This is the highest rate yet since January
Release Date: July 29, 2008
For release at 10:00 a.m. EDT
On July 28, 2008, the Federal Reserve conducted an auction of $75 billion in 28-day credit through its Term Auction Facility. Following are the results of the auction:
Stop-out rate: 2.350 percent
Total propositions submitted: $90.555 billion
Total propositions accepted: $75.000 billion
Bid/cover ratio: 1.21
Number of bidders: 70
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A follow-up on a post from March based on news today for Berkshire Hathaway (BRK.A).
Whitney Tilson and Andy Kilpatrick (who worte the best book on Berkshire, “Of Permanent Value”) were on CNBC today discussing the subject. Before we go on, watch what they said.
Now, earlier Tilson had this to say about housing and lenders.
Okay, so, if housing is going to drag for another 18 months, then Berkshire’s results will also. So, one would then expect lower comp. earnings and hence a lower share price.
Financials institutions like American Express (AXP), Wells Fargo (WFC), Bank of America (BAC), USB (USB), M&T Bank (MTB) make up about 30%-40% of Berkshire equity portfolio (it varies based on valuations). The argument can be made that these are the class of the financials and that may be true, but all have seen share prices cut almost in half in the last year and a half no mater their quality. The other parts are tied to housing (shares have suffered) and the consumer like Home Depot (HD), Lowes (LOW), USG (USG), Coke (KO) and others. A prolonged housing downturn could see further deterioration.
Wholly-owned subs such as Shaw Industries, Clayton Homes, Jordan’s Furniture (the are 4 furniture companies), Benjamin Moore, Home Services and Acme Brick and directly tied to housing and will suffer in the downturn Tilson predicts.
For all its holdings, Berkshire is essentially an insurance company. It has operated under “perfect” conditions for the last two years according to Buffett and eventually to run must end. Premiums are already falling and as houses are re-poed and fewer new cars are purchase, insurance premiums derived from those products will fall accordingly. I know people who are looking at homeowners and auto policies for way to decrease coverage and save money. Whether or not this is a good idea is irrelevant (I do not think it is), it is happening. Throw in a hurricane or two (we are due) and insurance could suffer quite a poor year.
For more on Berkshire’s insurance read this former post:
Back in March when shares sat at $133,000 I argued they were not a “value”. Today they sit at $111,000. Are they a value now? Perhaps but one also has to expect that the near term, if Tilson is correct is fraught with potholes for Berkshire and earnings ought to take a hit.
Based on that, share price ought to suffer also meaning you will probably be able to pick them up cheaper down the road. If I owned shares would I sell? If I needed the money in the next year, yes. If I had a multi-year time frame would I sell? No. If that was the case I would be watching down the road for a cheaper entry price, I think you’ll get it.
Disclosure (“none” means no position):Long WFC, None
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When he made the first statement I said he was putting the noose around his neck. Now Merrill Lynch’s (MER) John Thain just joined the list of execs who made statements regarding their firms fiscal well-being only to go back on them a few months later. Will his fate be the same as theirs?
Let’s go back. In April Thain said ““We deliberately raised more capital than we lost last year … we believe that will allow us to not have to go back to the equity market in the foreseeable future,” realizing he just was very vague he later clarified it to say “through issuing additional equity”.
Less than a month later he reiterated that his company would not need additional funds. At the time I said he had nothing to gain and everything to lose in the situation since no oe would believe him anyway, why say it at all?
Two months later in an effort to raise more capital Merrill announce they would shed valuable assets (Bloomberg). Even this was worse than raising it through equity I said as it permanently impairs earnings power while an equity dilution can be undone over time.
Now comes news that Merrill will issue $8.5bn share offering and $5.7bn in additional write-downs from the sale of mortgage securities only 10 days after they reported a $4.6bn Q2 loss that included $9.4bn writedown, and announced the previously discussed asset sales aimed at raising an additional $8bn.
The CDO sale is shocking as Merrill said it would sell CDOs valued at $30.6bn to Lone Star Funds. At the end of Q2, the bank had estimated the value of the CDOs at $11.1bn. The securities are being sold for just $6.7bn, or about 22 cents on the dollar.
