Sunday, February 22, 2009

Better Off Dead... Intrinsic Investing Part I

In 1932, value investor Benjamin Graham wrote an article in Forbes "Is American Business Worth More Dead Than Alive?" in this article, Graham questioned management from companies for sitting on troves of cash and investments, while investors over-looked this value. Graham developed a valuation system based on his skill for analyzing numbers. Security analysis became more of an art than a science due to the fact that companies(even back then) required a great deal of probing and detective work. A crime scene where hidden assets and liabilities are found and evaluated. IF the intrinsic value of a stock was the solution for X, then time was a Y variable. When will the stock reflect the hidden value? From these lessons, Warren Buffet developed three principles to follow when it came to investing:

1. Stock is the right to own a piece of a business. A share is worth a fraction of the entire business.

2. Use a margin of safety. Investing is built on estimates and uncertainty. A wide margin of safety ensures that the effects of good decisions are not wiped out by errors. If an investment is worth making, then the investor must advance positions, not retreat from them.

3. The Market is Your Servant, not your Master. Mr. Market's moods should not influence your view of price, but may occasionally allow the opportunity to buy low and sell high.

While no one really knows the value investing formula that Buffet uses, no one can argue his long-term success. Intrinsic valuations are just knowing the basics of number crunching, but in essence it takes due diligence to another level. We are reminded that intrinsic value can suggest stocks that are short as well as long candidates. While there are a variety of intrinsic value calculators on-line, the individual investor is best served with a system that is measurable, and consistent. In this market, Benjamin Graham would have us look for stocks that are over-valued (as in the case of many financial companies whose toxic assets are still undisclosed) to the banks that have been unjustly lumped with the losers.

Thursday, February 19, 2009

Straight Talk from Chuck... What the Experts Think...

An old mentor of mine by the name of Chuck gave me some recent advice about the state of economic affairs in the United States. "Boy, they are the problem and we are their cure." Chuck was alluding to the massive bailouts that are going on in this country. Bailouts for banks... Bailouts for car companies... Bailouts for homeowners... Chuck qualified these needy parties as part of the problem. He went further to explain how the funds that are being spent should not be called anything other than taxpayer funds... anything else is a play on words. "Nobody is at fault, nobody is going to jail... GE's CEO is made to look like a hero because he didn't take a bonus... How the hell can you take a bonus of $11.7 million for performance when your company's stock is down and earnings were off 22% in 2008, and are down another 33% in 2009." Chuck went on to say that all the crooks who socked away money over the past five years, are trying to influence law-maker's decisions, and even agreeing to more regulations. "That's o.k. Brian because those rotten son-of-a-bitches will be around the next time to figure out how to steal more money."

"Do you know that every American owes $48,000 in debt for all those greedy son-of-a-bitches?" We are their cure, make no doubt about it. They are going to tax us to high heaven or print out so much money that we'll need wheel barrels full of it to go grocery shopping. Now that being said, Chuck believes the market is starting to look cheap. This is coming from someone who put $50 grand into the market the day after the 1987 crash. I reminded Chuck that this market is a bit different in that there is a triple convergence of credit, unemployment, and foreclosures... things that are just not going away any time soon. While the 1987 Crash was based more on a panic from the S & L scandal and subsequent fallout, I believe the current situation is systemic in nature... not only limited to the United States but throughout a good portion of the developed world. "Hell no I wouldn't put a whole bunch into this market but I would start looking to enter in incrementally." Sorry Chuck, I will depart with your wisdom at this juncture. Your mentee believes this market is on its way to 5,000. Readers should know that 74 year old Chuck said that the stock market will never see another dime of his money. He has all reserves in CD's that are earning 3%. "Three percent isn't $%^& but I am a winner because I am not a loser in this market."

If the cheerleaders on CNBC were upset to see the market close at 7522... then they must be in shock with a break below the 7500 psychological mark. Click here to see the reaction of an expert panel...


1. Nouriel Roubini anticipates a more aggressive stance will be needed to cure the foreclosure crisis. He also believes in temporary nationalization of banks until they are cleaned up.
2. Fred Mishkin believes unless the banking system itself is cleaned up then any money placed into the system is nothing less that throwing good money after bad.
3. The female guest (Nina Easton, Fortune Magazine) is a Washington insider and has noted the variation in plans from a academic to a political solution, as each seems to not completely understand the other.
4. Mark Zandi suggests that the only way out of the housing crisis includes a reduction in principal...a.k.a. principal write-downs... and no one in D.C. is willing to swallow that pill yet...

