Tuesday, November 27, 2007

Citigroup's new friends

So citi raises $7 bill or so from middle eastern friends -- but takes another 6+ bill in charges too. Given the size of Citigroup, $7 bill is a joke -- a rounding error -- and the terms of 11% rate that Citi will pay on the funds till they are converted (if they ever are) is pretty steep -- close to 2X what Citi was paying prior to that deal. That said, Cramer is right -- don't forget the situation is better than it was.

Obviously Citi is in trouble but this move does help some -- I'm not smart enough to say this means Citi is bottoming. I have said repeatedly that financials are to be avoided and I haven't changed my tune -- we have not had the kind of failures that I would have expected given the situation.

Companies with large international businesses and secular growth drivers are the place to be. Last stock I mentioned -- Boom -- can you believe the progress it has made since then -- i.e. since last Tuesday prior to T-day? Its up like 10% since then or at least it seems like it. I never bought.

Latest reading was about ELMG which I read about in my latest Forbes. They provide wireless broadband equipment for aerospace and defense including allowing exec's to surf the web on the corporate jet. The margins are horrible, the returns on equity are bad too but the valuation and growth potential are interesting. The margins have the potential to increase from 6% or so up to 10%, which is more in line with peers. This year the defense side is up 28% after not growing for 3 years prior. The aerospace side is doing great too -- up like 40% but the warehouse logisitics side, which accounts for 50% of revenues is only up 1%. I look at these numbers and I realize that FLIR is that good of a situation. I am still reading about ELMG but so far I'm wondering why this is better that my existing ideas.

Another DNA consummable supply company that I am researching is Qiagen (QGEN) -- similar growth drivers to TECH but the growth is faster and the margins are no where near as good -- but they have been rising. Still need to do some reading to better understand the opportunity that they have. I like TECH but so far the stock has not done as well as I would have expected.

FDS -- this is one that I am wondering when to pull the trigger on -- they are going to report earnings in a couple of weeks so this is a big decision. They are trading at 24X next 4 quarters earnings which is below average but still pretty high. There is a lot of concern that their business will slow and that would hurt the stock but they have no exposure to fixed income which is the area with the most problems. They do have exposure to investment banking (deals), which was a busy area during the buyout binge. I think FDS continues to have a great future -- because they keep adding new functionality and the number of users is still very small compared to the potential pool of users.

So stocks I would like to add to include FDS, TECH, ILMN, FLIR, CLB. Stocks I am thinking about trimming include GGG, MDT, LH, etc. GGG because I am afraid they will no longer be able to keep growth up with the housing area getting crushed. Just figure that LH should be a smaller portion of the portfolio. MDT -- I'm tired of waiting for this pig to ever get moving.

that's enough for tonight -- hope you are holding up well. The secular growth portfolio is outperforming by about 9% this year -- a great year.

Wednesday, November 21, 2007


So much to say and so little time to say it!!!! The wife headed to her family this week so I figured I would have tons of time to make lots of posts -- as it turns out -- this is it!

Fascinating stuff in the market with FRE and FNM plunging yesterday. Glad to see MDT's not as bad as thought -- still debating sellng that one -- at least some of it.

People still saying silly things about the dollar -- smart guy this week said that our future demographics issues with social security and medicare will cause the budget deficit to get big and hurt the dollar? Hello? Are you kidding me? Have you looked at the budget situations of our competitors in Europe and Japan? whatever. If the dollar continues to fall, it will be against non euro/yen currencies for reasons other than social security.

that wells fargo ceo? he said a few things noteworthy -- first, that we are having a severity problem in mortgages meaning its the high loan to value mortgages that are failing so the bank takes a big loss on each one. The other option is frequency, which is driven by employment -- meaning people lose their incomes and that causes them to miss payments and foreclose. Most of these loans are going to have good asset security -- meaning lower loan to value ratios so the banks don't lose as much on each loan. Since its a severity issue, we will reset home values and wipe out a bunch of homeowners and bank capital but then because employment is good, rates are low and there is liquidity in the markets, we will rebound quickly.

let's hope we keep the employment up then!

interesting company I have been reading about lately? BOOM. great business during upcycle in energy -- not so great otherwise. valuation high. looks like great management team. still thinking -- trouble is I have no idea what advantage I bring to predicting future explosion welding demand?

