. AGO 0715 – Insurance (Property & Casualty) Bermuda

1.18

18.59
Partnerre Ltd PRE 0715 – Insurance (Property & Casualty) Bermuda

1.23

10.75
Argo Group International Holdi AGII 0715 – Insurance (Property & Casualty) Bermuda

1.27

11.55
Endurance Specialty Holdings L ENH 0715 – Insurance (Property & Casualty) Bermuda

1.31

12.55
Gerdau SA (ADR) GGB 0121 – Iron & Steel Brazil

1.32

6.84
Gafisa SA (ADR) GFA 0215 – Construction Services Brazil

2.04

15.52
Petroleo Brasileiro Petrobras PBR 0606 – Oil & Gas – Integrated Brazil

1.67

13.2
Telefonica Brasil SA (ADR) VIV 0915 – Communications Services Brazil

0.85

7.58
Companhia de Saneamento Basico SBS 1209 – Water Utilities Brazil

0.89

8.57
Endeavour Silver Corp EXK 0118 – Gold & Silver Canada

0.89

9.9
Teck Resources Ltd (USA) TCK 0124 – Metal Mining Canada

1.33

6.84
TransGlobe Energy Corporation TGA 0609 – Oil & Gas Operations Canada

0.85

10.03
Granite Real Estate Investment GRP.U 0933 – Real Estate Operations Canada

0.87

7.53
Brookfield Office Properties I BPO 0933 – Real Estate Operations Canada

1.08

10.08
Boardwalk REIT (USA) BOWFF 0933 – Real Estate Operations Canada

1.14

11.54
Greenlight Capital Re, Ltd. GLRE 0715 – Insurance (Property & Casualty) Cayman Islands

0.9

19.45
Sinopec Shanghai Petrochemical SHI 0103 – Chemical Manufacturing China

1.52

11
Yongye International, Inc YONG 0103 – Chemical Manufacturing China

1.65

43.36
China XD Plastics Co Ltd CXDC 0109 – Containters & Packaging China

1.13

22.71
Lihua International Inc LIWA 0127 – Misc. Fabricated Products China

2.31

41.21
Xinyuan Real Estate Co., Ltd. XIN 0215 – Construction Services China

5.22

42.83
China Automotive Systems, Inc. CAAS 0415 – Auto & Truck Parts China

0.99

11.04
China Petroleum & Chemical Cor SNP 0609 – Oil & Gas Operations China

0.87

10.11
Concord Medical Services Hldg CCM 0806 – Healthcare Facilities China

3.06

12.45
China Telecom Corporation Limi CHA 0915 – Communications Services China

1.17

7.03
Xueda Education Group (ADR) XUE 0969 – Schools China

0.84

6.63
Changyou.Com Ltd (ADR) CYOU 1018 – Computer Services China

1.23

20.92
Nam Tai Electronics, Inc. NTE 1024 – Electronic Instruments & Controls China

1.11

21.58
Jinpan International Limited JST 1024 – Electronic Instruments & Controls China

1.7

13.36
Semiconductor Manufacturing In SMI 1033 – Semiconductors China

0.96

8.06
China Eastern Airlines Corp. L CEA 1106 – Airline China

1.05

12.11
China Southern Airlines Co Ltd ZNH 1106 – Airline China

1.7

13.19
Guangshen Railway Co. Ltd (ADR GSH 1112 – Railroads China

1.34

6.64
Axa SA (ADR) AXAHY 0709 – Insurance (Life) France

1.19

9.46
Volkswagen AG (ADR) VLKAY 0412 – Auto & Truck Manufacturers Germany

0.94

9.73
Allianz SE (ADR) AZSEY 0715 – Insurance (Property & Casualty) Germany

0.92

11.08
E.ON SE (ADR) EONGY 1203 – Electric Utilities Germany

1.28

8.17
National Bank of Greece (ADR) NBG 0727 – Regional Banks Greece

2

131.03
Capital Product Partners L.P. CPLP 1118 – Water Transportation Greece

0.83

10.36
Safe Bulkers, Inc. SB 1118 – Water Transportation Greece

0.83

11.99
StealthGas Inc. GASS 1118 – Water Transportation Greece

1.32

9.08
Navios Maritime Holdings Inc. NM 1118 – Water Transportation Greece

1.32

13.4
Sun Hung Kai Properties Limite SUHJY 0215 – Construction Services Hong Kong

1.44

15.22
Hysan Development Company Limi HYSNY 0215 – Construction Services Hong Kong

1.66

20.18
Tai Cheung Holdings Ltd (ADR) TAICY 0215 – Construction Services Hong Kong

2.11

34.38
Le Gaga Holdings Ltd ADR GAGA 0509 – Crops Hong Kong

1.55

14.63
Bank of East Asia Ltd. (ADR), BKEAY 0727 – Regional Banks Hong Kong

0.85

8.78
Iao Kun Group Holding Co Ltd IKGH 0912 – Casinos & Gaming Hong Kong

1.36

12.89
Cheung Kong (Holdings) Limited CHEUY 0933 – Real Estate Operations Hong Kong

1.16

11.07
Seaspan Corporation SSW 1118 – Water Transportation Hong Kong

1.05

15.2
Magyar Telekom Tavkozlesi Nyrt MYTAY 0915 – Communications Services Hungary

1.34

6.66
XL Group plc XL 0715 – Insurance (Property & Casualty) Ireland

1.12

11.72
Fly Leasing Ltd(ADR) FLY 0939 – Rental & Leasing Ireland

1.3

17.39
Ellomay Capital Ltd. ELLO 1033 – Semiconductors Israel

0.93

10.95
FUJIFILM Holdings Corp. (ADR) FUJIY 0112 – Fabricated Plastic & Rubber Japan

1.55

6.64
Kobe Steel, Ltd. (ADR) KBSTY 0121 – Iron & Steel Japan

1.47

14.7
Mitsui & Co Ltd (ADR) MITSY 0218 – Misc. Capital Goods Japan

1.33

13.26
Wacoal Holdings Corporation (A WACLY 0403 – Apparel/Accessories Japan

1.45

7.14
Toyota Motor Corp (ADR) TM 0412 – Auto & Truck Manufacturers Japan

0.82

10.5
Honda Motor Co Ltd (ADR) HMC 0412 – Auto & Truck Manufacturers Japan

0.92

7.61
Nissan Motor Co., Ltd. (ADR) NSANY 0412 – Auto & Truck Manufacturers Japan

1.11

10.04
Nomura Holdings, Inc. (ADR) NMR 0718 – Investment Services Japan

1.09

10.18
Mizuho Financial Group Inc. (A MFG 0727 – Regional Banks Japan

1.13

14.9
Sumitomo Mitsui Financial Grp, SMFG 0727 – Regional Banks Japan

1.28

16.67
Mitsubishi UFJ Financial Group MTU 0727 – Regional Banks Japan

1.53

13.67
Nippon Telegraph & Telephone C NTT 0915 – Communications Services Japan

1.39

8.93
ORIX Corporation (ADR) IX 0939 – Rental & Leasing Japan

0.98

7.59
Ternium S.A. (ADR) TX 0121 – Iron & Steel Luxembourg

0.89

7.61
ING Groep NV (ADR) ING 0709 – Insurance (Life) Netherlands

1.14

9.46
VimpelCom Ltd (ADR) VIP 0915 – Communications Services Netherlands

0.93

13.67
ASM International NV (ADR) ASMI 1033 – Semiconductors Netherlands

1.01

74.95
Petroleum Geo-Services ASA (AD PGSVY 0612 – Oil Well Services & Equipment Norway

0.81

9.85
Banco Latinoamericano Comerc E BLX 0727 – Regional Banks Panama

0.85

8.39
Compania de Minas Buenaventura BVN 0118 – Gold & Silver Peru

1.18

10.05
OFG Bancorp OFG 0727 – Regional Banks Puerto Rico

0.93

11.04
Popular Inc BPOP 0727 – Regional Banks Puerto Rico

1.52

19.77
Triple-S Management Corp. GTS 0806 – Healthcare Facilities Puerto Rico

1.79

12.52
LUKOIL (ADR) LUKOY 0606 – Oil & Gas – Integrated Russian Federation

1.91

19.08
China Yuchai International Lim CYD 0218 – Misc. Capital Goods Singapore

1.2

15.34
Net 1 UEPS Technologies Inc UEPS 0703 – Consumer Financial Services South Africa

0.91

6.79
POSCO (ADR) PKX 0121 – Iron & Steel South Korea

1.72

6.97
Shinhan Financial Group Co., L SHG 0727 – Regional Banks South Korea

1.24

8.42
Woori Finance Holdings Co., Lt WF 0727 – Regional Banks South Korea

1.91

9.86
SK Telecom Co., Ltd. (ADR) SKM 0915 – Communications Services South Korea

0.89

11.87
Repsol SA (ADR) REPYY 0606 – Oil & Gas – Integrated Spain

1.06

7.93
Transocean LTD RIG 0612 – Oil Well Services & Equipment Switzerland

1.14

9.54
ACE Limited ACE 0715 – Insurance (Property & Casualty) Switzerland

0.84

10.92
Allied World Assurance Co Hold AWH 0715 – Insurance (Property & Casualty) Switzerland

1

11.73
United Microelectronics Corp ( UMC 1033 – Semiconductors Taiwan

1.3

8.02
Silicon Motion Technology Corp SIMO 1033 – Semiconductors Taiwan

1.96

19.74
BP plc (ADR) BP 0606 – Oil & Gas – Integrated United Kingdom

0.85

15.1
Noble Corporation PLC NE 0612 – Oil Well Services & Equipment United Kingdom

1.08

10.05
Subsea 7 SA (ADR) SUBCY 0612 – Oil Well Services & Equipment United Kingdom

1.09

7.02
ENSCO PLC ESV 0612 – Oil Well Services & Equipment United Kingdom

1.11

12.2
Rowan Companies PLC RDC 0612 – Oil Well Services & Equipment United Kingdom

1.3

6.71
HSBC Holdings plc (ADR) HSBC 0727 – Regional Banks United Kingdom

0.94

8.09
Vodafone Group Plc (ADR) VOD 0915 – Communications Services United Kingdom

1.47

31.68
J Sainsbury plc (ADR) JSAIY 0957 – Retail (Grocery) United Kingdom

0.96

10.57
Global Ship Lease, Inc. GSL 1118 – Water Transportation United Kingdom

2.11

16.62
Cliffs Natural Resources Inc CLF 0124 – Metal Mining United States

1.87

12.76
M.D.C. Holdings, Inc. MDC 0215 – Construction Services United States

0.91

23.28
M/I Homes Inc MHO 0215 – Construction Services United States

0.92

27.21
URS Corp URS 0215 – Construction Services United States

1.16

7.02
Mestek, Inc. MCCK 0218 – Misc. Capital Goods United States

0.98

11.53
General Motors Company GM 0412 – Auto & Truck Manufacturers United States

0.83

7.98
Rocky Brands Inc RCKY 0418 – Footwear United States

1.21

6.82
Johnson Outdoors Inc. JOUT 0430 – Recreational Products United States

0.87

7.83
LeapFrog Enterprises, Inc. LF 0430 – Recreational Products United States

0.89

17.58
Yasheng Group HERB 0509 – Crops United States

11.77

70.4
Seaboard Corporation SEB 0515 – Food Processing United States

0.82

6.77
John B. Sanfilippo & Son, Inc. JBSS 0515 – Food Processing United States

0.84

8.55
Omega Protein Corporation OME 0515 – Food Processing United States

1.01

12.24
Ennis, Inc. EBF 0518 – Office Supplies United States

0.92

8.43
ACCO Brands Corporation ACCO 0518 – Office Supplies United States

1.01

11.07
Universal Corp UVV 0524 – Tobacco United States

0.93

10.8
Hess Corp. HES 0609 – Oil & Gas Operations United States

0.86

12.86
Approach Resources Inc. AREX 0609 – Oil & Gas Operations United States

0.93

9.48
Equal Energy Ltd. (USA) EQU 0609 – Oil & Gas Operations United States

0.96

9.38
Sandridge Mississippian Trust SDT 0609 – Oil & Gas Operations United States

1.49

63.59
PHI Inc. PHII 0612 – Oil Well Services & Equipment United States

0.85

8.96
Medallion Financial Corp TAXI 0703 – Consumer Financial Services United States

0.94

9.13
CIT Group Inc. CIT 0703 – Consumer Financial Services United States

0.96

7.26
Goldman Sachs Group Inc GS 0703 – Consumer Financial Services United States

0.97

10.16
Ellington Financial LLC EFC 0703 – Consumer Financial Services United States

1.04

13.7
Walter Investment Management C WAC 0703 – Consumer Financial Services United States

1.11

23.94
Chimera Investment Corporation CIM 0703 – Consumer Financial Services United States

1.12

11.58
PHH Corporation PHH 0703 – Consumer Financial Services United States

1.19

9.68
EZCORP Inc EZPW 0703 – Consumer Financial Services United States

1.58

7.55
WellPoint Inc WLP 0706 – Insurance (Accident & Health) United States

0.89

9.52
Employers Holdings, Inc. EIG 0706 – Insurance (Accident & Health) United States

0.93

10.46
Reinsurance Group of America I RGA 0706 – Insurance (Accident & Health) United States

1.08

7.49
American Equity Investment Lif AEL 0709 – Insurance (Life) United States

0.86

16.77
Protective Life Corp. PL 0709 – Insurance (Life) United States

0.92

9.76
FBL Financial Group FFG 0709 – Insurance (Life) United States

0.96

9.73
Unum Group UNM 0709 – Insurance (Life) United States

0.98

9.55
Assurant, Inc. AIZ 0709 – Insurance (Life) United States

1

9.67
Lincoln National Corporation LNC 0709 – Insurance (Life) United States

1.07

9.76
Symetra Financial Corporation SYA 0709 – Insurance (Life) United States

1.23

8.64
CNO Financial Group Inc CNO 0709 – Insurance (Life) United States

1.29

12.39
Imperial Holdings, Inc. IFT 0709 – Insurance (Life) United States

