Jay over at Market Folly has a special discount to the Value Investing Congress this October in NYC. To me, it is the best value event out there today.
If you are interested, visit Jay’s site and sign up…..see you there!!
Category: Articles
Categories
Free Post: On Wall St. Media 9/8
Talking to Doug about the new site, Stocktwits and some results of recent investments.
Whitman is a great investor who has stood the test of time. This is a key year for him thought. After last years results and several large bets on securities other said were worthless, Whitman will be either viewed as a “genius” or “washed up” after this year. Fair? No…but it is the world we live in…
Categories
SEC Report on Madoff…..Stunning
Don’t know whether to laugh, cry or become a criminal after reading this as the chance of the SEC catching me is virtually nothing…
Disclosure (“none” means no position):
Still no whiff of a Dow Ag sale from Dow Chemical (DOW)
The Detroit Free Press Reports:
Dow Chemical Co., the largest U.S. chemical maker, said it is ahead of schedule on its plan to repay by year-end a $9.2-billion bridge loan that helped finance the April acquisition of Rohm & Haas Co.
The sale originally announced in May, to reflect inventory values, Bob Plishka, a spokesman at Midland-based Dow, said Tuesday in an interview.
Proceeds will be used to repay the bridge loan, which had a balance of $4.1 billion at the end of June, he said.
CEO Andrew Liveris secured agreements to sell $3.3 billion of assets, including the refining stake, which were among a dozen units valued at as much as $26 billion that the company considered divesting.
The company spent most of a $2.75-billion debt issue in August on payments, trimming the loan’s balance to about $2.1 billion, Plishka said.
“We have more gross proceeds due us from definitive divestiture agreements already in place than the outstanding balance of the bridge loan,” Plishka said. “We are way ahead of schedule.”
The sales of Morton Salt for $1.68 billion and a stake in the Optimal Group of Companies for $660 million are expected to be approved by regulators and close this year, Plishka said.
Disclosure (“none” means no position):Long DOW
Davidson” submits:
With the 2007’s Total Mortgage level over $14.5Trillion of which more than $11.1Trillion were home mortgages it would be hard to find a stronger connection to the financial system than this. Data from US Census Bureau most current information.
Equity REITs are publicly traded investment vehicles which use mortgage debt in the purchase of investment properties and form the REIT asset class that is used as part of your balanced portfolio. The market capitalization of the Equity NAREIT holdings has grown from 1972’s year end $332Mil to 2007’s year end $288.7Bil. This ~870 fold increase results from a combination of growth and increasing holdings from 12 REITs at inception and to 118 REITs at the end of 2007. Data from http://www.reit.com. At the end of 2008 the Equity NAREIT market capitalization had fallen to $176.2Bil. A comparison of the NAREIT Total Return vs Equity Indices in Chart 1 makes clear that ~94% of returns are derived from dividends which in turn by law are 90% of FFO(Funds From Operations).
Chart 2 of the NAREIT Equity Index vs. Ttm(Trailing12mos) Dividend Yield shows that the dividend yield which had held in the 6%-9% for much of the period fell almost to ~3% in 2007 during a period of low cost mtg funding. The subsequent correction of 2008-2009 forced dividend yields to 10.08% in Feb09 which was at a historically high level and was a signal that the Return/Risk had become attractive. The recent fall in dividend yield to July ‘09’s 4.92% is a function of recent changes in the tax law that currently permit REITs to issue stock in lieu of cash which increases their financial flexibility. This change is expected to be a temporary forbearance, a bridge during the current economic period. Most expect regular 90% dividends to be paid in cash once this difficult environment has moderated.
My view is that these dividends will return although it is difficult to predict their timing and their magnitude till there is greater clarity. I continue to recommend REITs as an attractive allocation in balanced portfolios with a strong preference for Global REIT exposure.
Disclosure (“none” means no position):
Davidson” submits:
With the 2007’s Total Mortgage level over $14.5Trillion of which more than $11.1Trillion were home mortgages it would be hard to find a stronger connection to the financial system than this. Data from US Census Bureau most current information.
