Friday, March 28, 2008

The latest sad travail of John Meriwether


I am confused. Does John Meriwether get all the breaks? Or is it that he can't catch one? The greatest and most heralded trader of the old, fabled Salomon is once again being brought to his knees by the credit markets. First, it was the Treasury scandal back at Solly, then it was the blowup of Long Term Capital Management(LTCM). Now his group of hedge funds, JWM Partners LLC, is on the ropes. The largest fund in the group is rumored to be down by 28% YTD. One of the sadder details in the story is that he was actually not nearly as leveraged as he had been back in the heyday of LTCM(he was only levered 14 to 1).

Obviously the guy is super bright, if only because he can consistently blowup and then get people to fund his latest venture. I guess there are second acts in American life. Even third. My guess is that if forced to shutdown his funds, that he will start yet another. People will no doubt clamor to give him money, confident that they can get find a chair when the music stops.

Tuesday, March 25, 2008

Hats off to Bill Miller


I have been critical of Bill Miller on this blog. I find it strange that a guy as smart as he clearly is has failed to anticipate the energy bull market and not buy oil stocks. He's not perfect though, and so such a mistake is unavoidable. Friday's Wall Street Journal featured an article detailing his woes owning Bear Stearns(BSC), Countrywide Financial(CFC), Pulte Homes(PH), and Eastman Kodak(EK). So far he has wrong, very wrong on these picks. The streak has been over for two years now, largely aided by these wagers.

Reading his quarterly shareholder letter for Q407 from about a month and half ago really reaffirmed my respect for his intelligence and courage as an investor. First of all, he uses words like alacrity and enantiodromia. That's a tad bit more erudition than you should expect from the typical fund manager, but then again, Miller dropped out of a doctoral philosophy program in order to join Legg Mason(LM). He is also on the board at the Santa Fe Institute.

He flatly states in the opening line, "we had a bad 2007, which followed a bad 2006." He then goes on to say that losses are "unavoidable and unpredictable."

No B.S. No euphemisms. The naked truth. This is a man with whom you can feel comfortable entrusting your investment dollars.

He is not panicking like Stanley Druckenmiller did at the end of the tech bubble. He is sticking to his guns, waiting for the market to come to him rather than chasing it.

What exactly are his guns? Read his Q405 shareholder letter. You will not find a more well-reasoned, humble, or honest account of one's investment philosophy and performance from a fund manager. I mean, he even admits to screwing the pooch when it came to Enron!

Read both of the letters. You'll learn a great deal about investing.

Friday, March 21, 2008

It's not over yet

The Fed has once again appeased Wall Street. The rate cut and the Treasury swaps had led to a market rally and an easing of the liquidity problems. However, things are still dangerous. I still think that the full extent of the problems are unknown.

So far, subprime has been the word on everyone's lips, but I wouldn't be surprised if prime mortgages begin to show significant deterioration. Then there's the issue of the commodities boom. All the talking heads have declared this over, citing recent reversals in the oil and gold futures. I don't think it's over. I think that it is a correction as investors unwind positions and take profits after a huge run, but I still think that long term, the supply-demand ratio is out of whack. Markets don't go straight up after all and this is no reason to bail on this thesis yet. If you're not interested in averaging down, then I suggest that you just sit on cash until you figure out your next move.

By the way, I still like agriculture even though the momentum money has left the sector. Their P/Es are in the 40s, so I wouldn't jump in just yet. Wait for the media to really sour on them and then snap them up from the bargain bin.

As usual, we Americans are solipsists. It's very easy to get caught up in our financial difficulties and forget that Europe and the U.K. are suffering right along with us. They too have experienced a runaway real estate bubble that has been fueled by cheap debt. Their big banks were no more savvy than ours about asset-backed securities and derivatives. Oh, and not everyone in Europe loves the strong euro. It's great if you want to come to the States and shop, but hell if you want to sell your products here. Just ask any of your friends who enjoy French, Spanish,Italian, or Portuguese wines.