1.38

37.03
National Western Life Insuranc NWLI 0709 – Insurance (Life) United States

1.63

10.85
Genworth Financial Inc GNW 0709 – Insurance (Life) United States

1.72

6.87
Fortegra Financial Corp FRF 0712 – Insurance (Miscellaneous) United States

1.28

8.18
Allstate Corporation, The ALL 0715 – Insurance (Property & Casualty) United States

0.82

8.75
HCC Insurance Holdings, Inc. HCC 0715 – Insurance (Property & Casualty) United States

0.82

8.92
State Auto Financial Corp STFC 0715 – Insurance (Property & Casualty) United States

0.83

6.92
Stewart Information Services C STC 0715 – Insurance (Property & Casualty) United States

0.83

7.96
Safety Insurance Group, Inc. SAFT 0715 – Insurance (Property & Casualty) United States

0.84

7.39
Investors Title Company ITIC 0715 – Insurance (Property & Casualty) United States

0.86

9.85
First American Financial Corp FAF 0715 – Insurance (Property & Casualty) United States

0.87

6.75
American Financial Group Inc AFG 0715 – Insurance (Property & Casualty) United States

0.87

9.15
ProAssurance Corporation PRA 0715 – Insurance (Property & Casualty) United States

0.87

10.86
Old Republic International Cor ORI 0715 – Insurance (Property & Casualty) United States

0.88

10.53
Selective Insurance Group SIGI 0715 – Insurance (Property & Casualty) United States

0.9

8.51
Horace Mann Educators Corporat HMN 0715 – Insurance (Property & Casualty) United States

0.91

9.6
Kemper Corp KMPR 0715 – Insurance (Property & Casualty) United States

0.95

9.64
Baldwin & Lyons Inc BWINB 0715 – Insurance (Property & Casualty) United States

0.98

9.42
Hanover Insurance Group, Inc., THG 0715 – Insurance (Property & Casualty) United States

0.99

9.44
Alleghany Corporation Y 0715 – Insurance (Property & Casualty) United States

1.01

9.15
EMC Insurance Group Inc. EMCI 0715 – Insurance (Property & Casualty) United States

1.02

9.88
United Fire Group, Inc. UFCS 0715 – Insurance (Property & Casualty) United States

1.05

10.3
Navigators Group, Inc, The NAVG 0715 – Insurance (Property & Casualty) United States

1.09

7.68
Cna Financial Corp CNA 0715 – Insurance (Property & Casualty) United States

1.1

8.15
American International Group I AIG 0715 – Insurance (Property & Casualty) United States

1.34

12
American National Insurance Co ANAT 0715 – Insurance (Property & Casualty) United States

1.4

8.99
MBIA Inc. MBI 0715 – Insurance (Property & Casualty) United States

1.45

10.86
FBR & Co FBRC 0718 – Investment Services United States

1.03

29.21
KKR Financial Holdings LLC KFN 0718 – Investment Services United States

1.05

11.24
NASDAQ OMX Group, Inc. NDAQ 0718 – Investment Services United States

1.13

6.66
Piper Jaffray Companies PJC 0718 – Investment Services United States

1.17

7.42
Primus Guaranty, Ltd. PRSG 0718 – Investment Services United States

1.25

50.12
Arlington Asset Investment Cor AI 0718 – Investment Services United States

1.28

11.6
Oppenheimer Holdings Inc. (USA OPY 0718 – Investment Services United States

1.34

6.71
CIFC Corp CIFC 0718 – Investment Services United States

1.73

9.51
JPMorgan Chase & Co. JPM 0724 – Money Center Banks United States

0.98

7.39
First National Bank Alaska FBAK 0727 – Regional Banks United States

0.81

6.61
Old National Bancorp ONB 0727 – Regional Banks United States

0.81

7
Sandy Spring Bancorp Inc. SASR 0727 – Regional Banks United States

0.81

7.28
TowneBank TOWN 0727 – Regional Banks United States

0.81

7.52
Fidelity Southern Corporation LION 0727 – Regional Banks United States

0.81

10.35
Central Pacific Financial Corp CPF 0727 – Regional Banks United States

0.81

21.18
Cascade Bancorp CACB 0727 – Regional Banks United States

0.81

22.18
LCNB Corp. LCNB 0727 – Regional Banks United States

0.82

6.69
S & T Bancorp Inc STBA 0727 – Regional Banks United States

0.83

7.38
Great Southern Bancorp, Inc. GSBC 0727 – Regional Banks United States

0.83

8.55
ESB Financial Corporation ESBF 0727 – Regional Banks United States

0.84

6.88
WesBanco, Inc. WSBC 0727 – Regional Banks United States

0.84

7.15
Trustmark Corp TRMK 0727 – Regional Banks United States

0.84

7.28
KeyCorp KEY 0727 – Regional Banks United States

0.84

7.3
MidWestOne Financial Group, In MOFG 0727 – Regional Banks United States

0.84

8.77
Bar Harbor Bankshares BHB 0727 – Regional Banks United States

0.84

9.1
Seacoast Banking Corporation o SBCF 0727 – Regional Banks United States

0.84

21.31
First Bancorp Inc FNLC 0727 – Regional Banks United States

0.85

7.39
Mercantile Bank Corp. MBWM 0727 – Regional Banks United States

0.85

9.45
Heritage Financial Group Inc HBOS 0727 – Regional Banks United States

0.86

7.23
MainSource Financial Group Inc MSFG 0727 – Regional Banks United States

0.86

7.33
Norwood Financial Corporation NWFL 0727 – Regional Banks United States

0.86

7.9
Fulton Financial Corp FULT 0727 – Regional Banks United States

0.87

6.82
Pulaski Financial Corp PULB 0727 – Regional Banks United States

0.88

6.85
Washington Federal Inc. WAFD 0727 – Regional Banks United States

0.88

6.87
International Bancshares Corp IBOC 0727 – Regional Banks United States

0.89

7.93
Lakeland Bancorp, Inc. LBAI 0727 – Regional Banks United States

0.9

6.84
Northrim BanCorp, Inc. NRIM 0727 – Regional Banks United States

0.9

7.67
BCB Bancorp, Inc. BCBP 0727 – Regional Banks United States

0.9

7.91
ACNB Corporation ACNB 0727 – Regional Banks United States

0.9

8.14
Intermountain Community Bancor IMCB 0727 – Regional Banks United States

0.9

9.74
First Financial Corp THFF 0727 – Regional Banks United States

0.91

7.44
Farmers & Merchants Bancorp In FMAO 0727 – Regional Banks United States

0.91

7.8
Southeastern Bank Financial Co SBFC 0727 – Regional Banks United States

0.91

11.29
Isabella Bank Corp ISBA 0727 – Regional Banks United States

0.92

6.95
First Merchants Corporation FRME 0727 – Regional Banks United States

0.93

6.76
Wintrust Financial Corp WTFC 0727 – Regional Banks United States

0.93

7.12
First Citizens BancShares Inc. FCNCA 0727 – Regional Banks United States

0.94

7.57
Firstbank Corporation FBMI 0727 – Regional Banks United States

0.94

8.03
Century Bancorp, Inc. CNBKA 0727 – Regional Banks United States

0.95

10.72
Central Valley Community Banco CVCY 0727 – Regional Banks United States

0.96

6.62
PNC Financial Services Group I PNC 0727 – Regional Banks United States

0.96

8.94
American National BankShares I AMNB 0727 – Regional Banks United States

0.96

9.01
Capital One Financial Corp. COF 0727 – Regional Banks United States

0.97

9.95
Provident Financial Services, PFS 0727 – Regional Banks United States

0.99

6.92
NASB Financial, Inc. NASB 0727 – Regional Banks United States

0.99

11
Flagstar Bancorp Inc FBC 0727 – Regional Banks United States

1.01

21.87
First Defiance Financial FDEF 0727 – Regional Banks United States

1.02

8.35
MidSouth Bancorp, Inc. MSL 0727 – Regional Banks United States

1.03

6.96
C&F Financial Corp CFFI 0727 – Regional Banks United States

1.04

13.4
First Community Bancshares Inc FCBC 0727 – Regional Banks United States

1.05

7.25
Provident Financial Holdings, PROV 0727 – Regional Banks United States

1.05

8.78
Chemung Financial Corp. CHMG 0727 – Regional Banks United States

1.06

6.7
Territorial Bancorp Inc TBNK 0727 – Regional Banks United States

1.08

7.23
Berkshire Hills Bancorp, Inc. BHLB 0727 – Regional Banks United States

1.09

6.61
Regions Financial Corporation RF 0727 – Regional Banks United States

1.09

7.73
Old Second Bancorp Inc. OSBC 0727 – Regional Banks United States

1.1

113.32
Farmers Capital Bank Corp FFKT 0727 – Regional Banks United States

1.14

7.7
Premier Financial Bancorp, Inc PFBI 0727 – Regional Banks United States

1.18

10.46
FIRST FINANCIAL NORTHWEST, INC FFNW 0727 – Regional Banks United States

1.18

14.46
Intervest Bancshares Corp IBCA 0727 – Regional Banks United States

1.19

8.37
MBT Financial Corp. MBTF 0727 – Regional Banks United States

1.23

28.89
New Hampshire Thrift Bancshare NHTB 0727 – Regional Banks United States

1.26

7.66
MVB Financial Corp MVBF 0727 – Regional Banks United States

1.29

10.03
Citigroup Inc C 0727 – Regional Banks United States

1.3

8.73
Susquehanna Bancshares Inc SUSQ 0727 – Regional Banks United States

1.31

8.42
QCR Holdings, Inc. QCRH 0727 – Regional Banks United States

1.44

12.41
First Niagara Financial Group FNFG 0727 – Regional Banks United States

1.45

8.28
First Citizens Bancorporation, FCBN 0727 – Regional Banks United States

1.5

9.95
Farmers & Merchants Bank (Long FMBL 0909 – Business Services United States

0.98

8.05
Kelly Services, Inc. KELYA 0909 – Business Services United States

1.02

7.21
Lakes Entertainment, Inc. LACO 0912 – Casinos & Gaming United States

1.01

14.29
Black Box Corporation BBOX 0915 – Communications Services United States

1.38

7.36
Iridium Communications Inc. IRDM 0915 – Communications Services United States

1.72

10.16
Courier Corporation CRRC 0927 – Printing & Publishing United States

0.86

6.72
CSS Industries Inc CSS 0927 – Printing & Publishing United States

1.08

7.53
Blackstone Mortgage Trust Inc BXMT 0933 – Real Estate Operations United States

0.87

145.18
New York Mortgage Trust Inc NYMT 0933 – Real Estate Operations United States

0.88

14.44
PennyMac Mortgage Investment T PMT 0933 – Real Estate Operations United States

0.89

13.15
Starwood Property Trust, Inc. STWD 0933 – Real Estate Operations United States

0.94

7.84
Capstead Mortgage Corporation CMO 0933 – Real Estate Operations United States

0.99

7.31
Dynex Capital Inc DX 0933 – Real Estate Operations United States

1.02

12.82
Two Harbors Investment Corp TWO 0933 – Real Estate Operations United States

1.04

16.24
American Capital Agency Corp. AGNC 0933 – Real Estate Operations United States

1.05

14.81
Apollo Commercial Real Est. Fi ARI 0933 – Real Estate Operations United States

1.09

7.4
MFA Financial, Inc. MFA 0933 – Real Estate Operations United States

1.09

9.89
Anworth Mortgage Asset Corpora ANH 0933 – Real Estate Operations United States

1.1

9.07
Resource Capital Corp. RSO 0933 – Real Estate Operations United States

1.16

9.91
Rent-A-Center Inc RCII 0939 – Rental & Leasing United States

0.97

8.84
Willis Lease Finance Corporati WLFC 0939 – Rental & Leasing United States

1.31

9.51
Biglari Holdings Inc BH 0942 – Restaurants United States

0.83

23.81
Rick’s Cabaret Int’l, Inc RICK 0942 – Restaurants United States

0.92

8.66
PCM Inc PCMI 0948 – Retail (Catalog & Mail Order) United States

1.09

7.11
Trans World Entertainment Corp TWMC 0963 – Retail (Specialty Non-Apparel) United States

1.68

7.37
TravelCenters of America LLC TA 0963 – Retail (Specialty Non-Apparel) United States

1.76

7.55
Tech Data Corp TECD 0966 – Retail (Technology) United States

0.87

7.43
hhgregg, Inc. HGG 0966 – Retail (Technology) United States

1.32

6.67
Ingram Micro Inc. IM 1015 – Computer Peripherals United States

0.84

6.68
Key Tronic Corporation KTCC 1015 – Computer Peripherals United States

0.93

9.42
