Monthly Archive for November, 2009

Third Quarter Data for Atlantic Southern Bank (ASFN)

Posted on November 30, 2009, 9:59 pm. 0 Comments

The FDIC data for third quarter 2009 has been updated so I’d like to show you how Atlantic Southern (ASFN) is doing. My initial impression is that the deterioration has definitely slowed down, and in some areas there may be some stabilization or even some improvement.

The chart below compares the two most recent quarters for ASFN to the last two quarters of Security Bank (a former competitor of ASFN’s in the middle Georgia area) before they were taken over. (click for larger size)

security-vs-atlantic

Performance Ratios

First, net interest margin declined by thirty basis points. Second, returns on assets and equity are still negative, but they are less negative. Third, net charge-offs to loans has increased by a factor of approximately six. If I were an investor in ASFN, I would be asking about the likelihood of additional future charge-offs and whether the bank will have enough loss provisions set aside in the event of further deterioration of their loan portfolios.

Condition Ratios

The loss allowance to noncurrent loans decreased by about 230 basis points, suggesting to me noncurrent loans increased while the bank did not add to their loss allowance reserves. I would be asking if the bank has any money it can be setting aside for loss allowance. If not, get out of the stock while you still can!

Also, the noncurrent ratios both increased meaning more of the loans in their portfolio are now classified as noncurrent. These ratios are still a far cry from Security Bank’s before they were taken over, but I would keep a close eye on them to see if they keep increasing or if they look to be stabilizing.

Finally, the capital ratios declined all across the board. Judging just the third quarter data, Atlantic Southern has fallen from “Well Capitalized” to “Adequately Capitalized” as defined by the FDIC. I bet they didn’t include that in their press release!

Summary

In all fairness, Atlantic Southern might be stabilizing, but it is still too early to tell. I would wait to see what the next quarters of data look like before further modifying my opinion that Atlantic Southern will eventually be taken over. If the data shows further, slight deterioration, I think that would suggest Atlantic Southern is going to experience a slow and painful death. If the data does not change or it improves, I’ll give Atlantic Southern a 50-50 shot at staying alive past 2010.

Gold: A Crowded Bubble?

Posted on November 27, 2009, 9:46 am. 0 Comments

A month ago, I began a second investment game with two of my pals. I won the previous game, which lasted about 8-9 months. Anyways, in the current game, I exited from 60% of the gold miner positions this past Wednesday. Gold in my eyes just has gotten extremely close to the end of its parabolic move, a type of move that just is not sustainable in the long run. I think there will soon be profit-taking and people realizing that they are participating in a precarious bubble. (click for larger image)

2009-11-27-gold

Since just the beginning of November, the mining stocks in my game portfolio have risen by25% to 50%. In a year, the price of gold has risen from $700 to nearly $1,200.

U.S. Dollar Sentiment

Posted on November 25, 2009, 11:47 am. 0 Comments

Seems like everyone is a USD bear. I’ve read several articles regarding a carry trade in the USD. Here’s a chart of USD sentiment and the USD index. (click for larger image)

US Dollar sentiment 20091124

I do believe the USD will rebound as current sentiment seems to be a little too crowded. If this does happen, I expect to see the markets and the price of oil fall. Thanks to Humble Student of the Markets for the chart.

Bargains: Harder to Find, But Still Out There

Posted on November 25, 2009, 12:39 am. 0 Comments

It’s been my belief for the past several months the market in general is overvalued. That means a lot of the single stocks that comprise the market are overvalued, but there are still a few out there that I think are still very undervalued.

One simple example is RTI International Metals (RTI), a company that produces titanium mill products. As far as I can tell, it is the third largest of such companies in the U.S., behind ATI and TIE. RTI is trading at a price to book ratio of 0.79. That means you’re just paying 79 cents on the dollar for a company that provides a high-performance (and often mission-critical) product to a diverse array of industries.

Another example is Smart Balance (SMBL), which distributes food products and is known for the Smart Balance Brand. This company became public through a reverse merger with a special purpose acquisition company. Right now SMBL is trading at a 20% discount to book value (0.8 P/B ratio). There has been insider buying throughout this year. Though the Smart Balance brand is likely not in terribly high demand as consumers are trading down for less-expensive (and probably less healthy) products, SMBL will not perform as well as it could. However, I do believe the price of the stock will eventually move up to at least fully reflect book value.

