Monthly Archive for July, 2008

After Lumbering Along, Paper Now Profitable

Posted on July 31, 2008, 11:12 pm. Closed

I’ve known for 4-5 months that famed value investor Seth Klarman has been invested in two paper-related companies: International Paper (IP) and Domtar (UFS). It seems that lumber and paper-related companies have been particularly out of favor. However, International had a great day, gaining nearly 14% after announcing net earnings gains of 20%. In fact, Bloomberg reported, “International Paper Soars Most in 28 Years on Profit.”

Another interesting tidbit is that with IP’s recent acquisition of a business asset from Weyerhauser, IP will soon be the world’s largest maker of containerboard and corrugated boxes. Sounds like a decent-sized moat to me.

Turning away from paper and towards lumber, the market blog from the Canadian Globe and Mail asks whether lumber be the next oil? The Canadian blog gives particular attention to Canfor Corp., Canada’s largest (or second-largest by market value) lumber producer.

Canfor’s stock has fallen over 40% in the last 12 months, yet Canfor’s CEO Jimmy Pattison has been purchasing shares and has increased his stake in the company to nearly 30%. The fact that Pattison is aligning his interests with the company is a great sign. Pattison also seems to have a history as an activist investor. Two other catalysts for a recovery of Canfor’s stock is a falling Canadian dollar or a recovery of the U.S. housing market.

Things still look pretty bad for Canfor, and most likely other lumber companies as well. A recovery can be imagined, but is not in clear view. But aren’t the bad times the best times for a value investor?

Recent 13D Filings

Posted on July 31, 2008, 1:07 pm. Closed

Two activists that specialize in closed-end fund investment have recently filed 13Ds. The 13D filing is a statement of acquisition of beneficial ownership. According to the SEC, “When a person or group of persons acquires beneficial ownership of more than 5% of a voting class of a company’s equity securities registered under Section 12 of the Securities Exchange Act of 1934, they are required to file a Schedule 13D with the SEC.

The activists are Bulldog Investors and Western Investment LLC.

On 7/8/08, Bulldog stated they had 14.64% of the outstanding shares of Morgan Stanley High Yield Fund (MSY). Currently, MSY is trading at an 11.6% discount to NAV.

On 7/22/08, Bulldog stated they had 8.22% of the outstanding shares of Insured Municipal Income Fund (PIF). Currently, PIF is trading at an 8.5% discount to NAV.

On 7/8/08, Western Investment stated they had approximately 9% of the outstanding shares of DWS Global Commodities Stock Fund (GCS). Currently, GCS is trading at a 13.6% discount to NAV.

Merrill’s Stock Dilution Plan

Posted on July 28, 2008, 9:50 pm. Closed

I think its funny how Calculated Risk eschews the euphemisms of “stock offering” or “raising capital” in favor of the more blunt “stock dilution plan” in relation to Merrill Lynch.

The Economic Falacy of Government Job Creation

Posted on July 28, 2008, 8:51 pm. Closed

The WSJ Political Diary recently had a story about the RINO Senator Chuck Hagel and how he shares a vision with Barack Obama that what America lacks right now is a “national infrastructure bank.” For just a modest $60 billion over 10 years to finance projects, the bank will “create” two million new jobs.

Regardless of whether America needs to work on its infrastructure, the idea that government can create jobs is an economic falacy. This proposed national infrastructure bank is simply a new tax on all citizens. Every dollar taken away from taxpayers is one dollar less they have to spend on other stuff. Thus, for every job that is created by funding from this national infrastructure bank, a private job has been destroyed elsewhere.

In essence, government job creation is simply government sleight-of-hand where at best there is a diversion of jobs from economic sector to another.

An Apology

Posted on July 28, 2008, 8:49 pm. Closed

I apologize for allowing the site to go down for nearly a week. I could say that the problem was outside of my control, but that would be merely an attempt to justify my paying for a really cheap web host that has continued to give me headaches. If I really had wanted good insurance against web problems, I would have paid twice what I am now paying for the web host. I plan on looking at more reputable and expensive hosting services before school starts up again.

A Modest Proposal From Macro Man

Posted on July 23, 2008, 7:15 am. Closed

Always speaking in the third person, Macro Man puts forth a modest proposal – perhaps even more modest than a Jonathan Swift-like proposal – to fix the economic and financial malaise that’s hit the United States over the past few years:

What he’s come up with is a modest proposal that should restore the fiscal health of the United States, reduce a large portion of future liabilities, and set the country on the road to economic health and prosperity. The assumptions that Macro Man used in his calculations are pretty modest, and while the identities of some of his suggested participants are a tad ambitious, he’s confident that his sums could work out in real life.

The first port of call is to take profit on a number of 18th century transactions conducted by the US Government. Top of the list is the Louisiana Purchase, which was consummated in 1803 for the princely sum of $23,213,568. To derive a current marketable value, Macro Man calculates an annual cash flow by multiplying state GDPs by 18% (the proportion of US nominal GDP that the Federal government receives in tax revenue) and assigns a modest P/E multiple of 8 to the result. Perhaps some banks or Donald Trump would assign a higher multiple to these one-of-a-kind assets, but Macro Man prefers to dwell in the realm of reality.

In any event, selling the Louisiana Purchase back to the European Union would get rid of Arkansas, Colorado, Iowa, Kansas, Louisiana, Minnesota, Missouri, Montana, North Dakota, Nebraska, Oklahoma, South Dakota, and Wyoming. Using the methodology described above, Macro Man reckons the US Government could raise $2.34 trillion. Good thing the euro’s so strong! You’ll agree that the price seems eminently reasonable…after all, it’s less than 50 times as much as InBev paid for Anheuser-Busch.

