Search Results for: rga reinsurance

Sorted Weekly Tweets

Sorted Weekly Tweets

Posted on by David Merkel

Bond Markets

 

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

 

Politics

 

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

 

LIBOR

 

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

 

 

Eurozone

 

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

 

Residential Housing

 

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

 

 

Market Impact

 

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

 

Pensions

 

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

 

Companies

 

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

 

Central Banking

 

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

 

Miscellaneous

 

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

 

Rest of the World

 

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

 

Economics

 

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

 

Finance Companies

 

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

 

Comments

 

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

Grow Embedded Value

Posted on by David Merkel

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

But there are some caveats:

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

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

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

company ticker img_desc country exchg_desc P / TB P / E Expected P/E Mkt cap LT Debt/ Equity
AerCap Holdings N.V. AER 0939 – Rental & Leasing Netherlands N – New York

0.66

7.6

5.2

1524.4

263.6
Aircastle Limited AYR 0939 – Rental & Leasing United States N – New York

0.64

8.4

8.1

931.2

202.1
American International Group, AIG 0715 – Insurance (Property & Casualty) United States N – New York

0.55

2.9

9.8

56637

73.6
Anworth Mortgage Asset Corpora ANH 0933 – Real Estate Operations United States N – New York

0.94

7.8

7.9

917.8

3.8
Assurant, Inc. AIZ 0709 – Insurance (Life) United States N – New York

0.74

5.7

6

2992.7

19.6
AXA (ADR) AXAHY 0709 – Insurance (Life) France O – Over the counter

0.88

7.6

5.8

29204.3

21.5
Axis Capital Holdings Limited AXS 0715 – Insurance (Property & Casualty) Bermuda N – New York

0.86

8.3

8.8

4325.9

19.3
AXT, Inc. AXTI 1033 – Semiconductors United States M – Nasdaq

0.94

7.5

9.9

129

2.8
Banco Bilbao Vizcaya Argentari BBVA 0724 – Money Center Banks Spain N – New York

0.9

8.7

6

34554.8

250.4
Barclays PLC (ADR) BCS 0727 – Regional Banks United Kingdom N – New York

0.42

6.9

3.6

31291.9

44.7
Callon Petroleum Company CPE 0609 – Oil & Gas Operations United States N – New York

0.86

1.7

5.8

171.6

62.6
Chimera Investment Corporation CIM 0703 – Consumer Financial Services United States N – New York

0.73

4.6

5.3

2434.6

59.2
China Gerui Adv Mtals Grp Ltd CHOP 0121 – Iron & Steel China M – Nasdaq

0.55

2.3

1.7

157.4

0
China Zenix Auto International ZX 0415 – Auto & Truck Parts China N – New York

0.49

1.8

1.4

127.3

0
Citigroup Inc. C 0724 – Money Center Banks United States N – New York

0.53

7.4

5.8

77291.7

165.3
Corning Incorporated GLW 1024 – Electronic Instruments & Controls United States N – New York

0.95

8

8.4

19410

14.7
Crexus Investment Corp CXS 0933 – Real Estate Operations United States N – New York

0.85

6.6

9.4

779.2

0
Deutsche Bank AG (USA) DB 0727 – Regional Banks Germany N – New York

0.65

7.6

4.7

31543.1

318.7
GeoEye Inc. GEOY 0909 – Business Services United States M – Nasdaq

0.8

7.3

8.7

358.5

97.6
Hardinge Inc. HDNG 0218 – Misc. Capital Goods United States M – Nasdaq

0.74

8

7.4

105.1

4.3
Homex Development Corp. (ADR) HXM 0215 – Construction Services Mexico N – New York

0.91

8.6

5.5

846.4

85.4
Ingles Markets, Incorporated IMKTA 0957 – Retail (Grocery) United States M – Nasdaq

0.91

9.9

8.2

400

183.1
Ingram Micro Inc. IM 1006 – Computer Hardware United States N – New York

0.77

9.6

7.6

2591.2

8.7
Jinpan International Limited JST 1024 – Electronic Instruments & Controls China M – Nasdaq

0.85

5.3

4.7

132

0.8
Kelly Services, Inc. KELYA 0909 – Business Services United States M – Nasdaq

0.77

6.4

7.4

462.9

0
KeyCorp KEY 0727 – Regional Banks United States N – New York

0.83

8.4

9.5

7339.2

90.7
KKR Financial Holdings LLC KFN 0718 – Investment Services United States N – New York

0.89

5.1

4.7

1557.4

0
Knightsbridge Tankers Limited VLCCF 1118 – Water Transportation Bermuda M – Nasdaq

0.61

6.9

9.4

215.2

42
KT Corporation (ADR) KT 0915 – Communications Services South Korea N – New York

0.89

9

7

7041.3

72.6
Le Gaga Holdings Ltd ADR GAGA 0509 – Crops Hong Kong M – Nasdaq

0.89

8.1

4.1

200.3

5.3
Lihua International Inc LIWA 0127 – Misc. Fabricated Products China M – Nasdaq

0.7

3.1

2.1

161.3

0
LUKOIL (ADR) LUKOY 0606 – Oil & Gas – Integrated Russia O – Over the counter

0.68

4.2

4

47753.8

10.4
Mechel OAO (ADR) MTL 0124 – Metal Mining Russia N – New York

0.8

4.6

3.5

3322.6

139.6
Metlife Inc MET 0709 – Insurance (Life) United States N – New York

0.69

5.7

5.4

32402.5

45.3
Mizuho Financial Group Inc. (A MFG 0727 – Regional Banks Japan N – New York

0.9

3.5

8.5

40165.5

236.3
Navios Maritime Holdings Inc. NM 1118 – Water Transportation Greece N – New York

0.53

4.6

7.6

350.3

131.3
Newfield Exploration Co. NFX 0609 – Oil & Gas Operations United States N – New York

0.98

5.9

8.8

3943.1

72.2
Olympic Steel, Inc. ZEUS 0127 – Misc. Fabricated Products United States M – Nasdaq

0.86

8.8

6.4

181.8

95.4
Orbotech Ltd. ORBK 1033 – Semiconductors Israel M – Nasdaq

0.78

6.3

9.7

329.7

13.1
Patterson-UTI Energy, Inc. PTEN 0612 – Oil Well Services & Equipment United States M – Nasdaq

0.93

6.6

8.3

2276.5

18.7
Petroleo Brasileiro SA (ADR) PBR 0606 – Oil & Gas – Integrated Brazil N – New York

0.9

6.8

6.3

126006.1

43.5
Phoenix Companies, Inc., The PNX 0709 – Insurance (Life) United States N – New York

0.21

3.6

3.7

203.5

45
Popular, Inc. BPOP 0727 – Regional Banks Puerto Rico M – Nasdaq

0.52

8.9

6.1

1664

47.1
Protective Life Corp. PL 0709 – Insurance (Life) United States N – New York

0.7

7.2

8

2557

53
Reinsurance Group of America I RGA 0706 – Insurance (Accident & Health) United States N – New York

0.68

7.8

7.2

4059.3

34.9
Republic Bancorp, Inc. KY RBCAA 0727 – Regional Banks United States M – Nasdaq

0.94

4.7

8.7

489.6

7.7
REX American Resources Corp REX 0103 – Chemical Manufacturing United States N – New York

0.65

7.8

6.8

163.9

41
Royal Caribbean Cruises Ltd. RCL 1118 – Water Transportation United States N – New York

0.71

9.7

9.5

5542.1

91.9
Societe Generale SA (ADR) SCGLY 0724 – Money Center Banks France O – Over the counter

0.29

5.8

3.8

16945.2

20.7
StanCorp Financial Group, Inc. SFG 0706 – Insurance (Accident & Health) United States N – New York

0.84

2.5

8.7

1676.1

14.8
StealthGas Inc. GASS 1118 – Water Transportation Greece M – Nasdaq

0.38

8.5

5

122.1

98.5
Symetra Financial Corporation SYA 0709 – Insurance (Life) United States N – New York

0.47

7.8

8.5

1494.6

0
Tech Data Corp TECD 1006 – Computer Hardware United States M – Nasdaq

0.96

9.8

8

1918.9

2.9
Ternium S.A. (ADR) TX 0121 – Iron & Steel Luxembourg N – New York

0.81

8.3

5.8

3993.4

26.2
Thompson Creek Metals Company, TC 0124 – Metal Mining United States N – New York

0.33

3.5

5.7

563.9

20.8
Transportadora de Gas del Sur TGS 0609 – Oil & Gas Operations Argentina N – New York

0.43

5.6

7.5

191.7

80.6
TravelCenters of America LLC TA 0963 – Retail (Specialty Non-Apparel) United States A – American

0.51

4

3.7

145

31.9
Triple-S Management Corp. GTS 0806 – Healthcare Facilities Puerto Rico N – New York

0.76

9.4

8.6

510.6

18.2
Unit Corporation UNT 0612 – Oil Well Services & Equipment United States N – New York

0.94

8.7

9

1819.7

15.8
Valero Energy Corporation VLO 0609 – Oil & Gas Operations United States N – New York

0.86

9.1

5.6

13578.5

40.5
Vishay Intertechnology VSH 1033 – Semiconductors United States N – New York

0.97

7.7

7.1

1433.8

23.4
Woori Finance Holdings Co., Lt WF 0727 – Regional Banks South Korea N – New York

0.57

4.5

4.8

8482.1

0
