Monthly Archive for February, 2009

A Look at Fair Isaac (FIC)

Posted on February 27, 2009, 5:13 pm. Closed

Despite the indexes being down today, Fair Isaac (FIC) was up a bit. FIC looks very appealing to me now. Here’s what they do, according to Morningstar:

Fair Isaac is the leader in predictive analytic products that use historical data to predict future events. Its FICO score, used to determine the creditworthiness of consumers, is the established standard in the United States. The company also provides marketing; customer-management, fraud-detection, and collection products; and consulting services. Almost three fourths of its revenue is derived from the consumer credit, financial services, and insurance industries.

The italics are mine, as it represents to me the largest risk factor as a lot of credit, financial, and insurance industry business may never come back to Fair Isaac. But let me state briefly why FIC might be a good buy at this point.

First, it has a cash flow yield in the double digits. Bruce Berkowitz has constantly talked about the importance of cash flow yield when he’s looking at companies. Second, P/B and P/S ratios are at the lowest they’ve ever been in a decade. Third, despite declining margins in the short-term, margins in the long-term have grown at somewhat respectable rates:

Fourth, in ten years, FIC has never reported negative income.

Fifth, yesterday a director purchased 10,000 shares. Sixth, FIC has been buying back its shares: since 2003 FIC has reduced shares outstanding from 72.29 to 48.48 million today. And finally, FIC is the Longleaf Partners Small-Cap fund’s fourth-largest holding at 6.05% of its net assets.

U.S. Gov’t and Citigroup Reach New Agreement

Posted on February 27, 2009, 12:03 am. Closed

Breaking news people! The WSJ reports that Citigroup and the U.S. have reached an agreement in which the government will substantially increase its stake in the bank in return for a boardroom shakeup:

Under a deal expected to be announced early Friday morning, the Treasury Department has agreed to convert some of its current holdings of preferred Citigroup shares into common stock. The government will convert its stake only to the extent that Citigroup can persuade private investors to do so alongside the government, the people said. The Treasury will match the private investors’ conversions dollar-for-dollar up to $25 billion.

The size of the government’s new stake will hinge on the amount of preferred shares that private investors, including sovereign wealth funds, agree to convert into common stock. The Treasury’s stake is expected to rise to 30% to 40% of Citigroup’s shares, the people said.

As a condition to the agreement, which is designed to ease investor jitters about the adequacy of Citigroup’s capital base, the government is demanding that the New York company overhaul its board of directors, the people said. Treasury will call for Citigroup’s board to be comprised of a majority of independent directors.

I wonder how the market will respond tomorrow morning?

Commercial Real Estate Could Break Down Right Now

Posted on February 26, 2009, 10:58 pm. Closed

First, The Financial Ninja says the commercial real estate index could come crashing down. Take a look.

Second, REIT dividends are being cut, paid in the form of stock, or eliminated as commercial real estate values fall.

I still am short real estate via SRS.

World’s Largest Rubber Glove Maker Might Have a Moat

Posted on February 25, 2009, 4:08 pm. Closed

Top Glove is apparently the world’s largest rubber glove maker. They are based in Malaysia and produce over 30 billion gloves that they sell to over 850 customers in 180 countries. I would imagine that “world’s largest anything” might have a sizeable moat as they are most likely able to have higher margins due to efficiencies of scale. Another reason why I might look more deeply into Top Glove is because I feel their product is pretty recession-proof. Sterile, rubber and latex gloves are mandatory for medical professionals around the world. If you’re handling dangerous or fragile materials, you must have protection.

Taking a cursory look at the financials, their net income (I assume that what they call “profit attributable to equity holders” is the same as net income) has steadily increased from 2002. I also would think that their production costs have decreased substantially along with the price of oil. This could be an interesting investment and might merit further research. The ticker symbol is TGLVY.

Bank Nationalization Hysteria

Posted on February 25, 2009, 11:53 am. Closed

Here is a burn-down analysis of Wells Fargo. The author notes that the stock now trades for 1.5 times estimated 2009 pre-prevision pretax income (PPTI) and that Buffett was happy to purchase Berkshire’s shares for 3 times pretax earnings back in the early 90s.

Remember, be greedy when others are fearful.

Commercial Real Estate Loan Charge-offs at Commercial Banks

Posted on February 24, 2009, 8:59 pm. Closed

The Fed reports that charge-offs and delinquency rates rose in Q4 (via CalculatedRisk):

Commercial real estate delinquencies are rising rapidly, and are at the highest rate since Q2 ’94 (as delinquency rates declined following the S&L crisis).

Residential real estate delinquencies are at the highest level since the Fed started tracking the data (since Q1 ’91).

Credit card delinquency rates are now above the previous high in 1991 (the Fed started tracking data in ’91).

Although there is credit deterioration everywhere, the rise in these three categories is especially significant. Residential delinquency rates jumped by over 1% from 5.22% to 6.29% – in just Q4! Credit card delinquencies rose from 4.83% to 5.56%, the fastest increase since the Fed started keeping records.

I made a chart of charge-off rates of real estate loans at commercial banks. Check it out.

I think its interesting that the charge-off rates during the 2000-2002 market downturn did not increase as drastically as now or in the early 90s. That the charge-off rates of both commercial and residental real estate loans have increased so dramatically this time around is evidence that this is no ordinary recession we are experiencing. I have a bad feeling this might well be a once-in-a-lifetime event for a young person like me.

Commercial Real Estate is the Next Crisis?

Posted on February 24, 2009, 12:12 am. Closed

Is commercial real estate likely to be the next crisis?

ORLANDO (Reuters) – U.S. commercial real estate problems could derail the country’s economic recovery later this year, a top Federal Reserve official said on Monday.

“Many banks are pretty heavily exposed to commercial real estate. It is also a big part of the securitization market. So commercial real estate is one that concerns me,” said Federal Reserve Bank of Atlanta President Dennis Lockhart.

Lockhart, a voting member of the Fed’s policy-setting committee this year, said that around $400 billion of commercial real estate refinancing was hanging over the market and he was monitoring its progress with care.

“If you think of 2007 and 2008, in a negative sense, as the year of…residential real estate issues, it is possible to think of 2009 as the year of commercial real estate. That is the one domestic factor that keeps me up at night,” he told the Association for Financial Professionals after a speech.

With the government incapable of instilling any confidence in the markets, it seems inevitable to me that nothing will be done about this seemingly impending disaster. For now, I remain short real estate via SRS.

Rick Santelli’s Tea Party

Posted on February 19, 2009, 4:38 pm. Closed

I was watching CNBC this morning and Rick Santelli put in a great performance (click the link for a video). I love this guy. Santelli is the only reason why I am able to tolerate all the other buffoons. It’s stuff like this that gets me to tune in.

Earnings and Cyclicality

Posted on February 19, 2009, 12:41 pm. Closed

The S&P recently reported negative earnings for the first time ever. The S&P is also predicting very weak earnings for the remaining quarters this year. Taking a look at the following two charts, it seems to me that there is still room for more downside in the markets.

The Party of Tax Cheats

Posted on February 19, 2009, 12:12 am. Closed

Whether its intentional or unintentional, it seems that the Democrats have earned a reputation as the party of tax cheats by virtue of Obama’s staff picks. With news that Rahm Emanuel lived rent-free for yeas being reported, Karl Denninger asks if anyone in the Obama administration pays taxes?

In the middle of the greatest economic crisis of my life, how can this newly elected president be nominating and selecting people with histories of cheating and fraud? How does instill confidence in anyone?