Category: Articles

Wilbur Ross Eyes Another Florida Bank

Post author By ToddSullivan
Post date February 10, 2009

Ross has been talking about buying banks for a while. After his recent purchase, he is back in the Florida market

Billionaire investor Wilbur Ross and the Carlyle private equity group are considering a joint bid for BankUnited Financial Corp (BKUNA.O), the Financial Times said, citing people familiar with the matter.

The two investors were conducting due diligence as Tim Geithner, U.S. Treasury secretary, prepared a financial sector rescue plan that would seek to induce private capital to pursue deals for distressed financial institutions and assets, the newspaper said.

Bank deals could have a growing appeal for private equity groups, which are facing big obstacles in securing the financing they need to make big leveraged buyouts, the paper said. Florida-based BankUnited Financial is a troubled bank with $14 billion in assets, the newspaper said.

Carlyle has been among the more cautious private equity investors in making investments in financial companies, the FT said. By contrast, Ross said he is looking at more than 100 banks after buying several mortgage servicing operations, the newspaper added.

Disclosure (“none” means no position):None

Visit the ValuePlays Bookstore for Great Investing Books

Articles

More Thoughts on the AutoDealer Decimation

Post author By ToddSullivan
Post date February 10, 2009

Folks keep asking me about US auto dealers and how much the market is shrinking. Some numbers..

From USA Today:

Auto sales last year were a paltry 13.2 million, the worst since 1992 and down 18% from 2007. This year, forecasts are 10 million to 10.5 million. The reality: Too many dealers; too few sales.

“The whole goal is to be here a year from now,” says Mike Jackson, CEO of AutoNation, (AN) the country’s largest dealer chain.

The industry will see a net loss of 900 new car dealers this year, the biggest thinning of the ranks in nearly three decades, predicts the National Automobile Dealers Association. That’s on top of a net loss of 760 dealers last year.

The numbers alone “don’t describe the pain,” said the NADA’s immediate past president, Annette Sykora, who has Ford and Chrysler dealerships in the small West Texas towns of Slaton and Levelland. Speaking to dealers at the group’s convention in New Orleans last month, she added, “Some dealers mortgaged their own homes to try to stay in business and still had to close.”

Counting all brands, foreign and domestic, there are about 20,000 new car dealerships in the USA. Consultant Grant Thornton recently estimated the optimal number at about 16,000. At that level, dealers on average should be able to sell as many cars this year as they did 10 years ago — about 750 each.

GM, Ford and Chrysler dealers will bear the brunt of the closings because of the Detroit 3’s market share losses. From a high of 8 out of 10 new cars sold in 1984, their market share today hovers around 50%. Weak dealers aren’t profitable, aren’t able to keep their facilities as clean and modern as competitors’ and generally hurt the image of the brands they sell.

State franchise laws generally make it difficult and expensive for an automaker to close or buy out a dealer. So automakers have been letting the recession do the dirty work.

What are the dealer losses looking like?

•General Motors. GM had 6,375 dealers at the start of 2009, down 401 in a year. The goal: 4,700 by the end of 2012. As one of the conditions for its loan, GM promised the government it would drastically slim its business. Hummer and Saab brands are for sale. Saturn could go, too, and Pontiac is to shrink. GM may decide what to do with them this month, said Mark LaNeve, a GM vice president.

•Chrysler. The weakest of the Detroit 3 managed to shed 287 dealers last year to leave it with 3,287 at the start of 2009. It was using a program called Project Genesis, aimed at eliminating overlapping vehicles in Chrysler’s lineup and pressuring Chrysler, Dodge and Jeep dealers to consolidate the brands under one roof. This year the program was iced because Chrysler had a bigger need: survival.

•Ford Motor. Ford continues to reduce dealers in metro areas but doesn’t have to be as aggressive about it because it didn’t accept a government loan. If it had, Ford would have to stick with a formal plan to show that it will become viable, which could include slashing the dealer count. Ford started the year with 3,787 dealers, down 269. CEO Alan Mulally is pinning his hopes on a second-half rally. Ford just tapped its remaining credit line from private sources. If that’s not enough, it will have to turn to the government.