Sources Referenced
Calculated Risk, Charlie Rose Interview

Tuesday, February 17, 2009

Haircuts for All... Bailing on Bove... Market Watch... Stock Watch During the Great Depression...

Senator Dodd along with countless other Americans took another haircut today. For Dodd, it is nothing new as he has lived on the edge of controversy for a good bit during his political career in D.C.. Lax accounting rules for Arthur Andersen helped bring about the Enron debacle. And Dodd is extremely tight with accounting companies. Still, Dodd is in power and making critical decisions as a Sr. member of the Senate Banking Committee. I wanted to remind readers that Dodd had received campaign contributions from Countrywide... and Bank of America... Only two Senators received more money from Bank of America Hilary Clinton and Barack Obama. I predict that Dodd will be looking for a new line of work after this next election... After all, 48% of constituents disapproved of him in October of 2008... Do you think things have gotten better? (1) One more disclosure. Dodd received more money in campaign contributions from Fannie and Freddie than ANYONE ELSE IN CONGRESS!!! The question is will the people of Connecticut recall him before they have a chance to throw this guy out of office?

Speaking of hair cuts, Richard (a.k.a. Dick) Bove is no longer employed by Ladenburg over comments he made about a commercial bank. Bove is an excellent analyst who ranks among the upper 20% of analysts covering commercial banks. However, Bove has been strongly criticized over his comments. "In March 2008, Bove said the U.S. financial crisis was over and it was a "once in a generation" opportunity to buy bank stocks, a call which clearly proved to be wrong." (2) For instance, Bank of America was trading at $37.14 back then... Today BAC closed at under $5.00 per share.

The market is currently testing the November lows almost to the point as of today. GM and Chrysler are back asking for more money, and unless they get major concessions on retiree health care plans it is all over!!! These liabilities have grown in size and create an unsustainable cut into profit margins... And, at the end of the day, every company in the United States is out for a profit... unfortunately for some Wall Street firms, greed killed. As of now, GM and Chrysler plan to cut 50,000 more jobs and are seeking an additional $21 Billion dollars in aid!!!! The good news is that they are not alone... Toyota and Honda are both showing weakness as well. Give me the opportunity, I will always prefer to by American!!!

Bubble Bubble Toil and Trouble
Corporate bonds and Treasury Bills are supposed safe havens. (3) However, they are over-bought and are in need of correction. Blue chip stocks were safe havens... but even Wall Street darling WMT is taking a hit as of late. I believe this explains the continued flow into precious metals in general, and gold in particular. Also, there are a number of bear or ultra short funds that are gaining a bit of momentum. The key is taking profits in this environment. To continue referring to this meltdown as a recession... or deeper recession could well be a modest assumption. I still don't believe things have gotten ugly yet, and I hope they don't either. This is what ugly looks like:

Please note the market direction after the Great Crash in 1929... In the grand scheme of things, it was continued slide into the abyss that did most investors in... and that is when true credit destruction took place.


Saturday, February 14, 2009

Fear Sells... To the Victors go the Spoils... A Modest Proposal...Speaking of Congress...Stock Watch... Try try again...

1. a distressing emotion aroused by impending danger, evil, pain, etc., whether the threat is real or imagined; the feeling or condition of being afraid. (1)

Fear is even a convenient advertising tool. From Head and Shoulders advertisements tauting dandruff as the root cause of a love life gone askew to a Odor Eaters advertisement where the father scares off the family with the smell of bad feet one thing is for certain, fear sells!!!

Before Harry Truman announced the Truman Doctrine (financial aid to Greece and Turkey) he understood that he had to "sell" it to Congress and the American people. His chief of staff suggested that since Soviet aggression was a real threat to the region, that he uses fear to push the measure through Congress... (2)

So it was no surprise when fear was used again last night as the main point of pushing through what will amount to the largest spending measure in U.S. history. Fear worked when Bush was tauting the need to go to war in Iraq... Fear reared its ugly head again with the first Tarp Plan... and now fear has moved this 800 pound gorilla through the House and the Senate in lock step fashion. This is not to say that the spending is not needed, nor that the plan will not be effective. However, Congress should know what they are voting on... No one knows exactly what was in that bill that passes last night except the lobyists.

