The Genius Guide to Value Investing

Dealing with Madoffs and Thornburgs

2009-12-30T12:33:20Z

In the world of investing and research, we all, from time to time, get caught unaware by something. Rule 1 of any investment is to never put enough of your total funds in any one thing that will kill your portfolio.

On the numbers, and by the SEC filings, Thornburg was a good working company hit by an excessive need for capital from its investors in the reverse mortgage end of the business.

Everyone, including folks who know the principals in Santa Fe, New Mexico, where I used to live, felt pretty comfortable with the people running the show, because they talked the talk and walked the walk, and the numbers largely backed them up.

Now, of course, as we hear that these people allegedly siphoned off millions to protect their own assets and that they are in the process of setting up SAF Financial, another company to do effectively what they were doing before, one can only hope that civil, and potentially criminal charges rectify what appears to be a lot of smoke being blown investors' way by what is now TMST

TMST, under bankruptcy court protection, filed suit against CEO Larry Goldstone, Chief Financial Officer Clarence Simmons III and SAF in October, 2009 in the U.S. Bankruptcy Court for the District of Maryland.

If the company, under the bankruptcy court's aegis, recover funds allegedly removed from Thornburg, it would allow the company to emerge from bankruptcy and go back into the business of jumbo lending. Prospect: Highly unlikely. More likely will be that it will allow TMST shareholders to recover a small portion of their losses from the folks that gave them, in my opinion, a cosmic screwing.

We follow the numbers, and read the reports, and do our best to come up with good investing ideas. This is definitely one that went South, and unfortunately I share in the loss on this investment.

Overall, though, it is still a drop in a much bigger bucket, and, hopefully, anyone who took my advice here also listened to my words about balance and risk previously as well.

The Right Time Windows - A Rebuttal to Pat Dorsey

2009-12-30T13:41:42Z

I firmly believe that, if you have nothing constructive to say, don't comment.

Over the last year, I have watched closely, invested a little here and there, and watched. Opportunities were best at the end of 2008 and the beginning of 2009 as the lemmings were literally throwing money at you rushing for the safety of equally unsafe government treasuries, and getting hammered by the run-up in gold.

Being positioned more in the basic, the boring, that was carried down along with the exotic and the financial, was a sound move, if you took it, for portfolio stability.

The Kinder Morgans (KMP, KMR) of the world fared very well through 2009, as did most other pipeline companies.

We still need propane, and it still bears a market price. If you had picked up a couple of those companies with high switching costs at their dips, you are being rewarded.

Value investing is still, fundamentally, the art of buying a gold vase in the Turkish market for a $10.00 when everyone else paid $100.00.

Long time windows are also a critical component. Even more so, though are the right time windows.

Pat Dorsey is cheerleading the lousy decade theory that is floating around the investment chit-chat world. It's not so bad, he opines, because you're paying less than 40 or 50 times earnings now for companies where you were paying that back in 1990.

First, from a value perspective, anyone paying 40 or 50 times earnings should have had their head examined back then. You could find far more attractive assets by looking for stocks that were being temporarily hammered for this or that.

Apple is a fine example. If you had bought it in the days that Microsoft was paying millions to foster a rumor in the IT world that Apple was going out of business, even though they were holding $5 Billion in cash reserves in the bank at thet time, you could have picked up the stock for 10-12x earnings at the worst. Apple stock was trading during those depressed days at $5-7 share. You would look very smart holding it now in the $200 range. I was very smart when I bought it then and sold it in the mere $20s half a decade later.

Second, Mr. Dorsey and others who use the decades as yardsticks are doing the time-honored thing, but they are as wrong as their predecessors who have used them to either crow or cry about a period of time in the stock market.

Each company has cycles of its own. Sometimes that financial cycle lasts a year, three years, or thirty.

You don't invest in the market as a whole. You put your investments into particular companies, and bind your fate, to some degree, to theirs.

So talking about the decade in investing is a little like talking about the win-loss records of individual players in baseball, basketball, hockey and football all at the same time. You wouldn't do that, because it's apples and oranges, and a lot of variables that you understand. You wouldn't do it with real value investing either.

This has been a pretty damn fine decade if you bought on value, waited for particularly good companies to hit road bumps, or to have larger outside forces affect their pricing temporarily.

Kinder Morgan hit an invisibility bump with big investors because of limited partnership stocks' inability to be placed into mutual funds, in the latter part of the 1990s.

There are hundreds of other stocks as well that hit road bumps great and small.

911 was a terrible tragedy. In its aftermath, though, nervous investors dumped stocks.

3M (MMM) went from 125 to 92 overnight. If you bought it on the 92, it returned within a few months to its original value then split two-for-one a bit later. Even at today's price of $84.13, your initial investment cost in 100 shares at 92.00 that split down to $46.00 would mean that, if you are still holding the stock, you still show a profit of 82.9% over the decade on price alone. With dividends running at about 2% per annum reinvested in the stock, it would be more like 85%

Some stocks are more short cycle. If you picked up Frontline (FRO), the tanker company, before its huge boom that threw money at investors, your phenomenal dividend returns of 21% and stock spin offs over the last few years mean that, even if you sold the stock at what you bought it for two years ago, you've had nearly 20-22% returns on your investment.