Friday, November 16, 2007

the next depression?

Wells Fargo's CEO presented at a Merrill Lynch financial services conference today and said the housing issues have a long way to go before bottoming. Cramer described his comments as suggesting a depression was coming.

Interesting comments. On the one hand, Wells is a far better manager than most financials that are suffering write offs -- meaning Wells has avoided writeoffs. On the other hand, Wells is based in CA one of the epicenter's of the current crisis. He might be extrapolating too much from the bad CA numbers he is seeing to the rest of the country.

I don't know the CEO so I don't know if he tends to hyperbole or not -- most bankers you would assume are not into hyperbole.

Certainly makes you wonder though about the economy -- if home values drop like he talks about, what impact will that have on the economy? This is what is driving the market lower right now. Again -- we are ready for a rally again -- probably a better one than the one day wonder of Tuesday -- market has a habit of bottoming in expiration week -- which is this week. I bought more CLB yesterday at 128.75.

I think Cramer is right that without energy this market sucks -- Ag, energy, infrastructure, etc -- most of the bull markets he talks about are driven in some ways by high energy prices.

more this weekend.

Tuesday, November 13, 2007

DFR -- must have been drunk when I wrote that last comment

Everything I wrote the last time about DFR was partially true -- it is a cheap stock with a high yield. They do have quality assets and in some ways they are a better buy than most bank stocks. Problem is that the one way they aren't is liquidity -- they are at 14X leverage -- a few percent drop in their AAA mortgages thanks to spreads widening and they may have trouble making margin calls on the RMBS portfolio.

that extra risk is a huge deal. Its why DFR is a dangerous stock right now -- the cheap appearance sucks you in but the high leverage could wipe you out. I don't have a good feel for what the odds of wipeout are -- more than zero but less than a lot.

Monday, November 12, 2007

markets -- financials, correction, dollar, etc.

two signs we are nearing the end of the correction --

1. financials no longer going to new lows (banks report bad charges yet don't hit new lows)
2. tech stocks -- the darlings of the recent market are beginning to experience a correction.

When investors/traders throw out their favorites it means they no longer feel safe owning any stocks. Its a sign the decline is done but its critical to realize that the market can't bottom as long as the favored stocks are holding up.

The dollar -- its dropped quite a bit recently and the first thing I want to make clear is that whenever the dollar declines, we who live and work in the US are poorer. Some pundits try to argue that the dollar falling is good for something but it is absolutely impossible for any country to become wealthier through a declining currency. by definition your currency declines in value, any assets valued in that currency decline in value too.

That said, exporters will gain share of the shrinking wealth pie because their products appear to be cheaper to foreign buyers after a drop in the dollar.

while some blame the falling dollar on interest rate differentials, I think its more to do with investors betting investment returns will not be as good in the US as they are in other parts of the world. beliefs like that occur and are reinforced as the dollar drops. but at some point -- probably soon given that some super model has decided not to be paid in dollars -- our assets become too cheap to ignore.

why would foreigners think our asset returns won't be very good? Perhaps every day they read about Congress and some of the presidential hopefuls talking about raising taxes on incomes and capital gains, etc. the Fed appears to rather have some increase in inflation then have a slowdown in economic growth. capital goes where it feels welcome -- capital rarely feels welcome where it's value is hurt by taxes and inflation.


Added to the position on Thurs and Fri. My perspective is there has been no change to the fundamentals of FLIR -- most analyst reactions to the FLIR analyst day on Thursday were positive. The stock has pulled back because most tech stocks are pulling back and because some investors may have expected some kind of upside from the analyst meeting that didn't occur.

I think there will be upside to Q4 estimates and that 2008 results will be higher than current estimates. no hard and fast data for that opinion -- just assuming that growth will not decelerate as fast as current estimates assume.

just now getting to the point where the position is almost half the size I would like to get to before I'm done. will need to see either further declines or the passage of time (stock flat yet growth still there) before buying more.

still believe this is a great long term growth story.