To the Victors go the Spoils...
Whether it be genuine concern for the American people... grandstanding... or being a pig, one thing is for certain the pork in that bill, like many of its predecessors underscores the business climate in D.C.. Republicans don't quite get it, as they pushed for tax cuts for the rich, business, and limits on state aid. Democrats don't quite get it either. As the agents of change, they have included a few "pet" projects such as the (magnetic train from L.A. to Las Vegas courtesy of Senator Reid from Nevada) that give D.C. the real black eye. We ar ealso reminded that Pork Barrell spending (at least in American hsitory) can be traced back to Henry Clay and John C. Calhoon who created legislation that built Northern Infrastructure at the expense of tariffs on imports. Ironically, we may well look for a replay of this scenario as Congress will eventually need ways to pay for this excessive amount of spending.

A Modest Proposal...
As a taxpayer, and concerned American I would like to make a modest proposal. When bills are put forth in Congress, I would like every member in both the House and Senate to know what they are voting on... Maybe we can start a program called NO CONGRESSMAN LEFT BEHIND... Let's test them on what they are voting for, if they fail the test, then they are not allowed to vote on it. Afterall, if these are the same measures placed on the nation's youth and teachers, then it should also be placed on Congress. No this is what I refer to as high stakes testing. If the Congressman fails the test, then they are not permitted to vote on the legislation(3)!!! Heck, this idea sounds so obnoxious that I may even submit this to my Congress... or even get a petition started... Can you imagine the outcry? Our leaders are voting on bills and don't even know the content of what they are voting on!!! Now that's CRAZY!!!

Speaking of Congress
I always enjoy a bit of grandstanding, and could not help but get a chuckle when CEO Pandit from Citi Bank faced the music on Capitol Hill this week... First it was the aut executives, and now it is the banks CEOs. Mark my word, as this financial catastrophe continues to unravel, we can rest assured that some of the fat cats on Wall Street who received bonuses while their companies were heading for failure will be the next group called up. And pulic outcry toward the fat cats will make last week's hearing look like Sunday School!!! To think the U.S. government got $7 billion dollars in preferred stock, and is on the hook for over $234 billion... IT IS BEAUTIFUL!!! CLICK THIS LINK...

Stock Watch
The market took some interesting turns this week. While most people expected an automatic jump on Treasury Secretary Geithner's proposal, instead the market punished it. Oil started to turn back after a seven day losing streak. Gold continued its run. Stocks in general... and the financials in particular took another beating. That being said, I have one month to exit several positions.

CNK is my only winner, and that one is only haning on to modest gains... My only hope is a sell off on a dividend cut before this option expires... Earnings due 2/26...

MDC is a loser. I was over-zealous on a financial downturn and got caught on this one. While I believe my reasoning to be fundamentally sound, this one coudl still surprise me with a hard drive to the bottom before x-date. The company is holding steady at a -8.24 earning per share... If the debt markets remian tangled, these guys could be goners... Unfortunately, they will no report until April. However, the stock reacted violently last week as analysts did not like the bailout's impact on these characters...

GE call is a loser as well. Thsi was originally intended to be a hedge play against TARP I and the assumption that GE would be able to "lay off" bad debt in a bad bank scenario, and gain more tax payers monies. Right idea... wrong price. I have whip marks on my back from this one...

Try Try Again...
I like shorts on trasportation... BNI may be a play here... PH is a consideration as it is deeply connected to industrial output... ROK could have lost my opportunity here. QID is a consideration now that technology seems to have had a bit of a rally (except for RIMM).

On the long side of things, I believe there is potential for companies that deal with things of real value... raw materials... oil... and natural gas.

We are reminded that this massive stimulus package at best has a 50/50 chance of avoiding a major recession... and could well be nothing more than the beginnings of a safety net to insulate some Americans from dire poverty. We are reminded that bread lines did not form until 1932 during the Great Depression.