•Foreign brands. Most import brands have proportionally fewer dealers and aren’t in the same shape as Detroit. Toyota (TM), for instance, has about 1,400 dealers, fewer than half as many as Chrysler or Ford, but it outsold both of those automakers last year. On average, a Ford Motor dealer sold roughly 500 vehicles last year, while each of Toyota’s averaged more than 1,600.

For a while now I have been saying what is happening in the economy while painful now for shareholders of AutoNation, is setting the company up for dramatic gains down the road. Domestic brands currently make up less that 30% of AutoNation’s sales and Jackson has stated his desire to move that to 20%. The business model at AutoNation has them owning the property their dealerships are on. That simply means they can convert a Ford (F) or GM (GM) dealership to a Toyota (TM) or Honda (HMC) easily without any landlord or property owner considerations.

It also means that Jackson is easily able to alter his product mix to capture trends in the markets place. While AutoNation may be part of the national reduction in GM dealerships for example, that dealership is not sitting idle, it is being converted to a more useful and profitable purpose (different brand). Here is a “did you know”, AutoNation sells 10% of the Mercedes Benz sold in the US (I do not have specifics but I believe their BMW percentage approaches 15%). This is the reason despite “depression conditions” in the auto industry currently, Jackson’s company is both cash flow positive and profitable.

When I aksed Mr. Jackson last summer if he would attmept to grow his market share through picking up cheap distressed properties or simply let is grow through attrition, his reply was instant….”through attrition”.

The above numbers are showing that those gains are going to be substantial to say the least.

Disclosure (“none” means no position):Long AN, none

Visit the ValuePlays Bookstore for Great Investing Books

Tags AN

Articles

"Davidson" on Blankfein vs Westbury

Post author By ToddSullivan
Post date February 10, 2009
2 Comments on "Davidson" on Blankfein vs Westbury

Seeing the Blankfein piece in the FT against Mark-to-Market vs. Wesbury is the dichotomy of the market place. Those who believe in Efficient Market Hypothesis believe that price trend represent all the information available for a particular security. Mark-to-Market is valid in all environments for traders, technical and momentum investors. Efficient Market players have investment horizons from minutes to months. If they hold longer than a year, it is only due to a series of short term technical signals that reinforced holding.

The “Value Investors” on the other hand look for mispricing vs. fundamentals, i.e. discount to Book Value, Cash Flow or some other value parameter that is measurable and quantifiable. Warren Buffett is the prime example of Value Investing, the best known, but there are numerous others. However, the number of true “Value Investors” is far less than all other investors. Value investors investigate, analyze and parse a target company’s business till they are comfortable with the decision to commit funds at a level at which they feel an anticipated rate of return is likely to be had over a multi year period. It is not unknown for Value investors to hire investigators and analysts to look at each business site of a company’s operation, individual tax filings, competitors and vendor information in an effort to sleuth the locations of all values within a company. Value investors have an investment horizon that is typically greater than 5yrs.

Mark-to-Market accounting during down markets provides opportunities for Value investors. Their records are well known. There are no traders famous for their investment judgment over the same period of any well known value player.

Importantly, mixing Value investors and Efficient Market players (calling them investors is an abomination of the word) in the same room is like watching two vastly different cultures trying to communicate. They can’t. They are so culturally different that the terms, “value”, “return”, “analysis” which stand for defining action and criteria for one have no equal meaning in the other. What is even more bazaar is that in most instances they do not understand why they don’t understand each other as they each believe they are perfectly correct in their views of assessing investment opportunities.

I am a Value investor. There are truly very few of us vs. other investors. My guess is less than 2%.

Mark-to-Market accounting is an abomination of reasoning during periods of market disruption such as we just experienced when the SEC banned short selling. Unfortunately, there are more of them than us, but fortunately the market will and is currently righting itself even with the mistakes we have made and continue to make. Philosophically we need the majority of investors to not get it right so that us few can take advantage of the deep discounts not produced in any other way.

All will be well even if the current stimulus package is passed. It may just take longer.

Disclosure (“none” means no position):

Visit the ValuePlays Bookstore for Great Investing Books

Tags buffett, davidson

Articles

Tuesday’s Links

Post author By ToddSullivan
Post date February 10, 2009

Blackberry, “Fairness”, Stimulus, Inventory, Spinal Tap

– Which one is best?

