RIMM, The TAP, Blockbuster,Satellite to desktop
– Should apps be free or not?
– Spinal Tap will live forever
– “Hey, we are not going out of business, we just suck”
– A neat idea
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Having a stunning track record is a very good thing in bad times…
Baupost Group LLC, a Boston-based hedge fund run by Seth Klarman, gained the most assets in 2008, with money under management rising 49 percent to $16.8 billion, according to the magazine.
Disclosure (“none” means no position):None
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This situation is getting really fun to watch…It also gives us more clarity into the value of General Growth Properties’ (GGP) assets.
Bloomberg Reported Yesterday:
General Growth Properties Inc.,(NYSE:GGP) the mall owner at risk of bankruptcy, received offers of almost $400 million for properties including Boston’s Faneuil Hall and New York’s South Street Seaport, according to a person familiar with the matter.
General Growth, the No. 2 U.S. shopping-mall owner, put the two properties and Harborplace & the Gallery in Baltimore up for sale in December. More than 10 offers were received, including offers for the entire portfolio and for individual properties, said the person, who asked not to be identified because the sales process isn’t public.
So, in 2004 GGP acquired the Rouse Company, who owned the above properties. It included a total of 40 million sq. feet of retail space plus another 9 million of land for $11.3 billion.
From the press release:
The Rouse Company acquisition adds 37 regional shopping malls, four community centers, and six mixed-use projects totaling 40 million square feet to General Growth’s portfolio of owned shopping centers. There is also a portfolio of office, industrial and other commercial properties totaling approximately 9 million square feet and considerable undeveloped land in some of the most successful master planned communities in the country, such as Summerlin, Nevada, Columbia, Maryland and The Woodlands outside Houston.
If we look at it, GGP paid $11.3 billion for 49 million square feet or $230 per square foot. Yet, if the numbers in the Bloomberg article are accurate (no reason to assume otherwise) they are selling just over 1 million square feet of it for $400 million or $389 a square foot.
Remember GGP carries all real estate on it books at cost. This potential transaction gives us more confidence that the $28 billion asset value on the books of GGP is far below the actual value. With $27 billion of debt, there is plenty of value left for shareholders.
Disclosure (“none” means no position):Long GGP
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This is always great stuff….Fairholme’s (FAIRX) Bruce Berkowitz is featured
Disclosure (“none” means no position):None
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GE (GE) sent the following note to the investment community today addressing rumors and concerns in the market. Here is the thing, because of recent erroneous statements by the company and management, few will put much faith in this.
GE sent out this investor update:
“To the Investment Community:
Recently claims have been made that GE will be required to raise new capital near term. This is pure speculation, is inaccurate and is not based on any input from our company.
GE has acted aggressively during the current global economic crisis to strengthen our capital base and significantly increase sources of liquidity at GE Capital.
GE has a balanced portfolio of businesses and broadly diversified assets in terms of class, customer and geographic distribution. We are well positioned to weather this downturn.
Below are facts that address this recent speculation directly:
– GE has a stronger capital position with ample liquidity
– With the 1st quarter $9.5 billion capital contribution, GE will have contributed $15 billion of capital into GECS over the last 6 months. GECS will have $63 billion of total equity, $34 billion of tangible equity and $36 billion of cash.
– As a result, GECS ratio of tangible common equity to tangible assets is 5.3%, which compares very favorably to other financial service institutions.
– Reducing the GE dividend in 2H ’09 will result in $4.4 billion in incremental cash in the second half of 2009 and about $9 billion annually.
– As committed in December, we have further reduced our commercial paper to $60 billion and have completed 71% of our ‘09 long term debt issuances.
– We have de-levered our balance sheet. Our debt/equity ratio will decrease from 8 to 1 to 6 to 1 (including hybrid debt).
– We have ~$70 billion of remaining capacity under the TLGP and ~$98 billion of access to the CPFF if necessary.
Currently, we have no plans to raise additional equity. In the unexpected event that GE Capital requires additional equity, we have a number of options to satisfy that need without seeking external capital.