This is why I would tell you that it was not an awful decade, and that any decade is not inherently awful.

The market is what you make of it. Making the most of it means spotting opportunities. The opportunities are where either market blindess or panic causes an irrationality pocket where value can be tapped.

Tap it, and stick with the cycle of that company or stock.

What you sell is what has no long-term furture (5-8 years). What you hold are companies that are riding through rough times.

Once upon a time, Morningstar was about this kind of value theology. Apparently, that is no longer the case.

The next decade will be great. Your investing started in 2008 with the dip. What is the next big dip? What is the next cyclical dip in a company that runs opposite the rest of the market?

These are your gold. Mine it.

Cemex (CX), The Housing Market & Recession/Depression America

2008-10-16T14:43:54Z

Looking past the current mess which, slowly, is sorting itself out, there are several scenarios that play out. OFHEO numbers on unsold inventory have dropped to above a million units. That's way down from 2.5 million back in 2005. Housing prices in most overheated markets are now down at or below a fair market value. As capital frees up, if interest rates stay low, there will be some opportunities for both the construction business to begin some limited development, and for rebuilds and remodels to again pick up some pace as people buy distressed properties or finish projects that went into bankruptcy.

Obama will probably be our next president. His pledge is to revitalize infrastructure. Bridges and highways will get facelifts.

McCain says that he wants to build 45 new nuclear power plants. Not realistic, but even if 10 were built, it is a massive amount of construction. He too, would have to address the aging infrastructure in the federal highway system.

All of this runs on concrete.

Cemex is cheap, with a dividend yield now in the double-digits. I am buying a bit more. They have their short term debt issue forthcoming that may hammer the company in the short-term. It is possible that they may not be able to extend or renogtiate credit and tank.

I don't think so. This is one of the largest corporations in Mexico. Their banking system is not ours. I think that if they need credit adjustments, they will be forthcoming. Cemex dominates their concrete market, and their global success has been a point of national pride, along with their being integral to the Mexican economy.

I think the under R9.00 price represents a great value. Don't buy the farm of it, but it would be prudent to have a position and benefit from the dividend while you wait for the company to worth through the economy and its present funding issues.

The dividend could be cut or eliminated to pay the short-term debt obligation. This would likely be short-term, and still, at this value, it would be compelling. The housing market is in the fifth year of its burst bubble. Historically, the OFHEO inventory numbers suggest that with a liquid credit market, some change will probably be what leads the economy out of the recession that we find ourselves in. Cemex, which has a strong world footprint, did not report particularly bad numbers for as bad as things are in the United States, and their overseas numbers were good.

FYI.

Thornburg Mortgage is REIT-ous

2007-10-26T00:57:53Z

Thornburg Mortgage (TMA) never touched a sub-prime loan. In fact, they haven't done much other than jumbo and super-jumbo mortgages, the USDA prime of the lending biz. So why is the stock in the toilet?

Pressure to find liquidity to meet financial requirements meant selling off quite a bit of their inventory at firesale prices to meet their needs to keep a certain amount of money on hand. That has tanked the stock badly in the short-term. Estimates are that they will dig out slowly, but steadily. With no sub-prime exposure, the company may still face some bumps from the general volatility of the mortgage market, but since they deal in high end properties, they should endure the storm well in the long haul.

They have suspended their dividend, but I think they will move forward and upward from here. They have their capital requirement and they're able to keep on. I’m getting a bit more.

Dividend Equities or Bonds?

2008-10-24T17:08:56Z

Discounts in both equities and bonds right now are substantial, as people flee to the sidelines and take hits on their assets by not holding on to them. The pain is largest at the hedge and mutual funds, where they are dumping stocks that they don't want to sell, and cannot buy much of anything because they need cash on hand to be able to pay off fleeing investors.

This is, as Warren Buffett pointed out in the New York Times Opinion section last week, a good time to buy, but buy smart.

Bonds can be very good, but they can, when you buy them in small quantities, as would the avereage investor, be very illiquid, meaning that you can't sell them that easily.

Dividend paying stocks, on the other hand, especially those with a high yield, are very liquid, and, given the massive over-correction of most of them, are trading at 20%-50% discounts to fair market value unseen for decades.

If you use the Warren Buffett screener in the premium area, and add two features:

Fair Market Value ≤ 17% and
Dividend ≥ 4%

You will see a window that shifts daily on a variety of stocks that are in good shopping range. Research carefully, but there are some execptional buys out there right now.

I particularly like grimy stocks, companies that produce basic materials, simple household products, or move raw materials from place to place. While some are being dinged, particularly metals makers that have exposure to construction and the auto industry, there are companies experiencing discounts to fair market value that push dividends up between 6% and 18%

On the high end is ERF, Enerplus Resources Fund, a Master Limited Partnership (MLP) that invests in oil and gas exploration in Canada. Trading in the mid 21 range on a down day, the dividend yield has risen to 18%. Even if they slash the dividend in half, it remains respectable. Oil prices have dipped but long-term they will probably stablize up slightly from where they are today. There is a 2011 law change affecting Canadian MLPs that might nick dividends a bit, but at 18% yield right now, it is, relatively, likely to be a drop in the bucket and two+ years down road.