– So, would this be censorship?

– Sad state when China is the one doing it right

– Are they really at all-time highs?

– A new interview……hilarious
Disclosure (“none” means no position):

Visit the ValuePlays Bookstore for Great Investing Books

Articles

Kuwait Desperately Tries to Save Reputation

Post author By ToddSullivan
Post date February 9, 2009

This is about as transparent as it gets…But, it could lead to something..

From the FT

The Kuwait Investment Authority would consider increasing its support for Dow Chemical’s (DOW) disputed takeover of Rohm and Haas (ROH) if the terms of the deal were changed to account for the downturn, a person familiar with the matter says.

Dow failed to complete the $15bn (€11.5bn) deal after the collapse of a joint venture between Dow and PIC – an arm of the Kuwaiti Petroleum Corporation – that was supposed to contribute $7.5bn to help pay for the acquisition. Warren Buffett has agreed to contribute $3bn and the KIA was to have added $1bn. According to a person with direct knowledge of the matter, the KIA would consider putting up more money if there were new terms.

“Today, it is very difficult to complete this deal on the old terms,” this person added. “There would have to be a new price and new terms. The environment has changed so much and chemical companies are losing so much money.”

Rohm and Haas underlined the brutal conditions faced by the sector, reporting an 81 per cent fall in fourth quarter earnings from continuing operations.

The figures make it harder for Dow to justify paying its original price for the company. Rohm shares fell more than 1 per cent to $55.70 at midday in New York, well below the $78 per share Dow agreed to pay last year.

The KIA had not approached Dow to discuss increasing its investment in the deal, Dow said. It is also highly unlikely that KIA on its own would put in anything like the $7bn to $8bn Dow would need to close the Rohm deal.

However, an increased investment by the KIA strikes many analysts as an elegant solution to the break-up of the Dow-PIC joint venture.

“There is a concern as to Kuwait’s reputation for direct foreign investment,” says Ahmed Barakat, managing partner with Al-Sarraf & Al-Ruwayeh in Kuwait City who is not directly involved in the matter. “KIA could salvage that reputation.”

Initial talks between the Kuwaitis and Dow began in 2007. In November 2008, the deal was renegotiated to reduce the Kuwaiti contribution to $7.5bn from $9bn in recognition of the deterioration in the economy.

Even the revised terms, however, met with criticism in the Kuwaiti parliament, where questions were raised about the price tag and a $2.5bn break-up fee.

Dow has until July to take advantage of its one-year bridge loan for the deal. It reported a $1.55bn fourth quarter loss.

What do we really have? Kuwait has finally realized the obvious to everyone else. They have done irreparable harm to their reputation as a business partner. At all cost, they want to avoid the coming legal confrontation with Dow. Why? Discovery will lead to disclosure on internal communication with Dow and their deception will be laid bare for the world to see.

Recent accusation from Kuwait of bribery from Dow officials and “reviewing” other upcoming ventures only served to further cast doubt on the country as a business partner in the international community.

This “offer to help” is an olive branch to Dow. What will happen is Kuwait will commit more funding for the Rohm deal and in return, Dow will drop its seeking $2.5 billion in damages. Despite what Kuwait has done, they are still a valuable partner for Dow although Kuwait must now see that Dow does have options as it has been confirmed they are talking to Sabic (Saudi Basic Industies) to purchase to commodity businesses Kuwait had been scheduled to buy. One must come to the conclusion the Kuwaiti’s thought they were the only dance partner Dow had.

Dow dropping the lawsuit lets Kuwait off the hook and clears the way for future collaborations, a positive for both parties.

Like I have said all along, this will all get worked out…in due time…

Disclosure (“none” means no position):Long DOW. none

Visit the ValuePlays Bookstore for Great Investing Books

Tags buffett, dow

Articles

Howard Schultz: We’ll Be McDonalds Except More Expensive and Less Convenient $$

Post author By ToddSullivan
Post date February 9, 2009

I have been all over Starbucks (SBUX) for over 2 years now, someday they’ll listen. After two years of scoffing, dismissing and mocking those who would suggest the notion of discounting, calling it “diluting the brand”, Starbucks is chasing McDonalds (MCD) and Dunkin Donuts down the food chain (pun intended).

