Even if you are not an investor in Sears (SHLD), this will be entertaining high drama.
Lampert recently said he was going to buy back 14% of the company (at then prices). Even at that, the shorts seem to be pressing their bets, although modestly.
Here is the information:
The math here does not add up. It is going to be very interesting…
Disclosure (“none” means no position):Long SHLD.
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Had this emailed to me by a reader…
The risks of risk management Banks now employ thousands of highly-qualified mathematicians to quantify risk for them. So why did they not foresee the credit crunch?
Quantitative finance lecturer Paul Wilmott explains how a failure to see beyond the numbers might be to blame. We have learned the hard way how important it is to measure and manage risk. Despite the thousands of mathematics and science PhDs working in risk management nowadays we seem to be at greater financial and economic risk than ever before.
To show you one important side of banking I would like you to follow me in an exercise with parallels in risk management.
You are in the audience at a small, intimate theatre, watching a magic show. The magician hands a pack of cards to a random member of the audience, asks him to check that it is an ordinary pack, and to give it a shuffle.
The magician turns to another member of the audience and asks her to name a card at random. “Ace of Hearts,” she says. Pick a card, any card The magician covers his eyes, reaches out to the pack of cards, and after some fumbling around he pulls out a card. The question to you is what is the probability of the card being the Ace of Hearts? Think about this question while I talk a bit about risk management. Feel free to interrupt me as soon as you have an answer. Oh, you already have an answer?
What is that, one in 52, you say? On the grounds that there are 52 cards in an ordinary pack.
It certainly is one answer. But aren’t you missing something, possibly crucial, in the question? Ponder a bit more. One aspect of risk management is that of ‘scenario analysis.’ Risk managers in banks have to consider possible future scenarios and the effects they will have on their bank’s portfolio.
Assign probabilities to each event and you can estimate the distribution of future profit and loss. Not unlike our exercise with the cards. Of course, this is only as useful as the number of scenarios you can think of.
You have another answer for me already? You had forgotten that it was a magician pulling out the card. Well, yes, I can see that might make a difference. So your answer is now that it will be almost 100% that the card will be the Ace of Hearts – the magician is hardly going to get this trick wrong.
Are you right? Think just a while longer while I tell you more about risk and its management. The risks of probabilities Sometimes the impact of a scenario is quite easy to estimate. For example, a bank might ask what will happen to the value of their assets if interest rates rise by 1%.
After some mathematical analysis they will come up with an answer – which will depend, for example, on how many bonds they hold.
But estimating the probability of that interest rate rise in the first case might be quite tricky. And more complex scenarios might not even be considered. What about the effects of combining rising interest rates, rising mortgage defaults and falling house prices in America?
Hmm, it is rather looking like that scenario didn’t get the appreciation it deserved. Back to our magician friend. Are those the only two possible answers? Either one in 52 or 100%? Suppose you had billions of dollars of hedge fund money riding on the outcome of this magic trick – would you feel so confident in your answers?
(A hedge fund betting on the outcome of a magic show, how unrealistic! But did you know that there is at least one hedge fund that ‘invests’ in poker players, funding their play and taking a cut of their winnings? So who knows what they will think of next?)
When I ask finance people this question, I usually get either the one in 52 answer or the 100% answer. Some will completely ignore the word ‘magician,’ hence the first answer. Some will say “I’m supposed to give the maths answer, aren’t I? But because he’s a magician he will certainly pick the Ace of Hearts.”
Rather frighteningly, some people trained in the higher mathematics of risk management still don’t see the second answer even after being told.
Human behaviour This is really a question about whether modern risk managers are capable of thinking beyond maths and formulas. Do they appreciate the human side of finance, the herding behaviour of people, the unintended consequences – what I think of as all the fun stuff?
There is no correct answer to our magician problem. The exercise is to think of as many possibilities as you can. For example, when I first heard this question an obvious answer to me was zero. There is no chance that the card is the Ace of Hearts. This trick is too simple for any professional magician. Maybe the trick is a small part of a larger effect – getting this part ‘wrong’ is designed to make a later feat more impressive…the Ace of Hearts is later found inside someone’s pocket.