Equity REITs are publicly traded investment vehicles which use mortgage debt in the purchase of investment properties and form the REIT asset class that is used as part of your balanced portfolio. The market capitalization of the Equity NAREIT holdings has grown from 1972’s year end $332Mil to 2007’s year end $288.7Bil. This ~870 fold increase results from a combination of growth and increasing holdings from 12 REITs at inception and to 118 REITs at the end of 2007. Data from http://www.reit.com. At the end of 2008 the Equity NAREIT market capitalization had fallen to $176.2Bil. A comparison of the NAREIT Total Return vs Equity Indices in Chart 1 makes clear that ~94% of returns are derived from dividends which in turn by law are 90% of FFO(Funds From Operations).
Chart 2 of the NAREIT Equity Index vs. Ttm(Trailing12mos) Dividend Yield shows that the dividend yield which had held in the 6%-9% for much of the period fell almost to ~3% in 2007 during a period of low cost mtg funding. The subsequent correction of 2008-2009 forced dividend yields to 10.08% in Feb09 which was at a historically high level and was a signal that the Return/Risk had become attractive. The recent fall in dividend yield to July ‘09’s 4.92% is a function of recent changes in the tax law that currently permit REITs to issue stock in lieu of cash which increases their financial flexibility. This change is expected to be a temporary forbearance, a bridge during the current economic period. Most expect regular 90% dividends to be paid in cash once this difficult environment has moderated.
My view is that these dividends will return although it is difficult to predict their timing and their magnitude till there is greater clarity. I continue to recommend REITs as an attractive allocation in balanced portfolios with a strong preference for Global REIT exposure.
Disclosure (“none” means no position):
Categories
Philadelphia Fed’s Bullish Report
“Davidson” submits:
The Philadelphia Fed report on the business outlook survey has startled Wall Street and set abuzz chatter regarding the long forecasted V-Shaped Recovery by Wesbury. This report was so far better than expected 4.2 vs. an expected -0.2 that Treasuries fell in value as investors sold to buy stocks. The report can be accessed at the URL here and I have presented the relevant chart below.
The market is if anything anticipatory. On CNBC @4:30PM yesterday John Herrmann of Herrmann Forecast LLP commented that he expected the Sept. Purchasing Managers Index(PMI) to show new orders up dramatically to ~59% level.
It would be convenient if investing could be so simple that we could take these pieces of information and invest with confidence into just the right sectors and asset classes. But, the markets are anything if convenient and predictable. While the Return/Risk appears to favor many asset classes, approaching the market with a balanced portfolio has always proven in the long run to have been a prudent strategy. There is always present no matter how bullish the news seems to be developing the significant uncertainty of unseen events. We always know what we would like to have as a return, but we can never know when an unpredicted event will spook the market confidence and implode our short term needs.
Disclosure (“none” means no position):
Categories
Philadelphia Fed's Bullish Report
“Davidson” submits:
The Philadelphia Fed report on the business outlook survey has startled Wall Street and set abuzz chatter regarding the long forecasted V-Shaped Recovery by Wesbury. This report was so far better than expected 4.2 vs. an expected -0.2 that Treasuries fell in value as investors sold to buy stocks. The report can be accessed at the URL here and I have presented the relevant chart below.
The market is if anything anticipatory. On CNBC @4:30PM yesterday John Herrmann of Herrmann Forecast LLP commented that he expected the Sept. Purchasing Managers Index(PMI) to show new orders up dramatically to ~59% level.
It would be convenient if investing could be so simple that we could take these pieces of information and invest with confidence into just the right sectors and asset classes. But, the markets are anything if convenient and predictable. While the Return/Risk appears to favor many asset classes, approaching the market with a balanced portfolio has always proven in the long run to have been a prudent strategy. There is always present no matter how bullish the news seems to be developing the significant uncertainty of unseen events. We always know what we would like to have as a return, but we can never know when an unpredicted event will spook the market confidence and implode our short term needs.