Xinyuan Real Estate Co., Ltd. XIN 0215 – Construction Services China N – New York

0.33

2

2.1

215.1

8.8
Yongye International Inc YONG 0103 – Chemical Manufacturing China M – Nasdaq

0.55

1.9

1.3

163.7

2.8
ZHONGPIN INC. HOGS 0515 – Food Processing China M – Nasdaq

0.89

6.6

5.5

371.9

18.1
Zuoan Fashion Ltd (ADR) ZA 0403 – Apparel/Accessories China N – New York

0.6

2.4

1.8

102.1

0

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

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

Modified Glass-Steagall

Modified Glass-Steagall

Posted on by David Merkel

If you’ve read me for more than two months, you probably know that I am an actuary, though not a practicing actuary at present.? I grew up in the life insurance industry.? It’s an unusual place for an investor to start, but there are some advantages:

  • You learn some of the most complex accounting rules in business.
  • You learn the value of having a strong balance sheet, because when it slips, it is hard to get back.
  • You learn the value of simplicity, because many companies that wander from that die.
  • You get to know a lot of people with different bits of specialized knowledge, which you the actuary have to tie together.? And, respecting the older people in dead-end jobs which they do well goes a long way toward getting significant cooperation.
  • If you are a corporate actuary, as I sometimes was, potentially you become a good risk manager.
  • If are an investment actuary, you learn that risk control is far more difficult than it seems, and so you learn not to take obscure risks, and test a variety of modeling assumptions, because models can go wrong.
  • You build in margins for error if you are a pricing actuary, as I often was, and review actual results when setting assumptions.
  • You get to see regulation up close and personal, because you have to interact with 51 different regulators if you do valuation, cash flow testing, pricing, etc., with your home state regulators leading the way.

There’s more, but my topic this evening is financial regulation generally.? I’ve been thinking about it, and I have had a moderate shift in my views: I think it would be wise to reinstitute a modified version of Glass-Steagall, but modeled after the way that insurance regulation is done today.? For solvency regulation, insurers are much better regulated than banks.? The banking industry should imitate the insurance industry in a number of ways.

Here’s the main idea: Allow financial holding companies to own all manner of financial subsidiaries, but disallow:

  • Stacking of subsidiaries.? No A owns B, B owns C.? This allows capital to be stretched thin.
  • Cross-ownership and cross-lending: subsidiaries may not interlace their capital.
  • There may be no reinsurance or derivative agreements across subsidiaries.

This would bar complex ownership charts.? There would be a big box at the top, with lines to little boxes below, but only one level of depth, and no lines between subsidiaries.

Also:

  • Each subsidiary must be subject to its own regulator.? There must not be an overall regulator for “financial supermarkets.”? Keep it simple and focused.? Remember, the Fed has never been a good regulator.
  • Since financial holding companies die if they don’t get dividends, make the payment of dividends from any subsidiary to the parent company subject to the discretion of the regulators.? Regulators should not care about the holding companies, but only about the solvency of subsidiaries.
  • If a company is presently in two businesses with different regulators, the company must divide the business into two subsidiaries which each regulator can separately regulate.
  • Subsidiaries do not get to choose their regulators.? If there are potentially duplicate regulators, merge them and create one regulator if that makes sense.? Otherwise, make rules so that there is no ambiguity on who regulates what.

The view of the government toward financial holding companies should be this: we don’t care if you fail.? We do care if your subsidiaries fail, so if the solvency of any of them is getting marginal, dividends to the holding company will be cut off.

Now, I would prefer the rest of the financial industry mimic the insurance industry, in that State regulation is better than Federal regulation.? If you want to end too big to fail, split up banks into state subsidiaries.? Each state regulator would separately determine solvency issues, and would limit dividends back to the holding company.

Remember, we don’t care if holding companies go broke.? If a holding company goes broke, and all of the subsidiaries are solvent, the subsidiaries will easily be sold to other holding companies.? The creditors of the bankrupt financial holding company will divide the spoils after a year or so.? Cost to the taxpayers: zero.

And maybe, mimic the guarantee funds of the insurance industry, and let the financial subsidiaries self-fund the losses of their fallen competitors.? Cost to the taxpayers: zero.

Under this sort of arrangement, you can have “financial supermarkets,” but they would be very different, because the solvency of each part would be separately regulated.? You don’t want macro-regulators, they are far easier to fool; specialization in financial regulation is a plus; don’t give any credit to those who use a diversification argument.? We are focusing on risks, not risk.? Failure does not happen from risk in abstract, but from particular risks that were underrated.

Finally you need risk managers inside all regulated financial institutions that are either FSAs [Fellows in the Society of Actuaries] or CFAs [Chartered Financial Analysts].? I am both, though my FSA status is inactive, because I don’t pay the dues.? Why is this valuable?

You need organizations with ethics codes to teach and monitor the behavior of those within.? There are failures amid FSAs and CFAs, but society and legal punishment tends to decrease the occurrence.

If we did this, financial companies would be much more stable, and we would reduce the need for the FDIC.? There would be personal ethics standards among risk managers inside financial companies, and less reason for regulators to compromise from political pressure.

This is my modified version of Glass-Steagall, which gives financial industries most of what they want, but offers solvency protections far beyond what we have today.? Is this a good compromise, or what?

Sorted Weekly Tweets

Sorted Weekly Tweets

Posted on by David Merkel

Eurozone

 

  • If Greece Quits Euro, Its Ruin Will Be Pointless http://t.co/2DotggME Suggests Greece will face more pain if leaves E-zone than stays $$ May 17, 2012
  • Experts Try to Chart Path for Exit From Currency http://t.co/dtIAoo3g Let’s see, where is that manual for unscrambling eggs? Mmm… $$ May 17, 2012
  • On the E-zone: the politicians, like sorcerer’s apprentices, thought they could reshape Europe; end up fighting forces beyond their power $$ May 17, 2012
  • The Running of the Bank Depositors http://t.co/WC7aN5LP Governments r smaller than economies, which r smaller than cultures $$ #fightgravity May 17, 2012
  • Governments are smaller than economies, which are smaller than cultures.? The Eurozone is a huge experiment that igno? http://t.co/YUqGTSLN May 17, 2012
  • Greek President Told Banks Anxious as Deposits Pulled http://t.co/mx5626V2 If u thot u faced a conversion 2 new drachmas, ud w/d euros2 $$ May 16, 2012
  • ECB Said to Stick to Current Crisis Stance as Tools Reviewed http://t.co/vSKBTnax No worries; ECB policies r meeting the challenge $$ 😉 May 16, 2012
  • Bet on Greek Bonds Paid Off for ?Vulture Fund? http://t.co/nrka09y7 While Greece is in disarray, makes full pmt2 hedge fund Dart Management May 15, 2012
  • Lightning Strike Delays Hollande Trip http://t.co/G0hgIGsP Weird, but he gets to Germany anyway to have a disagreement w/Merkel $$ May 15, 2012
  • Hazardous Greek-Exit Scenario http://t.co/LZooTMlf WSJ goes through the steps and effects of an orderly Greek exit, should there b1 $$ May 15, 2012
  • European Officials Warn Greece http://t.co/WJ4Wmk5B No way to kick Greece out; what do you do if they refuse to pay? $$ #enduredefault May 14, 2012

?