Finally, there is United Fire and Casualty, an insurance company I have mentioned before. Since my previous mention, UFCS has gone up slightly, but I think it still represents a great bargain despite it not being a top-notch insurance outfit like Berkshire or Markel. UFCS is trading at a 0.73 P/B ratio.

I know these examples are pretty basic in that I’m only basing them on P/B ratios, but oftentimes, the simplest method is the best one. Greenbackd has recently been posting some great stuff about how the price to book ratio is a demonstrably useful predictor of future investment returns.

What Would Charlie Munger Say About Global Warming?

Posted on November 21, 2009, 11:03 pm. 1 Comment

If you haven’t heard by now, hackers (or an insider) broke into The University of East Anglia’s Climatic Research Unit and downloaded 156 megabytes of data including extremely damaging emails that show how data supporting the global warming thesis was manipulated and/or fabricated.

Here is just some of the coverage I’ve seen from various blogs:

The Washington Post also has posted a story about this, but I find it very interesting the slant they take to the story. Instead of focusing on the manipulation/fabrication of data for the purposes of proving a highly controversial hypothesis (what I think could become known as one of the greatest hoaxes advanced by mankind), the Washington Post article merely focuses on how the stolen e-mails deride and disparage the skeptics of warming. When there’s even a whiff of fraud on such an important subject, how can than NOT be the focus for a newspaper? Why focus on the pettiness of these scientists and not on the apparent fraud and manipulation? Could it be the Washington Post writers and editors have an agenda of their own?

Anyways, to get to the title of this blog post, I’m not sure if Munger has said anything about global warming in the past. But I do know Munger’s views on responsibility for social problems, which I think applies to so-called global warming or climate change (or whatever you want to call it):

I’m all for fixing social problems. I’m all for being generous to the less fortunate. And I’m all for doing things where, based on a slight preponderance of the evidence, you guess that it’s likely to do more good than harm…

What I’m against is being very confident and feeling that you know, for sure, that your particular intervention will do more good than harm given that you’re dealing with highly complex systems wherein everything is interacting with everything else.

Our climate system has to be one of the most complex systems on this planet. Consider just all the big and small factors on the planet that affects the weather. Then consider all the factors outside this planet that has an effect on the climate. Consider the millions of possible ways these factors can interact with each other. Consider the fact that global temperatures have always fluctuated without man-made pollution and carbon dioxide. It’s been been much hotter than it is now and it’s been much colder than it is now.

I would like to believe that Munger would be against doing anything to “fix” the so-called problem of global warming or climate change given that it is such a highly complex system and given that anything we do would most likely have zero positive effect and would very likely have serious negative consequences.

Fairfax Financial to delist shares from NYSE

Posted on November 20, 2009, 12:07 am. 0 Comments

Via the Globe and Mail:

Fairfax Financial Holdings Ltd. is delisting from the New York Stock Exchange, having decided that the expense and inconvenience of being listed in the United States outweigh the benefits.

The Toronto-based company has been listed on the NYSE for about seven years. In 2006, it filed a lawsuit in New Jersey alleging that a group of powerful U.S. hedge funds short sold its shares and then schemed to drive down its stock price using a series of tactics, including intimidating executives and influencing analysts.

For a time, the company felt that a U.S. listing was necessary to enable its U.S. employees to own its shares, and to attract U.S. investors.

But these days it’s relatively simple for U.S. investors to use the Toronto Stock Exchange, and Fairfax’s ability to easily raise $1-billion through a share offering in September has demonstrated its ability to attract investors. Fairfax sold most of the shares on a so-called agency basis, meaning it took on the risk that they might not sell, rather than offloading the issue to banks. The insurer was raising the money to buy the part of its subsidiary Odyssey Re Holdings Corp. that it didn’t already own.

“After our recent privatization of Odyssey Re, Fairfax now wholly owns all of its primary businesses and is the largest property and casualty insurance company based in Canada, with worldwide operations in over 50 countries,” chief executive officer Prem Watsa said in a news release Thursday. “While our decentralized operations have global reach, after reviewing the factors relevant to our continued listing on the NYSE, we determined that our company and its shareholders will be better served by the simplified focus and lower cost resulting from the maintenance of only our original TSX listing.”

The voluntary delisting will have no impact on the company’s substantial operations in the U.S., he added.

“In recent years, as markets have become significantly more global and liquid, our constituents, including shareholders and employees, no longer require multiple listings,” Mr. Watsa said.