Macro Man continues on. The cash that could be raised in this method would be quite substantial.

Sears and Creative Destruction

Posted on July 16, 2008, 10:53 pm. Closed

Another article on Sears (SHLD), this one from The American. Keeping in line with majority sentiment, the article is mostly negative on Sears’ future. However, I like the article for the fact that it describes the history of Sears and how it once was like the Walmart of the early 20th century, a true innovator in business and retail.

Along with his partner, Alvah Roebuck, Richard Sears opened one of the first mail-order businesses. In 1895, they rolled out their first catalogue, a 532-page behemoth containing thousands of items, enough to supply every need a family could have. Sears was a master marketer, an apostle of advertising, and it pioneered such innovations as the money-back guarantee. By the 1920s, Sears was selling everything from houses (now highly desirable collector’s residences) to violins. Local merchants couldn’t compete, and the culture of mom-and-pop stores was devastated by modern marketing and low prices.

Sears soon branched out to retail stores, which had already started emerging due to growing consumer demand stimulated by the mail-order business. By the eve of World War II, more than 600 Sears department stores dotted the American landscape. Production and distribution systems evolved and multiplied; thousands of smaller producers whose products were carried by Sears found themselves expanding beyond their dreams, providing employment for tens of thousands more workers.

I would agree with the article that Sears has been a victim of its own success and failed to innovate and keep up with its competition, but I also believe there is still some hope that Lampert and management will be able to turn Sears around.

Disclosure: I own SHLD and I also used to work for The American

Starbucks: Coffee Hut or Smoothie Shack?

Posted on July 14, 2008, 10:04 pm. Closed

In late April, Todd at ValuePlays posted his thoughts on the news that Starbucks would be introducing smoothies this summer. Smoothies would not be a bad idea if they were reasonably priced below $4 a drink.

Well, here’s a news release with the pricing details, flavors, nutrition info, and name of the new smoothies:

(Crain’s) — Starbucks Corp. plans to introduce a new line of smoothies Tuesday called Vivanno.

The drinks are the latest push by Starbucks CEO and founder Howard Schultz to boost sluggish sales at the Seattle-based coffee chain. The smoothies illustrate Starbuck’s strategy of offering more healthy options to attract new customers. The 16-oz smoothies will sell for $3.75 to $3.95, and initially will feature two flavors: orange mango banana and banana chocolate.

The drinks will include a banana, whey protein and Naked juice. The orange mango banana blend will have 250 calories, 16 grams of protein and 2 grams of fat. The banana chocolate blend will have 270 calories, 21 grams of protein and 5 grams of fat.

The new drinks debut tomorrow. Good luck, Starbucks.

Steve & Barry’s: It’s cheap. It’s chic. Is it worth it?

Posted on July 14, 2008, 8:56 pm. Closed

“It’s cheap. It’s chic. Is it worth it?” That’s the question a fashion article in The News & Observer asks regarding a $9 little black dress from discounter Steve & Barry’s. The story observes not even Walmart has a dress for that kind of price.

The reason why I’m even delving into the subject of female fashion is because Steve & Barry’s has recently filed for Chapter 11 bankruptcy and news stories have reported that Sears is interested in either the whole company or in just a selection of some of the brands.

Getting back to the original question, I think it could apply just as well to the company. A bankrupt company can certainly be had on the cheap. I’m willing to trust that its fashions are fashionable. You have celebrities like Sarah Jessica Parker and sports stars like Venus Williams and Stephon Marbury on record as backers of the store. But is Steve & Barry’s worth it?

Well, in the fashion article, the author deems the $9 little black dresses she tried on definitely worth the money. She even thought about getting two dresses and some other stuff while she was in the store. This point definitely stuck out to me as a big positive. I think most shoppers know they can’t expect a lot for a $9 dress, and when the store and clothing surpasses those expectations, shoppers will keep coming back and buying more.

Right now, there are reportedly 276 stores open. An article from Business Week leads me to believe that what got Steve & Barry’s into trouble was a focus on unreasonable and unsustainable growth. The article suggests that Steve & Barry’s could have been in a better position today than bankruptcy if it had not pushed for opening nearly 300 stores — almost ten times the number of stores it had five years ago — in such a relatively short time. “If the company had focused more on design and quality at super-low prices … instead of the number of stores, perhaps it could have found itself in a different position today.”

After learning a little bit more about this discount fashion retailer, I’m starting to believe that an acquisition by Sears (SHLD) would be worth it and also would be yet another indication that Sears is serious about becoming a retailer. As if trying to prove that it wants to be a retailer, Sears today named Craig M. Israel, a veteran retail executive, as senior vice-president and president of apparel, responsible for men’s and women’s clothing as well as the children’s and cosmetics divisions.

If the largest problem with Steve & Barry’s was simply that it focused too much on growth, I feel that Eddie Lampert and Sears management could turn Steve & Barry’s and its brands into a much more profitable enterprise.

More Bank Failures on the Way

Posted on July 14, 2008, 7:02 am. Closed

Calculated Risk writes there will be many more bank failures, but probably not as many as there were in the 80s and early 90s. From 1982 to 1992, there was a minimum of 100 banks failing per year, with over 500 failing in 1989.

Furthermore, “Unlike IndyMac that failed mostly because of bad Alt-A mortgage loans, most of the coming bank failures will probably be small regional banks with too much exposure to Construction & Development (C&D) and Commercial Real Estate (CRE) loans.”

I believe this forecast to be in line with reality, as there are many states with banks that have contruction and development loans making up very high percentages of their core capital. More banks will fail, but they will be mostly smaller, regional banks. Those that don’t “fail” will be absorbed by better banks. I am starting to believe that a good indicator of an end to this mess will be after a fair amount of consolidation occurs in the regional banking sector.