Today I bought some more CME -- just a small increase -- left some powder dry for later. The stock was hurt today because of the Sentinel fund issue -- people are concerned about CME's clearing house operations where they serve as the counterparty for each side in a trade. So rather than 2 investors trading with eachother, they trade with CME in the middle because that way neither investor has to worry about whether the other is going to meet its obligations in the trade (deliver cash, etc.)
CME then needs to get the money from the investors or they suffer the loss. They claimed today there are no issues with people maintaining the appropriate margin or performance bonds (money set aside to cover the margin required to trade futures). So this is one issue -- that CME could face lots of losses from hedge funds or other parties backing out of trades and forcing CME to cover for them. I don't have an edge here but I go with history -- not been a problem before despite volatile markets with lots of losses. They mark to market customers twice a day too so they can wipe someone out pretty quick if necessary.
Second bear issue is that much of the problems in the credit markets are driven by losses on derivatives like those traded at CME's exchanges. So there could be either regulatory or investor concern about using these instruments in the future since they turned out to be too dangerous. But the OTC market for interest rate swaps and foreign currency trades is much much larger than what gets traded at CME's exchange. The problem then is not the standardized stuff that is traded in the open on the CME. The problem is the esoteric stuff that is traded behind the scenes in the over the counter market (OTC).
One answer could be to convince investors to convert their risky behind the scenes trades into more standardized stuff that trades in the open on CME's exchange. That is one way to continue to see big upsides in volume growth. July was up 40% but August is up closer to 100% at least in terms of certain contracts -- keep in mind that August of 2006 was probably a slow month given all the people out on vacation.
I think the estimates are too low given the volume and I am confident the higher volume is sustainable and they will not suffer counterparty issues. The stock could very well be $650 or more in a few months.
good luck.
Tuesday, August 14, 2007
DFR update
Another DFR update - I know you are probably sick of reading notes about DFR but this will capture some thoughts about the market too.
DFR dropped 11% today, which doesn't look so bad relative to the 60+% decline of Thornburg (TMA) mortgage. They announced after the close that they were delaying their dividend payment to a point when their liquidity would be better -- not a good sign really especially when you try to convince people that your book value is near $14 and your stock is around $8 (if your book value is so good, why are you having liquidity issues). TMA does jumbo loans -- those that are larger than Fannie and Freddie are legally able to buy/securitize.
You would think jumbo loans would be fine given that these are for wealthy people -- you would be wrong. These jumbos are also facing liquidity risks just like other parts of the mortgage market. These are loans that right now are having a tough time finding investors -- basically anything that isn't guaranteed by Fannie, Freddie and Ginnie is struggling. So what is the difference between TMA and DFR? One major difference is that TMA originated its own loans -- they have offices and loan officers that convince buyers to use them for their mortgages. DFR is just an investment pool -- they buy mortgage backed securities that are based on mortgages originated by someone else. The difference is in terms of what liquidity requirements there are. Originators are being attacked more. I don't know for sure that origination is the problem for TMA but it makes sense given that has been the problem for many others in the mortgage market.
TMA's book value was down to $14 from $19 at the start of the quarter -- quite a drop in such short time frame. I would not be suprised if DFR's book value has also been hurt this quarter -- life isn't just roses for them I assume otherwise the stock wouldn't be $7. I still think they have the liquidity to make it but one never knows -- diversification matters. David Merkel raised the issue of increased margin even for agency and AAA prime quality mortgages today -- if that is true it puts DFR in more pressure. TMA, just like LUM, said they were fine until the last week -- that's how a liquidity crisis works -- it sneaks up on you when you get complacent and takes you out before you know what hit you. If it happened slowly, people would be able to react and save themselves.
the saga will continue....
DFR dropped 11% today, which doesn't look so bad relative to the 60+% decline of Thornburg (TMA) mortgage. They announced after the close that they were delaying their dividend payment to a point when their liquidity would be better -- not a good sign really especially when you try to convince people that your book value is near $14 and your stock is around $8 (if your book value is so good, why are you having liquidity issues). TMA does jumbo loans -- those that are larger than Fannie and Freddie are legally able to buy/securitize.