Rest of the World

 

  • Hugo Ch?vez’s Enemy No. 1 http://t.co/LtdZXcM7 Henrique Capriles, governor of Miranda state & candidate selected by the united opposition May 19, 2012
  • Kolatch Bullish on Argentina?s Debt http://t.co/8dfUoRdv When someone is willing to cheat others, he is more likely to cheat you $$ #FTL May 17, 2012
  • Iranian Rapper Fears for His Life After Fatwa http://t.co/AD27SHZY Interesting how killing ceases 2b murder after cleric issues fatwa $$ May 16, 2012

 

Bond Markets

 

  • US insurers seek $300 mln cat bond cover http://t.co/rNw0b4hu There’s a hard property reinsurance market, so alternatives r attractive $$ May 18, 2012
  • Junk-Debt ETFs Set Markets ?Abuzz? After Record Trades http://t.co/Zzq4BHV2 New ways of putting biggish HY positions on/off quietly $$ May 18, 2012
  • @Fullcarry @munilass At least the Treasury yield curve is “out of this world.” Have long Tsys on as a hedge in my bond strat, when2punt? $$ May 17, 2012
  • Every two years, the annual shareholder filing for the iShares Trust, which holds the big bond ETFs, doubles in size: now 20MB $$ May 15, 2012
  • RT @Munisrgood: @munilass More room to go. If you subscribe to Hoisington’s predictions, (I do to an extent) 30 yr tsy could be 75-100 l … May 15, 2012
  • +1 Needle in red zone $$ RT @groditi: HY CEF wavg premium 15%; min -8.27 max 67.3%; +1.1stdevs; sample-size: $11B (40 funds) #YieldChase May 14, 2012
  • Euro-Zone Fears Drive Bund Yield to Record Low http://t.co/sNntlOYU Opposite risk: Germany might leave EZone; ECB actions disliked $$ May 14, 2012
  • Euro Officials Begin to Weigh Greek Exit as Euro Weakens http://t.co/nERx6dAG Note the shift, indicates the bailouts may b over 4Greece $$ May 14, 2012

 

Elderly Poverty

 

  • See pg 26 4 details http://t.co/NnS2Jyo2 Figure is low IMO b/c 25% “don’t know” what they have saved. They r prob below $50K, so ~60% <$50K May 17, 2012
  • Report says “Overall, slightly more than one-third have saved less than $50,000.” http://t.co/NnS2Jyo2 Still thought the % was higher, ~50% May 17, 2012
  • Same here RT @ballenmo: @AlephBlog @fundmyfund 20%? I?m surprised the number is so low. May 17, 2012
  • +1 that’s what I think RT @fundmyfund: @AlephBlog 20% of 50 and 60 yr old dont have 50K to their name, not to mention saved for retirement May 17, 2012
  • Expected worse RT @MoneyMag_Penny 20% of workers in 50s & 60s have saved less than $50,000 for retirement: Transmerica http://t.co/PqWIm74w May 17, 2012

 

JP Morgan

 

  • Lawrence Lindsey: Why Washington Hates Jamie Dimon http://t.co/dZEzVnOq Not a diplomat & does not perform kowtows to politicians $$ $JPM May 18, 2012
  • For JP Morgan Trader, From ‘Caveman’ to ‘Whale’ http://t.co/U2iXH2uJ It is often dangerous to win, next step is try to win big & fail $$ May 17, 2012
  • Romney Vowing Dodd-Frank Repeal Hits JPMorgan Risky Trades http://t.co/Y9aMyHR0 Tough sell; existing law had enuf pwr, but regs didn’t use May 14, 2012
  • The core problems with JPMorgan’s failed trades http://t.co/HktxLRnq When that illiquid, putting positions into runoff only solution $$ May 14, 2012
  • Dimon Fortress Breached as Push From Hedging to Betting Blows Up http://t.co/Rc5TXU9E $JPM too big relative 2market; hard2mark prices $$ May 14, 2012
  • Bank Order Led to Losing Trades http://t.co/00llzrIO $JPM ‘s Efforts2Shield Itself From European Market Fallout Prompted Disastrous Bets May 12, 2012

Buffett & Newspapers

 

  • Why Warren Buffett is buying newspapers http://t.co/a6qVZAet It certainly isn’t for economic reasons; he overpaid, plain & simple. $$ $BRK.B May 18, 2012
  • Warren Buffett buys into ‘declining’ newspapers http://t.co/BYmAmiZT $MEG does have TV and data businesses, not sure how much that helps. May 17, 2012
  • Berkshire Buys Media General Newspapers for $142 Million http://t.co/ISIniNZG add in a $400 million term loan with an rate of 10.5% $$ May 17, 2012

(As an aside, if you read any of my comments on Buffett, newspapers, and Media General, I made the mistake of think that he had bought Media General, when he bought most of their newspapers, a portion of the company, and lent them $400 million at 10.5% with a first priority of payment in bankruptcy.? Now that I realize my mistake, I can?t say whether Buffett got a good, bad, or indifferent deal.? Apologies for the mistake.)

 

US Economy

 

  • ?One Recession Away? From Next Bull Market ? John Mauldin http://t.co/WwOL8nj7 5 min interview, short-term bearish, long-term bullish $$ May 17, 2012
  • Paul Krugman’s Simple — or Is It Simplistic? — Reasoning http://t.co/0lmcAVSQ Is there any level of govt spending or debt that is2much? May 17, 2012
  • North Dakota Tops US States in Credit Ranking as Florida Rises http://t.co/cttmsatF Amazing what energy & the influx of elderly will do $$ May 17, 2012
  • North Dakota Tops Alaska in Oil Output http://t.co/Ulo7jzcU The US potentially has more hydrocarbons than Saudi Arabia. TX, ND, AK $$ May 17, 2012
  • RE: @bloombergview The two papers look pretty good, but would the bureaucracy have the guts to rein in a boom based o? http://t.co/mvScOD74 May 16, 2012
  • Tom Frost: The Big Danger With Big Banks http://t.co/414ZAkTV Fine, but it was mortgage lending that led the crisis, not invt banking $$ May 16, 2012
  • When I used to mix sound, there was a knob on my board called “contour.” That’s what QE is to the Fed.? When I would ? http://t.co/DC0O0kjS May 17, 2012
  • Midwest Sees a Sand Rush http://t.co/815yYdBQ Fracking Spurs Demand for the Stuff, Sparking a Mining Boom?& Vexing Some #midwestboom $$ May 14, 2012

 

US Politics, Regulation, and Culture

 

  • SEC Probes Role of Hedge Fund in CDOs http://t.co/wMUFuoPt Don’t forget the blame due the yield hogs 4 their inadequate due diligence $$ May 17, 2012
  • Dental Abuse Seen Driven by Private Equity Investments http://t.co/QzEb161T Long article on unscrupulous dentists that harm poor kids 4 $$ May 17, 2012
  • The creeping disaster for USPS is that as they cut services, they become irrelevant. The internet changes everything? http://t.co/ION20cep May 17, 2012
  • School-Test Backlash Grows http://t.co/RIiaRg1Z Some Parents, Teachers & Boards Rebel, Saying Education Is Being Stifled $$ #room4both May 16, 2012
  • Please apply the same logic to the liberal justices of the court, who have flouted the Constitution for far longer. http://t.co/gEsZGazC May 16, 2012
  • Jerry Brown vs. Chris Christie http://t.co/T0uyb6iC More states r realizing that the road2fiscal hell is paved w/progressive intentions May 15, 2012
  • California Deficit Swells to $16 Billion, Governor Says http://t.co/LJT9Dl1s & http://t.co/2Rg8E98K CA in self-reinforcing neg spiral $$ May 14, 2012
  • Obama Hits Romney on Bain as He Raises Wall Street Money http://t.co/09M2hhHK “The pot calls the kettle black.” $$ (has 2ba better phrase) May 14, 2012
  • Midnight Was Movie Hour, Nap Time in New York Air Tower http://t.co/cNT0C080 Long piece; parts of the FAA r seriously messed up $$ #unions May 12, 2012
  • Trouble in Coal Country for Obama http://t.co/dJoko2Aj If persists, could mean Obama wins popvote, Romney win the election $$ #kingcoal May 12, 2012