Xerox Corp XRX 1018 – Computer Services United States

0.89

8.31
VOXX International Corp VOXX 1024 – Electronic Instruments & Controls United States

1.57

10.96
OmniVision Technologies, Inc. OVTI 1033 – Semiconductors United States

0.91

8.46
Benchmark Electronics, Inc. BHE 1033 – Semiconductors United States

1

9
JetBlue Airways Corporation JBLU 1106 – Airline United States

0.85

6.84
Republic Airways Holdings Inc. RJET 1106 – Airline United States

1.42

12.1
SkyWest, Inc. SKYW 1106 – Airline United States

2.19

8.93
Atlas Air Worldwide Holdings, AAWW 1109 – Misc. Transportation United States

1.49

10.44
International Shipholding Corp ISH 1118 – Water Transportation United States

1.67

7.41
Gas Natural Inc EGAS 1206 – Natural Gas Utilities United States

0.89

6.75

What are my surprises here?

  • My but there are a lot of foreign companies in this list, far more as a percentage than the 3575 total companies I started with. ?It seems that foreign companies are cheap.
  • Now, that said, accounting standards are tighter in the US than elsewhere, and particularly, be careful on Chinese companies. ?Many of them are scams.
  • There are a lot of financial companies listed. ?I would note that earnings quality for financial companies is often poor, so don’t go “hog wild” buying financial companies.

All that said, this could be a good list for starting due diligence, and I will use at least some of this in my next selection of companies for my clients.

What’s that, you say? ?Do I and my clients own any of these firms? ?Yes we do. ?Of the 38 stocks in my portfolio, 11 of them pass this screen, and here is the summary:

Full Disclosure: Long?ENH, SNP, GTS, LUKOY, BP, ESV, RGA, AIZ, NWLI, IM, XRX

Sorted Weekly Tweets

Sorted Weekly Tweets

Posted on by David Merkel

Rest of the World

 

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

 

US Politics & Policy

 

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

 

Market Impact

 

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

 

Other

 

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

 

Wrong

?

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

?

 

Replies, Retweets, and Comments

 

  • @DavidBCollum Look here: http://t.co/VaqQESCdCu Value Line has a chart that goes back to the 20s though… Jan 17, 2014
  • RT @cate_long: Please add http://t.co/QHQiCxYopc RT @researchpuzzler: a guide to finding data on the cheap from @AlephBlog http://t.co/mb? Jan 15, 2014
  • RT @Pawelmorski: Great spot @toby_n : DB’s Slok quantifies how difficult the Fed finds explaining itself. http://t.co/1quahXrnJD Jan 14, 2014
Classic: Talking to Management, Part 5: Understanding Major Shifts

Classic: Talking to Management, Part 5: Understanding Major Shifts

Posted on by David Merkel

The following was published at RealMoney on April 20th, 2007:

The Changing Business Environment

What do you think is the most important change happening in the competitive environment at present?

This query can highlight emerging issues and demonstrate how the company is adjusting to the changes. Again, you need to compare the answers of various managers against each other; an odd answer could either be ahead of the pack or out of touch. If you think the answer makes sense, it can open up new questions that further enhance your understanding of the industry and the role that the company you are interviewing plays in it.

After Hurricane Katrina and other storms in 2005, ratings agencies toughened up their risk models, and catastrophe modeling companies increased their frequency and severity estimates. This created an even greater squeeze in the 2006 property reinsurance markets than what the losses of capital alone would have caused, as happened to the 2005 property reinsurance market from losses suffered in 2004. New entrants in the reinsuring property risk space found that they could write only half of the premium that their more seasoned competitors from the class of 2001 could. Further, property-centric writers found the capital required went up more for them than for their more diversified competitors.

There was less effective capital in property reinsurance at the end of 2005 than at the end of 2004, even though surplus levels were higher on net. Those who recognized the change in the rules of the game caught the rally in the stock prices as the price for reinsurance went up more rapidly than most expected for the 2006 renewal season.

What laws, regulations, or pseudo-regulations (such as debt ratings criteria) would you most like to see changed?

This is another attempt to understand what most constrains the growth of the enterprise (see Part 1 for a different angle on the question). The answer should be something that is reasonably probable, or else the management is just dreaming.

For an investment bank like Goldman Sachs (GS), an answer could be, “We want the ratings agencies to agree with our view of our risk management models, so that we can get a ratings upgrade and lower our funding costs.”

For a steel company in the early 2000s, the answer could have been, “The government needs to enforce the antidumping duties better.”

A media or branded goods company today might say, “Better efforts by the government to reduce piracy both here and abroad.”

For companies under cost pressure, such as General Motors (GM) and Ford (F), the answer could be, “A better labor agreement that includes changes in the union rules, so that we can improve productivity.”

What technological changes are most driving your business now?

Technology often benefits its users more than its creators. Prior to computers, it took a lot more people to run banks and insurance companies. Now financial companies are a lot more efficient and hire fewer people than they used to as a result of the change. You as the analyst want to know about the next technological change that will lower costs or create new products in order to forecast increases in growth of profitability.

There are other technological changes, but the biggest one recently in business terms is the Internet. The creation of the Internet has changed the way people search for information. World Book Encyclopedia was owned by Berkshire Hathaway (BRK.A), which thought it had a pretty good franchise until Microsoft (MSFT) and others came out with their own cheaper encyclopedias on a CD-ROM. Now even these are getting competed away by Wikipedia.

Who else is being harmed by the Internet? Newspapers are under threat from all sides. Classified ads have been marginalized by eBay (EBAY), Craigslist, Monster (MNST), etc. Regular advertising has been siphoned off by Google (GOOG), Yahoo! (YHOO) and others.

What cultural changes are most driving your business now?

Cultural changes affect demand for products. As more and more women entered the workforce, demand increased for prepared foods and dining out options. Demand decreased for Tupperware parties and things sold door-to-door.

Cultural changes can also lower the costs of an operation. Outsourcing has lowered costs and improved time coverage for call centers, computer programming and many other service functions. The willingness of nations to embrace the cultural change of capitalism creates new markets that previously did not exist.

One more example, again from insurance: Insurance became a growth product when extended family ties weakened and nuclear families became the standard. Now as nuclear families break down and are replaced by a greater proportion of singles without children, some insurance markets are weakening (life) and others are strengthening (annuities, personal lines, individual heath and disability).

What regulatory changes are most driving your business now?

Before you talk to management, you should know the answer to this one. But what matters here is that you know that they know, too, and more importantly, are building that into the plans for the business.

To get you started, consider the possible impacts of some changes on a few industries. For a pharmaceutical company such as Merck (MRK) or Pfizer (PFE), this could be a change in the way that drugs get approved. It might be a larger political change, such as the recent election of the Democrats, which is expected to produce a change in Medicare reimbursement rates.

Increases in environmental regulation can affect the profits of extraction businesses significantly, whether agriculture, mining, silviculture, energy exploration and production and more. If it becomes easier to unionize, that can affect wage rates and productivity even more as work rules bite into effectiveness and flexibility of work; both of these can lower profits in labor-intensive businesses.

Now, these are pretty obvious examples, and most examples here will be obvious, because most regulation is done openly. The answers that a management gives can be a test as to whether they themselves know what is going on.

Sometimes the answers get a little more subtle. In personal lines insurance, it took analysts a long time to catch up with the safety trends that were bringing down the frequency and severity of losses, particularly graduated licensing for young drivers. Internally, the companies had figured it out long before they told the analyst community. The analysts who asked why severity and frequency of loss were so good and got an answer that allowed them to “connect the dots” to the regulatory change realized that there was a secular, not cyclical, change going on. Thus they were able to make money buying personal auto insurers, because the trend was likely to extend to more states.

Mergers and Acquisitions

Without naming names, what types of business alliances do you think could be most valuable in the future?

This helps flesh out competitive strategy. Managements will be reluctant to part with details, but usually are willing to explain their approach to supplier agreements, joint ventures and so on.

The answer to this question can also highlight the “missing pieces” for the current business, and how the management team is trying to source them. It can also shine a light on new products and services that management is considering.

Is it cheaper at present to grow organically or through acquisitions?

The right answer is almost always organic growth. Acquirers usually overpay, particularly in acquiring scale. Intelligent acquisitions are usually small and often private firms, where the sale is negotiated and not an auction. The goal is to gain new core competencies or markets that can grow profits in concert with the capital and other resources that the company can add to their new acquisition.

If a company answers “through acquisitions,” there had better be a reason it has an advantage in acquiring companies that its competitors don’t, which is rare. If it’s the only public company rolling up a sector (again rare), there should be some logic as to what discipline the company exercises in not overpaying for acquisitions.