You would think jumbo loans would be fine given that these are for wealthy people -- you would be wrong. These jumbos are also facing liquidity risks just like other parts of the mortgage market. These are loans that right now are having a tough time finding investors -- basically anything that isn't guaranteed by Fannie, Freddie and Ginnie is struggling. So what is the difference between TMA and DFR? One major difference is that TMA originated its own loans -- they have offices and loan officers that convince buyers to use them for their mortgages. DFR is just an investment pool -- they buy mortgage backed securities that are based on mortgages originated by someone else. The difference is in terms of what liquidity requirements there are. Originators are being attacked more. I don't know for sure that origination is the problem for TMA but it makes sense given that has been the problem for many others in the mortgage market.
TMA's book value was down to $14 from $19 at the start of the quarter -- quite a drop in such short time frame. I would not be suprised if DFR's book value has also been hurt this quarter -- life isn't just roses for them I assume otherwise the stock wouldn't be $7. I still think they have the liquidity to make it but one never knows -- diversification matters. David Merkel raised the issue of increased margin even for agency and AAA prime quality mortgages today -- if that is true it puts DFR in more pressure. TMA, just like LUM, said they were fine until the last week -- that's how a liquidity crisis works -- it sneaks up on you when you get complacent and takes you out before you know what hit you. If it happened slowly, people would be able to react and save themselves.
the saga will continue....
UEPS -- updated info
I wrote about UEPS last about a month ago after Baird had upgraded the stock. His model showed that wage payment would not be a big application for them -- maybe 25 cents of earnings 5 years from now, while Nigeria could be more like $1.50 of incremental earnings.
I just listened to the Morgan Stanley conference call that is available on their website (http://www.aplitec.co.za/) and during the call they mentioned wage payment customers would generate 2-3X as much profits as their current welfare customers due to the higher wages that are paid to workers vs. welfare distribution. Since it took them quite a long time to get access to a banking license to make wage payments, they already have a lot of customers lined up to use this service soon after they get the infrastructure ready. They have 3.5-4 mill cards now used by welfare recipients. In the next few years I could easily see them earning close to $1 in earnings from this area similar to the last few quarters earnings in the welfare business.
The call also covered Nigeria. The CEO explained that they expect 200-300k customers to be signed up within the first 6-7 months and for that country to be breakeven within 12 months. Those initial customers will come mostly from the 8-9 million community bank customers that do not have access to national payment networks, which UEPS can give them. They are also bidding on a national ID tender that could give them access to 65 million cards -- that would be a huge jackpot.
The company also explained their latest technology which has integrated cell phones with existing credit and debit card networks and with the UEPS system to allow what they call virtual payments. It is complicated to explain and this note is long enough already but basically this technology integrates the 3rd world with the 1st world by allowing anyone with a cellphone to buy something using a virtual visa number that accesses their UEPS account. They are trying to get this up and running in Indonesia and Africa. It sounds pretty interesting to me (they talked about using this technology in the money transfer business from the US to the developing world -- Western Union's current domain).
Between continued growth in South African welfare, wage payments in SA, Nigeria, new cell phone technologies, plus other countries and other new services (prepaid electric and water), the growth opportunities for this company are huge. In fact this business sounds so good I continually wonder what I am missing -- it shouldn't be this good. Assuming it is, we should make several times our money in this stock. I am thinking about buying more.
I just listened to the Morgan Stanley conference call that is available on their website (http://www.aplitec.co.za/) and during the call they mentioned wage payment customers would generate 2-3X as much profits as their current welfare customers due to the higher wages that are paid to workers vs. welfare distribution. Since it took them quite a long time to get access to a banking license to make wage payments, they already have a lot of customers lined up to use this service soon after they get the infrastructure ready. They have 3.5-4 mill cards now used by welfare recipients. In the next few years I could easily see them earning close to $1 in earnings from this area similar to the last few quarters earnings in the welfare business.
