Monthly Archive for June, 2008

Rebel Yid’s Random Predictions

Published
by
Doug
on June 30, 2008
in Economy, Elections, Energy and Politics
. 0 Comments

Rebel Yid has posted a list of random predictions. I’d like to address each one of them.

McCain will defeat Obama by 6 % points. McCain will be propelled by significant reduction in troop deployments and successes in Iraq. Obama will suffer further setbacks after debates with McCain.

Can an old, conservative white dude beat a young, liberal black guy named Barack Hussein Obama? As the election process progresses, Obama will lose the halo and McCain will prove himself in debate, but I think 6% is far too generous. I think McCain will win by 3% at most.

Oil will be below $100 per barrel in 6 months. High prices will deflate when market absorbs news of new supplies, and financially sound alternatives; particularly improvements in battery technology.

No argument here. The higher oil goes, the faster it will fall.

The mortgage banking debacle will bottom on the news of several consolidations and purchases of regional banks by larger players, one of them being Warren Buffet’s Berkshire Hathaway and its companies.

Yes, there will be a bottom, and yes, the bottoming process will most likely begin with consolidations and purchases by larger players. I wonder if Berkshire will purchase a bank? Wells Fargo? Wachovia? SunTrust?

Food prices will spike on the Midwestern floods, but will recover quicker than the market expects and drops below current costs.

Interest rates will slowly but steadily climb as the dollar recovers strength, oil prices reverse their climb, and speculative premiums disappear in commodities.

If the dollar can find any sort of meaningful strength, oil and commodities will reverse to the downside.

The price of hybrids will fall as production increases to satisfy higher demand and the costs of better battery technologies are spread over the larger consumer base. New delivery systems and business models will also reduce the price of battery driven automobiles.

Democrats will cave on the energy front and support more domestic drilling, more refining capacity and more nuclear power plants. This will happen largely as a result of these energy issues becoming the forefront of the election, and will be seen as a major reason for Obama’s defeat.

I’m not so sure about the price of hybrids falling this year, but perhaps next year. I also agree that Dems will cave on the energy front. A lot of “conservative” Dems were elected two years ago and I think this group is far more amenable to domestic drilling, increasing refinery capacity and even nuclear power.

Global warming will become a dead issue under new evidence and climate trends. It will quietly go away as every other environmental doomsday scenario has.

It’s hard to imagine that global warming will ever go away.

A new model for higher education will start to make current college institutional structures obsolete, as higher tuition costs do not translate into better educations and the college value paradigms collapse.

Foreign language education becomes a booming business.

A new model for higher education will eventually become dominant, but this will be a trend that will be at least three decades in the making. Also, foreign language education will NOT become a booming business any time soon.

Iran unseats Ahmadinejad and adopts a more pro western stance, but still out of pride does not want to reverse its progress on atomic energy. The political change will be viewed as the most successful application of an economic boycott in history.

I’d like to believe this will happen, but it’s hard for me to imagine that the mullahs would have allowed Ahmadinejad to be elected if they did not approve of his views. But when Ahmadinejad is replaced, his successor will be much more moderate in tone.

Phil Gramm: America Losing Its Competitive Advantage

Published
by
Doug
on June 28, 2008
in Economics and Politics
. 0 Comments

The WSJ has a good interview up with Phil Gramm. One of the things Gramm talks about is how America is losing its competitive advantage in financial markets. One reason is the increase in government regulation post-Enron and now the sub-prime mess. A second reason is our relatively high corporate tax rates.

Also, Gramm says our advantage over the rest of the world has been our more efficient free-market system:

“Why is America the richest country in the world?” he asks. “It’s not because our people are more brilliant; it’s because we have a better free-market system. Why has Texas created 1.6 million jobs in the last 10 years whereas Michigan has lost 300,000 jobs and Ohio has lost 100,000 jobs? Because governance matters, taxes matter, regulation matters. Our opponents in this campaign are so dogmatic in their goal of having more government because they love the power it brings to them that they’re willing to let it impose costs on the working people that they say they want to help. I am not.”

When picking the President this November, consider very carefully the economic policies of the candidates. These policies will have an impact and could mean the difference between a new era of stagnation or a reinvigoration of our economy.

McCain and Obama Tied

Published
by
Doug
on June 25, 2008
in Charts, Elections and Politics
. 0 Comments

Did I not say that the spread would narrow? After weeks of pollsters showing Obama far ahead of McCain, Gallup says both presidential candidates are tied among registered voters nationwide.