Friday, November 9, 2007

DFR -- good situation

I would rather own DFR then any of the large banks or regional banks. why? they pay a much higher yield; they have high quality assets in their mortgage portfolio; they are much more undervalued.

Interesting point from the call -- we knew that a lot of their alternative assets came from deals but on the call they reinforced that these are middle market deals -- they never got frothy in terms of interest rates or payment in kind like terms -- terms were getting easier but not to the same extent that the big loans did. middle market deals have less competition and better profitability.

liquidity looks good. they reduced the size of their RMBS -- and rebalanced towards agency so that their non-agency book has dropped as a percentage of the total -- that improves liquidity a lot because its the AAA part that could see rising liquidity issues and is what everyone is concerned about in terms of defaults -- well not their AAA part but others. no one is really worried about agency RMBS.

the stock could easily make its way back up towards $10-11 based on the new book value ratios.

interesting thoughts on the dividend -- they will pay out the undistributed earnings in a dividend either in Q4 or in Q1 of 2008. for 2007 that adds up to an extra 9 cents

more later -- over weekend.......

Monday, November 5, 2007


I just added a 2% position (roughly) to the Wintergreen fund based on the writeup in the latest Forbes (James Grant's column) and my reading of his shareholder letters. Fund has a great track record and likes to buy great businesses at cheap prices -- his mandate is he can own anything anywhere. From stocks to bonds to derivatives from the US to other developed countres to the emerging markets, this manager can own pretty much anything. Its one of the broadest mandates I have seen.

Energy -- Its supply stupid

"On an oil-equivalent basis, production decreased by 2% from the third quarter of 2006." Exxon Q3 earnings press release.

That about says it all -- at a time when the price of oil is over $90 a barrel, Exxon, the largest oil company in the world, is unable to increase production. Many analysts are arguing that the price of oil is unsustainably high due to speculation by hedge funds, geopolitical issues, temporary supply disruptions (nigeria, iran/iraq/turkey, etc. Truth is demand is up and supply can't keep up because production growth is too difficult. Too many old fields that are no longer able to produce at historical rates. Too many new fields that are smaller and unable to produce at the rates of previous finds for very long.

Will oil drop if the US has a recession? YES! - (a hilarious suggestion given that Q3 growth was almost 4% but many are absolutely convinced we are headed for recession. no way to know for sure in 2008 but as of now -- no way we are headed for recession in the next 6 months).

I remain quite comfortable with a large weighting in energy because I am optimistic on the economic front and pessimisstic on the oil supply front.

bill miller

Pride Goeth Before the Fall

I have only read a few quarterly commentaries from Bill Miller but they have all been interesting and worth reading. For the most part I have learned something about investing from each report I have read.

I remember one he wrote for Q3 in 2005 that foretold his underperformance -- if you were paying attention. I wasn't at the time but in hindsight it is clear he was getting a little too prideful.

This report was right around the time of the Legg Mason buyout of Citigroup's money management business. He wanted to welcome new shareholders with a description of his process which included his thoughts on cyclical value (traditional value stocks) and secular value (growth stocks). He also included a story about his willingess to average down -- or keep buying more shares as a stock drops to lower his average cost. Someone asked him how does he know when a stock has fallen too far to average down -- his reply was when he can no longer get a quote.

This was partly said in jest but it was an accurate reflection of his views. Problem: it means he would never be willing to admit he was wrong or possibly worse -- that he was NEVER wrong. Either way that lack of humility is why he has underperformed and why I believe he will continue to underperform. His most recent note suggests financial stocks will be the winners going forward and that people are panicking out of their financial stocks including Countrywide Financial (CFC). He has the audacity to assume CFC is worth $40 rather than the $14 it is trading for. How he knows that CFC will even have the liquidity to survive let alone be worth $40 is beyond me. I wonder if Bill would use that valuation for CFC if he assumed mortgage originations equaled only half of their recent annual levels.