The call also covered Nigeria. The CEO explained that they expect 200-300k customers to be signed up within the first 6-7 months and for that country to be breakeven within 12 months. Those initial customers will come mostly from the 8-9 million community bank customers that do not have access to national payment networks, which UEPS can give them. They are also bidding on a national ID tender that could give them access to 65 million cards -- that would be a huge jackpot.
The company also explained their latest technology which has integrated cell phones with existing credit and debit card networks and with the UEPS system to allow what they call virtual payments. It is complicated to explain and this note is long enough already but basically this technology integrates the 3rd world with the 1st world by allowing anyone with a cellphone to buy something using a virtual visa number that accesses their UEPS account. They are trying to get this up and running in Indonesia and Africa. It sounds pretty interesting to me (they talked about using this technology in the money transfer business from the US to the developing world -- Western Union's current domain).
Between continued growth in South African welfare, wage payments in SA, Nigeria, new cell phone technologies, plus other countries and other new services (prepaid electric and water), the growth opportunities for this company are huge. In fact this business sounds so good I continually wonder what I am missing -- it shouldn't be this good. Assuming it is, we should make several times our money in this stock. I am thinking about buying more.
Monday, August 13, 2007
Stocks you are interested in?
If you are interested in a stock, see if I have commented on it before by using the Google Search feature on the left and clicking on the search the blog option. If I haven't commented or you would like a fresh comment, try posting your question in the comments or send me an email at kyle.smith39331@gmail.com
I keep up with quite a few stocks/industries so I may have thoughts on it even if I haven't written about it.
Right now I am continuing my search for stocks with secular growth where something has caused the market to question just how good the future will be for the company. Perfect examples were Navteq and Illumina -- both great growth stories but many investors doubted the future only 2 months ago. Now everyone is fully convinced and the stocks are up a lot. Often times I don't wait for their to be a pullback in the stock -- CME is a recent example where I thought the prospects were good enough to jump in -- it did pull back after I bought but I was too slow to buy more.
would appreciate any comments. Thanks
I keep up with quite a few stocks/industries so I may have thoughts on it even if I haven't written about it.
Right now I am continuing my search for stocks with secular growth where something has caused the market to question just how good the future will be for the company. Perfect examples were Navteq and Illumina -- both great growth stories but many investors doubted the future only 2 months ago. Now everyone is fully convinced and the stocks are up a lot. Often times I don't wait for their to be a pullback in the stock -- CME is a recent example where I thought the prospects were good enough to jump in -- it did pull back after I bought but I was too slow to buy more.
would appreciate any comments. Thanks
Sunday, August 12, 2007
market plus couple of other names
Lot of moving parts the last couple of days. I buy into the idea that some quant funds are having troubles and unwinding their trades within smaller cap stocks. Each day for the last week or so I have had several stocks move up and down at least 3-5% often in a direction opposite of how the market was moving. There doesn't seem to be any fundamental news behind the stock price changes -- TECH had great earnings and moved up $4 one day only to lose $4 the next day. Will be interesting to see how long this lasts -- check out the article in the WSJ about Lehman's top quant who issued a letter to the "quant community" last week urging calm.
I was shocked to see the main headline of my local newspaper blaring out the news that the Fed injected liquidity into the market -- huh? They acted to keep the fed funds rate at 5.25%, which is what you would expect them to do. Isn't that what targeting a fed funds rate requires? adding or removing liquidity to maintain that rate? Why the rate was rising above the targeted rate is an interesting question -- obviously some bank that was part of the Fed system needed extra liquidity (demand) more than what was available (supply) at the 5.25% rate. The news headlines likely jumping the gun -- this action isn't news, but it has likely opened pandora's box -- a fed funds cut is probably in the cards over the next several months. That will provide nice juice to technology stocks and perhaps a few financials.
But don't get carried away on the financials -- not much the fed can do to repair the balance sheet woes of many hedge funds or other leveraged players. Just like when the fed cut in 2001, everything took off at first but then all the tech stocks kept dropping -- the business kept declining despite the fed cuts and the stocks were all overvalued too. There are financials that are overvalued relative to the future -- imagine a mortgage industry that is 40% smaller than 2006 and you can get an idea what I mean about future earnings power being under pressure.