Disclosure (“none” means no position):
Key quote regarding the state of the CRE market: “On the fundamental side, today is not as bad as the 90’s”
“Davidson” Submits:
Subject: Dallas Fed Releases Updated 12mo Trimmed mean PCE Inflation benchmark.
The Dallas Fed released their 12mo Trimmed mean PCE inflation benchmark this morning. This includes the Jun09 and July09 values and was delayed while they went through a periodic review. It should be no surprise that the values are lower as this indicator carries an estimate for cost of housing as well as energy and food. This index “trims” monthly spikes, but includes all relevant expenditures as opposed to earlier “Core Inflation” which simply excludes food and energy components.
This is in a favorable direction for market valuations. My analysis uses the long-term Real GDP trend of 3.15% and adds the 12mo Trimmed mean PCE to produce the Market Capitalization Rate(MCR). This value then is calculated with today’s release to be 4.85%. This then becomes the means of valuing whether the market is over/under priced all things being equal and the same can be said of individual stocks and bonds.
For Treasuries this becomes a simple calculation. One simply takes the 10yr Treasury Yield which today is ~3.46% and by comparison it is simple to see that the general economy should produce a higher return than 10yr Treasuries. The lower 10yr Treasury Yield is because of the risk investors perceive in alternative choices.
There is not enough space this email to detail the analysis of the SP500, but mean estimated earnings are currently $64.50(3Q09) and as I write this the SP500 is priced at 1030. The Earnings Yield of the SP500 is calculated simply by dividing est. earnings by the current price or $64.50/1030 = 6.26%. This is a simple methodology and all the inputs can change over time, but the process produces a relative return comparison that is simple to use. To convert this into a estimate for the SP500 price target one divides the SP500 Earnings Yield by the MCR, 6.26%/4.85% = 1.291 or 29.1% higher. This means that all things remaining equal the SP500 has the capacity to rise to ~1330 IF earnings were to be at median level today and IF investor psychology normalized. Note: If inflation changes so does this number which can dramatically change market pricing. Lots of “IF’s” here but this is how the market works. We can only make estimates and can never make guarantees.
The calculation uses a normalized or mean earnings estimate because the basic assumption is that the companies in the SP500 are expected to recover as they have since 1930(79yrs of economic and investment history). There is nothing that I can see in our current situation that would suggest that a recovery would be impossible. If something should suddenly become apparent that our Free Market Economy had been injured by unthinking government action, then we would have to revisit all assumptions. But, even with all the issues being discussed today which seem potentially injurious to our economy, history shows that sparring political parties generally compromise without major damage to our economy.
This Dallas Fed release makes allocation to stocks and corporate bonds quite favorable at this time.
Disclosure (“none” means no position):
The firm of Wachtell, Lipton, Rosen and Katz has put out some very interesting opinions as to the General Growth (GGWPQ) Chapter 11. It goes to the central thesis we have here that the lenders, one way or another will end up extending maturities on the loans. This, in turn, will leave tremendous value for the common shareholders.
First this from 8/12:
GGP WLRK
Here is the applicable section:
Given the novelty of some of these issues, it is not yet clear how the coming wave of real estate restructuring and bankruptcies will play out. While this round went to GGP and against the SPE and CMBS lenders, it remains to be seen where the balance struck by the GGP court between creditors’ rights and the interests of equityholders leads when thorny issues such as cramming down secured lenders to extend maturities and alter pricing and other terms to the benefit of equity are presented to the court, or how negotiation and settlement discussions – both in formal bankruptcy proceedings and in consensual non-bankruptcy restructurings – will play out in the post-GGP era. The prospect of SPEs being included in consolidated bankruptcy proceedings will also raise issues not addressed in GGP, such as whether solvent SPEs will participate in an enterprise’s DIP financing, potentially structurally subordinating mezzanine lenders. Another twist may be the bypassing of the intricate consent and control mechanics in pooling and servicing agreements, with CMBS certificateholders working independently of their servicers.