Today’s Memo from Howard Schultz.

To: All Partners
Date: February 9, 2009
Subject: Value and Everyday Affordability – The Starbucks Way

Partners,

During these tough times, customers need to know they’re making a smart choice when they come to Starbucks. That they’re getting the world’s finest coffee, delicious food made with quality ingredients, and an experience they can’t get anywhere else. But they also need to know we’re listening to them, and that we’re helping them by making Starbucks an affordable, everyday value. We have taken some time to understand how Starbucks can deliver more value in a way that is both consistent with who we are, and relevant to the day-to-day realities consumers are facing. It was time well spent. We have tested concepts, conducted research, and most important, listened to our customers. I am very pleased to report that we have arrived at a value strategy that will appeal to customers without compromising our commitment to quality.

On March 3, we will introduce a selection of new pairings at $3.95. They combine our most popular beverages with our most popular breakfast items – and we’ve added a few new ones as well. Our pairings lead with our hand-crafted beverages. They offer our customers more affordability at breakfast time – not a free extra they wouldn’t have ordered anyway. And they come with the Starbucks Experience each and every day.

This move is the right thing to do for our customers. And we can do it while maintaining our high standards in sourcing, buying and roasting the finest coffee in the world. Starbucks success over the years has been in delivering a level of taste, quality and authenticity based on the coffee beans we start with and the experience created by our partners. The majority of our customers are coffee lovers and we need to trust them to find value and quality at Starbucks over and above fast food purveyors and other coffee companies.

At the same time, we will do more to tell our story. I talked to a Partner recently who was frustrated by the persistent misperceptions about our value. He was urging the company to be more aggressive in responding to the mythical claims about the $4 latte. With your help, that is exactly what we are going to do.

Did you know, for example, that ounce for ounce; our brewed coffee is competitively priced vs. others in most markets, and in some cases, is lower priced? And did you know that the average price customers paid for beverages for all of 2008 was under $3? We will be providing you more facts like these over the coming weeks, so you have the ammunition to dispel the myth — with customers and friends, online and in conversation. We’ll also be adding new offers over time that combine everyday affordability with an emphasis on why Starbucks is a smart choice for customers – in tough times and in good times.

I look forward to sharing more with you about the value we bring to customers, and I thank you in advance for playing a critical role in telling the story.

Onward,

Howard

Problem? Yeah, it is now an admission that everyone who has said they were too expensive were right. Had they done this last summer they could have played it as a “helping out the consumer” motive. Now it just smacks of desperation as sales plummet and customers continue the two year exodus to the “competition” Schultz & Crew always denied existed.

How is the competition doing?

Yeah….good thing they aren’t competition for Ole’ Howard. Will the price drop help? NO. Why? Starbucks is in reactionary mode and has no direction and no soul. They no longer know who they are and what they stand for.

Until they figure it out, shareholders will suffer. What really needs to happen is for Schultz to go. Since the firing of Jim Donald last year, the return of Schultz has not lead to any better leadership or decision making.

Schultz returned promising a return to what made the brand great and almost every decision he has made since then has been counter to what Starbucks once stood for. Because of that, the brand is in shambles…

A fresh face is needed….or at least an original idea…

Disclosure (“none” means no position):Loing MCD, none

Visit the ValuePlays Bookstore for Great Investing Books

Tags mcd, sbux

Articles

Pershing’s Lettter to Shareholders Regarding Target $$

Post author By ToddSullivan
Post date February 9, 2009

Ackman feels that like Wendy’s (WEN) and McDonalds (MCD) he will eventually prevail in Target (TGT)

Pershing Square IV Letter to Investors

Publish at Scribd or explore others: Finance & Investing Business & Legal target william ackman

Disclosure (“none” means no position):

Visit the ValuePlays Bookstore for Great Investing Books

Tags ackman, mcd

Articles

Pershing Updates Target Holdings $$

Post author By ToddSullivan
Post date February 9, 2009

Ackman has taken it on the chin over Target (TGT) but is not giving up.