We have stressed our financial service portfolios and do not see the need to raise additional capital. We plan to present results of these tests at our upcoming earnings webcast to further demonstrate the quality of our portfolio and ability to absorb potential losses in this difficult environment. Over the last several months we have significantly increased disclosure regarding our financial services businesses. We are committed to continue to enhance disclosure and transparency for our investors in the future.
We know these are challenging times, please be assured that we are taking the steps to ensure we keep GE safe and secure during this tough economic environment.”
Disclosure (“none” means no position):Long GE
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Blackberry v Apple, Defamation, Foreclosures, Starbucks
– This is good
– Comments on blogs
– It is impossible for this plan NOT to reward cheaters, thus it will fail
– This is two years too late
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Remember last fall when AutoZone (AZO) fell under $100 a share and CNBC was doing it’s “Lampert has lost it” refrain? What a difference a few months make…
AutoZone, Inc. (NYSE:AZO) today reported net sales of $1.4 billion for its second quarter (12 weeks) ended February 14, 2009, an increase of 8.1% from fiscal second quarter 2008 (12 weeks). Domestic same store sales, or sales for stores open at least one year, increased 6.0% for the quarter.
Net income for the quarter increased $9.2 million, or 8.6%, over the same period last year to $115.9 million, while diluted earnings per share increased 21.1% to $2.03 per share from $1.67 per share in the year-ago quarter.
For the quarter, gross profit, as a percentage of sales, was 49.7% (versus 49.9% last year). Gross margin was negatively impacted by higher than prior year shrink expense of approximately 30 basis points offset in part by lower distribution costs as a percentage of sales due to improved efficiencies and lower fuel costs. Operating expenses, as a percentage of sales, were 34.9% (versus 35.2% last year). The lower operating expense ratio primarily reflected positive leverage of store operating expenses of approximately 80 basis points due to higher sales volumes and lower promotion costs, offset in part by higher investments in hub store enhancements of approximately 20 basis points, higher medical costs, and an increase in legal costs associated with estimates for minor settlements.
Under its share repurchase program, AutoZone repurchased 2.8 million shares of its common stock for $375 million during the second quarter, at an average price of $133 per share. Year-to-date the Company has purchased $647.2 million of stock, at an average price of $128 per share. The Company has $462 million remaining under its current share repurchase authorization.
Now, Lampert first began buying AutoZone shares in 1998. Those shares are up over 345% despite two recession, the tech bubble collapse and the current sell-off. In fact, in the last year, AZO is up 28% vs a 47% decline in the S&P. By early 2000, Lampert owned 21 million shares of AutoZone. Why does that matter? Today he owns just over 23 million shares after recent purchases late 2008 and early this year. What is also of note is through share repurchases he spurred at AutoZone, his ownership share has gone from 16% in 2000 to near 50% today.
Does any of this sound familiar?
Much of the commentary on Sears (SHLD) focuses on recent share price losses. What is lost in the debate is that early shareholders with Lampert are still sitting on gains despite that fall. Meanwhile Lampert has steadily reduced the outstanding share count and increased ownership percentages for current shareholders. Let’s also not forget that Sears has a balance sheet second only to Wal-Mart (WMT) and Target (TGT) in the retail space with $1.3 billion of cash on the books.
One also should credit Lampert for selling Sears credit card division in 2007 (2006?) for top dollar at the time. Anyone who follows Target knows that store credit cards are becoming an giant albatross on hanging on the neck of retail earnings.
Yes he is under with Citi (C), Sallie Mae (SLM) and a few other small positions but when measuring Lampert and Buffett, we need to look back after years, not 6 months. When you have an $8 billion portfolio (not including cash, that is not disclosed), a $19 million Home Depot (HD)investment is less than .2% of assets (note: that is “point” 2% … not 2%). For comparisons sake, Lampert has $2.3 billion in AutoZone stock, a $.80 cent rise in those shares cover the entire Home Depot investment.