Like Kinder Morgan (KMP/KMR) or Trans-Canada Limited Pipeline (TCLP) MLPs not only pay out attractive dividends, but the American ones, like KMP, can also spin off some of the partnership's passive loss to its shareholders. Ask your accountant about whether filing the K1s for an MLP make sense for you, and have them look over the dividends and pass-throughs of the company to see what real effective yield it has for you.

Meanwhile, Alcoa (AA), with some buzz about its exposure to the ailing auto industry, skidded down to the $9 range and pushed the dividend yield up to near 7%. Buying a little of this is probably a good idea, as Alcoa was already in the midst of a corporate turnaround, and will continue to get itself healthy faster as it was already in rebuilding mode.

I also am buying a bit more of ARCELOR-MITTAL (MT), the steel producer. Short term bump, but steel will continue to be in demand globally as the rest of the world industrializes. The short-term issues will be outshone by its long-term gains.

In an over-valued market there are 10-15 stocks that can play as good growth and dividend instruments. Right now, there are more than 100. Look to depressed telecom companies like British Telecom. Avoid Altria, as they may have larger issues as a domestic tobacco company now.

There are, though, enough good high-yield equities in products already beaten down or of a high commodity value at the moment that the combination of the dividend plus even modest future growth both offer more attractive liquid safe harbors than bonds.

Ben Graham and Building Igloos In the Financial Snowstorm

2008-10-09T14:01:26Z

Ben Graham is probably the most famous contrarian investor in history. A student of real value, he was one of the big winners out who, after nearly being wiped out by the market crash of 1929, went on to use the crash to become very rich.

Warren Buffet Secrets puts it well:

"In 1934, Benjamin Graham together with David Dodd, another Columbia academic, published the classic Security Analysis which has never been out of print. Despite the crash, the book proposed that it was possible to successfully invest in common stocks as long as sound investment principles were applied. Graham and Dodd introduced the concept of ‘intrinsic value’ and the wisdom of buying stocks at a discount to that value."

When everybody else panics and loses their head, pick up the pieces, and make them pay for them when they come to their senses. Unless you are convinced that people will stop using oil, home heat, driving their cars at all, will stop eating at McDonalds completely, etc... Basically shutting down all reasonable functioning completely, then dumping stock and running to Tresuries that are actually costing you money is just plain stupid. When people are panic selling, someone is buying. Buy smart, and you can do very well by feeding on people's fears.

Those who've read me before know my financial ship analogy. Right now it's tipped almost to capsize because of the irrational fear that is driving people out of the market. Big mutual funds, pension funds, and insitutional investors have to divest themselves of billions of dollars of smart plays just to get liquid, to hold cash or cash equivalents in case they get called upon to come up with someone's money.

The dumping causes all kinds of stocks, including ones in companies that are solid, have good balance sheets, and low debt, to get tossed out with the bathwater. My screener, which in good times yields maybe 24 stocks, now sports 90.

Right now may be one of the few historic opportunities for value investors (the real ones who don't flinch in markets like these) to make some real money. I sat on cash when the DOW was at 14,200 because the market was overheated. Today, we can walk through, like Will Smith in that end of the world movie, and pick off what we like.

Don't buy too much of any one thing. Ladder your dividend stocks like you would ladder bonds. Some of these picks will yield you 3%-5% after taxes, which would seem pretty good. A few more can yield 7%-18% after taxes, and that makes your money grow even in these conditions where stock prices sink.

Important to understand: PRICE IS TRANSITIONAL, both to the upside and downside. No stock market in history has ever seen it sit for more than a few years one way or the other. Again, financial gravity kicks in. Stocks highly overvalued cannot stay that way much longer than stocks that are deeply undervalued. Eventually enough someones see the opportunity and drive the price up. If you are getting paid to wait, great.

So what do I like?

First and foremost, I like stocks that pay good dividends, and by good I'm looking at 7% or better. There are a number of them. This is a point where you want to get income, and be rewarded for your patience. If you can pick up a great stock with a great dividend cheap, get paid well currently and ride it back up when market gravity pull kicks in and sends it north, that's a win-win.

I'm adding more to my positions in these:

Commodities movers. No real exposure to the commodity itself. You have a highly regulated transportation facility that produces predictable returns, and dividends in some of these Master Limited Partnerships that are often tax-reduced or tax-exempt, pushing up actual yields. You have to file a bit more tax paperwork, but worth it. They are also not subject to future hits on the commodities. A pipeline can carry many things. If oil is this decade's flavor, so be it, but if the push is on to deliver say, liquid hydrogen across country, retrofitting and/or replacing piplelines running across already set rights-of-way will be a key to the roll out of these new energy platforms.

Kinder-Morgan (KMP/KMR) pipeline masters, come up well and have both a great dividend and tax sheltered income from pipeline distributions that can be largely tax-free.