I stopped reading about Mastercard -- I think they do a horrible job of telling their story. I just have a hard time understanding them and I don't really want to work at it to figure them out. My bet is that there is more opportunity in Net 1 (UEPS, use the search line on the left to search within the blog for comments on UEPS) then in MA.
I read something on Friday that suggested IGT -- International Game Technology. They sell slot machines and other equipment and services to casino's and other gambling establishments. Its a pretty good business with good profitability, good cash flow and what has been pretty good growth during industry up cycles. The stock has pulled back as growth is under pressure (US is replacement only and there is no reason to upgrade now. Valuation wise its ok -- not super cheap but not really expensive either. I think this could be a great stock going forward but I'm not sure its secular value investor material -- if the US is 80% of revenues and its almost all replacements how is that secular growth? its more like a cyclical story once the new server based gaming systems are available.
Another story I heard about is more speculative -- Angio-Dynamics (ANGO) which makes equipment for use in treating cancer as well as helping interventional procedures. The good news is that they get 90% of revenues from disposables -- generally higher margin products. The bad news is they are very small in size.
I plan on continuing to do some reading on these two plus -- I will let you know what I think.
I was shocked to see the main headline of my local newspaper blaring out the news that the Fed injected liquidity into the market -- huh? They acted to keep the fed funds rate at 5.25%, which is what you would expect them to do. Isn't that what targeting a fed funds rate requires? adding or removing liquidity to maintain that rate? Why the rate was rising above the targeted rate is an interesting question -- obviously some bank that was part of the Fed system needed extra liquidity (demand) more than what was available (supply) at the 5.25% rate. The news headlines likely jumping the gun -- this action isn't news, but it has likely opened pandora's box -- a fed funds cut is probably in the cards over the next several months. That will provide nice juice to technology stocks and perhaps a few financials.
But don't get carried away on the financials -- not much the fed can do to repair the balance sheet woes of many hedge funds or other leveraged players. Just like when the fed cut in 2001, everything took off at first but then all the tech stocks kept dropping -- the business kept declining despite the fed cuts and the stocks were all overvalued too. There are financials that are overvalued relative to the future -- imagine a mortgage industry that is 40% smaller than 2006 and you can get an idea what I mean about future earnings power being under pressure.
I stopped reading about Mastercard -- I think they do a horrible job of telling their story. I just have a hard time understanding them and I don't really want to work at it to figure them out. My bet is that there is more opportunity in Net 1 (UEPS, use the search line on the left to search within the blog for comments on UEPS) then in MA.
I read something on Friday that suggested IGT -- International Game Technology. They sell slot machines and other equipment and services to casino's and other gambling establishments. Its a pretty good business with good profitability, good cash flow and what has been pretty good growth during industry up cycles. The stock has pulled back as growth is under pressure (US is replacement only and there is no reason to upgrade now. Valuation wise its ok -- not super cheap but not really expensive either. I think this could be a great stock going forward but I'm not sure its secular value investor material -- if the US is 80% of revenues and its almost all replacements how is that secular growth? its more like a cyclical story once the new server based gaming systems are available.
Another story I heard about is more speculative -- Angio-Dynamics (ANGO) which makes equipment for use in treating cancer as well as helping interventional procedures. The good news is that they get 90% of revenues from disposables -- generally higher margin products. The bad news is they are very small in size.
I plan on continuing to do some reading on these two plus -- I will let you know what I think.
Friday, August 10, 2007
ugly
Unfortunately I don't have the time to cover Thursday's swoon but I think the stories about a hedge fund blowing up and being forced to sell make a lot of sense -- how else do you explain Factset (FDS)'s 12% decline? I expect it will bounce back soon.
Overall the portfolio outperformed slightly thanks to better Asia, a strong bounce from DFR and a few others not falling as much (GOOG for one).
Overall the portfolio outperformed slightly thanks to better Asia, a strong bounce from DFR and a few others not falling as much (GOOG for one).