In the early phase of a roll-up, prices are typically reasonable for the small firms being purchased. As the roll-up proceeds, the acquisitions that are easy, logical and cheap get done first. In later phases, if there is a mania, the hard, illogical and more expensive acquisitions get done.

It’s rare to have a roll-up in which some party doesn’t start overpaying badly at the end. Sometimes that signals the end of the roll-up phase, with a decline in the share price of the overpayer, destroying the value of the currency that it is using to acquire small entities; namely, its stock price.

How important is scale when you consider acquisitions?

Again, acquirers usually overpay for scale. The right answer is usually that it is not important, unless it is a commodity business and the acquirer is the low-cost competitor, and will wrench expenses out of the target company to make the target as efficient as the acquirer.

Summary

The difference between my approach and the approach of most analysts is that I think about the business and its strategy rather than the next quarter or year’s earnings. My methods probably won’t help you make money in the short run but will help you make money in the long run as you identify intelligent management teams that understand how to compete for the long term, rather than those that can manage only next quarter’s GAAP earnings.

Two additional side benefits to doing it my way: First, the management teams will like talking with you. I can’t tell you how many times managers have said they appreciated my businesslike approach to analyzing their companies. Second, it will translate back into an improved understanding of the business you presently work in, as you think about strategic issues there.

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Sorted Weekly Tweets

Posted on by David Merkel

Market Impact

 

  • Keep the Economists off the Trading Desk http://t.co/3E3OoDJLrS As Howard Simons said, “Stocks are not GDP futures.” Ignore the economy $$ Nov 01, 2013
  • ‘Skew’ Measure Points to Excessive Market Optimism http://t.co/sT8aVfJ2MI Calls priced high, puts priced low & we r not so bad u know? $$ Oct 30, 2013
  • Bear hunting http://t.co/nvnCpNfl1G Bear shortage has a few wondering who is left to buy from existing stockholders $$ Oct 30, 2013
  • Amazing fact #1: Market has been unexpectedly strong since May 1 | Amazing fact #2: Market?s YTD 2013 returns have never been negative $$ Oct 30, 2013
  • 3 ?amazing? facts about the stock market http://t.co/SKog36iBgE Amazing fact #3: The stock market?s Sept and Oct have both been positive $$ Oct 30, 2013
  • Wall Street is way too bullish http://t.co/dBNe8oaeho Collapsing time horizons may presage a bearish turn for the risky asset markets $$ Oct 30, 2013
  • BlackRock?s Fink Says There Are ?Bubble-Like Markets Again? http://t.co/cgj8MI5vls “Fed policy is contributing to ‘bubble-like markets.'” $$ Oct 30, 2013
  • Five Bad Ways to Pick a Mutual Fund http://t.co/9ZXV7y0lWv Good as far as it goes. Important: don’t chase performance or ratings $$ Oct 30, 2013
  • How Our Brains Betray Us http://t.co/ZFzTZT4t1t We tend 2b 2 optimistic about the future,& not realistic enough about the present $$ Oct 30, 2013
  • JP Morgan’s Subprime Troubles Ran Deep http://t.co/df0Ok7fQG4 The originators r all dead, so they go after one of the last standing $JPM $$ Oct 30, 2013
  • Bond-fund charts of the day, rising-rates edition http://t.co/q7DDAectXI Where @felixsalmon finds the speed of rates rising matters a lot $$ Oct 30, 2013
  • Six Ways to Ensure Qualified Borrowers Can Get Mortgages http://t.co/S7XBegLn4k Unrealistic article, though the part on servicing is good $$ Oct 30, 2013
  • Is Your Pension Courting Catastrophe? http://t.co/0kMj4FdCpO Good summary & resources, but few pensions invest 2much in CAT bonds $$ Oct 30, 2013
  • Are CAT Bonds The Answer to Today?s Retirement Planning Woes? 2 Early 2 Tell?More Transparency Needed! http://t.co/M7taq4X2XE Not4retail $$ Oct 28, 2013

 

Companies & Industries

 

  • Phillips 66 to Build Texas Terminal to Export Propane, Butane Overseas http://t.co/XIUbREChpH Exporting nonstandard fuels from fracking $$ Oct 31, 2013
  • PwC Agrees to Purchase Booz to Expand Advisory Services http://t.co/TW21OqwH5Q Conflict of interests: auditing firms 4 which they consult $$ Oct 31, 2013
  • Now Amazon Is Just Giving Money Away http://t.co/mdtioUbM4K $AMZN -> great nonprofit that eats businesses continues like Galactus $$ #nomnom Oct 31, 2013
  • Stop Subsidizing Colleges? 100-Year Debt Binge http://t.co/76w7ngChue Colleges r more fragile than 2 last 100 years; don’t lend 2 them $$ Oct 31, 2013
  • Dell?s Mitzvah Rescued Buyout as JPMorgan?s Lee Warned of Perils http://t.co/hKyGu1VCnj Da dirt, da whole dirt & nuttin but da dirt $$ Oct 30, 2013
  • Who?s Right About Apple?s Cash Pile: Cook or Icahn? http://t.co/ZJNFMpVtXu Simple: Cook. Most of the $$ is overseas & can’t easily return Oct 30, 2013
  • How Mobile Technology is Changing the Way We Dine Out http://t.co/Su0Po5ezxx Social media affects how people choose restaurants $$ Oct 30, 2013
  • Why Consol is Diving Into Natural Gas While Others Jump Out http://t.co/m3nIsWFv8a Oil > Natgas > Coal | Simple, huh? $CNX $$ Oct 30, 2013

 

Insurance News

?

  • Harbinger Insurer Switches to Iowa Watchdog From Maryland http://stks.co/hsV7 Decamping 4 a more friendly & sophisticated regulator $$ $HRG Nov 02, 2013
  • Berkshire Hathaway defends asbestos claim-paying record vs stories by Mark Greenblatt of Scripps News http://t.co/lYcEQH13Ea FD: + $BRK.B $$ Nov 01, 2013
  • Buffett?s $40B Cash Pile Provides Acquisition Fuel http://t.co/WYZ5AWsBaj Would view largest private companies look4 transitional probs $$ Nov 01, 2013
  • Lincoln National Wins $4 Billion Annuity Reinsurance Deal http://t.co/E3v9AwvDb4 I find this dubious, but $WFC is the likely loser $$ Oct 31, 2013
  • Crop Insurance Hazards Shown in Lost Pheasants in Grasslands http://t.co/s96GcQn8jw W/Ag doing so well, we need to end the Ins subsidies $$ Oct 30, 2013

?

Other

 

  • No Bones About It: Day of the Dead Is Finding New Life http://t.co/AGzU8olA1b Life is for the living; let the dead bury their own dead $$ Nov 01, 2013
  • Little Sign of Housing Bubble in Land Prices http://t.co/P8LyXzvyZu Overinvested for a long time; we shouldn’t subsidize home ownership $$ Oct 31, 2013
  • The 50 Greatest Breakthroughs Since the Wheel http://t.co/Hy0ePPNa9W Ambitious article that explains why innovation benefits us all $$ Oct 30, 2013
  • Drones Delivering Pizza? Venture Capitalists Wager on It http://t.co/njvc3uysge Sadly, the pizza was cold when it arrived. $$ Oct 30, 2013
  • If New York Freezes in January Blame Siberian Snow Now http://t.co/7oMGUa8poK These tendencies r weak, like most things on global warming $$ Oct 30, 2013
  • Cheaper Laser Sensors for Self-Driving Cars Are on the Way http://t.co/Nx09HA3zEW If sensors r that expensive, driverless cars r far-off $$ Oct 30, 2013

?

NSA / Privacy

 

  • Furious Tech Giants Fight Back Against NSA Surveillance http://t.co/KSNmBfE2v4 Ripple effect from Snowden’s revelations get bigger weekly $$ Nov 01, 2013
  • Edward Snowden Has Japan Copying China?s Playbook http://t.co/iZ1sKibSSd Excessive secrecy creates environment for government wrongdoing $$ Nov 01, 2013
  • How anti-NSA backlash could fracture the Internet along national borders http://t.co/gswU55LYiS Democratic nations hate being NSA snooped $$ Nov 01, 2013
  • NSA infiltrates links to Yahoo, Google data centers worldwide, Snowden documents say http://t.co/Sr5YZD4u74 $$ shot: http://t.co/fTFufojKwz Nov 01, 2013
  • Tax delinquents by the thousands have security clearances, GAO finds http://t.co/8VnAziQSVN Easier 2 suborn someone who is in debt $$ Nov 01, 2013
  • Obama Unaware as US Spied on World Leaders: Officials http://t.co/DTz36LPrPE The surveillance state takes on a life of its own $$ Oct 30, 2013
  • The NSA?s Rent Is Too High http://t.co/xSGkk8GZvy Even if what they do were legitimate, they cost Americans far too much $$ Oct 30, 2013

 

PPACA / Obamacare

 

  • Health Policies Canceled in Latest Hurdle for Obamacare http://t.co/eT3EkcotYp I’m grandfathered for now, but how long will that last? $$ Nov 01, 2013
  • Obamacare?s Biggest Threat Isn?t the Website http://t.co/az9Imf0qBK burdensome complexity subsidy-based plan; failure universal coverage $$ Oct 31, 2013
  • You Can Keep Your Health Plan* http://t.co/Wi5xqZvdrB *Except if it not a health plan that the Obama Administration does not like $$ #lies Oct 31, 2013
  • Obama Tempers Insurance Pledge as Health Fight Rages http://t.co/fpZPH27KML An arrogant man who doesn’t understand economics and lies $$ Oct 31, 2013
  • Yes, People Are Losing Their Insurance Under Obamacare http://t.co/8aqWoASQfl Affects some people who buy their health plans on their own $$ Oct 31, 2013
  • The ObamaCare Awakening http://t.co/P01zM98SNZ Americans are losing their coverage by political design. That’s a feature, not a bug $$ #lose Oct 30, 2013
  • Insurers Oppose Obamacare Extension as Danger to Profits http://t.co/nsIz2wSoyT Clever Obama got the insurance companies2carry water4him $$ Oct 30, 2013
  • Americans lose coverage, Democrats say Obama too rosy about health care law http://t.co/jGg1lWtJA7 My plan was canceled; i had no choice $$ Oct 30, 2013
  • How Jon Stewart became President Obama?s biggest problem http://t.co/YAJ8fOnFJZ Lousy efforts from the govt deserve 2b exposed $$ Oct 30, 2013
  • Desperately Needed: More Geriatricians http://t.co/THkwfgtFqn We cannot create more Geriatricians via fiat in the sort run $$ Oct 30, 2013
  • The First Cracks http://t.co/UAnrYjlzXQ Some Democrats begin to question PPACA/Obamacare $$ Oct 30, 2013

 

Rest of the World

 