Or maybe on the card are the winning lottery numbers – which are drawn randomly 15 minutes later on live TV. Or maybe the magician was Tommy Cooper. When I ask non mathematicians, this is the sort of answer I get. Once you start thinking outside the box of mathematical theories the possibilities are endless. And although a knowledge of advanced mathematics is important in modern finance I do rather miss the days when banking was populated by managers with degrees in History, who had been leaders of the school debating team.
A lot of mathematics is no substitute for a little bit of commonsense and an open mind
Disclosure (“none” means no position):
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Circuit City, Chanos, Wal-Mart, Oil
– Still going higher
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For those not keeping score, AutoNation’s (AN) stock has almost doubles the past month. Jackson makes a good point that banks were bailed out and are now sitting on that money causing the auto crisis. It is a hard argument to dispute as there are buyers, they just cannot get loans for the cars..
Yesterday on FOX
Today on Bloomberg:
Disclosure (“none” means no position):Long AN
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Is it just me or does Rick win this hands down?
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OJ, Commodities, Self-control, Cars
– “At least I didn’t kill no one this time“
– No one buying
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What is the plan here? We know General Growth (GGP) is in a tight spot. But, with Citi (C) taking a 5% stake, the debt is all but assured to be refinanced. Some thoughts at the end, does it have to do with Target?
Hedge fund manager William Ackman’s Pershing Square Capital Management LP disclosed that it owns a 7.5 percent stake in General Growth Properties. Pershing Square directly owns a total of 20 million shares in the REIT.
The company also said it owned 48.5 million shares through total return swaps, bringing its economic interest in the company to 68.6 million shares (over 18%).
SEC Filing
“The Subject Shares are beneficially owned by the Reporting Persons. Furthermore, the Reporting Persons entered into Swaps for the benefit of Pershing Square, L.P. (the “PSLP Swaps”), Pershing Square II, L.P. (the “PSII Swaps”) and Pershing Square International, Ltd (the “PSIL Swaps”, collectively with the PSLP Swaps and PSII Swaps, the “Pershing Square Swaps”) on the dates described on Exhibit 99.1. The Pershing Square Swaps constitute economic exposure to approximately 18.1% notional outstanding Common Shares in the aggregate, have reference prices ranging from $0.49 to $1.58 and expire on the dates described on Exhibit 99.1.
Under the terms of the Pershing Square Swaps (i) the applicable Pershing Square Fund will be obligated to pay to the counterparty any negative price performance of the notional number of Common Shares subject to the applicable Pershing Square Swap as of the expiration date of such Swap, plus interest at the rates set forth in the applicable contracts, and (ii) the counterparty will be obligated to pay to the applicable Pershing Square Fund any positive price performance of the notional number of Common Shares subject to the applicable Pershing Square Swap as of the expiration date of the Swaps. With regard to the Pershing Square Swaps, any dividends received by the counterparty on such notional Common Shares will be paid to the applicable Pershing Square Fund during the term of the Swap. All balances will be cash settled at the expiration date of the Swaps. The Pershing Square Funds’ third party counterparties for the Pershing Square Swaps include entities related to BNP Paribas, Citibank, Morgan Stanley and UBS. “
Here is the trading data:
Now, if we really want to go further with this we could look at Target (TGT). The buying here coincided with Target’s lukewarm response to Ackman’s Target REIT plan. It picked up heavily after his second proposal to the company.
After Target dismissed it, Ackman added over 25 million share directly and another 30 million through the swaps. I rarely find too much pure coincidence in timing like this.
What then? Perhaps he could offer up GGP to Target (TIP REIT) to expand it presence? Perhaps off to have GGP run TIP REIT to take the burden of running it off Target execs hands? After all, it was one of the objections Target put forward, albeit a very weak one.
Perhaps placing them into a JV to share the running and vastly expand the footprint of them…it would also give Target access to cheap land to expand.
Who knows…….something is up though…
Disclosure (“none” means no position):None
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After heaping piles of BS on shareholders for most of the year, John Thain wants to kick them in the chops one more time.
Here is the news:
Merrill Lynch (MER) CEO John Thain has suggested to directors that he get a 2008 bonus of as much as $10 million, but the firm’s compensation committee is resisting his request. The committee and full board are scheduled to meet later Monday to hear Thain’s formal bonus recommendations for himself and other senior executives, the report said. It isn’t known what Thain will recommend, but the compensation committee is leaning toward denying the executives bonuses for this year, the report said. Merrill Lynch has been acquired by Bank of America (BAC) .
