Monthly Archive for August, 2009

The Difference Between the Stupid and the Intelligent

Posted on August 22, 2009, 12:40 pm. Closed

“Nell,” the Constable continued, indicating through his tone of voice that the lesson was concluding, “the difference between ignorant and educated people is that the latter know more facts. But that has nothing to do with whether they are stupid or intelligent. The difference between stupid and intelligent people—and this is true whether or not they are well-educated—is that intelligent people can handle subtlety. They are not baffled by ambiguous or even contradictory situations—in fact, they expect them and are apt to become suspicious when things seem overly straightforward.

Page 283 of The Diamond Age by Neal Stephenson

An Ineffective Regulatory System

Posted on August 21, 2009, 10:50 am. Closed

We have too many ineffective regulators: the OCC, Fed, OTC, FHFA, SEC, FDIC, and more. Watching the regulatory system is like watching bad doubles tennis players. No one hits the ball thinking the other guy will get it. Investment banks are not suffering from too much regulation. The global capital markets are suffering from too little competent regulation where it counts most.

Page 205 of Dear Mr. Buffett: What an Investor Learns 1,269 Miles from Wall Street by Janet Tavakoli.

A Most Bullish Chart

Posted on August 20, 2009, 11:32 pm. Closed

Bill Nasgovitz shows a chart of the ten year rolling returns of the stock market in this video. He is definitely correct in that it is a very bullish-looking chart and that the next ten years will most likely be better than the last ten years.

However, I am sure that there are different charts out there that show we have not yet hit the point where we have the true beginning of a new bull market. For example, Vitaliy Katsenelson has a chart showing the 10 year trailing P/E ratio of the S&P 500 on slide 18 of this presentation (click image below for larger size):

kastenelson-pe-chart

Katsenelson says the market is now trading at an average valuation, not a below-average valuation, which he argues is the point at which a new bull market begins.

My own personal opinion is that this market is fairly valued or maybe even slightly overvalued.

The Financial Panic: A Mental Disorder

Posted on August 20, 2009, 12:53 am. Closed

A financial panic is precipitated by sudden, excited, and imprudent action. An industrial depression is precipitated by deliberate, thoughtful and prudent inaction. One is the result of mental excitement, which results in a temporary check to a natural flow of the media of exchange. It is a mental disorder. The other is the effect of calm, deliberate consideration, which results in reducing the rate of production of materials of physical wealth. It is a physical disorder.

A financial panic is an acute malady. Its beginning is sudden, intense, vivid, and startling. Its chief element is fright. It paralyzes finances at a single blow. Each subsequent step in its course is an alleviation. Each day, week or month shows a marked recovery. From its nature and intensity it is short-lived.

An industrial depression is a stubborn, chronic malady. Its beginning is gradual and quiet. It commences and goes on increasing in force for many months, unnoticed. Its cause is silently doing its fatal work while actual business is increasing by leaps and bounds. When actual depression appears, its cause has almost ceased to exist. From its nature and its deep-seated growth industrial depression is long-lived

A financial panic is usually a matter of a few months, weeks, or days. An industrial depression is usually a matter of one or more years.

A financial panic may be compared to a mob, in which a great number of excited minds work upon and incite each other until men act in a body as no one of them would act if left to himself. Industrial depressions, on the other hand, are the cumulative results of the deliberate and thoughtful decisions of individual men.

These two calamities can be classed together only because the results of each have a disastrous effect upon business. A panic has an effect which is short, exciting, and a temporary disaster, not to existing material wealth, but to the documentary representatives of wealth; a loss from which the country may entirely recuperate within a short time. The other is a compulsory laying down of the tools which produce wealth, by a vast army of wealth-creators; a loss that can no more be regained than a lost day or year can be regained.

This is an excerpt from an article written by George H. Hull in 1911 regarding panics and depressions. It almost sounds like it could have been written this year, which I find most interesting because this near-century-old article shows how investor psychology will always remain the same in any setting. The article also helps to serve as a reminder that business and the economy will continue to go up and down in cycles.

Another interesting thing is how Hull chooses to describe panics and depressions. He describes them as if they were diseases or afflictions, or rather, a psychological ailment or “mental disorder,” describing the symptoms and how the disorder will run its course through the economy.

Finally, I look up on this article as a reassurance for the tough times that many of us are experiencing in this country. If people back then could get through bank panics and economic depressions without the benefits of indoor plumbing, air conditioning, and sliced bread, then we really have no need to worry that things will eventually get better for us!

What’s the Point of Shorting a Sub-Four Dollar Stock?

Posted on August 20, 2009, 12:15 am. Closed

While sitting in the hospital again with my dad after my second procedure, I told him about the basic analysis I did comparing one of Macon’s publicly-traded banks to another local bank, the recently failed Security Bank (now State Bank and Trust). I told my dad things look really bad and that I felt chances were good that Atlantic Southern (ASFN) would fail within a year or two.

My dad asked me if one should short the stock. I replied that it was trading just below $4 and sure, I would short it but I would hedge by going long on the stock of a much stronger bank. My dad didn’t seem to think shorting a $4 stock was worth the effort as there was not much downside left. (click chart)

2009-08-19-asfn

Well, it’s true. Not much downside is left, but the stock can certainly go to zero. If one is confident of their analysis, shorting the stock of a bank that has numerous non-performing loans and is not adequately capitalized and hedging by going long on stock of a strong bank should still be  a good strategy.