  • Will Toilet Rules Prove EU’s Waterloo? http://t.co/0jLUpeIA1a Standardizing toilet specifications across different cultures is futile $$ Nov 02, 2013
  • Japan Stocks Sink to Monthly Worst in Developed Markets http://t.co/XHJewfR5NZ Really difficult 2c how Japan normalizes econ policy $$ Nov 01, 2013
  • Ignore Greek Elections: Stocks Might Be the Best Buy in over 60 Years http://t.co/7tKWQ365RW Good call from @valuewalk timely/contrarian $$ Oct 31, 2013
  • Greek Recovery Makes Stocks World?s Best as Paulson Buys http://t.co/m25XYjWQsE Buy on the rumor, sell on the news, stick a fork in it $$ Oct 31, 2013
  • Eike Batista’s Empire Soared, Then Melted Into Bankruptcy http://t.co/3lh9catSFf At best, a huckster. At worst, a robber. A cheater $$ Oct 31, 2013
  • Japan Salaries Extend Fall as Abe Urges Companies 2 Raise Wages http://t.co/jOprQhpTsk Abe has quite an imagination; markets will dictate $$ Oct 31, 2013
  • OGX Bankruptcy Filing Caps Batista?s $30 Billion Demise http://t.co/MkIdlrCKNv He seemed incredible to me at first, he is credible now $$ Oct 31, 2013
  • Political Gridlock, Beijing Style http://t.co/xCrcTd2htZ Entrenched economic interests fight Party leadership seeking economic reform $$ Oct 30, 2013
  • Rebuilding Reserves Means U-Turn on Treasuries http://t.co/5EH3t378gb The $$ is not the only game in town, better liquidity than others $$ Oct 30, 2013
  • India Breast Cancer Surge Hinders Private Exams for Women http://t.co/Fumyl2WHTO Big problem, few resources; makes me feel sorry for them $$ Oct 30, 2013
  • Study Sheds Light on the Dark Side of China’s Urbanization http://t.co/GZFyxNKEHn Communism alienates from the means of production $$ #China Oct 30, 2013
  • The Lust Beneath Japan’s Sex Drought? http://t.co/APyIFrlth7 Japan’s sex culture is perverse, & their society shrinks as a result $$ Oct 30, 2013
  • The China Americans Don’t See http://t.co/E8FwXk1H6W China is weaker than it looks b/c it can’t handle dissent against the Party $$ Oct 30, 2013
  • Greek Government Bonds Pay Off Big for Fund Managers http://t.co/9LiFTr8BED Every dog has its day, & this bond mgr rates a healthy “arf” $$ Oct 30, 2013
  • Man Making Ireland Tax Avoidance Hub Proves Local Hero http://t.co/Iy2CVenb3f Controversial fellow who is not universally admired $$ Oct 30, 2013

 

Monetary Policy

 

  • Fed?s Bubble Alarm Stuck on Snooze http://t.co/Wwx4fARLH4 Not in Fed’s interest 2 go bubble hunting, do bad enough w/inflation & unempmt $$ Nov 01, 2013
  • JP Morgan sees ‘most extreme excess’ of global liquidity ever http://t.co/WurN40hJfP Global QE leads to a surfeit of spendable funds $$ Nov 01, 2013
  • Yalies Yellen, Hamada Put Tobin Twist Theory to Work in QE http://t.co/Okj2CGXZfo Op Twist might work at low debt levels, not at high $$ Oct 31, 2013
  • Sen. Paul Ties His Fed Bill to Vote on Yellen Nomination http://t.co/5hBSNbsOCg Auditing Fed’s monetary policy decisions is a good idea $$ Oct 30, 2013
  • http://t.co/SrNx6yfP2T Negative interest rates are a way for the government to steal from those that want to keep their risk profile low $$ Oct 28, 2013

?

Politics & Policy

 

  • Prosecutor Pleasantly Surprised to Find There’s a Law Against Fraud http://t.co/nqneLdc6JP Regulators use FIRREA to prosecute finl fraud $$ Nov 01, 2013
  • Wife Poisoning Husband?s Lover Tests Weapons Law at High Court http://t.co/0p7Otz5hyD Upheld, would federalize all crimes using chemicals $$ Nov 01, 2013
  • Speedy Lunches Urged at SEC as Union Decries Time-Clock Watching http://t.co/RpXErNaSct Never knew SEC workers had a union $$ #huh Nov 01, 2013
  • Policymakers think of investment like magic; just because u invest does not mean everyone will be better off; investment can b a waste $$ Oct 31, 2013
  • 12 Steps toward a Simpler, Pro-Growth Tax Code http://t.co/vQWaVnHUw8 Problem is 2Much deferral of income tax & favoring investment $$ Oct 31, 2013
  • Gross Says America?s Privileged 1% Should Pay Higher Taxes http://t.co/c9i5W8i9R2 Real problem is definition of income; 2much deferral $$ Oct 31, 2013
  • Counties Made for Horse and Buggy Reject Savings http://t.co/oZshDLJGA6 Ppl value tangible/local govt & don’t begrudge its costs so much $$ Oct 31, 2013
  • Budget Deficit in US Narrows to 5-Year Low on Record Revenue http://t.co/9puVuXTbNm But it needs 2 shrink further, it is 2 big $$ Oct 31, 2013
  • Obama’s Broken Promise of Better Government Through Technology http://t.co/bWn3F3Pphy Bigness of govt tends to sabotage tech development $$ Oct 31, 2013
  • Christie Confounded as Padded Services Send New Jersey Taxes Soaring http://t.co/HTRKeQwchD NJ & corruption? We r supposed 2b surprised? $$ Oct 31, 2013
  • The expected future payments from defined benefit plans is the acid test for municipal finances; that includes social security & medicare $$ Oct 30, 2013
  • Pension Pinch Busts City Budgets http://t.co/dUid8OAyuI W/underfunded plans, watch the cash cost curve: what u expect to pay going fwd $$ Oct 30, 2013
  • The Great Pension-Bonus Giveaway Fiasco http://t.co/JWiO616X5e One of the stupidest things in pensions, allowing ppl 2spike benefits $$ Oct 30, 2013
  • Evangelical Pastors, Marriott CEO United on Immigration http://t.co/1AG0STUpK2 So long as we do not give them benefits, immigrants r good $$ Oct 30, 2013
  • Armed agents seize records of reporter, Washington Times prepares legal action http://t.co/NCJ33BSDjG State & Military abuse reporter $$ Oct 30, 2013
  • Software Helps GOP House Majority Leader Isolate ?Astroturf? Emails http://t.co/eDPLGwo1a7 Easy 2c lazy ppl who only have time 2 copy $$ Oct 30, 2013
  • Mystery of the ‘Missing’ Global Warming http://t.co/3xkNAd50JA Argues that rising water temperatures r more indicative of the problems $$ Oct 30, 2013
  • Colorado Secessionists Struggle as Trend Lifts Democratic Votes http://t.co/BJ9g0CbS6K Secessionists r unrealistic; Congress won’t do it $$ Oct 30, 2013
  • Reagan Revolution Misses Tax Fiefdoms Flourishing in US http://t.co/feUsHyGL5B Many local municipalities levy taxes; some do little $$ #IL Oct 30, 2013
  • Obamacare and the Death of Liberalism http://t.co/VLVk1GiJrT Liberalism ends when entitlement promises fail; I say give it 10-15 years $$ Oct 30, 2013

 

Wrong

  • Wrong: Germany Hits Back at US Over Economic Criticism http://t.co/hsoeuvvtLd Neomercantistic Germany’s surpluses will not get paid back $$ Oct 31, 2013
  • Wrong: Startup Defeats the Captcha, Wins One for the Machines http://t.co/vVAMnaBdJG Captchas have evolved beyond what has been cracked $$ Oct 30, 2013
  • Wrong: The political middle is dying. But it?s not redistricting?s fault. http://t.co/zRplttRK5w We need to force the middle to govern $$ Oct 30, 2013
  • An interview with Alan Greenspan http://t.co/eLgAExy6bQ One constant w/Greenspan is he will not accept blame for the mistakes he made $$ Oct 30, 2013
  • Wrong: PPP and Japanese Inflation Expectations (Extremely Wonkish) http://t.co/1G5MpBSnhw As usual, Krugman says inflation won’t hurt $$ Oct 30, 2013

?

Replies, Retweets, & Comments

  • $$ @ritholtz It is a plan if you prefund the deductible, which many medical service providers r requiring w/PPACA plans b4 service granted Oct 31, 2013
  • @viccan1 I don’t believe in conspiracy theories Oct 31, 2013
  • First, this isn’t new. I had professors talking about this in the early 1980s. Second, what may work when… http://t.co/MDJSt6EHaQ Oct 30, 2013
  • I do not want to spend my days, writing out the i’s & j’s. But i’s & j’s are an enigma, when squashed between a double sigma $$ #mathpoetry Oct 30, 2013
  • If you too should choose to skew sir, with the skew-goose, please sir, do sir — w/apologies to Dr. Suess $$ Oct 30, 2013
  • http://t.co/prav9FGJ2h “Now Fink tells us. He was more of a cheerleader for QE at its start.” ? David_Merkel http://t.co/MNHiiBTfnp $$ Oct 30, 2013
  • “The difficulty w/prosecution is apportioning blame. Easier to go after the corporation.” ? David_Merkel http://t.co/qOh82vAqvU $$ Oct 30, 2013
  • RT @RCdeWinter: This seems truer and truer every day. http://t.co/cKGi6IBdJH Oct 30, 2013
  • RT @TFMkts: Exactly how has QE helped jobs? NFP pattern no looks no different before and after QE http://t.co/Y0IUuDxT3B Oct 30, 2013
  • RT @mccarthyryanj: Amazing hire of @MattGoldstein26 by @DealBook. A really big loss for Reuters Oct 30, 2013
  • “Consider Stocktwits. They created cashtags. To refer to Google, you would type $GOOG. Twitter?” ? David_Merkel http://t.co/ZxWfSQjwze $$ Oct 28, 2013

 

The Education of an Investment Risk Manager, Part VI

The Education of an Investment Risk Manager, Part VI

Posted on by David Merkel

My boss walked in and said that we needed to terminate our annuity reinsurance treaty with an entity that I will call Bigco (this happened in July).? Senior management had deemed that we should do it, and in days we visited Bigco, assuming that the actuary in question would approve a termination of the treaty where:

  • There was no termination provision.
  • There was a guaranteed minimum return to the reinsurer.
  • The reinsurer had participation in the upside of profits.

Who negotiated such a treaty?? Very one-sided, and Bigco needed to deploy capital, not contract it.

Could a negotiating position be worse?? Yes, it could, just wait.

When we got to Bigco, we talked with the actuary for a little while, and then he handed us over to the head of M&A.? Uh-oh, he sized up the situation perfectly, and denied our request, unless we were willing to pay considerably above book value to repatriate the assets.

We went home depressed, and a few months after that my boss was summarily fired.? In those days, September was the firing time.? You can imagine what that did for morale.? Personally, I expect my boss was fired because he was most similar the the CEO, and had done things well in managing his line of business.

One day the chief actuary came to me and said, “We have to terminate that treaty.”? I explained to him the backstory, that we had offered to buy it back at an ROE of 9%, and Bigco was demanding 6%.? I said to him, “I’ve already compromised the 10% ROE objective of our company, I don’t want to go further.? I’m free to walk away, right, if we can’t get a decent price?”? He said, “No, the deal must be done.? Under no circumstances can you walk away.”

The sad thing was that any termination of the treaty would positively affect management bonuses.? (That was the real target.)

I had a strong sense that I should always serve the ultimate owners of the firm — the dividend receiving policyholders.? But this was at variance from that.

So, with the weakest bargaining hand that I can imagine, I used the following strategy.? I did nothing.? Nothing. Nothing until early December, where I called the M&A guy at Bigco and and told him, “I’ve had a change of heart.? I’ll accept an ROE of 6.9%.? That’s my final offer!”? This was ticklish because I *had* to get the deal done.

He bit on the offer, and I pressed him saying that between this time and the closing, my market value adjustment formula would rule.? He agreed.? (He probably had a profit goal as well, which was what I was counting on.)

But, he didn’t look closely at the Market Value Adjustment formula.? I gave him one that was volatility-loving, that would adjust of the greater of the absolute value of the yield changes in 3-month T-bills or 30-year Treasury Bonds.? Don’t criticize the guy too much, the Federal Reserve fell for the same tactic on GICs they bought from us.

Before the deal closed, the Fed started tightening monetary policy, and the Market Value Adjustment got us out at an ROE of 9.1%.? What a win, and for the policyholders.? Management got more as well, and I got almost nothing.

I took risks trying to do the right thing, praying the God would help me, and in this case, it worked.? Can you be more righteous than your management team?? In most cases, no, but in this case I succeeded.