Obama, McCain Tied at 45%

It’s been my experience that the spread eventually narrows as election day closes in. I don’t think this election will be any different. I expect Barack to regain his lead a couple of times, but in the end I think the two will be neck in neck.

GM’s Core Incompetence

Published
by
Doug
on June 24, 2008
in Investing
. 0 Comments

With GM’s recent announcement that it will offer 6-year no interest loans and that it has also engaged Citigroup to help decide what to do with its Hummer brand, Mish has some harsh words for GM and Citigroup:

I see that GM now needs the help of Citigroup to dump the Hummer. Two of the most incompetent big caps have joined hands hoping for some Hail Mary play that allows GM to dump the Hummer. GM should have dumped the hummer and GMAC years ago. I said so at the time. It could have done so easily then.

It’s only fitting that two companies with no core competence seek each other out.

The imagery that comes to mind is just too funny to me. I picture two bumbling, maladroit fools trying desperately to run in a straight line.

Of course, hindsight is 20/20 and its easy to point out past mistakes. But when you look at the Japanese auto manufacturers, there really is no excuse for the lack of foresight and innovation exhibited by the American auto industry.

Activist Investors: What Every Shareholder Should Be?

Published
by
Doug
on June 23, 2008
in Investing
. 0 Comments

If you’re a part-owner of a business and the value of your business is falling, what would you do? Would you do nothing, believing the directors and management have things under control? What would it take before you felt like taking matters into your own hands?

Unfortunately, a lot of individual shareholders do nothing. Many don’t even look at proxy statements or vote for directors. According to Jason Zweig, on average between a third and a half of all individual investors don’t vote their proxies. A simple vote should be a basic shareholder responsibility. The company and other shareholders benefit by having all shareholders acting with the best interests of the company in mind. I think it’s been true since the time of Graham that most investors put most of their effort into buying a stock, a little into selling it, but none into owning it.

With these thoughts in mind, there are some guys out there who put a whole bunch of effort into owning stocks. These are the activist investors, often guys who run hedge funds. The most interesting guy I’ve currently been reading about is Phil Goldstein who runs Bulldog Investors (see the recent Fortune article, dated June 18, 2008).

Phil used to be a civil engineer for New York, but got bored with it and nearly became a professional gambler, but instead focused his attention on investing in closed-end funds. The neat thing about closed end funds is the fact that they seem to be more prone to market ineffeciences.

Like traditional mutual funds, closed-end funds invest in stocks and bonds, typically with some sector or strategic focus. Shares are bought and sold on major exchanges, where they can trade for more or less than a fund’s net asset value, or NAV, which is defined as the current market price of all the investments it holds. In other words, the stock price can be higher or lower than the per share value of the fund’s investments.

The way Goldstein makes money is by investing in closed-end funds that are trading at a deep discount to its NAV and then using his large stake to pressure management to make changes that will close percentage gap between the share price and the NAV. Pressuring management usually means asking nicely first, and then progressing to proxy fights or litigation. The most common methods for closing the gap is either opening up the fund or liquidating the fund.

Though it might be easy to spot the inefficienies (just look here - easy as pie!), it seems to be a lot harder to eliminate the efficiencies. Challenging difficult and intransigent management via proxy fights and legal battles could very well end up being Pyrrhic victories. However, in the end, I think people like Phil Goldstein and Carl Icahn (check out his new blog) are the embodiment of the ultimate shareholder as their actions have in the end benefited both their “targets” and their co-shareholders by eliminating inefficiencies and by increasing shareholder value.

Barron’s 2008 Midyear Roundtable

Published
by
Doug
on June 21, 2008
in Investing
. 1 Comment

Just got finished reading Barron’s midyear roundtable. The roundtable has 11 members, each giving his or her view on the economic outlook for the next year or so and some stock picks. It’s always interesting to see what companies the big boys like.

The most interesting company I saw was Tredegar, a company located in Richmond, Va. that makes diaper components. Yes, diaper components. This was a pick by Mario Gabelli, CEO of GAMCO Investors. Gabelli writes:

The number of children 4 years old and under is going to stay flat at about 600 million for the next 30 years, but the use of diapers for incontinence is rising dramatically with the elderly population. Third-party pay is increasing. Tredegar also makes a fiber shield for flat-screen devices, and has an aluminum-products business. The company has 34.5 million shares and has been buying in its stock, which trades for 14.50.