Trans Canada (TCLP) is stable, does not have a high debt exposure and currently pays out a dividend in the 12.2% range.

Frontline (FRO) , trading in the 30s, is a ridiculous bargain. This oil tanker company has been gushing cash. Morningstar has FMV pegged in the mid 70s. You're buying this company at a 50% discount to FMV and getting a dividend yield at an astronomical 29%! Sounds too good to be true? FRO is the elite supertanker owner in the shipping business. They really can't build any more than they have online or in the, no pun intended, pipeline. So free cash flow is free cash flow back to shareholders. High prices certainly have helped send the dividends and distributions soaring, but king oil will maintain levels above their $50 floor level for pricing for the foreseeable future.

British Telecom (BT) reaffirmed its position that it will continue to make deals and grow its business. It sits in a catbird seat affected by currency a bit but still, trading in the mid-20s off a slashed 64.00 FMV it's a whopping deal with a 10% yield on its dividend.

New Ideas:

Amerigas (APU) hit a 52 week low yesterday. Propane is a great business because customers are very locked in. Most rent or have "managed" tanks from the propane company, which makes switching costs both high and inconvenient. Some companies won't even look at your tank if you didn't get it from them. Thumbs on the thermostat can hurt volume sales, but otherwise it is a high cash-flow business with a very stable dividend. Amerigas makes aquisitions here and there. It won't be the growth story of the year, but in this market, an asset at FMV $37 that is selling for 24.00 pushes your dividend yield up to a tidy 10%. This is another commodity that people can't do without, that isn't easy to replace with Liquid Natural Gas or natural gas pipe to the door in a lot of areas of the country. Another oddity is that, in extremely hard circumstances, barbequing seems to be a cooking method of choice. You can get a lot of mileage off a propane tank and the right grill, and it makes often less costly foods taste great (burgers, hot dogs).

Arcelor Mittal (MT) - Big big steel producer. Yes, short-term I expect there to be less demand for steel. Going forward though, that demand will increase again as India and China modernize buildings and put several millions more cars into their countries. Read the report. Morningstar has slashed their FMV in half, and it is still trading at a discount. Expansion through acquisitions had been a difficulty for MT in previous years. Distress in the market though makes it easier for the stronger players to take over ones that have debt liabilities that push them either into bankruptcy or into merging to avoid bankruptcy. MT is the big gun, and just reaffirmed its guidance. 4.26% is not a stunning dividend, but it is good. I would rather own the producers right now than the commodity guys like RIO, in spite of that idiot Cramer's recommends. Producers are like surfers. They can ride the wave and wait for the right ones. RIO can make big money on the wave, but can hit the sand when the tide rolls out. Keep this to a small investment in your big picture.

I think tech is highly oversold, but you can still get killed here. What is the smart tech play? Infrastructure.

I increased my position, which I took after 9/11's big drop, in ORACLE (ORCL) because typically as companies come out of these things they start to re-evaluate how to make money and control costs and business software that helps them do that goes on the shopping list.

Many people ask me about Apple (AAPL), which I do not own. In the 80s does not pay a dividend but it is a good buy if fair market is even hugely impacted. Right now, it is pegged around 189.00, so you're effectively buying a company with no debt, lots of product and cash flow for 47% of its FMV. They have a model that works. Can it be impacted by consumer spending reductions short term? Sure! Let's generously knock down their FMV by half, which is not realistic, but helps your cynical heart feel less tight. Anything below 94.50 already has a lot of doom and gloom priced into it.The problem is that it is a large and visible company. Like McDonalds during the Mad Cow scares, where the stock was pummelled even though they didn't have a mad cow, Apple is a visible symbol of consumer spending to the lemming investor. I would avoid this stock until signs of clearing in the market appear. I think you can get it cheaper if things in the economy continue or get a bit worse.

http://www.morningstar.com/cover/videocenter.html?lineup=stocks&bctid=1825806488

I would AVOID Google (GOOG). There are Google-killers on the horizon, companies with better search algorhytms and anyone who thinks their advertising prowess on the web gives them any kind of moat should look at the history of another nova star called MarchFirst. Advertisers move down the ropes of a sinking ship faster than rats.

ADDITIONAL NOTE:

To anyone who has been given my Warren Buffett Improved screener. There are several items on there that may look appealing. Avoid Altria, BP, Chevron and Coke (KO). All of these face special circumstances beyond the current market conditions that make them a bit less stable.

Dive into the dips - Buy on other people's misery

2008-09-30T16:27:18Z

Unless you are 150% certain that every company in the world will seize up and stop working as the planet grinds to a halt, then you need to be out there researching, running, and adding to your portfolio when the miseries hit the institutional investors.

The institutionals are big companies like mutual and hedge funds. They need to get liquid, have cash on hand, for a variety of reasons, none less than their investors might lose confidence and head for the exits.

You can benefit from this. Often they have to sell quality assets at prices at which they would rather not part with them. They move a ton of shares into the market compared to you and me.

The result is that there is a buyer's market. More shares out there than can be swooped up. So stocks in some companies that are not only quite sound, but paying killer dividends, get caught up in the dip as they're unloaded in either profit taking or stop-loss sales.