From the filing:

As of February 6, 2009, as reflected in this Amendment No. 4, the Reporting Persons are reporting beneficial ownership on an aggregate basis of 72,890,835 shares of Common Stock (approximately 9.7% of the outstanding shares of Common Stock), which include shares of Common Stock and shares subject to certain stock-settled American-style call options. The Reporting Persons also have economic exposure to approximately 6,050,766 notional shares of Common Stock subject to certain cash settled call options, bringing their total economic exposure to 78,941,601 shares of Common Stock (approximately 10.5% of the outstanding shares of Common Stock).

Here is the trading data:

Disclosure (“none” means no position):

Visit the ValuePlays Bookstore for Great Investing Books

Tags ackman

Articles

"Buffett Metric" Does NOT Say It Is Time To Buy $$

Post author By ToddSullivan
Post date February 9, 2009
6 Comments on "Buffett Metric" Does NOT Say It Is Time To Buy $$

So, there is a chart and a story going around regarding Berkshire’s (BRK.A) Warren Buffett that just does not jive to me. Hat Tip to “Davidson” for pointing bringing it to my attention..

First, here is the chart:

Here is the story that follows:

Fortune Magazine) — Is it time to buy U.S. stocks?

According to both this 85-year chart and famed investor Warren Buffett, it just might be. The point of the chart is that there should be a rational relationship between the total market value of U.S. stocks and the output of the U.S. economy – its GNP.

Fortune first ran a version of this chart in late 2001 (see “Warren Buffett on the stock market“). Stocks had by that time retreated sharply from the manic levels of the Internet bubble. But they were still very high, with stock values at 133% of GNP. That level certainly did not suggest to Buffett that it was time to buy stocks.

But he visualized a moment when purchases might make sense, saying, “If the percentage relationship falls to the 70% to 80% area, buying stocks is likely to work very well for you.”

Well, that’s where stocks were in late January, when the ratio was 75%. Nothing about that reversion to sanity surprises Buffett, who told Fortune that the shift in the ratio reminds him of investor Ben Graham’s statement about the stock market: “In the short run it’s a voting machine, but in the long run it’s a weighing machine.”

Not just liking the chart’s message in theory, Buffett also put himself on record in an Oct. 17 New York Times op-ed piece, saying that he was personally buying U.S. stocks after a long period of owning nothing (outside of Berkshire Hathaway (BRKB) stock) but U.S. government bonds.

He said that if prices kept falling, he expected to soon have 100% of his net worth in U.S. equities. Prices did keep falling – the Dow Jones industrials have dropped by about 10% since Oct. 17 – so presumably Buffett kept buying. Alas for all curious investors, he isn’t saying what he bought.

To examine this we need to go back the beginning.

One must remember that in the late 1960 Buffett closed the “Buffett Partnership” because at that time he felt “there were no values” in the general stock market. Yet, according to both the chart above and the story, Buffett would have been buying at this time.

If we fast forward to the mid 1970’s, a time when Buffett said he felt like “a guy in a whorehouse with a suitcase of cash” because stocks we so cheap, we see the above charts value level was actually below 50%. In fact, most of the largest positions in Berkshire’s portfolio, American Express (AXP), Coke (K), Gillette now PG (PG) and The Washington Post (WPO) were accumulted during this time. In fact, Buffett’s buying continued through the 1980’s and until the mid 1990’s when he then found equity values were overpriced, refrained from buying during the tech bubble and was called “out of touch” (he was later proven very right).

Again, looking at the chart we see during that at this time frame the chart values had crept back to the 75% level of the mid 1960’s when Buffett was a seller.

What is inmportant to note and what has been lost in the “Buffett is buying rhetoric” is that Warren’s three largest recent investments, totaling roughly $10 billion, Dow Chemical (DOW), GE (GE) and Goldman Sachs (GS) were NOT stocks purchases, they were preferred investments.

Essentially Buffett is betting their share prices will all rise, in the next 3 to 5 years, when the convertibles convert to common stock. Until then, he has a bond paying 10%. With Treasuries paying essentially nothing, Buffett has found a vehicle that pays 10% to park his cash.

Did Buffett pen the link article above? Yes. To be sure Warren is buying an interest in US companies as witnessed above, just not their common stocks (except Burlington Northern (BNI)).