In Buffet's book Snowball, Warren pointed out the fact that 100's of companies rise when new technologies arise... i.e. There were hundreds of car companies in the United States... now their are 2.5. There were 100s if not thousands of technology companies in the United there are only a few key players. (Remember the .com bubble). There will be 100s of green energy companies, and one day, there will only be a few main players...and a lot of short candidates once the euphoria dies... Green energies are always an easy sell when oil is high... a much tougher sell if and when the Arabs start giving it away...


Thursday, February 5, 2009

Letter to Congress

Dear Congressman,

This letter is written in regard to the Federal government's response
to the current economic crisis.

The most logical solution to the current financial crisis has nothing
to do with recapitalizing the banks, placing toxic assets in a bad
bank, or even guaranteeing toxic assets. None of these solutions
strike at the heart of this matter. Instead, a more logical approach
would include:

1. Capitalizing good banks and breaking-up the good assets of bad
banks. Stock holders of the bad banks would receive small portions of
shares in the new good bank. Their remaining shares would become

2. Creating new banks which have borrowing power to swallow up only
the good assets of bad banks. New banks would bid on the good assets
from the bad banks. Later, shares would be sold to the public in an
IPO. The U.S. government would be the main beneficiary here.

Regardless, bad banks should not be rewarded with additional government
monies. While there are some "feel good" measures like limiting
executive pay or company trips, these initiatives fail to reach the
heart of the issue which is poor management, short-sighted business models,
and greed. It should be duly noted that the people responsible for making
these terrible decisions that put their companies, investors, and now taxpayer
at risk were the ones to benefit the most. Ironically, now that these
institutions are falling apart these individuals are still making business decisions! Bank of America could well be the poster child of this debacle.

The current stimulus plan has several provisions that must be removed.
First, the notion that debtors should be able to re-negotiate mortgage
debts, or have a judge adjust mortgage amounts is a poor idea. People
should pay their debts whether the there is an ARM, ALT-A, or Sub-prime
loan. While we know there are some difficult decisions to be made
regarding the bankruptcy of these individuals, this mess was not
created by most Americans. Therefore, most Americans should not be held
accountable for the problems facing creditors or debtors. A loan is an
agreement between two parties. It is either the responsibility of the
creditor the debtor to work out a loan arrangement, not government.
Encouraging companies to lend more could in this time period in the
end, could exacerbate the problem.

Congress created the Federal Reserve, and while it is a quasi-public
institution, their current role needs complete transparency and
disclosure to the American people. The notion of loaning money without
disclosing collateral is at the bare minimum suspicious, and at most
could be considered an act of treason. Anything less than full
disclosure would be against the principles that our great nation was
founded upon. There is no doubt that we are in un-chartered waters. I
appreciate your diligent efforts to look out for the best interests of
the American people.

Respectfully Yours,
Brian A. Davis

Wednesday, February 4, 2009

A Response from Sherrod Brown...

Dear Reader,

I will post the reply I received from Sherrod Brown's ofice. I will post the rather pointed letter I sent to Congressmen LaTourette, Paul, Brown and Voinovich sometime tomorrow. I believe this appears to be a general response letter from Brown's office, as it does not address some of the critical points of my letter. Still, Brown's office has good PR.

A Response from Sherrod Brown's Office...
Dear Mr. Davis:

Thank you for getting in touch with me about legislation to promote an economic recovery. I have heard from many Ohioans sharing their ideas for how to best stimulate the economy and which proposals they believe should or should not be included in this legislation. I appreciate you sharing your thoughts and suggestions with me.

Last year the economy shed 2.5 million jobs. We now face the worst economic crisis since the Great Depression. The federal government must act to restore confidence in our economy, create jobs, and rebuild our nation's aging infrastructure. From shrinking retirement funds to high unemployment rates to stagnant wages, Ohioans are facing tremendous economic hardship.

It is important that our approach be timely, targeted, and temporary. Among the fastest and most effective ways to assist Americans in desperate need is by increasing funding for safety net programs, such as those for energy assistance, health care, and nutrition, as well as providing states with the help they need to continue providing necessary services.

Another important step we can take is to invest in our nation's infrastructure. Studies indicate that not only do these projects create jobs, but every dollar spent on infrastructure adds $1.59 to our economy. Infrastructure projects that improve our roads and water systems and invest in alternative energy and mass transit projects not only help rebuild our state, but promote much needed economic growth. I am working to ensure that these funds are targeted to states like Ohio that have been hardest hit by this economic downturn.