 

Companies

 

  • Tsst… $COP is no longer in the refining biz, it spun of $PSX which is.? FD: +COP, +PSX $$ Oh, and selling the comp? http://t.co/LxFTP91s May 17, 2012
  • Facebook ($FB) announces that they will no longer accept General Motors ($GM) cars in exchange 4 advertising exposure $$ 😉 #lamejoke May 15, 2012
  • Avon Shares Tumble After Coty Pulls Bid http://t.co/SVZ4zZgN Coty might b better off creating the parts of $AVP it wants organically $$ May 15, 2012
  • Margin Call: The Most Exposed http://t.co/4v2IsU16 Interesting what CEOs have borrowed against shares of the companies that they run $$ May 15, 2012
  • Yahoo CEO’s resignation spotlights tech action http://t.co/mUF19hRa We keep the board of $YHOO around 2make that of $HPQ happy. FD +HPQ May 14, 2012

 

Miscellaneous

 

  • Paper Plane Champ Watches His Record Fly, Fly Away http://t.co/zdPMR62e Division of labor in design & tossing-> paper airplane record $$ May 18, 2012
  • @ReformedBroker You really had lunch w/Mauldin? Cool, I know he is friends w/ @ritholtz ; I just reviewed his recent “Little Book.” $$ May 17, 2012
  • When people get 2 deep into a sliver of knowledge, they get dumb RT @jasonzweigwsj: is your sense of self an illusion? http://t.co/PHUXLmdB May 17, 2012
  • 5. They sometimes bring specialized knowledge of the topic at hand. 6. They tend to write for users, not reviewers o? http://t.co/T3oElbxQ May 17, 2012
  • Going for Gold?or Whatever http://t.co/F6kSto8O Secret to an Aging Olympian’s Endurance: Don’t Let Training Get in the Way of Fun $$ May 16, 2012
  • When you show up DD, you usually make me smile $$ RT @DoubleDeuce: Wisdom: “try to convince, don?t gripe” by @AlephBlog http://t.co/kDwSKgYJ May 15, 2012
  • ?Trigger-Happy? Investors Boost IPO Insurance Through Litigation http://t.co/GQKdNia3 Looks like Errors & Omissions coverage applied 2IPOs May 14, 2012
Sorted Weekly Tweets

Sorted Weekly Tweets

Posted on by David Merkel

Eurozone

 

  • Danske Bank?s Patience With Moody?s Evaporates http://t.co/eGbf3kV5 Questions over willingness of Denmark to provide support in a crisis. May 11, 2012
  • CIC Stops Buying Europe Government Debt on Crisis Concern http://t.co/dljk9Tau Overblown; China will return to funding the Eurozone $$ May 10, 2012
  • Greeks May Hold $510 Billion Trump Card in Renegotiation http://t.co/P7U4LSpG Depends on how well Core EZone banks have divested Greece $$ May 10, 2012
  • Spanish Banks Erode Creditors With ECB Loans http://t.co/HaEx3bgT Better collateral highly encumbered; Unsec debts implicitly subord 2 ECB May 10, 2012
  • Greece Euro-Exit Debate Goes Public http://t.co/0xOgsa7G Core Eurozone wrestles w/how to kick Greece out, even though they can’t. $$ May 10, 2012
  • How a Radical Greek Rescue Plan Fell Short http://t.co/Ds0589IG Greece is failing as a culture due2 corruption; no rescue would work $$ May 10, 2012
  • Denmark?s Banks Endure Writedown Shock Delaying Recovery http://t.co/A2Vdpymn Good sign on Denmark; take pain early -> in good shape $$ May 10, 2012
  • Greek Election Surprise Rejects ?Barbarism? of Bailout Austerity http://t.co/oX0nt5SF Growth is magic, magic I tell u! Just invoke it! $$ May 08, 2012
  • Merkozy End Means Franco-German Gulf; Greek Voters Rebel http://t.co/iCd0Cs6l Loss of Sarkozy may not b bad, but Greek paralysis will b $$ May 08, 2012
  • Francois Hollande has ten weeks to avert a French bond crisis http://t.co/3SEAWJB5 When few adults r in the room the children run wild $$ May 08, 2012
  • Challenge to Austerity, And Germany, Is Sharpened http://t.co/BWbgQJ85 The odds have risen that Germany will leave the Eurozone $$ May 08, 2012
  • Obvious but it needs 2b said $$ RT @Hawk100Clemens: Mauldin tells #CFA12 every monetary union in history has failed. May 07, 2012
  • France faces 40pc house price slump http://t.co/nPuMaVnJ If French banks have trouble now, just wait until the bad mortgage debt hits $$ May 06, 2012

 

JP Morgan

 

  • What Beached the London Whale? Credit Indices http://t.co/JKFxfaMb Crosshedging long credit risk by buying protection on an index? $$ May 11, 2012
  • J.P. Morgan Trades In Its Crown http://t.co/QUJ6hmoA That goes for firms and CEOs as well: $JPM and Jamie Dimon will not get free passes May 11, 2012
  • Drew Built 30-Yr JPMorgan Career Embracing Risk http://t.co/uocyyVC1 Lifetime 2build reputation; few years 2destroy it; revealed: 1 day $$ May 11, 2012
  • And the best way to reduce risk is to lower leverage & raise cash $$ RT @marydchilds: “The best way to hedge something is to get rid of it.” May 11, 2012

 

Facebook

 

  • Facebook Co-Founder Saverin Gives Up U.S. Citizenship Before IPO http://t.co/kL1VQYXU Cuts down on the tax bill; discount prior 2 IPO $$ May 11, 2012
  • Facebook IPO Said to Get Weaker-Than-Forecast Demand http://t.co/ktK5Bgun $FB faces slowing revenue growth, order books 4 IPO go slack $$ May 11, 2012

 

Miscellaneous

 

  • Google?s Brin Makes Strides in Hunt for Parkinson?s Cure http://t.co/YvL4LUNA He may get it one day; his Mother already has Parkinson’s $$ May 11, 2012
  • And also for those who call vegetables “veggies?” RT @jasonWSJ: Can we impose a $40 fine on dudes who refer to sandwiches as “sammies”? May 10, 2012
  • Firefox browser group irked with Microsoft, Windows 8 http://t.co/tBZ9GFuw Only Internet Explorer runs on Windows 8; expect some lawsuits $$ May 10, 2012
  • Aluminum Buyers in Japan to Pay Record Fee on Supply Drop http://t.co/7AVU1knI Smelting capacity reduced, China buys more, Japan pays up May 10, 2012
  • @RobTheStreet A lot depends on the definition of marriage, Would you allow people to marry inanimate objects, animals, or multiple parties? May 09, 2012
  • Brookstone to sell Lilliputian portable power chargers, this year http://t.co/FnSvdfOw Impressive technology if it works. $$ May 08, 2012
  • Economy Reshapes Wisconsin Recall Vote http://t.co/G0OetHhV My wife and father were forced in2 unions by collectivist brutes. Go Walker! May 08, 2012
  • Father?s Shadow as Transit Leader Hard to Evade for Shuster http://t.co/0FAZUqd4 Bud Shuster is a jerk, forcing us through Breezewood $$ May 08, 2012
  • Kellogg?s Kashi Targeted as Web Food Fighting Escalates http://t.co/BNhf5294 We need 2 send a lot of people back 4 science reeducation May 08, 2012

 

Rest of the World

 

  • Sony, Panasonic Fall to 30-Year Lows as TV Losses Mount http://t.co/Euo37RLQ Sold Panasonic after reviewing uneconomic “green” agenda $$ May 11, 2012
  • Kim Jong Un Bashes ?Pathetic? North Korea Fun Park http://t.co/gb4S9HBc He should know; he lived outside NK, where there is real fun $$ May 10, 2012
  • Sukhoi SuperJet Disappears During Indonesia Demo Flight http://t.co/0JrxAkAw Another sign of degraded Russian abilities in aerospace $$ May 10, 2012
  • Bad H/L: Shooting to Kill Pirates Risks Blackwater Moment http://t.co/laW55VEo Correct H/L: Hiring Armed Guards protects cargoes &crews $$ May 10, 2012
  • Drug-Defying Germs From India Speed Post-Antibiotic Era http://t.co/XGeno5mf Long. Scariest article of the day; wash your hands w/soap $$ May 08, 2012
  • Israel Pyramid Rules Turn Insurers Into Buyout Targets http://t.co/4tXBqehx Interesting:

Israel is limiting holding company levels to 3 $$ May 10, 2012

  • UK Pay Protests Oust Aviva Chief http://t.co/WKVdmQGM I remember when they overpaid for Amerus Life in the US; sign of bad management $$ May 10, 2012

 

 

Energy

 

  • RT @merrillmatter: @AlephBlog Methinks we’ll need to see some epic blowouts in natgas space (ha ha) before supply/demand can come back i … May 10, 2012
  • Chesapeake Deals Carry $1.4 Billion in Undisclosed Liability http://t.co/UFohsseZ $CHK May b worth a look when things stop getting worse May 10, 2012
  • When the Exxon way stops working http://t.co/BgN2zLO6 $XOM learns 2b more cooperative w/foreign countries where it wants 2 explore 4 oil $$ May 08, 2012
  • Argentina Taps Ex-Schlumberger Executive Galuccio to Run YPF http://t.co/j5P1oyoS Possibly a good choice to run the purloined company $$ May 08, 2012

 

Fixed Income

 

  • Still time to make money in Treasury bonds http://t.co/ABl43gzM The depressionary bull case 4 long T-bonds; D. Rosenberg & Lacy Hunt $$ May 10, 2012
  • Why Emerging Market Corporate Bond ETFs are Hot http://t.co/tWvz0sif High USD yield, but be wary. Laws governing creditor rights vary $$ May 10, 2012
  • In other words, the 30-year Tsy sold well today b/c some seek Depression insurance & others hedge convexity or immunize long liabilities $$ May 10, 2012
  • Treasuries Pare Losses as Europe Concern Aids Sale http://t.co/C7jytF08 Investors make sure they get income 4 30-yrs & $$ back when old May 10, 2012
  • S&P Warns Of $46T Perfect Credit Storm http://t.co/jZTbvy42 If companies have adequate cash flows from operations, this is not an issue. May 10, 2012

 

Canada

 

  • In Canada, Alternate Currency Keeps Traction With Fans http://t.co/ePyXRH1f Paper Money, Issued by Canadian Tire, Is Popular Way 2Pay $$ May 11, 2012
  • Revisit after their housing bubble pops RT @vgmac: There is a lot of love for Canada’s banking system here at the Chicago Fed conferences $$ May 10, 2012
  • @vgmac Then again, at the first Treasury/blogger summit I told them they should imitate the Canadian regulators and central bankers. #canada May 10, 2012
  • Canada Housing Bubble Concern Shown in Insurer Query http://t.co/kGHcqgDE Should the Canadian govt try2exit the mortgage insurance biz? $$ May 10, 2012
  • CMHC Says Capital Levels “Double” OSFI Requirements http://t.co/R4p5TuBO F&F also had capital far higher than their disaster level $$ May 08, 2012

 

Cisco Systems

 

  • Cisco shares drop on tech spending worries http://t.co/06maBaX4 Global economic weakness feeds into tech firms that sell much abroad $$ May 10, 2012
  • @ampressman Cramer said something like, “It’s not a growth company if they have to talk about the economy, weather, industry factors, etc.” May 10, 2012
  • @ampressman $AAPL is a growth company, at least for now, $CSCO was a growth company somewhere in the last 15 years… May 10, 2012

 

Delta Air Lines

 

  • Buy Delta Air Lines: Trainer Refinery Purchase & Improving Financials Will Lift The Stock http://t.co/W7YeEmgb Poorly reasoned thesis $$ May 08, 2012
  • Remember when $DD bot Conoco? There would b synergies in petrochemicals. $DD bot it at the peak, spit it out at the bottom $$ #limitscope May 08, 2012
  • $DAL substitutes risk in jet fuel pricing 4 risks in crude oil, gasoline, heating oil prices, & operational risk in a biz it doesn’t know $$ May 08, 2012
  • @The_Analyst Agreed, though enough capacity has come out of the industry through mergers that they might finally c some pricing power $$ May 08, 2012

 

US Housing

 

  • 5 Pitfalls of Home Refinancing http://t.co/ZxGUF3HM Longer maturity, Closing costs, Contract terms, Hidden fees, Appraisals $$ May 10, 2012
  • Look Who?s Pushing Homeowners Off the Foreclosure Cliff http://t.co/T6CBkUAt Mtge docs exist to protect the lender’s property interest $$ May 08, 2012
  • RE: @bloombergview Read any mortgage contract; it exists to protect the rights of lenders, including protecting the m? http://t.co/ob9eIcBt May 08, 2012
  • No Repeating Slowdown Seen by U.S. With Banks to Housing http://t.co/A0LNwrjh While hi % of mtges r underwater, finl stress will remain $$ May 08, 2012
  • Pimco Housing Bear Kiesel Says It?s Time to Start Buying http://t.co/f3zaBNZA He assumes dark supply will hang on for higher prices. $$ May 06, 2012

 

US Regulation

 

  • Maybe to be perfectly fair, the government releases the data on a website at midnight ET, long before the US markets ? http://t.co/9Zqniljs May 10, 2012
  • A Jury of Peers for Broker Disputes http://t.co/5Ly14oKJ The playing field may be more even now; odds r still stacked against investors May 10, 2012
  • Congress Seeks Postal Overhaul While Making It Impossible http://t.co/lvcEBxmw The real danger is after reduction, PS is less relevant $$ May 10, 2012
  • US Millionaires Told Go Away as Tax Evasion Rule Looms http://t.co/Tx6lr1Bl Fewer foreign banks will accept accts w/US citizens/firms $$ May 10, 2012

 

Berkshire Hathaway

?

  • Biggest Buffett Targets Seen Spanning Deere to Henkel http://t.co/dLbp9pic Muses about what Buffett would buy 2 eclipse BNSF $$ May 08, 2012
  • +1 RT @Kevin_Holloway: Good read on possibilities of recent $BRK.B purchases among some other gd thoughts by @AlephBlog http://t.co/xkN8SlXu May 08, 2012
  • Deep in the Insurance Weeds at Berkshire Hathaway http://t.co/GkH9oWBo This helps explain the life reinsurance losses at $BRKB. LTC $$ May 08, 2012
  • Buffett understands tech. But he searches for revenue streams that can’t easily be obsoleted. $AAPL & $GOOG could be ? http://t.co/VyOnKUTy May 07, 2012

?

Market Dynamics

 

  • World?s Simplest Stock Valuation Measure http://t.co/OvmQTmHs Growth Rate/2 + 8 = PE Ratio; @eddyelfenbein & his conservative PE formula $$ May 10, 2012
  • Dole Food Breakup Seen Bearing Fruit With 58% Return http://t.co/C4SvaNvw Can $DOLE become a high margin biz, & pay down debt? $$ May 10, 2012

 

Financial Sector

 

  • What about front-running? $$ RT @abnormalreturns: @MebFaber: Nail in the Mutual Fund Coffin (NAV Based ETF Trading) http://t.co/SZ3CbIY3 May 08, 2012
  • BTW, for those holding dividend funds, back in 1994, stock managers following a yield strategy got crushed. $$ #annushorribilisforbonds May 08, 2012
  • The Dangers of Dividend Funds http://t.co/5WSdEFwN Dividend funds may b safer than other stock funds, r still stock funds w/real risk $$ May 08, 2012
  • True 4 many $$ RT @ReformedBroker: ?Daddy, what do you do at your job?? http://t.co/mxrcVyhm May 08, 2012
  • BofA?s New Black-Belt Data Chief Targets Blinding Gaps http://t.co/P60yhtAk Merger integration didn’t happen in $BAC ‘s IT areas $$ #mess May 08, 2012
  • Billion-Dollar Traders Quit Wall Street for Hedge Funds http://t.co/2yFJ2JXr Volcker Rule reducing dealer-driven market liquidity $$ May 08, 2012
  • Flash-Crash Story Looks More Like a Fairy Tale http://t.co/0mBQDGKZ Still a mystery; but4any self-feeding panic, players leaning wrong way May 08, 2012
  • Almost Half of Finance Graduates Seek New Jobs, PwC Says http://t.co/YUuH9KJl The bubble in financial jobs has popped, decamp 2 other inds May 08, 2012
  • ?Where is Everybody?? http://t.co/7YPOcMUb Little retail participation is bullish; it means that only the relatively smart $$ is playing May 08, 2012
  • 50 Ways to Restore Trust in the Investment Industry http://t.co/VHhllKyp The CFA Institute gathers opinions from members on cleaning up $$ May 08, 2012
  • RE: @bloombergview Equity is more expensive than other types of bank capital; raising the cost of capital means fewer? http://t.co/qPvVygll May 07, 2012
  • Heat’s on Triparty Repos http://t.co/7Jk7DrTS Fed Is Pressing Big Players to Reduce Exposures to $1.7 Trillion Market $$ May 06, 2012