Right now, the pipeline companies, which continue to do well, are taking that kind of hit. Kinder-Morgan Partners (KMP) their management company Kinder Morgan Management (KMR) and Trans Canada Pipelines, to name a few, are all in good buying range on these dips.

Likewise, Frontline Ltd (FRO) the tanker company which is still doing well despite the pull-back puts out a monster cash dividend as there isn't a whole lot else that they can do with the money.

Other good ideas are any large commodity driven company that pays a dividend. You aren't just waiting for the growth, you're being paid while you wait, and usually at rates that meet or exceed what you can get tying up your money in a money market or CD, although having a little in those is probably advisable as a safety net.

Altria, the tobacco company, has just found its way into value territory. Johnson & Johnson, if you can get it at the right price, is another staple company that produces.

It can seem scary when the wave is coming your way, but this is like surfing. You paddle into the wave, ride it to the top, and come back again. Anyone who waits to start paddling too late into the wave usually gets wiped out.

Cowabunga!

Why McCain May Be Doomed - Fannie Mae & Freddie Mac As Third Horsemen

2008-09-13T12:16:28Z

Sadly these days, many of our financial journalists and analysts have the depth of introspection of a wading pond. Degrees aside, they respond to the surface of news events and drool like Pavlov's dogs when the appropriate bell is sounded. It would appear, beneath the surface that two events suggest that the actual power structure behind the Republican Party, in spite of the Sarah Palin love fest, does not see John McCain winning the White House. Here is why.

First, Gov. Palin is a bone for the religious right wing base. She has the depth of a wading pond, too little time as a governor, and no national or international exposure. Her first interview with a journalist outside of the People Magazine belt demonstrated that she is going to have a rough time backstopping a 72-year-old presidential candidate. Her purpose seems to be to keep the party's religious and gun core motivated.

The second harbinger of doom is the GOP's focus. It was very apparent at the convention that the party has determined that it can't win a broad election. Even while George Bush was giving his acceptance speech the key placements around cameras of delegates were well stocked with African-American and Hispanic faces to give the impression that they were cared about by the Republicans. Not so this go-round.

The GOP has become the SWP, the Scared White Party. The election is simply framed. Those who want a black man in the White House, and those who don't. No one wants to say it, but poll after poll basically indicate that it isn't about policy, or about issues as much as it is about skin color.

Republicans are voting for McCain like Democrats voted for Kerry: With the laundry clips on their noses. Hillary voters are not going to give up pro-choice, anti-gun sentiments just to vote for a less-than-full-term governor and hockey mom.

The thought that the Republicans think that they can't win was affirmed last Sunday by the third horseman of the GOP political apocalypse, the Bush Administration's move to secure Freddie & Fannie in a "conservatorship."

These are GSEs, people. The whole purpose of making them GSEs was that the government would back them in times of crisis, not assume them. Could the government have worked with both institutions through any bailout?

Sure they could have. That's how it is supposed to work. Does putting them into conservatorship prevent either institution from paying out up to $200 billion, as some fear? No. Either way, the government is on the hook for it. Can the government call for their reorganizaiton as publicly-traded entities. As a GSE, they sure can, and, more importantly, no CEO of either company is going to fight them on a restructure or a fire sale of assets.

Neither Fannie nor Freddie have ever gone to the well to tap government backstopping

Most realistic estimates, beyond the hysteria, are that collectively both massive companies are looking at a 52 Billion loss, which, both by their size and by the size of government bailout, is a drop in the bucket.

Why assume them, rather than leave them public?

It does keep the shorters at bay, and that is a decided plus. It was too easy to run the bad news gambit and keep them in perpetual hell. There is, possibly, a darker reason though.

By assuming the two mortgage giants, the Bush Administration leaves its successor with an enormous political headache that will take at least a few years to sort out. The Congress and the President will both have to deal with the politics of Freddie, Fannie and the GSE concept in general. It is a political football that can make or break a presidency.

If the GOP was sure of a win in November, why leave John McCain, a politician who, by his own admission, does not grasp economics and left his campaign, at one point, to people who put it millions in debt, with trillions of debt and a huge political mess to resolve?

That answer is: You don't, if you presume that McCain is the next president of the United States.

The assumption seems to be that Obama will win, even if by the slightest of margins. Based upon that assumption, the Bush Administration moved to leave him with a monumental challenge for the first term of his office. It will be harder to focus on foreign issues when the Elephant party has stuck you with the 3 trillion ton white elephant that you must fix to get the economy kick-started.

In four years, the Republicans can beat a battered Obama who has been left with more mess on his plate than he can possibly clean up.

Karl Rove, you are still an evil, albeit brilliant tactician.

Why McCain May Be Doomed - Fannie Mae & Freddie Mac As Third Horsemen of the Apocalypse

2008-09-13T12:05:34Z

Neither Fannie nor Freddie have ever gone to the well to tap government backstopping

Why assume them, rather than leave them public?

It does keep the shorters at bay, and that is a decided plus. It was too easy to run the bad news gambit and keep them in perpetual hell. There is, possibly, a darker reason though.