Bill has no energy, no consumer staples stocks and has 30% of the portfolio in consumer cyclical stocks (discretionary). The secular value investor has 0% in consumer discretionary stocks plus a bunch in energy -- could we be any more different in our views of the future?

time will tell who is right.

Regardless of what you think of my Bill Miller analysis, one critical point for value investors is to never ever have valuation be your thesis for buying a stock. If you say, I own stock XYZ because its cheap then when can you be wrong? if the news comes out bad and the stock keeps dropping but your thesis is I own it because its cheap then you can't sell. You have to give yourself an intellectual out for admitting defeat. Cheap stock is necessary but what you need for a thesis are catalysts for why the valuation will improve -- new products, improved pricing, new management team, etc. That way if those catalysts do not come to pass you have a legitimate reason for selling a "cheap" stock.

Friday, November 2, 2007

fed, dollar, japan, narrow market, oil etc.

Fed cut rates again -- is it me or have you noticed that most bank stocks are hitting new lows. I have told you repeatedly that fed cuts will not save the problem industries but it will make the good industries soar -- think energy, industrials, technology, materials, etc.

Everyone still freaking out about the dollar -- there are 3 factors that drive the dollar -- 1. interest rate differentials; 2. investment return expectations and 3. fund flows. right now the focus is on interest rates and maybe fund flows (those focused on trade deficit) but return expectations are also important -- our rates might be low but if our asset returns are high then money will flow to the US. we might not beat asia but we should do well vs. europe in terms of return competitions.

Japan is your only hedge. Given increased corelation of assets throughout the world -- i.e. hedge funds have bid up the value of most assets around the world -- nothing is really cheap right now according to many smart folks so if the markets drop then all will drop -- no safe havens is the theory. That has largely been true this year except for a key exception -- Japan. The yen carry trade unwinds whenever stocks get smacked. Unwinding a Yen carry trade means investors buy Yen -- that leads to good returns for anyone with Yen assets -- like a Japanese equity fund. if you want to have some part of your portfolio up on the day the markets get whacked then please buy some Japan stocks.

the secular value investor portfolio is doing very well this year -- as of today I am outperforming the S&P 500 by over 800bps. That is due to large holdings in Asian funds up 40% this year plus a holding in energy stocks like the vanguard energy fund up a similar amount. some strong individual stocks this year such as NVT, GOOG, MMP, EPD, and a bunch more. in some ways I'm brilliant for having these exposures but in many ways I'm just in the right place at the right time -- I like growth and so does the market. You may have noticed that very few stocks are doing well right now -- if you don't own something like GOOG or CME or that ridiculous horse FLIR then your portfolio might be sad. Technology is huge -- a couple of months ago energy went on a huge tear. industrials, commodities, etc -- even utility stocks have been strong. narrow markets last longer than people expect but eventually that which is bid up gets dumped.

oil -- part of the increase is dollar driven -- priced in dollars world wide if the price of oil doesn't rise as the dollar falls then the price of oil is being effectively cut for most of the world -- can't have that given the current supply demand situation for oil so the price rises.

lots of talk about oil driven by geopolitical issues or speculation by hedge funds or whatever -- bottom line is that there is a shortage of oil. It will last until more oil is produced than is demanded. when will that be? who knows. I don't think it will be soon -- that's why I own CLB and other energy stocks (VGENX). It will take time to find oil and to set up production infrastructure, etc. finding the oil is the hard part -- production at existing wells declines each year which adds to the difficulty in really ramping up supply. supply is in ugly places that like to tax oil companies so that even at current prices it may not be worth it to drill for oil. that's why you see such large share buybacks at most of the large oil companies -- they find it hard to effectively spend any more on finding or producing more oil.

TSRA Q3 07

good report -- upside to revenues and earnings although guidance for Q4 and 2008 was somewhat confusing. The reality is that 08 is all about the litigation -- if they win the revenue growth is huge and if they don't the stock will collapse. odds of success are high -- similar court to previous victories, same issues, etc.

over next several months this will hopefully be a big winner -- could easily be $50 in 6 months.