Thain clearly did not have a clue back in April when he opened his mouth.
Nor in May when he followed it up…..
It remains to be seen what happens but the mes Thain has put himself into rivals that of Chuck Prince at Citi (C), Ken Thompson at Wachovia (WB), Stan O’Neil at Merrill (MER) and Erin Callan at Lehman (LEH). All made promises that turned out not just to be wrong, but spectacularly so.
Disclosure (“none” means no position):Long WB,C, none
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Congress, Greenspan, Financial TV, Smokes
– This is actually a very interesting idea
– Agreed
– The more the better
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Congress, Greenspan, Financial TV, Smokes
– This is actually a very interesting idea
– Agreed
– The more the better
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This is bigger news than is being reported…
Remember this little nuggett from last summer?
Archer Daniels Midland (ADM) will now apparently start cane-based ethanol production in Brazil with local partners according to a Brazilian newspaper Monday. According to the paper, ADM’s CEO Patricia Woertz is scheduled to be in the area August 19th and an announcement will happen on the 20th.
The company will participate in joint ventures to open two mills, both in center-western Goias state, financial newspaper Valor Economico said. Each mill will be able to crush 3 million to 4 million tons of sugar cane per year and first one should come on stream in 2010.
ADM of course has nothing to say about the potential deal. So if 1 ton of sugar cane gives us about 19.5 gallons of ethanol then ADM will ad roughly 120 to 160 million gallons of ethanol production a year to its abilities (approx. 1.5 billion gallons after current expansion finished).
Now, since we know that ethanol can be shipped to the US duty-free by using the Carribean Basin agreement and that currently the limits to those import are not even close to being tapped, ADM should be able to funnel this ethanol into the US duty free should it wish. As much talk as there is about “getting rid of the tariff on Brazilian ethanol” it is just that, all talk. The reason is that Brazil is currently decreasing its ethanol exports because it is requiring more for domestic use. Even if the tariff were lifted, it would not result in additional imports.
The bigger news here for shareholders is finally to company seems to have broken into the Brazilian market. Last June I wrote that ADM seemed to be intent on using the strategy that is currently being employed by Dow Chemical (DOW) and would go the JV route rather than just try for an outright purchase in the country. This seems to be happening.
It will require minimum cash outlays by the company ans assuming success, opens up options for other partnerships……win-win.
Disclosure (“none” means no position):Long ADM, Dow
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So, what does KKR’s decision to finally go public mean?
Last August KKR said they had “not delayed” their IPO plans despite earlier reports they would and a year later, here they go. Yea, that was a bit of a delay boys but, no matter.
The AP reports:
“The transaction is a big departure from plans announced a year ago by founders Henry R. Kravis and George R. Roberts to tap equity markets for up to $1.25 billion through an initial public offering. Credit market turmoil torpedoed that plan.
Late Sunday, the buyout shop said KKR principals will hold 79 percent of the combined company and KKR Private Equity shareholders will own 21 percent.
No cash will change hands in the deal, which is expected to close in the fourth quarter, and no additional public stock sales are planned. But by having the shares of the combined company trading on the NYSE, KKR said it should have enough cash needed to finance additional takeovers.
The value of the combined company will depend on how KKR Private Equity shares trade in the weeks and months ahead.
KKR Private Equity Investors said in an earnings release Sunday it has 204.9 million units outstanding, giving it a market capitalization of $2.15 billion at the current price of $10.50 per unit. That would suggest a value for the combined company of $10.25 billion.
But in its earnings statement, KKR Private Equity said its net asset value totaled $4.56 billion, or $22.25 per unit, at the end of the second quarter — nearly double its June 30 market price of $12.75. Therefore, KKR said it will make additional payments if KKR Private Equity shares don’t reach a level of at least $22.25 each, which would suggest it values the entire enterprise at more than $21 billion.”
Why list now? The optimist in me says that perhaps KKR sees the current environment at or near a bottom so going public now will lead to significant share price inflation in the future.
The pessimist says that perhaps conditions are getting worse and perhaps raising cash is getting difficult. By listing KKR would be able to raise some additional money that way and even used the stock as currency should they wish.