The delisting is expected to take effect around Dec. 10.

Sounds to me like Watsa is proving once again he is one of the world’s best value investors. Everything he does is about increasing value for the shareholders of Fairfax.

United Fire & Casualty Has Been Down This Road Before

Posted on November 17, 2009, 1:53 am. 0 Comments

For several months, United Fire & Casualty (UFCS) has been in the dumps. I’m fairly certain it’s still paying for the catastrophes of last year. UFCS is by no means the best underwriter of risk or the best investor of its premiums, but I think it has staying power. UFCS was founded in 1946 and has done well since then. (click for larger size)

2009-11-16-ufcs

Just by looking at the chart, you can see that UFCS has undergone about three price corrections of similar magnitude to its most recent price correction. After each of the three previous times, the stock has rebounded nicely over time.

Here is some 10-year data for UFCS:

ufcs-10-year-data

I’m not a big fan of those high combined ratios (i.e., unprofitable underwriting), but UFCS currently has a P/B ratio of 0.7 and its 10-year average is 1.2. On a simple P/B ratio-based valuation, UFCS is trading at a 30% discount. If we assume UFCS were to trade at a more normal 1.1 P/B ratio, that means UFCS is now at a 40% discount.

I have no idea how long it will take UFCS to reach its intrinsic value, but I feel pretty confident that the true worth of the company will eventually be reflected in the stock price.

Appalachian Bancshares Fights for Survival

Posted on November 12, 2009, 12:27 am. 0 Comments

Today, another bank in Georgia fights for its survival. The bank is Appalachian Bancshares (ticker APAB) based in Ellijay, Georgia. Tracy R. Newton, the Director, President and Chief Executive Officer of Appalachian filed a 13D today with the SEC stating that he now owns approximately 9.17% of shares outstanding.

Newton came by his extra shares after he and his bank “executed an agreement to issue 857,142 shares of the Company common stock in exchange for $428,571 aggregate principal amount of Appalachian Community Bank Fixed Rate Subordinated Notes, due September 30, 2015.” Though on the surface this is a very commendable action on the part of Newton, giving up his fixed rate notes in exchange for common equity, but I have a feeling that this action is not going to matter in the long run.

Taking a look at the loan portfolio (as reported 6/30/09) of Appalachian, we see construction and development loans make up 44.09% of the total, an amount that is six times the national average. And of course, the C&D portfolio looks extremely bad. Total delinquency is 12.99% versus a national average of 4.2% and the non-accrual rate is 20.6% versus a national average of 12.10%. Commercial real estate and commercial and industrial loans also make up an additional 24.65% of the total portfolio, and these loans are only slightly less worse than the C&D side.

Additionally, Appalachian has a Texas Ratio of 221.26 (a figure greater than 100 and its more likely the institution will be taken over), negative returns on equity and assets for the each of the past four quarters, and its Tier 1 and Total risk-based capital ratios are rather small at 5.21 and 7.26 respectively.

Again, its commendable the CEO is being so nice to his bank, and I hope everything works out, but the situation looks like a band-aid for a gunshot to the stomach. (click image for larger size)

2009-11-11-apab

The Five Greatest Threats to Financial Markets in the Next Decade

Posted on November 8, 2009, 7:00 pm. 2 Comments

After a bit of reflection and quiet contemplation yesterday on the what might be the greatest threat to financial markets in the coming decade, I came up with a list of about five potential threats. I did my best to synthesize everything that I have read or listened to in the past year. I also tried to imagine the unimaginable and to envision scenarios that are counter to current conventional thoughts regarding the future.

So here are the threats, in no particular order.

Failure to Institute Appropriate Reforms

A year after the failure of several major institutions and Congress has not implemented any meaningful type of reform. Capital requirements have not been increased. Instead of breaking up the too-big-to-fail institutions, the government is allowing—in effect, encouraging— them to grow. Credit default swaps still do not have a central clearinghouse and are still treated as securities rather than insurance. The shadow banking system remains unregulated. The government is continuing to prop up housing prices via tax credits and is continuing to give home loans to risky people for only a measly 5% down payment.

Based upon the prior examples alone, any future crisis has the potential to be much worse because of the failure to institute adequate and necessary reforms.

A Major Country Defaulting on its Debt

I’m not talking about Argentina or Turkey. I’m talking about a country like Japan (see this article), the United Kingdom, or the United States. Now, a credit downgrade might be more likely, but I think its well within the realm of possibility that any one of these countries could default within the next decade unless their governments address their budget deficits and spending habits.