Thursday, August 9, 2007
DFR earnings
DFR finally reported Q2 results and explained their liquidity position (very strong) and the level of credit risk they have in their mortgage portfolio (its high quality) so that was reassuring. They refused to provide any guidance about the future both in terms of their dividend or the earnings potential of the management company they are buying in the next week, which was not reassuring.
It would take a lot of problems for DFR to become insolvent given the level of liquidity they have now (slightly less than 75% of mortgage portfolio is agency while the other 25% is in AAA rated mortgages that have various provisions to reduce credit risk but most important their funding sources do not have the ability to make margin calls most of the time -- only when they are repricing one of their repurchase aggreements (every 30 to 90 days). They also have an extra 10% of their AAA mortgage balance available to use as extra collateral if needed. The only squishy part is that they are assuming nothing goes wrong in the agency side but since those mortgages are guaranteed by either Fannie Mae, Freddie Mac or Ginnie Mae, there is an extra layer of protection for those assets.
I am not sure what the dividend will be going forward. This is a hard one to figure out. Their portfolio yield should be steady but one would expect they are suffering some losses in the credit portions of the portfolio -- even if its just market price declines on the fear of future defaults. The deal with DCM could actually be the biggest drag on the dividend since they are handing out almost 10 million new shares and taking out $145 million in new debt to fund the deal. Being a fixed income manager of CDOs and hedge funds dealing in higher credit risk products, DCM's revenues are probably under pressure. The extra shares mean an extra $4 mill per quarter in dividend payments at the current rate. The debt expense is probably an extra few million per quarter. so if DCM isn't able to provide an extra $7 mill or so in income or cash flow to DFR per quarter, that means a dividend cut.
Pre-crisis, I expected the dividend to reach $2.30 to $2.70 over the next couple of years -- perhaps its now going to take longer to get there. I still think its possible they reach that goal in a reasonable time though -- maybe its 4-5 years instead of 1-3.
I expect the stock to continue to be volatile depending on how other financial stocks are performing.
With any luck DFR will participate in a conference later this quarter and provide some more info on their current operations -- maybe even give some range for the dividend. I'm hoping that by September the credit markets will have settled a bit.
It would take a lot of problems for DFR to become insolvent given the level of liquidity they have now (slightly less than 75% of mortgage portfolio is agency while the other 25% is in AAA rated mortgages that have various provisions to reduce credit risk but most important their funding sources do not have the ability to make margin calls most of the time -- only when they are repricing one of their repurchase aggreements (every 30 to 90 days). They also have an extra 10% of their AAA mortgage balance available to use as extra collateral if needed. The only squishy part is that they are assuming nothing goes wrong in the agency side but since those mortgages are guaranteed by either Fannie Mae, Freddie Mac or Ginnie Mae, there is an extra layer of protection for those assets.
I am not sure what the dividend will be going forward. This is a hard one to figure out. Their portfolio yield should be steady but one would expect they are suffering some losses in the credit portions of the portfolio -- even if its just market price declines on the fear of future defaults. The deal with DCM could actually be the biggest drag on the dividend since they are handing out almost 10 million new shares and taking out $145 million in new debt to fund the deal. Being a fixed income manager of CDOs and hedge funds dealing in higher credit risk products, DCM's revenues are probably under pressure. The extra shares mean an extra $4 mill per quarter in dividend payments at the current rate. The debt expense is probably an extra few million per quarter. so if DCM isn't able to provide an extra $7 mill or so in income or cash flow to DFR per quarter, that means a dividend cut.
Pre-crisis, I expected the dividend to reach $2.30 to $2.70 over the next couple of years -- perhaps its now going to take longer to get there. I still think its possible they reach that goal in a reasonable time though -- maybe its 4-5 years instead of 1-3.
I expect the stock to continue to be volatile depending on how other financial stocks are performing.
With any luck DFR will participate in a conference later this quarter and provide some more info on their current operations -- maybe even give some range for the dividend. I'm hoping that by September the credit markets will have settled a bit.
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