Why the media disdain? One can only guess. My assumption would be that he has a loyal investor base and just does not talk to the media and that pisses them off. He also shuns communication with analysts. He essentially communicates once a year through his annual letter and the occasionally letter in between. That is it and the media hates it. Just guessing but can’t really come up with a better reason, if anyone has one, please comment below
For example it is rare to hear a story about the dismal auto environment without hearing how Lampert’s investment in AutoNation (AN) is “down “x” from its highs”. What is omitted is that AutoZone gains of $1.4 billion just since the $92 November 2008 low more than offset the approx. $700 million reduction in the value of AutoNation shares. Since the early 2008 high.
Note: a true “loss” number is hard to deduce because of heavy buying in 2008 of AN shares, lowering Lampert’s costs basis. For instance Lampert picked up millions of shares last fall between $6 and $10 a share, those purchases are gains currently. This means the actual loss on AN shares is most likely less than I stated above but we will just go with the guess above.
As for the end game. Here are my thoughts on that
The point is not to get too caught up with a single tiny investment in a portfolio and really do not get too caught up in the MSM.
Much of the malignant chatter about Berkshire’s (BRK.A) Warren Buffett’s “equity put options” is baseless. Those who wonder out loud if it will destroy Berkshire only prove they know little to nothing about the transaction. For instance. Buffett got $4.7 billion in 15-20 yr. S&P index puts covering $37 billion. Warren is on the hook for the full amount if at the end of the option (15-20 years) the S&P stands at 0, no chance. If at the end it is down 25% from last year, he owes $9 billion. BUT, he only need to grow the $4.7 billion just under 3% a year to cover it. In short, the option was basically a dirt free loan he can grow.
Anyone who says “Berkshire is on the hook for $37 billion” ought to be taken off your reading list….now.
Disclosure (“none” means no position):Long AN, SHLD, WMT, none
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I need Jeff Immelt to worry far more about his company and far less about telling people about it. Why? He credibility was shot last year and nothing he says publicly inspires any reassurances anymore. Mr. Immelt, let the company’s performance talk for you.
Let’s walk back in time.
It was April 2008 when Immelt told investors that earnings results for 2008 “were in the bag” only to reverse that statement just weeks later
It was Feb 5th this year Immelt backed the dividend payout for GE only to reduce it 70% two weeks later. For the record I know the dividend “is a board decision” but Immelt is Chairman of The Board, I am guessing he has some sway in the decision making process?
General Electric Co (GE.N) CEO Jeffrey Immelt acknowledged on Tuesday the company’s reputation had been “tarnished” and said the entire finance industry would need to be rethought due to the global economic meltdown.
The U.S. conglomerate is already identifying parts of its hefty finance arm that it will exit in the coming years, GE’s chief executive said in his annual letter to shareholders.
“Our company’s reputation was tarnished because we weren’t the ‘safe and reliable’ growth company that is our aspiration. I accept responsibility for this,” Immelt, 53, wrote. “No one is more disappointed than I am with the performance of our stock in this tough environmen
I think this latest falls under the “no sh%t” category. Here is the thing. Had Immelt NOT said anything about earnings and the dividend, he recent dividend cut would be looked at as prudent rather than desperate and this statement would not be necessary.
Anything said from this point forward, until results improve will be looked at with a huge does of warranted skepticism. Past statement have proved looking down the road is not Immelt’s strong suit, let’s work on the here and now. Immelt needs to drop out of sight and re-emerge when operations improve, assuming he is still there.
GE (GE) investors do not need Immelt “falling on his sword”, they need him to fix the finance unit and turn this boat around….the sooner the better…
Disclosure (“none” means no position):Long GE
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Forgotton Man, Ayn, Economy, Stem Cells, Woodrow
– Thank you to my friend Gregor for this
– Record sales of “Atlas Shrugged” … this means something
– Ouch….
– It would be nice to put this to rest
– If you do not read this blog, you should, Woodrow’s thought are always very insightful
Disclosure (“none” means no position):
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In his recent letter to shareholders, Sears Holdings (SHLD) Chairman Eddie Lampert suggested two books for all to read. Here is one of them. If you do nothing else, read the introduction, the parallels to today are stunning.