Karl Rove, you are still an evil, albeit brilliant tactician.

Financial Gravity: Fannie, Freddie and the DOW

2008-08-22T03:50:47Z

Continued lessons this week in financial gravity: The Fannie and Freddie situation. I still hold both stocks. I will tell you why:

Under the Bush Administration, there has been a tactical rape and pillaging of Fannie and Freddie. Big fundraisers at the brokerages and banks that compete with both of these GSEs wanted to roll out more of the business in less secure ways. They got their wish, and we now have this massive mess of loans so poorly bundled that it may take years to figure out what they are really worth. These are not Fannie and Freddie loans, mind you. They had to clean up house over the time period that everything was going to hell in a handbasket at Lehman, Citi, and the other places scooping up flaky originations.

Now, the forces, largely hedge funds, that overheated the market, which I told you previously had no business being much over a DOW 12000, are finding points of attack in the bear.

Fannie and Freddie are good shorter targets. Their losses in real terms have been well within the specifications of normal. Their leverage leaves them vulnerable, as does their position as GSEs, to shorters. After all, if you're going to short a company, what better than ones so pivotal to the stability of the housing market, that Congress, in an election year, cannot let tank?

Both have tested their recent lows again. On Fannie, 4 and change seems about as much blood as the shorters can wring out of the turnip.

While many Republican "experts" are calling for the government to privatize Freddy and Fannie, and now even a few Dems may be buckling, I would pay heed to what Barney Frank has said in the NYT... These companies are doing what they are supposed to do, and the situation we are in now would have been far worse had the private sector and its unregulated bundling of loans been there instead of Fannie and Freddie.

The government does not want to be in the housing business. Republicans don't want it, and when the mortgage system stablizes, neither do many of the same banks and brokerages who tried to cripple these institutions, because they will need both of them healthy to help take loans off of their books and make new ones.

In spite of the hysteria, the notion of standing by what a GSE means, and backing up the institutions, seems to be more in keeping with the government's pledge to stand behind them. Inviting shareholders into the party, only to say that the GSE label had no value would call into question the full faith and credit of the United States Government, something, which, as deeply as we are in debt to the Chinese, Saudis, and others abroad, would have far greater impact than on just the investors in these companies.

Politics doth make cowards of them all. They will not nationalize. They will rationalize. They will stablize. They will find a few shorters and hang them out to dry, perhaps, to vent common rage on some nice scapegoat.

Share price, not default rates, are Fannie and Freddie's real problem at the moment, along with their leverage position. If the companies can continue to de-leverage to a more acceptable point, and the government can calm trading fears, then they can weather the storm.

This does, however, rely on the kindness of strangers in the Bush governmental structure, one of the more corrupt and inept kingdoms in history. The stewards at the helm may still screw the pooch on this, but I doubt it. Too much at stake.

I really don't want to contemplate the alternative, if I am wrong. If the government nationalizes "private" equity in the name of its GSE guarantee, the wheels will come off of the cart on a lot of other equity classes. Treasuries are suspect, muni bonds with federal guarantees are fundamentally at risk of pillaging, and that mattress may be worth more than your FDIC guarantees.

Financial gravity orbits around fair market values, and perception. Right now perception is depressing the market, and certain issues, far more than it should. Still, though, the Dow is only off marginally from a logical 12,000 orbit point. Matter is neither created nor destroyed. Same with capital. It just sloshes from one side of the boat to the other.

At some point, the market allays its fears of more financials write downs. It will probably happen after enough blood is spilled. Fannie and Freddie are misdirections. If you want to see where the blood hits the water next, look to the far less guaranteed brokerages. I hear that Lehman can't find asset buyers fast enough, and that a Deliverance-style Countrywiding of the firm may be on the horizon.

Couldn't happen to nicer folks, if you ask me.

Why Cemex, the Saudi Arabia of Concrete Should Be In Your Mix

2008-08-08T12:32:34Z

The analysts here at Morningstar are featuring Cemex (CX) today. The analysis, though, is a bit flawed. Yes, Cemex does business all through the smoking hot economies of Latin America. Yes. they just bought Rinker and are positioning themselves for the next housing boom.

Where the analyst got it wrong is in the downside of: What if the housing boom is delayed or just doesn't materialize.

This is the genius of going with Cemex. Concrete is fluid. It can build houses. It can build roads and bridges.

Natural disasters cause damage. More concrete.

Our aging highways and byways will need a lot of upgrade over the next few years. More concrete. Even if the economy slows, the mistake of our dear analyst is thinking that belt-tightening happens in public works projects. In a big economic slow down, politicians look for economic stimulus plans. Construction, particularly of public works, is a big, big win for the vote-getting set. Thinking that the Feds are going to sit around the table and tighten their belts, as the analyst does here, goes against the history of make-work government spends from FDR's massive WPA project to Gov. Richardson's New Mexico choo-choo project to the Alaska bridge to nowhere.

There is nothing that says votes like politicians employing a lot of unemployed construction workers. Highways fix complaints about infrastructure problems, and put a lot of people to work.