What to think? I tend to lean towards the former. Using the public route to raise cash at this point would smack of a bit of desperation or worse, a loss of investors willing to give KKR money to invest. Unlike the Blackstone IPO in which insiders sold out at the top essentially, KKR will significantly benefit from any share appreciation incurred as markets recover. Only time will tell but perhaps this will be a mark of a bottom…
On a final note, was Blackstone’s (BX) IPO perhaps the “market timing” gem of the last couple years? It indeed marked the high water mark for the industry.
Disclosure (“none” means no position):None
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So, what does KKR’s decision to finally go public mean?
Last August KKR said they had “not delayed” their IPO plans despite earlier reports they would and a year later, here they go. Yea, that was a bit of a delay boys but, no matter.
The AP reports:
“The transaction is a big departure from plans announced a year ago by founders Henry R. Kravis and George R. Roberts to tap equity markets for up to $1.25 billion through an initial public offering. Credit market turmoil torpedoed that plan.
Late Sunday, the buyout shop said KKR principals will hold 79 percent of the combined company and KKR Private Equity shareholders will own 21 percent.
No cash will change hands in the deal, which is expected to close in the fourth quarter, and no additional public stock sales are planned. But by having the shares of the combined company trading on the NYSE, KKR said it should have enough cash needed to finance additional takeovers.
The value of the combined company will depend on how KKR Private Equity shares trade in the weeks and months ahead.
KKR Private Equity Investors said in an earnings release Sunday it has 204.9 million units outstanding, giving it a market capitalization of $2.15 billion at the current price of $10.50 per unit. That would suggest a value for the combined company of $10.25 billion.
But in its earnings statement, KKR Private Equity said its net asset value totaled $4.56 billion, or $22.25 per unit, at the end of the second quarter — nearly double its June 30 market price of $12.75. Therefore, KKR said it will make additional payments if KKR Private Equity shares don’t reach a level of at least $22.25 each, which would suggest it values the entire enterprise at more than $21 billion.”
Why list now? The optimist in me says that perhaps KKR sees the current environment at or near a bottom so going public now will lead to significant share price inflation in the future.
The pessimist says that perhaps conditions are getting worse and perhaps raising cash is getting difficult. By listing KKR would be able to raise some additional money that way and even used the stock as currency should they wish.
What to think? I tend to lean towards the former. Using the public route to raise cash at this point would smack of a bit of desperation or worse, a loss of investors willing to give KKR money to invest. Unlike the Blackstone IPO in which insiders sold out at the top essentially, KKR will significantly benefit from any share appreciation incurred as markets recover. Only time will tell but perhaps this will be a mark of a bottom…
On a final note, was Blackstone’s (BX) IPO perhaps the “market timing” gem of the last couple years? It indeed marked the high water mark for the industry.
Disclosure (“none” means no position):None
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Well, at least if they actually do it..
The SEC may force investors to disclose short positions and may take additional steps to rein in rapid-fire short sales, Chairman Christopher Cox said. The SEC is examining whether to require short sellers to reveal “substantial” stakes, just as investors must disclose significant positions in companies. The agency may also reinstate a version of the so-called uptick rule, which barred short sales of stocks when prices are falling, he said Thursday in testimony to the House Financial Services Committee.
The regulator is trying to strike a balance between installing a “circuit breaker, or something that keeps things from running away,” and providing trading liquidity, Cox told the House panel.
Now, I have stumped here many times that disclosure for some should mean disclosure for all. If you are long or short you ought to be required to disclose it.
When asked, Whitney Tilson said, “Many short-sellers will object to disclosure because there is such a stigma associated with short selling,”. I partially agree and at the same time disagree with Whitney. I agree short sellers will balk at the rule but I also think part of the “stigma” associated with short selling is because it is often done in the shadows, since no disclosure it necessary. Anything that is viewed being done in secret, is always going to be viewed sceptically.
Admittedly, Tilson, Ackman and Einhorn do not fall into this camp as they are upfront and honest with the investor community about their actions. Thus they tend to be viewed (at least by those other than their targets) as “short investors” rather than traders that “pile on” falling stocks. It does make a tremendous difference.