 

Company Specific

 

  • How Hewlett-Packard lost its way http://t.co/pA683e3H Very long & ugly article about board & mgmt dysfunction @ $HPQ. FD: +$HPQ 4 me&clients May 08, 2012
  • A Real Concern For Apple?s Stock: Telecom Carriers Threaten to Kill Subsidies on Phones http://t.co/JlQwSDAq Interesting thesis $$ May 08, 2012
  • AMR Said to Seek More Overseas Flights as Suitor Circles http://t.co/eUHdHju4 $LCC wins more backing, could allow filing another plan $$ May 08, 2012

 

Politics

  • Exodus From Tiburon to Texarkana Is Exaggerated http://t.co/nsyd3QjF Truth is, people & firms r sticky, until they finally get fed up! $$ May 10, 2012
  • If we do not discipline ourselves, the bond market will discipline us $$ RT @carney: Why the left will keeping winning. http://t.co/kJcfgEt4 May 08, 2012
  • Too bad, we need a better opponent to Obama $$ RT @BloombergNews: Breaking: Santorum Endorses Former Rival Romney as Republican Nominee May 08, 2012
  • Don’t Worry (About GDP), Be Happy http://t.co/BaSDMbTM GDP approximates economic growth; more subjective progress measures r ridiculous May 08, 2012
  • @justinwolfers Last thing we need on the Fed is another neoclassical Ph. D. economist. Let’s try some brainy generalists, value investors $$ May 07, 2012
  • @GaelicTorus @justinwolfers All I am saying is value investors understand how the economy works better than neoclassical economists do $$ May 07, 2012
  • Disabled Americans Shrink Size of U.S. Labor Force http://t.co/NX6ZzCjK I still resent former neighbor on SSD, putting Xmas lights on roof May 06, 2012
  • But are they ending with an accrual basis surplus, not just a cash surplus? That’s the question. http://t.co/uGa7WX14 May 06, 2012
Notes on the 2011 Berkshire Hathaway Annual Report, Part 1

Notes on the 2011 Berkshire Hathaway Annual Report, Part 1

Posted on by David Merkel

Start with the basics, this is on the Annual Report, not just the shareholder letter.? I may have a second report out after the 10K is released.

1) One thing that was fascinating was the large number of low level acquisitions happening in the subsidiaries, and the desire for more of them.? There is interest at Lubrizol, McLane, TTI, CTB, Marmon, etc.

2) With BRK and IBM, Buffett hopes that public buyers and sellers will be stupid, and sell their shares at levels far below what the eventual prices will be, allowing the remaining shareholders to do better, as management buys in shares at a bargain, benefiting the persisting shareholders.

3) Buffett makes it clear, though that no matter how much cash has has, if prices are dropping rapidly, he won’t put a floor under the stock.? He’ll let the stock fall, and buy bit-by-bit through the whole process.? Indeed, it might be to his advantage to let the price fall below the 110% of Book level for a time to unnerve those that may be gaming the situation.

4) BRK does not talk its book as a result.? They would rather have the stock cheap for buybacks.? (Eeenh… but wouldn’t they rather have the stock higher to aid acquisitions?)

5) And if they firmly know what the value will be in the long run, they would love it if other investors would be scaredy cats and sell out to management at cheap levels so that they could have more of the value as they do not sell.? (Buffett does not phrase it that way, but this is a zero-sum game as far as trading goes.)

6) Buffett talked a lot about goodwill this year, much more than in prior years.? Goodwill makes up about 30% of BRKs book value.? I appreciated his argument regarding goodwill at the insurance companies — if your underwriting profits over nine years exceed goodwill the goodwill is most secure.

7) That said, partly due to lower interest rates, underwriting profitability has been higher for the P&C industry as a whole.? BRK may be better in aggregate, but some of Buffett’s industry comments are not warranted.? BRK is better in degree, not kind.

8 ) Buffett has the key of good P&C underwriting/management when he says ?be willing to walk away if the appropriate premium can?t be obtained.?? That’s the only way to do it, with the price that your company will shrink when the rest of the industry is nuts.

9) All that said, the insurance lines did not do well this year, particularly not BH Reinsurance Group, which is Ajit Jain’s baby.? Part of that was the large catastrophes this year, some of it seems to come from not knowing how to run a life reinsurer.

10) Retroactive reinsurance showed gains, because losses on Swiss Re’s P&C experience was better than expected.? However, that was wiped out by?Swiss Re Life & Health America’s business doing much worse than expected.

In one sense, a big question for BRK is whether they will spend the money to get the expertise necessary to run a big life reinsurer profitably.? So far, the answer seems to be no.? In my opinion, they need to hire experts, or buy out RGA.? Why buy the line from Sun Life when you could have RGA?

11) On principle 11 — BRK distinguishes itself among private equity buyers by leaving distinctive corporate cultures in place , and not interfering with them.? That may not help the present, but it helps the future, as wealthy people selling out take less, because they know their friends in the business will be left intact.

That won’t attract all sellers, but it will attract some.

And note that BRK will cut their losses on hopeless subsidiaries, or those beset by labor woes.

12) As usual, BRK’s reserve development is good, with releases coming from prior years.

More in the next part on Monday.