Buffett’s preferred purchases are not an endorsement of cheap US equities, if anything it says he would rather be a bondholder than an equity one……for now.

Disclosure (“none” means no position):Long Dow, GE, none

Visit the ValuePlays Bookstore for Great Investing Books

Tags buffett, davidson, dow

Articles

Monday’s Links

Gartman, Autos, “Get your Treasuries”, Solar, Climate change

– Sell dollars and buy loonies

– Demand is building

– Just print it baby

– When Gregor speaks……listen

– Actual logic on the subject
Disclosure (“none” means no position):

Visit the ValuePlays Bookstore for Great Investing Books

Articles

"Davidson": Panic at The White House

Post author By ToddSullivan
Post date February 8, 2009
1 Comment on "Davidson": Panic at The White House

My readers, named “Davidson” by me has submitted the following piece…

He writes:

The panic in Obama’s recent speeches as he attempts to railroad the Democratic spending bill is without thoughtful analysis. Unfortunately, this reflects the misunderstandings of his advisors who believe that throwing spending at the lack of liquidity is the solution.

How wrong can so many people be!!!

The issue is that Mark-to-Market is providing a false view of the value of assets. Brian Wesbury and others have suggested a “Cash Flow” methodology, i.e. if the debt security is paying its interest and principal streams then it should be valued according to the risk of non-payment along bonds that are paying. This is a simple model and one that can be trusted as it is based on the realities of commerce.

This does not require another $800bil of spending. This requires 20min of discussion and a flip of the accounting switch. We may need a few guarantees as well.

Just where do we get people who cannot see the simplicity of this! It is Mark-to-Market that has caused many $billions of write offs. These need to be reversed and then let the market pricing mechanism get to work.

It is frustrating to watch so much intelligence go to waste and even do great damage because they are panicked.

For more on mark-to-market, here is a post I wrote in March 2008.

Here is a bit of a rant I wrote on it in May of 2008

Disclosure (“none” means no position):

Visit the ValuePlays Bookstore for Great Investing Books

Tags davidson

Articles

More on Dow Chemical & Rohm and Hass

Post author By ToddSullivan
Post date February 8, 2009

Spoke Friday with sources who have insight into the litigation between Dow Chemical (DOW) and Rohm & Hass (ROH). Some notes

– Delaware courts are “courts of equity”. Simply put, the Judge has a broad array of remedies short of forcing a merger. He could rule for or against “specific performance” and either force the merger or not and then decide on damages. Should he rule against Dow, they would have the option of an appeal.

– He also has the option to order specific performance but at a later date.

– The Judge did seem to recognize and agree that specific performance was a remedy of equity and that because he is in a court of equity, he won’t simply ignore certain realities outside of the contract.

– Dow is trying to impress on the court that those at Rohm & Haas who are fighting to close now, have no interest in the health or outcome of the company after the merger and that the well-being of the near 60,000 employees should be taken into account by the court.

For instance, the family of company founder Otto Haas, would receive $5 billion, Raj Gupta, the chief executive officer of Rohm & Haas would receive over $100 million and Paulson & Co. Inc., second-largest holder of Rohm & Haas stock, the value would be $1.5 billion. In short 3 groups receive nearly 50% of the proceeds of the sale.

Recently, David Bernick, an attorney for Dow, said the Haas family and other shareholders cared only about the huge payout, even more than the future of the company and its employees. “The Haas family apparently has no interest in the health of Rohm & Haas,” he said last week.

This is illustrated by the unwillingness of management to work with Dow at all on the closing date. What happens to the combined entity after the closing is of no interest to management.

– Paulson’s letter was self indulgent and old news. Dow has already considered (and publicly said so) and investigated the remedies he put forth in the letter. His offer to put money into an offering was gratuitous.

Separately, I was informed later in the day Friday (from other sources) that:

– Dow is in very active conversations with parties regarding the commodity business. The source said they believe that the primary party was Sabic or the Saudi Basic Industries Corp. You’ll remember they were the buyer for GE’s(GE) plastic business

More on this as I get more information..

Disclosure (“none” means no position):Long DOW

Visit the ValuePlays Bookstore for Great Investing Books