There is no doubt that our nation is in need of an economic jolt and that middle class families need help. As debate surrounding the economic recovery package continues, I will certainly keep your thoughts in mind.

Thank you again for being in touch with me.

Sherrod Brown

Sunday, February 1, 2009

The Enemy Within... The Case for Gold, Silver, and a Short positions for T-Bills... And the Great Flood...

Enemy Within

Things crawl in the darkness
That imagination spins
Needles at your nerve ends
Crawl like spiders on your skin

Pa pa pa pounding in your temples
And a surge of adrenaline
Every muscle tense to fence the enemy within

I'm not giving in to security under pressure
I'm not missing out on the promise of adventure
I'm not giving up on implausible dreams
Experience to extremes (1)

More and more people are concerned not so much of an enemy army invading the United States. Some suggest that the real enemy is within our own borders. Consider these points and the ramifications they "could" have on the United States' AAA bond rating, taxpayers, and anyone who holds dollar-based investments.

Obama's Plan...

According to one Bloomberg source, a cornerstone in Obama's bank bailout is a promise that banks must expand lending programs. "President Barack Obama will require banks to boost lending to consumers and companies in return for taxpayer aid from the $700 billion bailout fund, in a departure from Bush administration policy, a key lawmaker Barney Frank said." (2) The article goes on to state that this is a "lesson" learned from the first TARP program which has had little to no impact, save an increase in bank balance sheets. If the Federal government is looking for lessons learned, I can offer one other suggestion... Do not saddle our nation, taxpayers, and future generations with debts which equate to corporate welfare. Secondly, it is time to impeach any and all members of Congress who believe a quid pro quo plan where banks dump toxic assets for a promise to "loan" money is completely asinine. The only... only logical solution would be a capitalization program for good banks that would pick over the remains of bad banks, and allow the "investors" in bad bank assets to suffer the consequences of a failed capital adventure. Unfortunately, that scenario will never play out due to the trillions of dollars the Federal Reserve has already floated to these bad banks. (3) It is a systemic problem where the FED (whoever they really are) have dictated a policy that could well spell doom to the American taxpayer.

To further this point, it is helpful to consider a chart that demonstrates government spending that is, has, and will continue to spiral out-of-control. The first chart (courtesy of the St. Louis Federal Reserve)demonstrates Federal spending up to 2008.

The next chart compares current spending to all previous levels.

Money has been flowing into U.S. Treasury Bills due to a preconceived notion that the United States' government... its' debt... and the powers that be... are the most stable in the world. The flight to quality has in many ways demonstrated that as bad as the current perception of the U.S. economy is, there are plenty of governments throughout the world that are floundering. This is not to say the T-Bills are the best place to invest... The flight to quality has come at a price where the yield curve has become negative. This brings up a second case as what the little investor like us should do???

While gold has made a nice run, if could well be finding key support at the $900.00 support level. It that support is found, gold(GLD) could well move into the $1300-$1400.00 level out of speculation, fear, and a hedge against the dollar and yen currencies. Silver(SLV) is a poor man's gold, and could easily double in price from its current $11.50 price. Treasury Bills with a negative yield... and continued issuance face an over-supply for a product that has less world demand. Should this scenario play out, it means that the world will seek other places for money security. The flight to quality suggests that money is flying out of T-Bills to other investments. ETFs that short these thing -- TBT is 2x short 20yr treasuries, PST is 2x short 10yr treasuries... TIP may be another option.

The Great Flood
One of my favorite Old Testament stories is Noah's Ark. God saw Noah as a faithful servant, and righteous man. However, the world was filled with evil and idolatry. Once Noah's Ark was prepared, a Great Flood which whipped out life on the planet (save Noah's Ark) was God's way of cleansing the planet. When the waters subsided, it allowed man to rebuild and start over.

In some ways, the current financial crisis at the bare minimum reeks of inequity. Greed and the lust for things has driven this country into a dire situation. Without a cleansing of the bad executives, bad institutions, and business practices, the United States is setting itself up for a bigger problem later.

Sources Cited