Whether or not consistent with the expectations of creditors and debtors, the GGP ruling is consistent with the general tendency of bankruptcy courts to be pragmatic and to place substance over form. As the GGP court concluded: “These Motions [to dismiss] are a diversion from the parties’ real task, which is to get each of the [debtors] out of bankruptcy as soon as feasible. The [secured lenders] assert talks with them should have begun earlier. It is time that negotiations commence in earnest.”
Then on 8/24 this:
REIT and Real Estate Restructurings and Bankruptcies – Further Observations From the Front Lines
Again ,the applicable portion:
The “cramdown” provisions of the Bankruptcy Code (colloquially, in the case of a secured creditor, “cram up”) permit a plan of reorganization to be approved over the dissent of a class of creditors if the plan is “fair and equitable”. Even an over-collateralized loan need not be paid off in cash in a bankruptcy case, and in today’s climate of scarce refinancing capital, non-payment and partial payment have become common. With respect to secured creditors, a plan is fair and equitable if, among other alternatives, it allows the creditors to retain their liens and provides for new or “rolled over” debt in an amount, and with a value equal to, the secured claim. However, the appropriate interest rate, maturity and covenants of the new obligations are not specified by the Bankruptcy Code. Most courts refer to the market in deciding such terms, but some courts allow for the possibility that the market is inefficient (a serious risk in today’s financial climate) in choosing terms that will not result in the new instrument trading at par. In addition, the 2004 U.S. Supreme Court decision in Till v. SCS Credit Corporation – a chapter 13 case of uncertain applicability in chapter 11 – suggests that cramdown rates in the range of prime plus 1 – 3% are appropriate. Certain GGP shareholders have publicly floated the notion of cramming up GGP SPE debt with seven-year paper at current interest rates. Whether such terms would pass muster before a court depends on any number of factors. However, in the recent Spectrum Brands case secured creditors facing both a reinstatement and cram-up fight reached a consensual agreement with the debtor that gave them a 250 bps margin bump, a LIBOR floor and an actual shortening of maturity relative to their prepetition credit agreement.
This and other cases settled both in and out of court in recent months suggest that the uncertainty surrounding cramdown tends to lead parties, where debt is secured but cannot be refinanced, to compromise solutions – rates not so high as might be incurred in a refinancing, nor so low as the rates that prevailed in the recent bubble financing years.
It is important that the Judge in the case has a very wide range of latitude as it pertains to remedies. Other than maturity extensions, other options simply make very little sense. The battle now becomes over not whether or not to extend them, but for how long and at what rate. As long as CMBS markets remain as restricted as they are, the maturities have to be pushed out farther or the Judge risks being in the same spot a few years from now and this new debt comes due without a market to refinance it in.
Disclosure (“none” means no position):Long GGWPQ
Well, its official, the boo-bird are back out on Eddie Lampert after Sears Holdings (SHLD) recent quarter. Now, it should be noted this is after Q1 results that “surprised” everyone being better that expected and the stock rallied from $35 to near $80.
So, who is right, the cheerleaders or the boo-birds? Neither.
Unlike any other retailers, Sears is mainlined to the US housing market. With 40% of the US market share for appliances, what happens in housing is acutely felt at Sears. With that appliance share, when housing is good, Sears will do well, unfortunately, the opposite hold true. When folks comes to Sears for an appliance for a new home, they will pick up paint in the paint dept., lawn tools, bedding, TV’s etc…
Let look at some number more closely. At Q1 2007 American’s were buying (at an annualized rate) $281 billion in “Furnishings and durable household equipment” (furniture, appliances). That represented the high water mark for that category (wasn’t that the peak in most housing markets also?). FY ending 2/2007 also marks the high water mark for Sears Holdings earnings (the annual average in 2006 vs 2005 for consumer expenditures rose appreciably). By the time Q4 2008 rolled around, consumers were now buying $259 billion a year of those products, a $22 billion annual decline. Remember, Sears holds 40% of the US appliance market. (Note, not all of the $22 billion are appliance sales but with Sears selling appliances and furniture, it is safe to say a significant chunk of the revenue declines at Sears can be traced directly here).
