F.M Kirby II, Former CEO and Chairman of Alleghany (Y), Dies

Posted on February 11, 2011, 11:39 am. Closed

The Citizens Voice has a good obit on F.M. Kirby:

Fred Morgan Kirby II of New Vernon, N.J., the former chairman and CEO of Alleghany Corporation and namesake of the F.M. Kirby Center in Wilkes-Barre, died Tuesday morning in North Carolina at the age of 91.

His life reflected the words on his family’s coat of arms: “Facta Non Verba,” meaning “deeds, not words,” according to records and remembrances of friends and colleagues.…

During his nearly 39 years as chairman ending in 2006, Alleghany stock delivered a cumulative return to shareholders of 23,903 percent, compared to 5,215 percent for the S&P 500, according to a release by the National Football Foundation, of which he was an emeritus board member.

Alleghany Corporation (Y) has been an extremely well-run company and remains a large holding of mine.

James Grant Interview on Munis, Rates, and Risk

Posted on February 7, 2011, 11:15 pm. Closed

Bloomberg interview of James Grant on munis, rates, and risk.

Ensco plc (ESV) to Acquire Pride International, Inc. (PDE)

Posted on February 7, 2011, 8:30 am. Closed

Ensco plc to Acquire Pride International, Inc.

Ensco plc (NYSE: ESV) and Pride International, Inc. (NYSE: PDE) jointly announced today that they have entered into a definitive merger agreement under which Ensco will combine with Pride in a cash and stock transaction valued at $41.60 per share based on Ensco’s closing share price on 4 February 2011. The implied offer price represents a premium of 21% to Pride’s closing share price as of the same date and a premium of 25% to the one month volume weighted average closing price of Pride. The definitive merger agreement was unanimously approved by each company’s board of directors.
Under the terms of the merger agreement, Pride stockholders will receive 0.4778 newly-issued shares of Ensco plus $15.60 in cash for each share of Pride common stock. Upon closing, and reflecting the issuance of new Ensco shares, Pride stockholders collectively will own approximately 38% of Ensco’s outstanding shares.
Ensco expects the combined company to realize annual pre-tax expense synergies of at least $50 million for full year 2012 and beyond. The combination is projected by Ensco management to be immediately accretive to Ensco’s earnings and cash flow per share before synergies.
The transaction will create the second largest offshore driller in the world with 74 rigs spanning all of the strategic, high-growth markets around the globe. The combined company will have 21 ultra-deepwater and deepwater rigs, forming the second largest/youngest fleet able to drill in water depths of 4,500’ or greater. In addition, the combined company will have more active jackup rigs than any other driller. Mid-water rigs will represent 8% of the combined fleet.
Based on the closing price of each company’s shares on 4 February 2011, the estimated enterprise value of the combined company is $16 billion. The total estimated revenue backlog for the combined company is approximately $10 billion.

More Proof the Average Retail Investor Doesn’t Know What They’re Doing

Posted on February 6, 2011, 8:38 pm. Closed

Jason Zweig had an article in this past weekend’s WSJ on preferred stocks. I don’t really care about the theme of the article, but there was one example in there worth noting:

Preferred stock also can be “called away” if the issuer wants to retire it. That caught Stan Aten, a printing-company employee in Dallas, by surprise last year when some of his preferred shares of real-estate operator Public Storage, for which he had paid $25.74, were redeemed by the company at $24.50. Mr. Aten, who had bought a few months earlier, lost about $135. He still buys preferreds, but more carefully. “I should have read the prospectus and realized they had the right to do that,” he says.

Yes. He should have read the prospectus. That’s just a basic thing to do. I think this is just more anecdotal proof that the average retail investor does not know what they’re doing when it comes to investing their own money. These individuals would be much better served by giving investment authority to a registered independent advisor or sticking with mutual funds run by managers with a value investing philosophy and with a lot of skin in the game.

The Galleries

Posted on February 5, 2011, 2:52 pm. Closed

“‘The galleries are full of critics. They play no ball. They fight no fights. They make no mistakes because they attempt nothing. Down in the arena are the doers. They make mistakes because they try many things. The man who makes no mistakes lacks boldness and the spirit of adventure. He is the one who never tries anything. He is the break in the wheel of progress. And yet it cannot be truly said he makes no mistakes, because his biggest mistake is the very fact that he tries nothing, does nothing, except criticize those who do things.”

Gen. David M. Shoup,
Former Commandant, US Marine Corps,
Medal of Honor, Tarawa, November 1943

Meredith Whitney is Full of It

Posted on February 1, 2011, 2:18 pm. Closed

I’m even more convinced that Meredith Whitney and other doomsayers are full of crap in regards to the impending “muni crisis.” I just read these two posts:

Things are rarely ever as horrible as they seem and are rarely as wonderful as they seem. I also believe there is a lot of data out there to support my belief that there is not going to be a muni crisis that will cause investors to lose huge amounts of money.

Right now I am doing lots of research on the bond insurers AGO and MBI. I also believe there are great opportunities in the tax-free income closed-end funds, especially those that are trading at a discount to NAV.

Is There Anything Assuring About Assured Guaranty?