Full disclosure: long RGA

Recent Tweets

Recent Tweets

Posted on by David Merkel
  • @The_Analyst does Hempton do Twitter? Bright guy. Jan 26, 2012
  • RE: @SoberLook It’s not a pledge, indeed, but it is an estimate.? The bond market has reacted quite strongly to the e? http://t.co/crpU3QpH Jan 26, 2012
  • RE: @SoberLook Does this post from Alea change your opinion at all? http://t.co/2hs1LTyN? http://t.co/p3Plmjnb Jan 26, 2012
  • MF Customers Face Long, and Possibly Fruitless, Slog http://t.co/MoMIalrc Law s/b modified: customer accts s/b top priority in broker BK Jan 26, 2012
  • Solar Cheaper Than Diesel Making India?s Mittal Believer http://t.co/ZW2ta2aB This is the right way 2 employ solar; with no subsidies $$ Jan 26, 2012
  • Obama Pushes Salad in Schools at $3B Cost to States http://t.co/M9nWkW4T Healthier food is no good if the kids don’t eat it, ask L.A. $$ Jan 26, 2012
  • Con Artist Starred in Sting That Cost $GOOG Millions http://t.co/ErAgeziD New motto: Don’t be evil, but if you are evil, make $$ by it Jan 26, 2012
  • This is y well-capitalized P&C insurers r hard 2 kill, & usually make $$ over the int-term: past losses r more than paid 4 by higher prems Jan 26, 2012
  • US Commercial P&C Rates to Climb, Marsh Says http://t.co/OxCUuSsU The insurance brokers know; after a year of losses comes a hard market Jan 26, 2012
  • @researchpuzzler @The_Analyst “There’s an institutional hedge fund analyst born every minute.” Alleged 2 PT Barnum but, http://t.co/ku1NlqZG Jan 26, 2012
  • @BarbarianCap What I am saying is that structural legal protections around economically necessary authorities & municipalities r significant Jan 26, 2012
  • @BarbarianCap PV of losses are typically small, except on odd munis that don’t have any necessary economic value 2 a municipality + Jan 26, 2012
  • @BarbarianCap Part of the difficulty is that states can’t default, and Ch 9 4 what municipalities can use it, merely gives breathing room + Jan 26, 2012
  • @BarbarianCap There will be significant issues, but even during the Depression, losses were remarkably small on munis. Taxes will rise. $$ Jan 26, 2012
  • @The_Analyst Then again, it’s probably more “a fool and his money are soon parted.” Due diligence ain’t always that great 4 institutions $$ Jan 26, 2012
  • @The_Analyst Typically they were pretty good salesmen to get fund #1 off the ground, even better 4 #2. W/fund #3 they sell “It’s fixed.” $$ Jan 26, 2012
  • Iran’s Ahmadinejad ups rates to stem money crisis http://t.co/6IhpevuO Sanctions r having an internal effect on the Iranian economy. $$ Jan 26, 2012
  • Niederhoffer Discusses Being Wrong http://t.co/mWrnI7mg Frank talk from one who blew up twice. Perhaps he has a risk control discipline now. Jan 26, 2012
  • What’s In Your 401(k) Fund Line-Up? http://t.co/1ufb7xk2 Plan sponsors have an obligation 2 remove poorly performing funds but many don’t Jan 26, 2012
  • Wither the Wirehouse RT @ReformedBroker: Whither the Wirehouse? http://t.co/E4Xtz5Ul Jan 25, 2012
  • Wither the wirehouse 😉 http://t.co/TnuMFvDE Jan 25, 2012
  • RE: @wallstCS None of the competitor companies you list compete w/ $RGA. $PRE does a little bit of life reinsurance &? http://t.co/v9r3kg5z Jan 25, 2012
  • @TimABRussell Yes, I think Bernanke is sincere in what he is doing. That doesn’t mean that it doesn’t confuse, or get the right result. $$ Jan 25, 2012
  • @TimABRussell That was the Greenspan strategy. Talk about the six sides of the square & confuse: Top, bottom, right, left, inside, outside Jan 25, 2012
  • Fed learns that it is easier to hide a needle if they put it in a larger haystack. $$ All for now on the Fed. Back to normal activity. Jan 25, 2012
  • Final Q on fiscal policy asking what if deficits aren’t cut. B says that deficits need to be cut. IT’S OVER!! Jan 25, 2012
  • Bernanke essentially says that everyone has a lot of slack assets, and can invest them after-tax at 2% in the long run. Jan 25, 2012
  • Q on CPI vs PCE, critics saying Fed planning to destroy 2% of currency value per year. B: CPI has made up numbers, healthcare differences $$ Jan 25, 2012
  • French reporter asks whether Fed would extend a loan to the IMF. “Raison detre” cute response, punts to Tsy and Congress $$ Jan 25, 2012
  • Mkt news intl reporter: why have forward guidance when you give out forecasts? Bernanke: guidance describes Fed’s decision, vs expectations Jan 25, 2012
  • Bernanke gets symmetric questions asking whether policy is doing too much or too little, on inflation and unemployment. 😉 $$ Jan 25, 2012
  • WP reporter: could the Fed bring unemployment down faster if it were more aggressive? Bernanke really doesn’t answer. Jan 25, 2012
  • In general, people analyze better with limited amounts of data — zero data (w/Kremlinology) and lots of data make analysis harder $$ Jan 25, 2012
  • I think the more data the Fed hands out, the more lost the press and average people get confused. Jan 25, 2012
  • Q: Why isn’t Fed doing more now if you think things will be bad for so long? Internally Bernanke reconsiders the value of press conferences. Jan 25, 2012
  • Bernanke says that low rates conquer all and so providing more data won’t hurt things — expectations are a lesser thing $$ Jan 25, 2012
  • Peter Barnes, Fox Business: possibility of negative expectations because the economy is viewed as much worse than previously thought $$ Jan 25, 2012
  • AP reporter asks about principal reductions for the housing crisis. Bernanke says that the FOMC is concerned, but doesn’t say much really $$ Jan 25, 2012
  • Median b/c FOMC is a “democracy.” In practice, though, the Fed chair has 12 votes Jan 25, 2012
  • Robin Harding of FT asks about forecast, and what it implies for FOMC policy: Bernanke says there’s no mechanism, look at the median Jan 25, 2012
  • to be able to be released — mentions that June 2011 principles are still in force for shrinking the balance sheet (in 2015?!) Jan 25, 2012
  • Reuters reporter asks for more data on balance sheet data, versus data on Fed funds — Bernanke says there is only so much data at a time + Jan 25, 2012
  • RT @joshuademasi: @AlephBlog All fed needs to do is create esoteric invesment vehicle cross hedging USHY in Rand and Real. What could g … Jan 25, 2012
  • Donna Moran (?) of Amer Banker — Basel 3, capital requirements, etc. Me: Fed supervision of biggest institutions not done well in past $$ Jan 25, 2012
  • Bernanke waffles on the question of what happens to savers, confusing saving and investing. Needs to consider what finl intermediation does Jan 25, 2012
  • Greg Robb(?) Marketwatch asks about Republicans, and how older people on fixed incomes survive, and whether he might resign if Reps win Jan 25, 2012
  • Greg Ip questions the asymmetry comments — I think Bernanke would be better off saying “asymmetric in the long run.” Jan 25, 2012
  • @joshuademasi The hate for the Fed exists because they were overly loose 1984-2006, regulated banks poorly & created much of this crisis $$ Jan 25, 2012
  • Hilsenrath asks about confidence in the FOMC’s forecasting abilities. Wonders which dot is Bernanke’s… Bernanke affirms limitations Jan 25, 2012
  • Torres of Bloomberg asks about near-term inflation — The Bernank points to falling commodity prices, slower global growth Jan 25, 2012
  • Decent question on the symmetric nature of monetary policy Jan 25, 2012
  • Toady comments on what he views as strength RT @agwarner: Liesman Alert! $FED Jan 25, 2012
  • Full set of projections from the FOMC: http://t.co/VqWfrYgL Worthy of note that their forecasting ability is subpar. Jan 25, 2012
  • Fed Funds Projections: http://t.co/Wd9lmEeO Jan 25, 2012
Against Simple Valuation Metrics

Against Simple Valuation Metrics

Posted on by David Merkel

There have been a lot of articles dealing with use of corporate free cash flow lately:

  • Dividends — get them, are they sustainable?
  • Buybacks — do they add value or not?
  • Acquisitions — are they overpaying?? What are the synergies?

But you never hear about the last one — internal investment for organic growth.? There is a simple reason why — it is silent as night.? No one makes announcements on it.? If done properly, it is as quiet as a plant growing.

Dividends are simple — is there enough free capital to issue them, and do the other three priorities?? It is useful to ask how much room there is to increase the dividend, and how well the company can grow its earnings at the present rate.? Companies that pay a dividend understand that equity deserves a return, and are more careful with their capital as a result.? They often grow faster than companies that do not pay dividends.

But I never analyze a company primarily on its dividend yield.? I would rather look at the full set of the drivers of value.

Buybacks are harder because we don’t really know what the company is worth, and buybacks add value when you buy below the value of the company, and lose value when you buy above it.? In the reinsurance industry, it is understood that buybacks above 1.3x tangible book destroys value.? The threshold will be different in other industries because the value of intangibles will differ — but for industries where intangibles mean little, that 1.3x tangible book can be a useful limit.

We can do pro-forma analyses on acquisitions to see if they add value or not.? The best simple proxy is how large the acquisition is relative to the acquirer.? Small acquisitions typically add value? because they add a complementary product, a new marketing channel or region, lower costs, or raise product quality.

Large acquisitions typically lose value because acquirers overpay and integration is difficult.? One exception: negotiated sales by large private sellers.? There is no auction, and no winner’s curse.

The best acquisitions are small, but lead to an increase in organic growth.? Also, the best acquisitions are early; the worst acquisitions are imitative and late.? Typically the best deals get done first.

But much as I like managements who think that the equity deserves a return, via dividends and intelligent buybacks, the hard stuff gets done in organic growth: how are last year’s profits being increased on the existing infrastructure?? In mature industries, this is tough, which is why they typically return free cash flow to shareholders.? But when you find a company that can eke out improvements in a mature industry, finding changes that no one else does, hang onto that company, because it is driving profitable change in the industry.? (And probably taking share from others…)

The less mature the industry, the more room for organic improvement, and thus more free cash flow is dedicated to internal investment, and less to rewarding current shareholders.? In such a situation, it pays less to look at dividend yields, and more at dividend growth, adjusted for ability of growth to be sustained.