I would say to all, try to serve the interests of owners rather than management.? Act like an owner, not like a manager hauling down a fat salary.

Sorted Weekly Tweets

Sorted Weekly Tweets

Posted on by David Merkel

Financial Companies & Lending Markets

 

  • Hedge Fund GSO Scores Win With MBIA Bet http://t.co/eMYUgX6Syg Risky bet that paid off; he realized the banks would have2 compromise $$ $MBI Aug 10, 2013
  • Mortgage Delinquencies Hit Five-Year Low http://t.co/HlfyPTbUAV Judicial states trail non-judicial states as cases drag on $$ Aug 10, 2013
  • The bailout Wall Street is blocking from Main Street http://t.co/gFasMd4jdG Eminent domain should not b used 4 trivial reasons $$ Aug 10, 2013
  • The US July 2013 Senior Loan Officer Opinion Survey on Bank Lending Practices http://t.co/JAL5TggXg1 Perhaps bank lending is turning up $$ Aug 08, 2013
  • The US Has a Really Helpful Student Loan Repayment Program?and No One’s Using It http://t.co/xyAgjk24PE Pay % of your income for a # yrs $$ Aug 08, 2013
  • BofA Trader Avoided Bank’s Bad Mortgages ‘Like A Fat Kid In Dodgeball’ http://t.co/3OdziStl8r Colorful, shows awareness of credit issues $$ Aug 07, 2013
  • Consumers Find Investors Eager to Make ‘Peer-to-Peer’ Loans http://t.co/5gKhnAzJ2x Eventually credit will b abundant leading 2 failure $$ Aug 07, 2013
  • Obama Urges Mortgage Overhaul With Limited Role for Gov’t http://t.co/MCtNMlBlJX Guaranteeing 30Y mtges incents housing overinvestment $$ Aug 07, 2013
  • House Democrat introduces bill to end mandatory arbitration http://t.co/2VHm4qXeK3 Costs of court cases vs crooked playing field of arb $$ Aug 07, 2013
  • Mortgage Debt Rejected by Banks Facing New Rules http://t.co/GCCoZvINkt Fewer want 2 hold mtge debts b/c of changes in capital rules $$ Aug 07, 2013
  • Many Can’t Pay Student Loans http://t.co/PgxJqtBtYT Some 8% of Borrowers in a New Federal Program Have Defaulted; avoid student loans $$ Aug 06, 2013

 

Companies & Industries

 

  • Hurricane forecast may have traders on edge http://t.co/2mRSgZvuXZ Hurricane forecasting has not been very accurate over the last decade $$ Aug 10, 2013
  • Warren Buffett Trains ‘Elephant Gun’ on Smaller Prey http://t.co/G4l4fxVtOZ No surprise. Buffett lets his managers buy good prospects $$ Aug 09, 2013
  • Remodeling Rebounds in US With Contractors http://t.co/TqOVgTh9Wa Deferred projects r finally getting done, as ppl more willing 2 spend $$ Aug 08, 2013
  • Loeb?s Reinsurer With No US Staff Gains From Jobs Act http://t.co/jnBqNMgucG Just b/c u list on US exchange doesn’t mean u will hire here $$ Aug 08, 2013
  • Goldman sees ‘creative destruction’ in these businesses http://t.co/BkgQSb1wsk Don’t agree on reinsurance; underwriting takes expertise $$ Aug 08, 2013
  • Xerox’s Ursula Burns on Her Career Path and Changing Company Strategy http://t.co/z3kFlsSOKU Xerox is interesting turnaround FD: + $XRX $$ Aug 08, 2013
  • 27,900 Reasons For Amazon’s Loss http://t.co/lQ41dRZfuu Ordinarily, good corporate growth comes w/profits. $AMZN hires 28K over past year $$ Aug 08, 2013
  • CBS-Time Warner Cable Dispute Shows an Industry Unaware of Reality http://t.co/ZSNNOPstzV Internet may reshape economics of televison 2 $$ Aug 07, 2013
  • Jeff Bezos’s Tool Kit for Washington Post http://t.co/Yib1yt6k7Y Bezos is a bright guy, but making $$ off of newspapers tough w/internet Aug 07, 2013
  • Ride a Painted Pony, Let the Spinning Wheel Fly http://t.co/vG89yC4ooJ The word flywheel is popular 2 use, c here: http://t.co/vxc8d0fofQ $$ Aug 07, 2013
  • The 40 cheapest stocks, according to Goldman Sachs http://t.co/XADhLHVD4G $GS tells u2 buy cyclicals. I own 4 on the list. Seems risky $$ Aug 07, 2013
  • IBM Furloughs US Hardware Employees to Reduce Costs http://t.co/bQWk3BtgD3 2me, this seems kind of gimmicky; I would lean bearish $$ $IBM Aug 07, 2013
  • Hidden Billionaire Found With Food Fortune in California http://t.co/w2yUPsx86D Uses zoning laws to keep potential competitors at bay $$ Aug 06, 2013
  • We’re In 4A Long Bottom http://t.co/NtMxx5hIzj Barring strong inflation, gold miners have slashed exploration, mining best deposits only $$ Aug 06, 2013
  • For Twitter, Free Speech Is a High-Wire Act http://t.co/Yx80PIwfQ1 Twitter tries 2 chart a middle course in censorship in diff countries $$ Aug 05, 2013
  • Hidden Billionaire Cohen Hauls Fortune in Unmarked Trucks http://t.co/YpXAmxlo3F C&S Wholesale Grocers, biggest company u never heard of $$ Aug 05, 2013

 

Politics & Policy

?

  • A User?s Guide to Obama?s Inside-Out Economics http://t.co/5dHZasczfL Obama long on rhetoric, & short on reason; doesn’t understand econ $$ Aug 09, 2013
  • Fed Belongs to Everybody as Public Says It?s Our Money in Crisis http://t.co/YYy7dXkY3r Level of lobbying 4 Fed Chair is unprecedented $$ Aug 08, 2013
  • We Are All Going to Pension Hell http://t.co/SoGeWiryxV @asymmetricinfo points out hopelessness of the pensions crisis, only Q is when $$ Aug 08, 2013
  • Heroin Makes a Comeback, Especially in Small Towns http://t.co/Uwrh97QwU3 Small towns gain big city problems; drugs know no boundaries $$ Aug 08, 2013
  • Ted Koppel: America’s Chronic Overreaction to Terrorism http://t.co/4ueqew4oB9 The War on Terror has done more harm to the US than good $$ Aug 07, 2013
  • Deficit Shrinks to 5.7% of GDP as Debt Ceiling No Vote Risks All http://t.co/NaWdRcTzlf Maybe the deficit will disappear by accident? $$ Aug 07, 2013
  • Obama’s False History of Public Investment http://t.co/X8Lx8za8CW Planned 2b an investment, ended up being an expense. Happens in biz 2 $$ Aug 06, 2013
  • Insider-Trading Probe Caught in a Washington Knot http://t.co/ykIYLNNgvL Investigation of Health-Policy Leak Muddled by Congress’ rules $$ Aug 05, 2013
  • Central Bank Needs to Untangle ?Monetary Gordian Knot? http://t.co/IkNfB8X2sh Fisher says little help 2 job growth from $$ Trillions of QE Aug 05, 2013
  • US Growth comes Mostly from Inventories http://t.co/nEUK3zyDTY “Mostly” overstates it, but 40% does put a significant dent in GDP growth $$ Aug 05, 2013
  • US July Non-Farm Payrolls: The Hidden Weaknesses http://t.co/Cb8OyzJAMQ Number of hours worked decreased a lot & lower participation rate $$ Aug 05, 2013
  • Newt Gingrich sees major Mideast mistakes, rethinks his neocon views on intervention http://t.co/n27U4QpgxN Not as big a change as stated $$ Aug 05, 2013
  • Republicans Don’t Need to Sabotage Obamacare http://t.co/Eu9z62ITjz Obamacare, badly designed, is its own worst enemy $$ Aug 05, 2013
  • Summers After Government Saw Wealth Surge to $17M http://t.co/M0MgH8TUco “Consulting” can make up 4a lot of lost revenue post-govt $$ Aug 05, 2013

Rest of the World

 

  • In China, a New City Attracts Few http://t.co/QYyhVJPzx6 CIties r organic things; they grow a little at a time, not all at once $$ Aug 10, 2013
  • India?s Fear of Growth http://t.co/K2A7QTDruR Socialism in India is deep, as deep as corruption. Corrupt countries do not grow. $$ #simple Aug 09, 2013
  • Germany displaces China as US Treasury’s currency villain http://t.co/3JDudxN7yE Low labor costs, strong exports, weak consumer demand $$ Aug 08, 2013
  • Terrorist Tungsten in Colombia Taints Global Phone-to-Car Sales http://t.co/jgZr8fDbA6 Long piece regarding FARC smuggling tungsten $$ Aug 08, 2013
  • Vietnam Banking Fix Starts With $474M of Bad Debt http://t.co/Zt0YG7Mx0x Credit bust in Vietnam may b absorbed by central bank sub $$ Aug 07, 2013
  • Obama Snubs, Russia Laughs, Putin Wins http://t.co/ROvRuwFBDm Russia policy is ticklish 4 any US president, little 2 gain either way $$ Aug 07, 2013
  • The $4M Teacher http://t.co/onnV3kvClQ South Korea’s students rank among the best in the world, and its top teachers can make a fortune. $$ Aug 07, 2013
  • Islamists Seize Airbase Near Aleppo http://t.co/eNBrMdgDVu This feels like a long bloody stalemate; a warning to all who favor war $$ Aug 07, 2013
  • Toyota $37B Cash Program Shows Effect of Abenomics http://t.co/87YHXM0CkL No: Toyota has no profitable places 2 reinvest in Japan $$ $TM Aug 07, 2013
  • China?s Debt Surge Pressures Xi-Li to Avert Lost Decade http://t.co/tJp4pEDLKB The time to avert a lost decade is when the boom is strong $$ Aug 07, 2013
  • Mexico Leader Said to Seek Changes to Break Oil Monopoly http://t.co/Fqi9oJTj4U Never thought Mexico would change its position on oil $$ Aug 06, 2013
  • India Names Rajan Central Bank Governor as Rupee Plunges http://t.co/UOeo9Ah4Tg Good choice; 1 economist who understands financial crisis $$ Aug 06, 2013
  • South Africa?s Post-Apartheid Failure in Shantytowns http://t.co/o4CARCmq4L South Africa merely traded one group of cronies for another. $$ Aug 06, 2013
  • Will Portugal Bring Down the Spanish Banking Sector? http://t.co/TKEe5MfAil Spanish banks lent 2 Portugal credits. Tough 2 do Pt haircuts $$ Aug 06, 2013
  • Ex-Soros Adviser Fujimaki Sees JGB Bust From Tax Delay, Fed http://t.co/T2Ktp1lHFF Many difficulties afflicting Japan w/the weak yen $$ Aug 06, 2013
  • Baguette Hopes Fade for Some French Farmers on Wheat Quality http://t.co/a5JiNJAV4S Just 1 more economic difficulty 4 weak man of Europe $$ Aug 06, 2013
  • Stagnant South Korea Property Drags on Growth Rebound http://t.co/bHwUW59ard Add South Korea to property bubble club, underweight stocks $$ Aug 06, 2013
  • Bond Salesman Who Wasn?t Reveals RBS Human Errors http://t.co/5vU3u6pWfq Very senior managers fooled in2thinking janitor was top salesman $$ Aug 05, 2013

 

?