As of Q2 2009, that number is now at $251 billion annually. As of just Q2 2008 the number was $276 billion, an unprescedented one year drop. Anyone still wondering why Sears is seeing declines? ….
Appliances are the main reason folks come to Sears, absent that reason, Sears is just another retailer. So, when housing rebounds, one ought to expect Sears to once again show top-line growth. For that reason, the Q1 Cheerleaders came out way to soon and will probably stay hidden until Q1 or Q2 2010 when housing begin to gain some footing. The good news for them is that by then comps. will be so low that Lampert & Co. will be able to step over them.
Now for the boo-birds. You will be correct for now. BUT, lets look at what Lampert has done. He has steadily used Sears cash to repurchase shares. This is meaningless now but when housing does turn, the 20%+ fewer shares there will be outstanding will mean that a $1 million profit next year will equate to a 20% higher per share number, that is huge. For that reason, Lampert will not even have to deliver profit dollars in absolute numbers anywhere near what he did in the past for shareholder to reap large gains.
For several years the boo-birds have been saying Sears is “dead”, “dying” etc. Yet it has maintained a balance sheet healthier than almost every large retailers with the exception of Wal-Mart (WMT) and Target (TGT). Sears is not going to become extinct. The stories you are reading today are essentially reprints from any bad quarter over the last 4 years. Ignore them. Will Sears still be a big box retailer 5 years from now? Maybe, maybe not. The point is, “Sears Holdings” will still exist.
Sears is also making radically changing its online presence in a way that will differentiate it from all other brick and mortar retailers. It way too soon to know if this will payoff but if it does, the payoff will be multiples of what was invested. Pay attention to MyGofer, my gut tells me there is something there consumers will flock too.
My friend “Davidson” has this take on Sears:
While Lampert has improved the financial structure and efficiencies, he has not yet unlocked the value of the brands, i.e. Lands End, Die Hard and Craftsman. He needs to lay out a plan of attack in my opinion that lets investors understand his thinking on expanding brand distribution. At the moment they appear to be locked-up within a dull plain wrapper that is frayed at the corners.
He is right. Lampert’s silence is just fine when things are going great, but, when things are shaky, nervous investors need to be reassured or communicated with more. Lampert need not hold investors hands or bother giving guidance to Wall St., but an occasional letter to shareholders would not hurt. Davidson is right in his call for Lampert to communicate the strategy, shareholders “think” they know the strategy, but no one really “knows”.
I do get the whole “long term approach” Lampert espouses, but if folks are not clear where the ship is ultimately headed to, I’m not sure they can accurately look at where it is today and make an accurate assessment of progress.
A note: After Q2 Morningstar raised its “fair value” for Sears to $105 (hat tip reader Justin)
Just remember, most of what is said out there is simply “noise”.
Sears = Housing, don’t forget it.
Disclosure (“none” means no position):Long SHLD, WMT, none
Special thanks to Pitching Coach Mike Cather and the Portland Sea Dogs organization and players for having my boys Cameron and Luke at bat boys for a double header when we were up on vacation. Truly an event they have not stopped talking about since…
Doug and I also talk about Natural Gas (UNG) and some Biotech’s he likes…
The boys in action ans with Coach Cather..
Disclosure (“none” means no position):Long UNG
Special thanks to Pitching Coach Mike Cather and the Portland Sea Dogs organization and players for having my boys Cameron and Luke at bat boys for a double header when we were up on vacation. Truly an event they have not stopped talking about since…
Doug and I also talk about Natural Gas (UNG) and some Biotech’s he likes…
The boys in action ans with Coach Cather..
Disclosure (“none” means no position):Long UNG