Let's not forget Japan. No country is more export focused, so they're not happy with their strong yen versus the dollar. Growth is practically nonexistent. Toyota is saying that it probably won't make its 2008 sales goal of 9.85 million vehicles. Did I mention that they currently have no central banker?

So where do you put your money in a world like this? I'm seriously thinking about pulling a Jim Rogers and getting out of dollar-denominated assets. Through Everbank you can set up a money market account or CD in 17 different currencies. I'm partial to the Australian and Canadian collars as those economies will benefit from a continued commodities bull market. If you're really pessimistic, they also offer precious metals accounts that hold real gold and silver.

Tuesday, March 18, 2008

Goldman Sachs: The Andy Dufresne of this market


Goldman Sachs(GS), just like the hero of Shawshank Redemption is trapped in a prison for a crime that it didn't commit. Just like Andy, Goldman will have its good days and bad days on the inside, but ultimately will escape. Earnings were down last quarter, but still beat the estimates.
Let's look at some numbers and compare it to the sector.

P/B: Goldman 1.49, Sector 1.75
P/E: Goldman 6, Sector 14
P/CF: Goldman 4.75, Sector 11.65
P/S: Goldman 0.68, Sector 3.31

5-year sales growth rate: Goldman 30.94%, Sector 17.15%
5-year EPS growth rate: Goldman 43.78%, Sector 16.45%

Net income/employee: Goldman $380, 021, Sector $132,411

ROE 5-year avg.: Goldman 25.16%, Sector 14.94%

Simply put, GS provides both growth and value. It will probably be a bumpy ride for a while, but within the next five years you should be well rewarded.

Friday, March 14, 2008

Memo to those who live in caves: dump the insurers

When will Wall Street throw in the towel and admit the obvious? It's starting to remind me of a kid that's been caught lying yet sticks to their story, hoping that sheer will can convince their parents that they're telling the truth. When they reported three weeks ago, did any credible analyst not expect AIG's quarter to really stink? Has the market become so desperate/hopeful that it has deluded itself to reality. There will not be a speedy, neat solution to our housing/credit problems.

Every time I turn on the TV, there's some sycophantic"economist," "market strategist," or "President" telling us that a recession is not going to happen. They're right. It's already here. Recessions are part and parcel of a capitalist economy. They've occurred with regularity and will continue to do so for the forseeable future. I agree that both business and central bankers have lots of new toys that can help them navigate the recessionary shoals better than in years past. However, for all our genius at financial engineering, we have yet to invent a derivative or ETF that will allow us to avoid the business cycle.

Let me use a metaphor from professional basketball. Right now, the stock market is like the woeful New York Knicks. The Knicks have been bad for years and haven't made the playoffs since the 2003-04 campaign. Their problems are legion, but basically it comes down to the fact that they are dishonest with themselves. They haven't been able to accept a) that they are bad and b)there is no quick fix for a. Management at the Garden seems to believe that New York fans won't accept a rebuilding effort, that they are so moronic/crazy as to believe that their team can contend every year. Consequently, instead of letting bad contracts expire, building through the draft, and creating cap space for strategic forays into the free agent market, they haphazardly throw around money like that former telecom exec who dropped $241,000 at Scores a few years ago. They pile up bad free agent signings like a kid creating a snow fort. They mistakenly always belive that they are one deal away from being good again. No, New York, won't tolerate re-building, but they will tolerate an expensive yet awful team that has hopes of getting better any time soon.

Wall Street is no different right now. The Street is desperately searching for any indication that the sun will come out tomorrow, some sign that things aren't as bad as they seem. Perma-bulls like Abby Joseph Cohen continue to pick the market to rise and is even recommending tech. Thank God she finally stopped recommending Citigroup! I give her props for work in the 90s, but it's time for the media to stop giving her a pass.

Things are bad. No one knows when they'll get better. Stop looking for a bottom or an inflection point. Those things aren't apparent until after they've occurred. Just try to stay alive. If you're brave, like Wilbur Ross, you look for an opportunity. Or sit it out. There's no shame in cash. Don't be the Knicks and think that you always have to make a move. You might end up with a Marbury in your portfolio.