As a side note, I think its a travesty the way this bank has let its shareholders down. ASFN has been publicly traded for roughly 3.5 years and its stock has only been heading down the toilet for the majority of that time.

Here’s One Way to Get Rid of Our Debt

Posted on August 14, 2009, 9:30 am. Closed

The Onion reports on how the U.S. government has staged a fake coup to renege on all its debt. I think it’s pretty close to what will happen eventually.

A Conditioned Belief in a New Era

Posted on August 12, 2009, 3:34 pm. Closed

Pecora judged the Wall Street of his day to be a moral sinkhole, and in the defalcation of Richard Whitney, chairman of the New York Stock Exchange, and in the short selling of Albert Wiggin, he seemed to prove the point. However, he assigned too much to the lightly regulated financial system and too little to the boom. It wasn’t the lack of rules and regulations that raised the depravity index in American finance. It was the conditioned belief in a new era.

“The Miscreants We Deserve,” February 15, 2002, page 210 of Mr. Market Miscalculates by James Grant

Could Atlantic Southern Go the Way of Security Bank?

Posted on August 8, 2009, 11:17 pm. Closed

Atlantic Southern (ASFN), a bank based in my hometown of Macon, Georgia, reported its Q2 earnings at the end of July. Things are starting to look a LOT worse over there and I am beginning to think chances are increasing that they could be taken over within a year.

First, ASFN reported a net loss $5.65 per share for the second quarter of 2009. Compare this to a net gain of $.18 per share for the first quarter of 2009 and to a net gain of $.17 per share for the second quarter of 2008.

Second, asset quality and capitalization ratios have declined from the previous quarter and are starting to look very similar to the ratios of Security Bank before they failed and were acquired by State Bank & Trust.

secbank-asfn

So is it possible ASFN could eventually be taken over? I say yes because anything is possible and secondly because of the aforementioned data. Quarter after quarter, things have gotten progressively worse for Atlantic Southern and the stock price is clearly reflecting the lack of confidence. The stock is now trading again at all time lows (click chart).

2009-08-08-asfn

I also believe if this company was going to survive we would be seeing at least a little bit of insider activity. However, the last time we saw any positive activity was back in November 2008 when Director and largest insider Bill Fickling purchased some shares at $7.68. Since then, there has been zero activity. If ASFN was such a good buy in the seven dollar range, why haven’t we seen knowledgeable directors or executives purchase at half that price? Well, the presumed answer is that the these owners and executives have no confidence in their company.

Anyone still holding onto this stock should probably sell now while they still can.

“Buy American” Rule Delays Gov’t Stimulus Projects

Posted on August 7, 2009, 8:37 am. Closed

From Bloomberg:

President Barack Obama’s stimulus spending has run into a problem: A shortage of General Electric Co. water filters.

GE makes them in Canada. Under the program’s ‘Buy American’ rules, that means the filters can’t be used for work paid for by the $787 billion fund.

Contractors are searching the U.S. in vain for filters as well as bolts and manhole covers needed to build wastewater plants, sewers and water pipes financed by the economic stimulus. As officials wait for federal waivers to buy those goods outside the U.S., water projects from Maine to Kansas have been delayed.

See what happens when the government gets involved in anything? By placing artificial terms, conditions, and regulations on the marketplace, you often wind up with negative and/or unforeseen consequences. In this instance, I think most people could foresee that the Buy American provision was just a blatantly stupid rule. Now we have evidence.

Texas Industries CEO and Chairman Deny Board Seats to Shareholders

Posted on August 6, 2009, 5:58 pm. Closed

On August 3, 2009, representatives of the Shamrock Activist Value Fund met with both the CEO and the Chairman of Texas Industries (TXI) to discuss board seats. Shamrock has built up a 10% holding of all outstanding shares of TXI and understandably wants a voice in the company via three director seats they feel they deserve. However, despite Shamrock’s substantial holdings in the company, the Chairman, Mr. Rogers, “made it abundantly clear that he believes there is no place in the Texas Industries boardroom for the voices of its shareholders.”

Shamrock’s letter continues to describe the unfortunately paternalistic view toward shareholders by Mr. Rogers:

Mr. Rogers and his current Board behave as if only they know, and only they are capable of acting in, the best interests of the Company and its shareholders. This simply underscores Mr. Rogers’ misplaced belief that Texas Industries is his own personal fiefdom. It appears that Mr. Rogers fails to recognize that the shareholders own the Company, and that he and this Board are elected to serve only at the pleasure and in the interests of the shareholders. Perhaps this attitude is why the Company’s performance lags its peers, hundreds of millions of dollars of the Company’s funds have been “invested” in ill-timed capital expansion projects that have failed to generate any incremental profits, and there appears to be no credible plan to address these shortcomings.

In particular, Mr. Rogers summarily rejected our three director nominees. His dismissal was not based on their merits, but instead appeared rooted in Mr. Roger’s personal opinion that our three nominees are not sufficiently independent because they were nominated by a shareholder, and not by him and his fellow Board members.

Behavior like this by executives and board members boil my blood. It suggests to me that the executives and directors have extremely low opinions of not just Shamrock, but all the other shareholders who own the majority of the company. This behavior says to me they are arrogant and greedy and only working to protect their own interests and could care less about the company and its shareholders.

I wish the best of luck to Shamrock in their efforts to obtain their board seats and to help this company compete better against its peers.