Remember when in April and then again in May Thain said Merrill was just fine and would not need more capital?
Then, in order to not raise capital, Thain instead sold assets and said he meant “through equity offerings” in his previous statements.
If that was not bad enough we get news that the assets they sold were essentially sold by them through non-recourse financing. Thain essentially paid folks to take the junk off their books.
Finally he gave up, threw in the towel and sold out to Bank of America…
I guess he is right, sounds like it is worth at least $10 million…Imagine what he would have got if he actually did a decent job?
Disclosure (“none” means no position):none
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If everyone calls a bottom, does it matter?
Here are some recent calls:
Reuters had this article that carried the following:
“Bill Miller said that all long-term investors believe that stocks today are cheap, but credit markets must regain health before equity markets can rally. It “looks as if the bottom has been made” in U.S. stocks, said Miller, who runs Legg Mason’s $7.6 billion Value Trust fund.”
“”We are in a bottoming process in the markets, but that doesn’t mean we are now entering a bull-market phase,” said Brian Gendreau, an investment strategist in New York for ING Investment Management Americas. “Things take time to work itself out.””
“”All year, people have been so pessimistic that any kind of bad news and the market just goes down,” said Chris Orndorff, who helps oversee $50 billion at Payden & Rygel Investment Management in Los Angeles. “But when the market shrugs off bad news just as it did, investors are signaling that the worst is behind us.””
On CNBC Monday morning Blackrock’s (BLK) Bob Doll called what is happening a “bottoming process”
Pick any other video on CNBC talking about stocks and you’ll here the same thing recently.
Here is a Google (GOOG) search for “bottoming process” so you can find the other 26,000 plus articles on it.
So, what to think? Nothing actually. If you watch the clips or read the quotes, this is the essential translation. “The market should go up, but it might fall more from here too, but the long term trend is up”.
Basically they are not telling us anything. Do not start buying stocks in this market because of these calls. Buy individual or sell issues based on their specific pro’s or con’s and your time frame.
You could argue that at any level the market is in the act of a “bottoming process”. If the long term trend is positive, then by default all levels before higher ones must be a “bottoming process”, right?
“Bottoming Process” means nothing…..
Disclosure (“none” means no position):None
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Dow Chemical (DOW) updates is transformation progress and reiterated dividend will not be cut.
Another key point most folks are missing. The new Kuwait JV will lead to more profits for Dow with zero capex due to the new cost level for input costs. Rather than buying oil then processing it, Dow is going into business with the folks who own the oil, then selling the processed good at market prices. Liveris touches briefly on it.
Watch:
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Simoleon,
– Here is a neat linksite that focuses on value investing
–
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It just should not be this cheap….thinking about the (DXO). A followup to last weeks posts on oil. Both these interviews to follow are with Saudi Oil Minister Ali Naimi .
From 60 Minutes Tonight.
Watch CBS Videos Online
A CNBC Piece from 2005, Melissa Francis interviews Ali Naimi
No matter how many holes I try to punch in it, I just don’t see a scenario where oil is not much higher at the same time next year. If it isn’t, then the global slowdown has become far worse than anyone imagined and the price of crude is the least of our worries, unless….even despite a global severe recession it is still higher.
I also think the dollar is in for a major fall. Starting to look into a long oil, short dollar trade..
Disclosure (“none” means no position):Soon to be long oil..
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Obama’s speech writer gets caught with his hand..well..on the cookie jar?
How is this “change” from that administration? LOL
After DuPont (DD) reports job cutting and an expected Q4 loss, Dow Chemical’s (DOW) Liveris talks about his company’s plans. $$
Liveris:
“We are as strong as we have ever been going into a correction and we have plenty of cash”
“Global recession through 2009 and into 2010”
“The US is a black hole and Europe is not much better”
“This whole thing fell off the cliff in October”
“The weak will disappear”
Disclosure (“none” means no position):Long Dow, none
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Why is it that AutoNation’s (AN) Jackson is the only one talking about the necessary elimination of auto dealerships? Most of them would be Ford (F), GM (GM) and Chrysler dealers? $$
Disclosure (“none” means no position):Long AN, none
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