Tuesday, March 11, 2008

10 ETFs I'd like to see


Though they were first introduced in 1992, it's the last few years that we've seen an explosion in both the popularity and availability of these instruments. They've moved beyond plain vanilla market indexes to encompass commodities, currencies, and bear funds. Still there's more work to do. Here are ten new ETFs that I would like to see added to the stable.

1. More commodity ETFs. Where are ETFs for pork bellies, cocoa, and lumber? Most people aren't sophisticated enough to handle futures trading, but they still need exposure to this asset class. An ETF would be a great way to do this.

2. An ETF that mimics options strategies.

3. An ETF based on the new Merrill Lynch frontier equity index.

4. ETFs that track sentiment indicators like the VIX. Or how about one that tracked interest rates.

5. Momentum stocks ETF. I don't know how this could be done cheaply due to the constant shifts in buying and selling, but there would be HUGE demand for it.

6. An ETF of ETFs/target date retirement ETF.

7. More niche ETFs. What about ETFs that track companies involved in the burgeoning fields of space tourism or extreme sports?

8. An ETF for distressed debt. Let retail investors be vulture investors for a day.

9. Real estate ETFs for specific housing markets. People forget that we have many housing markets. Not everywhere is tanking.

10. A collectibles ETF. This would be very hard to value, so it might have to be in something really liquid like Bordeaux futures or Old Masters.

Friday, March 7, 2008

Stocks Watchlist


I am beginning to see some values emerge, but I'm not convinced that they won't get a lot cheaper in a month or so. So I'm making a list and checking it twice, just like Santa. These are stocks that I'm considering buying if they get a certain price target. These price targets aren't set in stone, as I realize that I am bad at calling bottoms.

Comcast(CMCSA)-This is still the largest cable operator in the United States, but its also still a bit too price for me. Cable is at a crossroads and I think that it'll be some time before they figure out how to take on the phone companies.

Citigroup-The government will not allow the largest bank in the country to fail or become a trading vehicle for wealthy Arabs. I have no idea how far this one will fall, but I'm buying at $17 and below.

Goldman Sachs(GS)- A trailing P/E of 6 and a forward one of 7. I should probably pull the trigger now, but I'm waiting for it to hit the 140s. Can you believe that Goldman is cheaper than Citi?

Johnson & Johnson(JNJ)-great household names and as well as a growing stable of drugs and medical devices. It's been flat for about three years. I am encouraged by the recent insider buying.

Bank of America(BAC)- Largest depositor base in the country, branches everywhere you turn. A really nice yield(6.8%)and trading at only 11x earnings. However, I don't feel great about the Countrywide transaction; it seems to have eventual write down written all over it. I'll wait to see what happens with that before plunking down cash.

Allied Capital Corporation(ALD)-These guys are basically corporate pawnbrokers. They lend to distressed companies on terms mostly favorable to themselves. They have an 11.8% yield and could actually benefit from a recession. Still, earnings and cash flow are going in the wrong direction and the price is expensive. If it falls under book value, then I might pull the trigger.

Fording Canadian Coal Trust(FDC)-The group is expensive, even after taking a hit a few months back. No one's growing free cash flow and earnings are pretty flat for the major companies. Plus, there's all this talk about the death of coal and any other dirty source of energy. Well, it ain't happening. There's too much of this stuff around to ignore and the industry spends too much money on K Street. Plus China is not in the same rush that we are to go green so they'll be using a ton of this stuff for the forseeable future.

Tuesday, March 4, 2008

The Latest Installment of Money Honeys


We last visited the pool back in mid-December. Since then, there have been a few changes, but nothing too radical.

1. Liz Claman
2. Erin Burnett
3. Ashley MOrrison
4. Bambi Francisco
5. Maria Bartiromo
6. Farnoosh Torabi
7. Jenna Lee
8. Brittany Umar
9. Alexis Glick
10. Sandra Smith