Posted on February 1, 2011, 5:57 am. 2 Comments

In the past three weeks, Assured Guaranty (AGO) has gone from $19.50 to $14.50. The newest and biggest and fear is that S&P might downgrade AGO due to changes in its rating system, meaning that AGO could be forced to raise additional capital.

Some background on AGO…

Although AGO had to raise capital and accept a $1 billion investment from Wilbur Ross, AGO still did a much better job of underwriting and managing the credit crisis than their rivals like MBIA and Ambac. AGO even managed to acquire FSA, a large muni bond insurer, expanding their market dominance. AGO is basically a monopoly right now—it was the only company writing new insurance on municipal bonds during 2010.

AGO also had a AAA until S&P downgraded them to AA+ in October 2010. AGO claims the October downgrade was unwarranted and was due to changes in criteria as opposed to changes in AGO’s capital position and risk portfolio. Furthermore, S&P did not provide clarity on their capital evaluation and the stress loss scenario S&P imposed seemed to be unduly harsh—1,600 bank failures and 25% unemployment.

Another thing I like about AGO is that value investor Bruce Berkowitz is high on MBIA. If he could purchase more of the stock he would, but New York State law prevents an investor from going above the 9.9% threshold. If Berkowitz is high on MBIA, a less well-run company compared to AGO, this gives me greater confidence in AGO.

Other Fears

Some other fears affecting investors is the impending muni crisis. Thanks to doomsayers like Meredith Whitney, investors now have a totally irrational fear that there will be hundreds of muni bankruptcies and even states going bankrupt. I see a host of reasons why things will not be as bad as they seem right now. Tax revenues for 2010 are going to be higher than they were in 2007. In the past several weeks, we’ve seen elected officials making tough decisions about their budget problems or getting prepared to make those tough decisions. Then there are simple facts like the costs of bankruptcy can easily outweigh any benefit. It’s also damn hard for a municipality to successfully file for Chapter 9, as it must: (1) be specifically authorized by state law to be a debtor (and there are only 27 states that authorize this); (2) demonstrate insolvency; (3) must be voluntary; and (4) must show proof of an attempt to avoid filing.

There’s also the fact that Chapter 9 has been pretty rare since the creation of the law in 1934. And the majority of debt defaults have occurred with unrated issues. AGO has only underwritten “BBB” or better rated bonds—78% of AGO’s net par outstanding is “A” or better.

Pundits also make bankruptcy sound like an easy choice. It’s not. Warren Buffett has also declared his fears and also stopped underwriting new business after 18 months. And as for Buffett, I would watch very closely to see if his words match up with his actions. I wouldn’t put it past him to play up the possibility of bad things happening in the muni debt markets so that he has a better opportunity to come swoop in on all of the deals when they arrive due to irrational selling.

I also like the fact that the buy-side dominated the questioning in the most recent quarterly conference call I listened to. I think there were a total of 5 different hedge funds represented versus 3 sell-side firms. And guess which group was asking the better questions? I have literally never experienced this before with a conference call. The fact that the buy-side is so well represented on a conference call is a positive sign for me.

Then there is the large discount to book value and huge discount to adjusted book value. And then there is the ongoing success of bond insurers and Fannie and Freddie of achieving rescissions and put-backs. Bond insurers could recover more than $4 billion from banks for breaches of representations and warranties on RMBS they guaranteed…

You get the point. I think there’s a whole lot of good news on the horizon and not much else can go wrong that hasn’t already gone wrong in the past three years.

Today AGO is holding a conference call to speak about S&P’s changes. I’ll be listening. Whatever AGO decides it needs to do, it will be positive for the stock price at current levels. If AGO needs more capital, then great—it gets more capital which it probably won’t need and the stock responds positively from these levels. If AGO doesn’t need more capital, then great—the stock responds positively from these levels.

Avoiding the Bank Crisis of 2015

Posted on January 31, 2011, 9:45 am. Closed

London-based consulting firm Oliver Wyman recently launched their 14th annual State of the Financial Services Industry report, titled “The Financial Crisis of 2015: An Avoidable History” in Davos, Switzerland during the 2011 Annual Meeting of the World Economic Forum. Bloomberg has an article about it here.

The report imagines a scenario in which another world banking crisis ensues as a result of the popping of a commodity-fueled bubble. Most interesting about the report is the general suggestions for regulators and for financial institutions who want to uncover and remedy the weaknesses in the financial system. For example, the report suggests to regulators they need to spend as much time preparing for crisis scenarios as they do modeling the probability of them happening. I recommend reading the report in full.

Firefly Value Partners Acquires 5.7% of Alliance Bancorp, Inc. of Pennsylvania (ALLBD)

Posted on January 27, 2011, 10:39 am. Closed

Firefly Value Partners Acquires 5.7% of Alliance Bancorp, Inc. of Pennsylvania (ALLBD).

Alliance Bancorp recently completed a second-step conversion from mutual holding company form to a stock holding company along with a concurrent public stock offering.

According to Alliance’s S-1 filings, price to tangible book right now should be about 65%, perhaps slightly higher given shares are trading above the offering price of $10 per share.

Interview With Phil Goldstein of Bulldog Investors

Posted on January 26, 2011, 5:21 pm. 1 Comment

This is a great interview with Phil Goldstein of Bulldog Investors. Phil is an activist  value investor with an excellent track record.