When the above mention three short something, it is because they view a fundamental flaw in the business, not because they think “banks stock will fall”. They are almost betting on the extinction of the company like Ackman and Tilson in MBIA (MBI) and Ambac (ABK) (although both have reduced short positions in those) and Einhorn in Lehman (LEH).
Far from a “we can make 20% here”, it is a “this thing ought to go to zero”.
The SEC is right to require disclosure, the more open everything is, the better. I think the more open it is, the less short sellers would be viewed as though they are “boogymen”.
Disclosure (“none” means no position):None
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RIP, Cullen, WaMu, SEC
– Really sad…….
– James hits the important points
– Are they for real?
– Finally
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RIP, Cullen, WaMu, SEC
– Really sad…….
– James hits the important points
– Are they for real?
– Finally
Visit the ValuePlays Bookstore for Great Investing Books
Getting through some past information from the week away..
Dow Chemical (DOW) released earnings last week and while the results were down, the fact that they were remotely as strong as they were speaks volumes as to where we are going.
– Geographies outside of North America posted very strong growth. Europe was up 11%, Asia-Pacific was up 12%, and Latin America was up 5%, including the impact of some of the recent divestitures. Volume growth of 12% in emerging economies, which today represent 27% of Dow sales, Eastern Europe was up 19%, India was up 64%, and the Middle East was up 89%.
– Feedstock and energy costs increased $2.4 billion compared with the same quarter last year, and increased a $1 billion sequentially. These were the highest increases in Dow’s history. In this quarter oil hit $145 a barrel. It has since dropped over $20, yet Dow’s price increases will remain.
– Dow AgroSciences. Following a stellar first quarter, Dow Ag delivered even better results in the second quarter based on their strong product portfolio and robust industry conditions, posting price and volume gains in every geography. Sales of new Ag chem products increased 65% compared with the year ago, with strong growth of these products in North America, Europe, Latin America and Asia-Pacific, while sales of seeds and traits increased almost 40%.
– Dow AgroSciences made two very important announcements in the quarter. First, the business announced it has submitted SmartStax, its new 8 way gene combination for corn, in the U.S. EPA for regulatory review. This marks the critical first step in clearing SmartStax for commercialization. This is a joint venture with Monsanto (MON)
– Share buybacks, another $393 million was used to purchase 9.6 million shares of Dow stock in the second quarter. Since the beginning of 2006, they have spent $3 billion to repurchase approximately 7% of outstanding shares.
– Year-to-date return on capital and return on equity were 13% and 17% respectively
– Operations of K-Dow Petrochemicals will begin in the fourth quarter (Kuwait JV)
Regarding oil prices and it effects oi margins, in the Q&A CEO Andrew Liveris said:
“As you have noted and others have noted, what is really important to us is stability. If we can hover around these ranges now, $120, $130 oil and therefore its associated naphtha equivalents, then frankly that gives all of us a platform to operate from in terms of restoring the margin and then expanding the margins if we can.
Right now, apart from the US, I think we are all seeing great strength around the world that is enabling us to keep price momentum and therefore — we went very close Frank, if you look at how close we came to keeping our margins level despite this unprecedented surge, we did pretty good. And so with the full quarter to work with we have better certainty to get to even or better.”
More on Oil:
Jeffrey Zekauskas – JPMorgan
“Good morning. On average shouldn’t your raw material costs be down sequentially in the third quarter? Natural gas has gone from — I don’t know — $12 to $9 and oil has come from $135 to $125?”
Geoffery E. Merszei – Executive Vice President and Chief Financial Officer; Member of the Board of Directors
“Yeah Jeff, this is Geoffrey here. Just to take oil, Brent crude average price as of this morning, let’s say, $124, $125. At today’s level it is still higher than our average cost during the first quarter. The average cost in the first quarter was around $122. I’m using crude as a reference point. And we are already towards the end of the first month of one-third of the quarter. So if you use an average rate for the third quarter of let’s say around $125, $126 then you are talking about over $0.5 billion additional cost for the company to absorb.”
Share repurchases:
Kevin McCarthy – Banc of America Securities
“Okay and then financial question for Geoffery, if I may. You have been very active in repurchasing shares, including during the second quarter. Given the pending Rohm and Haas deal, should we anticipate an even keel there in the back half of the year, or would you expect activity to diminish?”