According to the OECD, Japan’s debt to GDP ratio will likely rise to 197% next year. I bet that the United States will have a debt to GDP ratio of 100% next year. The United Kingdom will have a debt to GDP ratio of about 72% next year, the greatest its ever been in thirty years.

Inflation

Future inflation is the biggest thing about which everyone is worried, therefore this is probably the least likely to occur within this next decade. However with that said, inflation and the side-effect of rising interest rates has the potential to negatively affect a country’s debt situation. Increasing the costs for a country to service its already massive debts could very well induce a death-spiral that forces a country to default on its debt. Can you just imagine what it would be like for Japan or the United states if they were forced to pay double the rate for its long-term debt? I imagine it would not be very pleasant.

And as a reminder to those of us in the U.S., rates rose from the 50s to the 80s and rates declined from the 80s to 2010. Financial history is cyclical and there is nowhere to go but up for rates. Rates will eventually begin another 30-year journey upwards.

Conversely, since we are talking about just the next decade, a decade of world-wide deflation could probably be the most likely scenario simply because very few people consider it likely.

Global Catastrophe

Here are some catastrophic events that could serious consequences for global economies and markets:

  • a 9/11-type terrorist attack somewhere in the world
  • a global pandemic that kills millions of people
  • a nuclear war: Israel/Iran; India/Pakistan; any other imaginable/unimaginable combination of countries
  • a virus or bacteria or insect that destroys a large percentage of the world’s crops and food supply

As a sidenote, its not worthwhile to consider any scenario with a Mad Max-type result. When we’re in a wasteland fighting each other for fuel there is definitely not going to be any financial market to worry about.

“The Next Bubble”

“The Next Bubble,” whatever that might be, is probably another conventional threat to financial markets. Everyone knows they happen periodically and everyone knows that with all the money being printed by the government, this money has to go somewhere if people aren’t using it to pay down their debts.

Here are some potential future bubbles:

  • Oil/Natural Gas – Hard to imagine, but it could happen again.
  • Commodities – I’ve been reading how China has been stockpiling vast amounts of commodities to hedge against a depreciating U.S. dollar; perhaps this will be the next bubble?
  • Debt – After so many investors were burned by equities and complex securities, investors have turned to “safer” government and corporate debt for their investment needs. If investor psychology has shifted towards a general preference for debt, this preference will eventually shift at the peak of demand as it always does.
  • Real Estate – Another real estate bubble? I think its entirely possible. We’ll call it the Double Bubble. Prices are being propped up in the United States. Apparently there is a bubble in Canadian real estate (of all places). China is also a likely candidate.
  • China – China in general is a place where people worry about a bubble forming.
  • Alternative Energy – Solar, wind, geothermal, cold fusion (haha). Might become a bubble. I don’t know. But these alternative energy investments will surely suck if global demand for fossil fuels is near zero for the next decade.

Summary

In summary, I was able to envision five threats to the financial markets over the next decade: a major country defaulting on its debt, inflation (or an unexpected decade of deflation), global catastrophe, and “The Next Bubble.” I would be very interested to hear my readers’ thoughts and ideas on this subject. Its very hard to think about the future and possible black swan events, but definitely a worthwhile effort.

1999 Again for Amazon?

Posted on November 6, 2009, 4:36 pm. 0 Comments

Amazon’s stock (AMZN) has made all-time highs recently after beating many expectations and on high hopes for the Kindle. (click image for larger size)

2009-11-06-amzn

Right now AMZN has a P/E ratio of about 70. That seems way too high for a company that has operating margins of only 4.26%. Contrast Amazon with Walmart, a traditional brick and mortar outfit that sells nearly just as much stuff as Amazon and has been building its web presence and is now allowing other people to sell via the Walmart website. Walmart has an current operating margin of 5.65% and a P/E of only 15.

It looks to me that there is a lot of hope built into the stock price of AMZN. I would definitely consider shorting AMZN while going long Walmart. I might have mentioned before shorting an outfit like Nordstrom’s and going long Walmart, but I am now realizing that a -AMZN/+WMT trade might be a better fit as both companies are more similar to each other.

So when might one go short AMZN? That’s a tough question. I bet that AMZN could get up to 150 before not too long. High-flying stocks always seem to fly too high for too long before falling back to earth from the weight of more realistic expectations.