Even if commercial buiilding is affected, it may affect the budget of projects, but that well might benefit concrete. In Florida, for example, with steel prices rising, many big office projects go wide, not, high, and the buildings are often pre-fab sheets of concrete with a more minimal steel and glass structure.

The world keeps spinning. Some companies may make more or less in the construction trade. Oil, wood and concrete are life blood products to a wide variety of businesses and public projects.

Cemex has been dragged down with the rest of the construction business, but, its top-flight management, placement in the world's economies, and efficiencies in operation make it the Saudi Arabia of concrete.

Pour a bit into your portfolio.

Buy & Hold - Why Jim Cramer is an Idiot - Part IV

2008-08-08T12:13:03Z

While catching a Mad Money a couple of weeks ago, Jim Lemming, er Cramer, gave his dollar dittoheads some invaluable advice on the evils of buy and hold. Buy and Hold is bad, according to our momentum maven.

The way that the Big C framed it, you can hold on to stocks too long, and it will cost you because you didn't sell on the peak.

First, what he should have told you: Buy and Hold does not mean buy and hold forever.

All stocks are cyclical in nature. The question about the length of your buy and hold has to do with returns and with which cycles, the short-term, medium-term or long-term, you are interested in as an investor.

If you are in a bank stock, the dogs of the industry at the moment, and it is paying out, even with reductions in dividends at the 5%+ range, are you better off holding through the longer macro cycle and being rewarded short-term with the dividend, and long-term with the swing back to profitability in the sector and the company? Probably.

Some wide moat stocks picked up on the cheap are hard to replace, and their cycles are longer. GE, P&G, and other mega corps are behemoths that don't get a lot of fast run-ups unless they have a smooth-talking Jack Welch nuancing the analysts into economic ecstasy.

There are companies like the oil transporters, that, short of oil becoming obsolete, will produce exceptional dividends and whose market appreciation remains within a range that has improved and should, given the scarcity fears of the market, stay that way for some time.

You buy-and-hold in some of these companies for the long-haul because historically you make more money that way. Friends of Jim make money when you buy and sell, and think B&H boring. Personally I would rather have them all snoozing away.

A very compelling reason to hold are the tax benefits. When you buy and sell in a stock repeatedly, the government and the brokers eat away at your profit. Having the discipline to hold within a 3 to 5 year range usually sees through most mid-to-long range cycles.

Some companies get hit by the shorter wolves and it takes a while for their rotting, picked over carcasses to stop stinking. It typically takes a business whose stock was savaged about 3-4 years to fully recover from an attack of the shorts. Economically, the conditions that placed the company in the jackpot have to abate, then the lemmings have to turn and smell opportunity. Since many use the yardstick of what the guy jumping off the cliff next to them is doing, it can take some time for the whole herd to "find" your company's shares.

When do you stop holding? Some good signs to think about not holding your buy:

When analysts can't see much forward growth over the next 3-5 years and your stock is at or near peak price for the last 3-4 years;
Change in management that muddies the water for continuity;
Too many momentum investors buying in and over-inflating the value of the stock well above its fair market value.
Major changes in an industry at its peak. If oil has been artificially high for example, that bubble is likely to either deflate rapidly or just bust, taking a lot of the companies whose busineses, like drilling, are exceptionally price dependent, on a ride down with the commodity. It is important, though, to know the companies well enough to know which ones are price sensitive, and which ones are not. Pipeline carriage companies, for example, are federally regulated and only the interruption of flow from a natural disaster or supply constraints would impact their price;
MUCK - Material Unforseen Circumstances that Kill - Poor financial controls, in-fighitng, accounting scandals, or the sale of junk that passed for financial instruments. The first two are hard to know unless you are intimately familiar with a company until they happen. If you have profits and hear a rattle, it may be a good time to take them and wait on the sidelines until whatever disaster sorts itself out.

The other BANK stocks

There are some stocks, which, if acquired at the right price, produce dividends in excess of what you can find in comparable bonds or bank issues. These can be long-term holds because you have the cash-flow of a bond with the liquidity of a stock. Royalty trusts, in oil, natural gas, etc. or limited partnerships traded as stocks generate medium to high returns, and often because of their high dividend appeal, maintain nice gains if you can get them on the dip. Past winners (not necessarily where you should look now) include BP Prudhoe Bay Trust, Kinder Morgan Partners (KMP), and Frontline (FRO) to name a few.

So, to counter Cramer's brilliant nugget: Buy low in the depths of the company's crisis in a company that is big enough to weather tough times. Hold as long as you can see enough forward growth that the day-to-day and short year-to-year burps don't look to impact the long-term value of the stock. If you see major changes in the way that the company is doing business, changes to management that are not conducive to the company making money in future, or any signs of bookeeping or management irregularities, then quit holding.

There is never a blanket formula to the process. Learning the exceptions to the rules will keep assets that have real long-term benefits, and help you dump the flavor of the year, or decade, that is about to flame out.

Don't You Just Love the Smell of Fear?