Geoffery E. Merszei – Executive Vice President and Chief Financial Officer; Member of the Board of Directors
“I think that — look, for the time being, until we close the K-Dow transaction, I think we’re going to take a little breather from a large buyback. Having said that, we do remain committed to reducing our share count over time. So, there will be a time when we will be back very actively, but we’re going to take a breather for the time being.”
Dow is inching close to the cusp of its transformation. If you read the call you can sense it not only in the executives tone but even in the analysts.
Please visit the blog Prudent speculation who had a nice post on the current price environment vs. cost from the call. I was going to get into it but Prudent does a great job in the post. Please read it here
Disclosure (“none” means no position):Long Dow
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Some interesting tidbits in the earnings call.
– AutoNation retailed 73, 500 new vehicles on a same-store basis, down 13%, compared to the period a year ago. But favorable compared to the industry that, according to CNW Research, was off 16% at retail on the quarter. Used vehicle results were favorable relative to new. They retailed just under 50,000 units in the quarter, 4% less compared to a year ago. Inventory at June 30th reflects a new vehicle day supply of 62 days. This represents an increase of seven days compared to a year ago, it reflects the slower sales pace in May and June and compares favorably to the industry at 67 days. Margins are 10 basis points higher than the nearest competitor, and 140 bps higher than the average used-car dealer.
In short, AutoNation is clearly the class of the auto retailing industry.
At June 30th, store count numbered 242, representing 319 franchises and 39 brands in 15 states. In September, AN will open Mercedes-Benz of Del Rey in Del Rey Beach, Florida. This add point brings the Mercedes dealership count to seven in Florida and 14 company-wide.
AutoNation is focused on profitability rather than market share. Market share will take care of itself as US auto makers shrink brands and dealerships in an effort to streamline operations. As AutoNation lessons it reliance on US brands, it’s market share will increase by default. Said Jackson, “we continue to divest underperforming stores to optimize our portfolio. The divestitures are primarily domestic franchise. However, we will retain our high-volume, core domestic franchises. We expect over time that these domestic franchises will constitute about 20% of our new vehicle revenue (29% currently).
Jackson was asked specifically about this on the call:
Rick Nelson – Stephens
“Are you seeing an acceleration in store closings among competitors?”
Mike Jackson
“Yes, on the domestic side, absolutely. And as I said earlier, we have a core group of domestic stores that are great locations with high throughput franchises that as painful as the current environment will be long-term, we will be served well by the shakeout that is going on now.”
This news piggybacks on a previous post regarding the potential gains for AutoNation from domestic automaker’s problems.
It seems that expectations for several holdings, Dow Chemical (DOW), Sherwin Williams (SHW), Citigroup (C) and now AutoNation (AN) were all far worse than reality. With the exception of Citigroup (the jury is still out) they all have top flight management who are deftly steering their respective businesses through unprecedented times. With depressed share prices, better than anticipated results, and visibility clearing, buy opportunities abound.
Disclosure (“none” means no position):Long AN, none
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It seems like as soon as I go on vacation, the news start flowing like mad..and makes very little sense..or does it?
– Citigroup (C) lost $2.5 billion and people were thrilled
– Wachovia (WB) figured they would one up them so they lost over $8 billion, eliminated over 6,000 jobs and cut the dividend…..people were thrilled
– Wachovia looks so bad the CEO just spent $16 million buying a million shares
– McDonalds (MCD) beat estimates and gets downgraded
– Obama disses injured troops in Germany and then offers contradicting excuses on Friday and Saturday…what will Sunday bring? This one actually makes sense…..he doesn’t care..
– Starbucks (SBUX), after “not telling” what stores were closed realized it was cruel to keep people in wonder as to their job status and finally released the list. They can’t do anything right at this point..
– An analyst got sued by a company that did not like what he had to say.
– Starbucks apparently still thinks they can execute breakfast…….I thought they mercifully gave up on it..
–
Disclosure (“none” means no position):
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Shelby Steele, NY Times, Obama, SEC
– Doesn’t everyone outside of Manhattan?
– If you say anything enough, it becomes seen as true, whether it really is or not.
– They have become a hindrance to the market..
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