Please forward this post to as many friends as possible…
John Chamberlain characterised the period immediately following World War II in his foreword to the first edition of The Road to Serfdom as ‘a time of hesitation’. Britain and the European continent were faced with the daunting task of reconstruction and reconstitution. The United States, spared from the physical destruction that marked Western Europe, was nevertheless recovering from the economic whiplash of a war-driven economic recovery from the Great Depression. Everywhere there was a desire for security and a return to stability.
The intellectual environment was no more steady. The rise and subsequent defeat of fascism had provided an extremely wide flank for intellectuals who were free to battle for any idea short of ethnic cleansing and dictatorial political control. At the same time, the mistaken but widely accepted notion that the unpredictability
of the free market had caused the depression, coupled with four years of war-driven, centrally directed production, and the fact that Russia had been a wartime ally of the United States and England, increased the mainstream acceptance of peace-time
government planning of the economy.
At this hesitating, unstable moment appeared the slim volume of which you now hold the condensed version in your hands, F. A. Hayek’s The Road to Serfdom.
Hayek employed economics to investigate the mind of man, using the knowledge he had gained to unveil the totalitarian nature of socialism and to explain how it inevitably leads to ‘serfdom’. His greatest contribution lay in the discovery of a simple yet profound truth: man does not and cannot know everything, and when he acts as if he does, disaster follows.
He recognized that socialism, the collectivist state, and planned economies represent
the ultimate form of hubris, for those who plan them attempt – with insufficient knowledge – to redesign the nature of man. In so doing, would-be planners arrogantly ignore traditions that embody the wisdom of generations; impetuously disregard
customs whose purpose they do not understand; and blithely confuse the law written on the hearts of men – which they cannot change – with administrative rules that they can alter at whim. For Hayek, such presumption was not only a ‘fatal conceit’, but also ‘the road to serfdom’.
Hayek Friedrich-The Road to Serfdom Readers Digest Version-4-1945
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Taxes, Opportunity, Grant, Poole
– “The rich” can’t fund these spending plans
– “Of a lifetime“
– When will it end
– Stop the bailouts
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“Davidson” took a stab at having an influence with the Dallas Fed using their own published data and their statement that Wicksell is the “Father of Modern Monetary Policy”. The following letter was sent..
To whom this may concern:
Below you will find a comparison of what I call the Wicksell Rate based on Knut Wicksell’s observation that the cost of capital is arbitraged on the Return of GDP vs. comparable fixed alternatives, namely the 10yr Treasury Note. I took the Dallas Fed trimmed mean12mo PCE values and added these to the long term trend line of the Real US GDP(2nd Chart) to produce the Wicksell Rate(1st Chart). The reason for using longer term trends is that business investors typically make capital commitments with 10yr time horizons and ignore year to year fluctuations.
I think this comparison helps to differentiate the enormous short term effect of market psychology which can be observed in the multiple deviations reflecting both periods of enthusiasm and gloom. Net/net the proper relative return relationship holds over long periods. Perhaps, one will find a better fit with changes in tax treatment of capital gains, but I am a lone practitioner and have neither the resources nor the time for extensive analysis.
I note that a better alternative for making the same point which would strip out the economic swings of earnings (because the market does look ahead on the expected returns on assets) is to use a 5yr MovAvg ROE for the SP500 and its P/BV multiple thus producing a ROE/(P/BV) = hypothetical Asset Based Return Yield.
Not all returns come from earnings. For instance, oil companies and real estate companies have asset gains due to inflation which are eventually converted to earnings at some point in the future in the form of higher rents or asset sales. This is less true of companies like GE and PG which have finished products with rising cost inputs but do not have the ability to convert the rising cost of production (rising value of factory equipment) into higher margins during inflation periods as do oil and real estate based businesses. The problem with this approach is that SP500 has to my knowledge stopped issuing BV information as it is deemed unreliable as a financial indicator. However, I think that as a gross measure of the asset base of the economy, I have seen from Ned Davis Research an avg 14% ROE and ~6.1% BV growth rate which is much smoother than the ~6.1% earnings trend you see below for the SP500(3rd Chart).
The point to be made is that Knut Wicksell had the correct observation in 1898 even though the tools for proving it were not available till much later. By using his observation a less volatile monetary policy should produce a less volatile economy, less volatile inflation, fewer economic headaches and Federal Reserve decisions with substantial genius.