Makes sense to me; we are going to have more boomers needing diapers. Gabelli also says there is a potential for a takeover or management taking the company private. Two other factors going for Tredegar is the large insider ownership of 15.5% and it’s trading very close to its book value. The P/B ratio right now is about 1.05-1.07.

Western Sizzlin’

Published
by
Doug
on June 20, 2008
in Investing
. Closed

Circle of Competence has been writing some great posts on Western Sizzlin’ Corporation, a holding company and restaurant franchiser. Western Sizzlin’ has nearly half of its market cap in 3 investments: Steak ‘n Shake common stock, ITEX Corp common stock, and a real estate venture. The chairman of Western, Sardar Biglari, is of particular interest to me as his letters to shareholders are written in the same style as the letters from Warren Buffet of Berkshire and Ian Cummings of Leucadia.

What this means is that Biglari is up-front with his desire to create value for his shareholders and explains in plain language his methods. Biglari is also up-front with the mistakes he has made and what he will do to correct them. Just from reading his first three letters as chairman, there’s little doubt in my mind that he is a serious value investor and his interests are aligned with those of his shareholders.

I recommend reading these posts written by Circle of Competence about Biglari and Western Sizzlin’:

You can find Biglari’s letters at the bottom of Western’s investor relations page.

For the Benefit of the Shareholders

Published
by
Doug
on June 18, 2008
in Investing
. Closed

Warren Buffett has written in past letters to his shareholders about corporate governance and the importance of shareholder-oriented directors and management. In his 2002 letter, Buffett wrote about the decline corporate accountability and stewardship and how directors should have prevented mismanagement. The reason why directors failed is because of the “board room atmosphere.”

Directors have rubber-stamped mega-grants of stock options and have not fought for rights and benefits of the shareholders. Buffett also says that most directors have lacked at least one of the following qualities: business savvy, interest in the business, and shareholder-oriented. And when speaking of director independence, Buffett questions how a director can be deemed independent when their compensation accounts for 20% or more of their annual income.

The directors of Berkshire are in a singular class. I’m not sure if Berkshire can provide any more incentives to for the directors to be more shareholder-oriented. First, directors are only paid a “pittance.” Second, Berkshire does not provide liability insurance to the directors. Third, when selecting new directors, Berkshire chooses a person who has held a large amount Berkshire shares for a long time. Berkshire will then determine whether these individuals who have business savvy.

These are three very simple measures that work together to ensure that the directors have the interests of the shareholder closest to their heart and mind. This works well because the directors happen to be some of the largest shareholders.

For a recent example of some changes in a public company that has increased the power of its shareholders, look no farther than H&R Block, a former Berkshire holding. Bloomberg reports:

H&R Block Inc., the biggest U.S. tax preparer, plans to give shareholders more control over the firm’s affairs by holding a vote on executive pay, limiting directors to 12-year terms and dismantling takeover defenses.

The board will be reduced to 12 directors from 15, and the jobs of chairman and chief executive officer will be permanently separated, the Kansas City, Missouri-based company said today in a statement. A “poison pill” designed to discourage takeover bids that expired in March won’t be renewed.

This type of action is refreshing to see as it shows the company trusts the shareholders and provides a better incentive for management to increase shareholder value.

Presidential Election Spreads

Published
by
Doug
on June 18, 2008
in Elections and Trades
. 1 Comment

Currently, by the RCP Average, Obama is expected to take 46.8% of the vote and McCain 42.8%, which means there is a spread of 4 points. However, at Intrade, Obama is trading at 63 and McCain at 33.5, a huge spread of 29.5 points.

Here are the intrade charts:

If I were a betting man, I would bet that this spread will narrow as Novemeber approaches. I bet if you sold Obama and bought McCain, you’d be able to make a nice profit when you cash out a week before the election. Of course, this idea works best if McCain can make it to the election still alive. If McCain didn’t make it to election day for some reason, you’d have a big loss on your hands.

Investors in US financials lose $10bn

Published
by
Doug
on June 16, 2008
in Asides
. 0 Comments

“Investors who backed the recent drive by US financial companies to raise capital are sitting on nearly $10bn in paper losses amid a continued slump in the sector’s shares, an FT analysis shows.” Shit - I wonder how long it will be before they get that back? 5, 10, 20 years?