-=-=-=- begin rant mode -=-=-=-

This is why I am not crazy about simple articles that say:

  • Here are the five highest yielding companies of this industry, or
  • Here are the seven highest yielding investments of [famous investor, or company], or
  • Here are the companies that are buying back stock rapidly, or
  • Look at the combined dividend plus buyback yield of these companies…

Everyone wants to squish value investing into one simple metric and from what I have seen, it does not squish well.? That is one reason why I try to view companies off of the competitive dynamics of the industry in question, and adjust the metrics accordingly.? After all, no matter how cheap a company looks in an industry that is obsolete, like newspapers, it is rarely a good idea to buy.

Thus, I am skeptical of the many articles that are spit out by inexperienced investors that have a computer and can crank out a few simple ratios, and spew out some canned facts about a company — these articles are widespread, and not limited to writers on Seeking Alpha, or Zacks, or those that submit to Yahoo! Finance, and they have some canned and wrong way of identifying competitors.

Avoid these articles, and instead, look for some degree of qualitative reasoning — some depth that shows genuine industry knowledge, and not an ability to automate the provision of web “content.”

-=-=-=- end rant mode -=-=-=-

Maybe I should be quiet.? After all, the provision of bad advice on the web is a good thing for me.? The more people are misled, the better value investors with broader skill sets do.

But that’s not why I started writing on investments.? I was not a professional investor until I turned 39.? I read widely, and spent a lot of time reading the works of many different investors as I worked to develop a theory that encompassed most of it.? No, I don’t see how to encompass all of it… and what I can encompass is understood with some amount of error.

My view as I write is not so much to give “buy this” or “sell this” ideas so much as to get people to think differently about investing.? I recently looked at the amount of business/economics/finance/investment books that I have read over the past 25 (post-academic) years, and it would fill 3-4 bookcases.

So try to think of the companies that you own, or might own, like businesses.? Look at the dividends, and to buybacks at bargain prices, and analyze sustainability and growth prospects, but also look at opportunities for growth.? Many aspects of value can’t be encapsulated in simple ratios or rankings, but sadly, the majority of articles touting stocks will do just that, and for the most part, they are useless.

There.? I said it.? But it needs to be said.? The practical question to me is whether I should stop submitting my content to sites like Seeking Alpha, which to me have become a lot of noise, and which I wish I could get Yahoo! Finance to allow users to filter out of the news stream.

I let almost anyone republish my content, so dropping anyone would be unusual for me.? Or, should I drop all external users of my content, and allow no republishing?? If you have a strong opinion, submit it in the comments.? I’ve been a nice guy with all of this, but if you have good reasons for exclusivity, let me know, and I will consider it.

But to close I will say, look at a full range of valuation and performance metrics when buying a stock, and consider the industry dynamics to understand what matters most given the maturity of the industry.? That takes some work, but guess what?? Working intelligently and hard leads to better profits in investing.

Post 1600

Post 1600

Posted on by David Merkel

Every 100 posts or so, I take a step back to think about the broader issues I face in blogging, and describe what I am up to in my life, so that my readers can understand more about me.

Since my last post on this topic, I have had a difficult time.? Why?? I worry that my firm will not grow fast enough that it will support my family.? That said, I pick up 2-4 new clients per month, and my friends in the Baltimore CFA Society tell me that I am doing better than most.

So, I try to take heart amid the bear market, where it is more difficult to gain clients. Now, it would be nice if there were a database of dissatisfied investment management clients, but that doesn’t exist.? Thus I have to look to others for referrals of those who are dissatisfied with competitors in my business.

Over the last 100 posts, the economic/financial environment has turned from optimistic to pessimistic.? I haven’t changed much.? I still think there is more pain to come, where the big banks have to take losses.

I am more bullish now, but I am waiting for a turn in the momentum to get more aggressive.?? With momentum so negative, I commit small amounts of capital to my best ideas as they fall, like my RGA piece yesterday.

With all that, I thank my readers for reading me.? You have a lot of things you can do with your time, and if you decide to read me, I am flattered.?? I am grateful for any investing referrals.

Aside from that, I still enjoy blogging.? It is an opportunity to call out the powers that be and tell them they don’t know what they are doing.? Away from that, explain to people to avoid common scams.? I have a post coming on one of the scams soon.

I really enjoy writing for all of you.? I hope you enjoy my writing as much.

Book Review: Secrets in Plain Sight: Business & Investing Secrets of WARREN BUFFETT

Book Review: Secrets in Plain Sight: Business & Investing Secrets of WARREN BUFFETT

Posted on by David Merkel

I consider myself a lesser light compared to many following Warren Buffett.? Yes, I am a value investor and an actuary, so I guess I have some punch in attempting to analyze the actions of one far greater than me.

The book is organized around two main trips that the author made to the Annual Meeting of Berkshire Hathaway, with some notes from the the 2011 tacked on.

This book tries to distill the ideas of Buffett into simple concepts, and largely succeeds.? It also alleges weaknesses? in Buffett’s reasoning.? Why not consolidate similar, less profitable businesses?? Why not invest a little more in existing businesses? I partially agree: I used to call Berkshire Hathaway “a grab bag of undermanaged businesses.”? But I’ve changed my mind, mostly.

The cost of doing the first of those could be considerable.? Buffett gets certain deals because the seller knows that he will leave the business alone.? The unique culture, friendships, family relationships will be maintained.? The seller doesn’t get top dollar, but he gets the satisfaction that he was true to those he worked with and served him.? Getting these businesses cheaply is a competitive advantage for Berkshire Hathaway, even if it means a certain amount of inefficiency.? Personally, I expect the next CEO or two will centralize the company, and turn it into a normal company.

As for investing more in existing businesses, all the manager has to do is put forth the case to his boss, Buffett.? Buffett will give him a quick decision.

But the author is right, in general, Buffett has not focused on organic growth.? He has acquired all of the businesses that the owns, aside from the reinsurance business.

This book has many strengths:

  • It recognizes that there is a cult following around Buffett.? He’s a bright guy, no doubt, but few questions get asked him by shareholders about his main duty, that of being CEO of Berkshire Hathaway.
  • It points out the significance of Charlie Munger, who got Buffett to think more broadly about value, served as a “Dr. No” to Buffett’s more optimistic demeanor.
  • It doesn’t spend a lot of time on Buffett as an investor in public equities, which has contributed much less to the growth of Berkshire than the acquisition of whole companies.
  • The demographics of Berkshire’s Annual Meeting are older and white, and in general, are the patient shareholders that Buffett likes.
  • Omaha is an unusual place for such a large company, but the isolation is a plus if you are trying to do something different.
  • Understands the basic safety rules of Buffett’s investing: margin of safety, patience, think like a businessman, simplicity, read a lot, be a good judge of character, think independently, get the big ideas right, the value of cash, don’t risk the firm, etc.
  • Notes the value of ethics at Berkshire, even when significant mistakes are made, like the handling of the David Sokol incident.? Reputation matters; you only get one reputation, and it affects all aspects of your business.

Quibbles

  • Berkshire is primarily an insurance company.? I would have spent more time on that.
  • I would have spent less time on non-business ethical issues, like abortion, religion, etc.? Buffett is no good guide there; he is merely justifying his past actions.
  • The bit about the Hoopa Indians was interesting, but when Buffett said, ?I agree that we will not exercise decisions except those ministerial in nature,? he was being very clear and simple.? Buffett is not a Christian, but he was raised in a Presbyterian household.? A minister is one who does things on behalf of another.? The issue is that there are 4 California hydroelectric plants that are old.? If the Federal government destroys them, it may help in salmon production, or farmers might like the extra water for their own use.? Buffett will simply do what the authorities want done if they are willing to pay to do it.? It is not his call in a regulated industry.
  • Buffett’s hypocrisy on taxation is not addressed.? He backs high estate taxes and high personal income taxes, but he doesn’t pay those.? The increase in his wealth though Berkshire, which does not pay a dividend is sheltered from tax, because he never sells a share.

Who would benefit from this book: Anyone who wants to invest better could benefit from it. At five bucks, it?s cheap. A Kindle application for my laptop was free with the purchase.? If you want to, you can buy it here: Secrets in Plain Sight: Business & Investing Secrets of Warren Buffett, 2011 Edition (eBooks on Investing Series).

Full disclosure: I bought the e-book with my own money.

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