It is clear to me that the activities of the Federal Reserve have proven to have been since the US Real GDP trend from 1930 very beneficial as a shock absorber. However, under the Greenspan years the availability of cheap money followed by comparable contractions has resulted in higher corporate earnings volatility(see 3rd Chart Earnings Trend Line)
I ask that you consider using the Wicksell Rate. I ask that you publish this for all to see so that corporate and investment decisions can be made with greater long term clarity. My suggestion is that in the current environment an immediate implementation would be disruptive, BUT, if you were to announce that you were going to work towards implementing Wicksell Rate as a policy over the next 5yrs-10yrs, I believe you would bring great clarity to many financial decisions as well as give all a period in which to make adjustments that would not be unduly disruptive. Importantly this would result in far less speculation as returns would have to breach the Wicksell Rate and all would realize that the cost to doing this would be considerably higher than with funds much lower. Perhaps it would also be helpful to dampen rampant speculation that the Federal Reserve promote the concept of “matching maturities” when investment commitments occur and recourse as opposed to non-recourse financing.
I think some of these suggestions would result in higher levels of individual discipline and common sense.
Humbly submitted,
“Davidson”
Disclosure (“none” means no position):
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Now, before mark-to-market fans get all excited, one needs to take a close look at what Berkshires (BRK.A) Chairman says about it.
For those not sure where I stand on it, visit a past post.
From the Annual Letter.
Buffett makes the following statement, “We endorse mark-to-market accounting”.
Now, is it for the transparency its advocates seem to think it produces? On that subject Buffett says “Improved “transparency” – a favorite remedy of politicians, commentators and financial regulators for averting future train wrecks – won’t cure the problems that derivatives pose. I know of no reporting mechanism that would come close to describing and measuring the risks in a huge and complex portfolio of derivatives.
Auditors can’t audit these contracts, and regulators can’t regulate them. When I read the pages of “disclosure” in 10-Ks of companies that are entangled with these instruments, all I end up knowing is that I don’t know what is going on in their portfolios (and then I reach for some aspirin).”
If he does not believe that true transparency is possible simply due to the complexity of the instruments, then why would he support mark-to-market? What does the particular accounting system solve or produce that he finds of value?
Later he says:
“At the request of our customers, we write a few tax-exempt bond insurance contracts that are
similar to those written at BHAC, but that are structured as derivatives. The only meaningful
difference between the two contracts is that mark-to-market accounting is required for derivatives whereas standard accrual accounting is required at BHAC.
But this difference can produce some strange results. The bonds covered – in effect, insured – by these derivatives are largely general obligations of states, and we feel good about them. At year end, however, mark-to-market accounting required us to record a loss of $631 million on these derivatives contracts. Had we instead insured the same bonds at the same price in BHAC, and used the accrual accounting required at insurance companies, we would have recorded a small profit for the year. The two methods by which we insure the bonds will eventually produce the same accounting result. In the short term, however, the variance in reported profits can be substantial.
We have told you before that our derivative contracts, subject as they are to mark-to-market
accounting, will produce wild swings in the earnings we report. The ups and downs neither cheer nor bother Charlie and me. Indeed, the “downs” can be helpful in that they give us an opportunity to expand a position on favorable terms. I hope this explanation of our dealings will lead you to think similarly.” (Emphasis mine)
Buffett believes that mark-to-market accounting produces the very inefficient market pricing that he searches for and seeks to exploit. He gives a wonderful example how the same security, held in a different part of Berkshire and thus accounted for differently produces a far different results (one a large loss, the other a small profit).
Buffett’s endorsement of mark-to-market is NOT an endorsement of it as the best accounting system but an endorsement of it as an accounting system prone to producing conditions in which he believes he can profit handsomely.
Let’s see how the MSM and politicians run with this one……
Disclosure (“none” means no position):None.
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Haven’t read it yet so thoughts on it will come later……
Enjoy….
Waren Buffett’s 2008 Berkshire Hathaway Letter
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Housing
– Paul Kedrosky nails it..
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