Bond Market

 

  • Pimco?s Gross Vows to Win Bond ?War? After Redemptions http://t.co/yrmdUeVeo4 Maybe the total AUM has gotten too great 4 outperformance $$ Aug 08, 2013
  • Bond Share Tumbles as Morgan Stanley Says Sell: Credit Markets http://t.co/uq4QFGxYAD Another “interest rates can only go up” piece $$ Aug 08, 2013
  • For Bond Investors, a ‘Generational’ Chance to Sell http://t.co/PtV9OOW7Ok W/a weakening economy, this is not a done deal, 2many leaning $$ Aug 08, 2013
  • Private-Equity Payout Debt Surges http://t.co/PWslmEr7YU Borrowing to pay dividends to their sponsors; PIK toggles and other risky bonds $$ Aug 06, 2013
  • Get Ready for the Next Round of Bond Pain http://t.co/rMvYV3Op0b Pain won’t come if economy keeps weakening, but be wary on credit risk $$ Aug 06, 2013
  • US Credit Markets: My US Lite Rita Covenant: Freshness without Protection? http://t.co/N8lbbYEpvz Cov-lite loans larger % now than 2007 $$ Aug 05, 2013

 

 

Market Impact

?

  • How to Teach Teenagers About Investing in the Stock Market http://t.co/eL7BC7rqtQ I learned from my Mom; most of my kids aren’t interested $$ Aug 10, 2013
  • What if the Stock Market Were a Bond? http://t.co/3LJEhCwym3 @eddyelfenbein gives a tool 2 analyze stock prices: http://t.co/Wwu3q5t2kf $$ Aug 10, 2013
  • Confessions of an Institutional Investor http://t.co/Cu5OT0vxVw @reformedbroker prints a saga of high expenses, negative alpha & hopeless $$ Aug 08, 2013
  • Spot the Outlier http://t.co/BDfN1ms7t8 @ritholtz notes the considerable outperformance of US equities in 2013. When does the party end? $$ Aug 08, 2013
  • Mind the (Expectations) Gap: Demographic Trends and GDP http://t.co/5LyZkROeyl Because of low pop growth GDP growth resets 3% -> 1%/year $$ Aug 07, 2013
  • Advisers don’t have a firm grasp of ETF liquidity, Cerulli finds http://t.co/b5gnuEKTi4 ETFs do not create liquidity, but shift liquidity $$ Aug 06, 2013

?

Detroit

 

  • Detroit Losing $1 Million Check Bares Hobbling Processes http://t.co/X0R0QpE9an Real question is why didn’t Detroit go bankrupt sooner? $$ Aug 10, 2013
  • Foodies Fight to Save Detroit With Job Hopes Pinned on Arugula http://t.co/s2WZuTYPql Cities die slowly 2, as multiplier effect reverses $$ Aug 10, 2013
  • Michigan’s Saginaw County Postpones Debt Sale http://t.co/N1dbcUamXE Wait. U r in Michigan. They let munis default. We will not lend 2u $$ Aug 09, 2013
  • Steve Malanga: The Real Reason the Once Great City of Detroit Came to Ruin http://t.co/aWSmiIHyK3 Chase out middle class taxpayers $$ #boom Aug 06, 2013

 

Energy

 

  • Growth in crude oil shipped by rail slows http://t.co/Jw3f1KxVFc Price differentials narrow 4 feedstocks & it does not pay 2ship by train $$ Aug 10, 2013
  • US refiners eye shale butane to cut gasoline costs http://t.co/qsfuoOapYr Fracking producing cheap butane, alkylation can make it octane $$ Aug 10, 2013
  • Europe’s gas-fired power plants attract opportunistic investors http://t.co/ShLtiMicQY Idea counts on electric rates rising; uncertain $$ Aug 07, 2013
  • US becoming ‘refiner to the world’ as diesel demand grows http://t.co/8KG3qn4lJY Adds2 GDP growth w/rest of world short refining capacity $$ Aug 07, 2013

 

Replies, Comments & Retweets

  • RT @trengriffin: The spectacle of journalists giving Jeff Bezos advice on how to make a newspaper profitable is like watching a Three Stoog? Aug 09, 2013
  • “If I were running a significant endowment, I would invest in people rather than external firms, and?” ? David_Merkel http://t.co/kC5gAHHEl7 Aug 08, 2013
  • @BarbarianCap move along, nothing to see here… Aug 08, 2013
  • . @Contra_Invest Try this: http://t.co/WplgPsxjkL Wisdom from Howard Marks, with help from Seth Klarman in the last two pages $$ Aug 07, 2013

 

Sorted Weekly Tweets

Sorted Weekly Tweets

Posted on by David Merkel

Market Impact

  • Old-School Stock Picker Weitz Struggles With Index Craze?stks.co/gYnx?Weitz has a really good long term track record, good guy $$
  • High-Yield Companies Cash In on Dividend Deals?stks.co/cXCJ?W/the rise in interest rates, junk corporations move 2 refinance $$
  • IRS Reconsiders What Qualifies for REIT Status?stks.co/jYiU?There should b1 tax law for all things like corporations in the US $$
  • New Revenue Recognition Rules Arriving Soon?stks.co/rFvA?I’m afraid the new rules will b less clear than current GAAP rules $$
  • How the Robots Lost: High-Frequency Trading’s Rise & Fall?stks.co/gYk9?Every investment strategy has a capacity limit, even HFT $$
  • Sam Zell says sell?stks.co/rFr3?1 month old; he also thinks that efforts by corporations 2 manage single family homes will fail $$
  • Banks will take hit on mortgage refi buststks.co/pFwq?This may true 4 whole industry, but some banks will profit via MSRs, ALM $$
  • FASB?s Seidman: Americans Prefer Rules to Principles?stks.co/pFpb?We should stick w/GAAP & ditch IFRS convergence. We know GAAP $$
  • IFRS Makes Progress Around the Worldstks.co/tFir?Incomparable Financial Reporting Standards r less converged than many realize $$
  • 401(k)s Are Doing Great Except For A Few?stks.co/eX9U?Fine,except 401(k) users don’t put enough away 2 care 4 their retirements $$
  • Why Low Volatility Is Losing Its Alphastks.co/cX0J?Any strategy can be overfished. Monoculture rarely leads to good results $$
  • “Any strategy can be overfished. Monoculture is a recipe for disaster. How many analogies do I?” ? David_Merkeldisq.us/8dev71?$$
  • Money-market fix is a flawed compromise?stks.co/dWtx?My proposal was cleaner and far better:?stks.co/dWty$$
  • Bet on CDOs Returns to Wall Streetstks.co/bWy4?Synthetic CDOs take the field again, just in time to fleece anxious yield hogs $$
  • Bruce Berkowitz Places Bet on Fannie, Freddie?stks.co/jYCL?A lot of this rides on political future of F&F, w/Berkowitz unsure $$
  • Don?t Sell Your Soul for Yield, Pimco?s Simon Says?stks.co/qFRi?He retires @ 52 2pursue philanthrophy & fun; bond risks high $$
  • Rise in US Bond Yields Jolts High-Dividend Stocks?stks.co/qFIa?If they r used as bond substitutes, will trade more like bonds $$
  • Brokerage firms debate value of Certified Financial Planner title?stks.co/dWU1Interesting 2c firms asking CFPs to decertify $$
  • The 100% Stock Solution?stks.co/sEyrOnly the stoutest souls should try this; best time to start is after a meltdown, if u can $$
  • The Intelligent Investor: How Funky Is Your 401(k)? by?@jasonzweigwsjstks.co/dWKf?Unusual bond funds not recommended 4 novices $$
  • Why Hedge Funds Aren’t Worth the Money?stks.co/iXxM?Double-alpha & leverage r great in theory; in practice they don’t work well $$
  • ‘?@Matthew_C_Klein?@felixsalmon?But I disagree:?blogs.reuters.com/felix-salmon/2??Cov-lite loans r a sign of general credit degradation $$
  • Interesting argument by?@felixsalmonthat cov-lite bonds are good because they give borrowers greater flexibility:blogs.reuters.com/felix-salmon/2?

 

US Politics

  • The NSA Doppelganger?stks.co/jYiY?Govt has been collecting records on every phone call made in the US ever since Patriot Act $$
  • Will New Health Insurance Be Too Expensive 4 America’s Lowest-Paid?stks.co/rFvF?Law of unintended consequences teaches $$ lessons
  • Trading Dollar Bill for Coin Big Savings, No Small Change?stks.co/iYrY?This could makes sense if we eliminate the penny as well $$
  • Fed Hurdle of 4 Straight 200,000 Payrolls Sets Bernanke View?stks.co/iYrW?I don’t think the Fed has a coherent policy response $$
  • An Insider’s Guide to Obama’s Summit With China’s Xi?stks.co/sFp7?Makes me think that nothing much will come out of this summit $$
  • Start Your Engines: NatGas Revs for Transportation?stks.co/hYwm?This is more complex than it looks b/c liquification low temps $$
  • Obama’s Civil-Liberties Record Questioned?stks.co/qFu9?Obama is not a change agent; he is merely Bush-plus & we r the losers $$
  • US declassifies phone program details after uproar?stks.co/hYwd?Terrorism is an unlikely threat – doesn’t justify the snooping $$
  • Alan Greenspan’s Epic Incompetence: Another Shoe Drops?stks.co/jYXF?This piece provided the link 4 the last tweet $$#greenspan
  • How Elite Economic Hucksters Drive America?s Biggest Fraud Epidemicsstks.co/eXA3?Of course fraud should b a crime, it’s theft $$
  • NSA seizes phone records of Verizon customers?stks.co/jYXC?Shouldn’t a warrant b required 4 such indiscriminate investigation? $$
  • Jefferson County, AL, Reaches Bankruptcy Deal?stks.co/gYbR?$JPMloses most, then taxpayers. “gross incompetence, waste, graft” $$
  • Debt Deal in Alabama Will Cost JPMorgan?stks.co/aX7U?Sewer rates rise. Everyone loses except the speculators who bot debt cheap $$
  • Warplanes to Tankers Delayed by Contested US Contracts?stks.co/gYUYLosers contesting contracts is now normal & slows things $$
  • FHA Losses Could Hit $115 Billion in Extreme Scenario?stks.co/gYLJ?4 political reasons, FHA guaranteed lousy loans, losses come $$
  • Jefferson County Paves Way for Bankruptcy Exit?stks.co/cWky?The biggest losers r taxpayers, but then they elected the schmoes $$
  • Mistake:?$AIG,?$PRU,?$GE?Named Systemically Important by Panelstks.co/jYCN?Focus should b: financing long assets w/short loans $$
  • The Real Scandal at the IRS?stks.co/sFMf“…larger threat of abusive behavior by a fearsomely powerful government agency.” $$
  • ObamaCare Bait and Switchstks.co/jYCG?Obamacare was never meant 2 make healthcare affordable 2all, only 2 those w/o insurance $$
  • It really annoys me, because the key of financial safety is asset/liability mgmt & all of new regulations do not tighten this up $$
  • Risk that the Feds should care about is the toxic mix of illiquid assets funded by liquid liabilities; long liability structures r safe $$
  • Feds close to picking ?risky? non-banksstks.co/iY88?Really looks like the Feds r going2goof again & call non-risky firms risky $$
  • Overstated: Risk-Averse Culture Infects US Workers, Entrepreneursstks.co/eWev?Generally moderate risk-taking leads2best result $$
  • Little Cause for Inflation Worriesstks.co/jXms?Far better 2 use median or trimmed mean CPI, than the more doctored core PCE $$

 

Europe

  • France demands emergency EU summit over China’s wine tax threat?stks.co/dX8ATrade wars have 2 start somewhere, however small $$
  • Moody?s Casts Doubt Over Nordic Havens Amid Housing Risksstks.co/bXCh?Rest of world adopts bad monetary policy of US, EZ&Japan $$
  • Central Banks Put More Scandinavian Currencies in Reserve?stks.co/jY4tEnables the Nordic countries to import asset inflation $$
  • Swiss Seen Passing US Bank-Tax Law to Avoid Worse Fate?stks.co/qFJY?Most compromises r better than seeing many banks die $$

 

Companies & Industries

  • Tyson CEO Says Smithfield Deal Could Aid Pork Exports?stks.co/iYnc?Many Chinese might like 2 buy high quality American food $$
  • $COST?CEO Craig Jelinek Leads the Cheapest, Happiest Company in the World?stks.co/gYk1?Investing in workers vs cheap workers $$
  • Wells Fargo Will Benefit From Interest-Rate Increase, Sloan Says?stks.co/eX42Could just b brave words, few give up income $$
  • Fannie Shares Seen as Worthless Surging in Disconnect?stks.co/dWtw?The politics of the situation r in flux; no margin of safety $$
  • Goldman Wants You to Forget About Too Big to Fail?stks.co/gYUx?There is a subsidy to the big banks, not as large as some think $$
  • Like Berkshire, Markel thrives on buy&hold?stks.co/rFbN?Thomas Gayner, like Buffett is a compounder w/underwriting float $$?$MKL
  • Alcoa Junk Downgrade Is Rare Trauma for Dow Stocks?stks.co/iYYW?Time2 modernize & create News Corp Indexstks.co/gYUZ?$$
  • Whale of a Trade Revealed at Biggest US Bank With Best Control?stks.co/iYYVLong but definitive article on?$JPM?credit trade $$
  • Scor to Buy Generali Reinsurance Unit for $750 Million?stks.co/tFMQ?How do u say “Scottish Re” in French? “Scor”?$RGA$$?#spitspit
  • Apple Saves $724 Million With Well-Timed Sale?stks.co/qFCo?20-20 hindsight, but?$AAPL?timed their debt sale well $$
  • Kinder Morgan Cancels $2 Billion Pipeline Plan?stks.co/iY7O?Sending crude via rail costs same & does not require LT contract $$

 

Asia

  • Hedge Funds in Japan Ride Small-Cap Rally on Abenomics Boost?stks.co/eX41Be wary here, because there is no clear macro path $$
  • The Wonk With the Ear of Chinese President Xi Jinping?stks.co/qFfh?A modernizer who wants the Communist Party 2 keep control $$
  • Topix Profits Percentage Increase Tripling World Even in $400 Billion Wipeout?stks.co/qFUz?Wait. Weak yen also has bad effects $$
  • Poultry-Plant Fire in China Kills Dozensstks.co/jXzF?Sad, but it is common 4 firms that hire low wage workers 2 cut corners $$
  • Muddy Waters to Jupiter Seek Profit as Risk Rises?stks.co/eWeV?Convoluted financial systems can’t handle as much debt b4 crisis $$
  • Heard on the Street: Let Me Not See Old Age in China?stks.co/qFCr?Elderly poor who live away from the coasts suffer in China $$

 

Other

  • Co-hosts of radio show ‘The Pursuit of Happiness’ commit suicide togetherstks.co/sFhK?Happiness pursued as its own end fails $$
  • Harvard Humanities Fall From Favor Among College Students?stks.co/rFgfThere is no one more unrealistic than a humanities prof $$
  • To Catch a Thief: Banks Try Using Big Data?stks.co/jYPf?The banks try 2 detect correlated behavior among fraudsters & succeed $$
  • How Retirees Pay Zero Taxesstks.co/eX3v?If you r older & have little wage income there r often ways 2 reduce your taxes $$
  • Bermuda With Ireland Targets of Tax Vigilantes, Minister Says?stks.co/hYTPThey were really surprised when NATO blockaded them $$
  • Marriage Advice: Sharing a Hobby Is Good for Your Relationship?stks.co/tFMwOur hobby is raising kids, will have2find a new one $$
  • Meredith Whitney?s ?Great Migration?stks.co/fYHh?Disliked by genuine muni experts?@catelong?&Joe Mysakstks.co/gYGr?$$
  • Government 2 Hold Back Growth for Years?stks.co/qFJ0?Balancing the budget may have far less drag than most suppose, lowers risk $$
  • Vatican says Pope Francis got it wrong, atheists do go to hell?stks.co/iY8I?Adults @ Vatican correct Pope’s wishful thinking $$
  • Wrong: Smartest Decision Ever Made by Bill Gates, Warren Buffett?stks.co/rFAj?If u raise your children right, they can handle $$
  • Behind the ‘Internet of Things’ Is Android?and It’s Everywhere?stks.co/tF9hAmazing how 1can change the world on lo profit mgns $$

 

Finance

  • Has BIS Found the Solution to Too Big to Fail??stks.co/fYcY?Has issues, but much better than what was done in 2008. Worth a try $$
  • The rise of the real collateral ?mining? business?stks.co/bX4T?Overproduction of commodities feeds the shadow banking system $$
  • What is the opposite of helicopter money??stks.co/eX43?Negative interest rates suck liquidity, as people seek stores of value $$
  • World Chasing U.S. Yield With 25% Deal Jump: Real Estate?stks.co/hYUF?Enough inventory 2 pick from & seems 2b recovering $$
  • A World Awash in Credit with Much Work to Do?stks.co/gYHW?Increasingly hard to find safe yield; EM still seems promising,but… $$
  • i’d like to see: zip code level correlation between house price growth from 2011 to 2013 against absentee purchase share during same period.
  • Hedge Funds Boost Gold Bull Bets Most in Two Months?stks.co/jY4r?Makes me a little edgy for gold prices $$
  • Mortgage Investors Get Blindsidedstks.co/pFMV?Bonds Backed by Subprime Loans Had $1B Previously Undisclosed Losses $$?#surprise
  • Emerging-Market FX Gets Ugly. Very Ugly.?stks.co/qF1e?Yeah, I feel it, just look at the chart in?$EDD?of which I am long $$

 

FWIW

  • My week on twitter: 51 retweets received, 58 new followers, 34 mentions. Via:20ft.net/p

 

On News

On News

Posted on by David Merkel

I have a saying that when there is no news, the market reveals its true direction.? That applies to individual securities as well as the market as a whole.? Why?

Think of institutional traders, who drive much of the market.? They are so big that they have to spread out their orders over time, or they would move the market against their positions.? On days when there is no news, volume tends to be light, displaying the actions of the big traders.

Valero recently spun off CST Brands, which was their retailing arm, selling gasoline, and things you find at convenience stores.? Seems cheap to me.? Over the last few days it has been rising on no news.? To me that means some institutional investors are buying.

I’ve seen the same thing happen when a stock falls on no news.? That’s usually a bad sign if you are long, because it means someone is selling for a reason you are not aware of.? Now, if you have done your homework, and know more than the seller, a lower price is to you advantage if you want to buy more.? The trouble is, you don’t know how much the seller has to unload.? To use CST Brands as an example again, I received some shares as a result of holding Valero for clients (and me, I get what my clients get), but I estimated how much index related selling had to happen as a result.? I bought a full stake for my clients at the point where the total volume from the prior “when issued” trading, plus actual trading on the first day hit my estimates.? It was close to the low for the day, though someone more enterprising could have picked up shares cheaper during the “when issued” trading, if he was clever.

But sometimes when there is news, you need to try to gauge whether something is an over- or under-reaction.? My favorite example here is RGA, the prominent well-run life reinsurer.? Once every eight quarters or so, they report a lousy quarter.? Why?? Because of the law of small numbers.? The large claims inside a life reinsurer are few, but make a considerable difference to the earnings when a bunch of large policy deaths happen at the same time.? The general public does not get this, so when RGA has a bad quarter, it is usually a good time to be a buyer.

The same applies to P&C reinsurers during crises.? I added to my reinsurance holdings post-Sandy, because I knew that the reinsurers would take relatively few claims because they don’t cover flood for residential, though they might have commercial-related claims.? As it was, none of my insurance holdings had any significant claims from Sandy, and the portfolio did well.

Toss out another example, but Endurance Specialty is one of the leading underwriters of crop insurance.? Crop insurance was a horrible place to be last year, and that put pressure on ENH as a stock.? But that neglected all of the other lines of business of Endurance that were performing well, as well as the risk controls that Endurance placed on its crop insurance business.

Perhaps the broad message here is to know your stocks well, so well that you can gauge whether a? market reaction to news is overdone, underdone, or meh, normal.

Analyzing the reaction to news (or no news) bonds and other assets as well.? When I was an institutional bond manager, I would watch the results of trading on the slow days, because it would give a clue to what the “big guys” were doing.? Also, when an event that has been anticipated occurs, like a ratings downgrade on the bonds of a troubled company, the market reaction says a lot, because often there are many who were waiting to buy once the downgrade happened, so price rises a lot at the downgrade.? (Think of the USA downgrade by S&P.)? The reverse is true for downgrades that are more of a surprise.

In summary, all news is not equal.? The reactions to news, and the lack thereof, can tell us a lot about the intentions of large market actors.? Do your homework well, and prosper off of the knowledge that it gives you regarding reactions, over-reactions, and under-reactions.

Full disclosure: long VLO CST RGA ENH

At the Towson University Investment Group?s International Market Summit, Part 4

At the Towson University Investment Group?s International Market Summit, Part 4

Posted on by David Merkel

1??????? Any specific stock, bond, industry, country, or asset picks that you feel strongly about?

I like:

  • The P&C insurance & reinsurance industries — they are very good at compounding earnings, especially the ones that are good underwriters, conservatively reserved, and shareholder focused over the long haul.
  • Selected energy and information technology stocks, so long as the valuations are inexpensive.
  • RGA, National Western Life, Stancorp Financial, AFLAC, and Industrias Bachoco SA
  • Emerging market bonds — their policies are mainly more orthodox than the developed world, for now.

2??????? What strategies do you use to determine if a company is worth a deeper look into, in the first five minutes?

There is this article: GE Does Not Bring Good Things For Your Life. If you have a Bloomberg Terminal, that is a useful article.

But even if not, the five-minute drill is easy:

  • Look at price to expected earnings. ?Look at past earnings.
  • Look at indebtedness and goodwill. ?Ask: is this a stable industry? ?Does the goodwill represent anything valuable, some barrier against competition?
  • Compare cash flow from operations versus earnings. ?An excess is usually better.
  • Look at price-to-book for financials and price-to-sales for utilities and industrials — lower is better.
  • Ask yourself if this is an industry with increasing, stable, or decreasing pricing power.
  • Look at whether the share count is rising or falling. ?Falling is better.
  • Does it pay a dividend? ?Yes is better.

Beyond this, for corporate bonds, I have a similar arrangement. ?And I call that the one-minute drill, because in institutional fixed income, you have to be fast when the market is hot.

3??????? What have been valuable resources that you would recommend to up-and-coming investors?

Look through the book reviews that I have written — there are almost 200 of them. ?I have read a lot of books by eminent value investors, bond investors, growth investors, alternative asset managers — you name it, I have read a lot of investment books.

But let’s add in another question:

4??????? What advice would you give to a student who wants to start investing but has not prior knowledge?

My friend Niall O’Malley gave a good answer to this when he said create two lists of stocks — one that you think will do well, and one that you think will do badly. ?Then track them, and learn from the companies that violate your expectations.

My answer would be more plebian — paper trade. ?I did that in my early 20s, long before I had money to invest. ?I came close to winning the Value Line contest in the mid-80s.

But the biggest thing is making a commitment to improve your investment knowledge. ?When I was 26, I said that I would spend one hour per day, except Sundays, to improve my investment knowledge. ?I went all over the map. ?I read practical stuff. ?I read academic stuff. ?I read stuff on stocks. ?I read stuff on bonds. ?I read stuff on industries, sectors, companies, etc. ?I read stuff on management, operations, financial management. ?I read, read, and read.

Investing requires continual self-education. ?Read and learn and profit.

Final episode tomorrow.

Full disclosure: Long RGA, NWLI, SFG, AFL, IBA

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