2008-07-11T15:13:41Z

Just like shorters love blood in the water, value investors like to clean up after the shorters have finished robbing the rich and cleaning the meat off of the bones of a stock caught mired in rumor and innuendo, braying for survival.

Okay, it's a bit too picturesque.

However, down days like this are a great day to go shopping. Fannie Mae and Freddie Mac and oil are weighing down the prices of pretty much everything.

As a value investor you want to buy on the down days.

Berkshire Hathaway (BRK.B) was down to 3910.00. That's a good opportunty to get a share or two on a stock with a ballpark fair market value of $5,100.00

Kinder Morgan Partners (KMP) is a phenomenal pipeline and natural resources transportation company that has outstanding management that derives most of its income like we do, from the shares. It is a limited partnership, so it puts out a K-1 form which adds a bit of complexity for your taxes, but KMP also has sweetheart tax deals on its earnings from its pipleline operations that boost its yield up nicely.

Depending upon how good your stomach is, you might even take a small fly with Fannie Mae (FNM). If the doom and gloomers are accurate, then you should be withdrawing your money from the market and find a good cookie jar to put it in. Default of, or the assumption by the government of the trillion dollar mortage system of FNM and FRE would be a disaster that even legendary shlock producer Irwin Allen couldn't cook up. If, however, as is frequently the case, they are overstated, then Fannie should level out again in the teens for some time, and, at 7-9 per share, you are buying 50% of the mortgages in the United States for about 10%-15% of their value. As of this morning, the New York Times called Fannie Mae's default rate at about 0.15% to 0.17% VERY SPECULATIVE, but if you think you can even park $750.00 and potentially turn it into $3000.00, 7,500 or more in a year or three, it might beat a Lotto ticket ;)

Of Beer and Chewing Gum and Harleys - BUD and Wrigley and Profit in Down Markets

2008-06-12T15:33:50Z

Being a value vulture, I like food, beverages, and snacks. Everyone likes 'em. Everyone eats 'em. As I sit here with my 100 calorie snack bag of Doritos, you can go to the bank that, even though these companies have their cycles, that buying into them is buying into bedrock of world food culture.

So, with that in mind, 13 to 24 months back, I was buying a bit of Bud and Wrigley. I bought BUD at 25, when it was very off-track. If I wait until the proposed IN-Bev buyout, I get a 160% return on my money. If I sell now, I double it.

Likewise, M&M Mars was good enough to buy my Wrigley's stock at 120% to its depressed price of about two years ago.

For the big fish assets, if you do not perform, you get eaten by bigger fish who will take your assets and make use of them.

Investors are behaving like ants in a rainstorm, scattering all over the pavement. Stick to solid, knowable investment vehicles. Look for a great company that produces strong Return on Investment (ROI), Return on Equity (ROE) and Return on Invested Capital (ROIC) that sells at a significant enough discount to value that it is a good buy, and has management that is either recovering from prior bad management, or that is navigating through some bad waters for the sector in which the business operates.

Buying a dividend stock that pays in excess of the current rate of inflation preserves capital to a degree, and buys you some patience as you watch the turnaround unfold.

Right now, of the food, and spirits group, Diageo PLC still offers an excellent price to value.

While I don't think that bottom has hit at Harley Davidson yet, it is coming. I am keeping an eye on the stock, but I have not personally pulled the trigger on it. HOG is a great company, and has a very predictable cost structure. The tea leaves on international demand are what the analysts are studying. I want to know more about how the boomlet, the kids of the baby boomers who flock to Harley, are looking at the product.

If you're looking for investment ideas, two years ago, you should have been looking at practical food items. Today, exactly because the luxury goods companies are now largely the depressed, you should be looking at the best of their beaten-down stocks to find opportunities.

The lemming-literati love using the term "flight to quality" for falling off the crowded cliffs of supposedly-safe bonds. The flight should be into the areas that have already been burned and scorched.

Once a stock has been pillaged enough, the shorters and other raiders, like termites, leave to attack another healthy host. Pick them up while they're cleaning up the smoking remains, and you get to benefit from the financial gravity that carries quality stocks out of the dumper and over their fair market value.

Why August is Likely to be a Real Banker's Holiday - Some banks to buy now. Yes, Banks

2008-01-24T20:17:44Z

August. It's hot. No one wants to work. In most parts of the world with less A/C, they all close up shop and head to the beach. This year HSBC, Citi and BofA should have no problem joining them.

If there ever was a case of making lemonade out of lemons, the banks are in the middle of doing it. Write a bunch of crappy sub-prime loans. Rattle the system into a bubble pop, and accelerate it with the properly-timed bits of write downs and fears of catastrophe.

It drives up CD buying, even though inflation and taxes on the earnings will eat away every penny of interest for 99.95% of the people buying them. It drives lots of cash into checking and savings accounts held by nervous people who react with panic to what they hear Katie Couric tell them (That Katie is a sharp financial cookie, btw.) by way of federally insured accounts into banks to make more loans.

If you're a bank, want to be making loans right now. They are your salvation, and a way to grow out of the mess that you just made.

You just scared the bejasus out of the Fed and forced interest rates down to very attractive rates for those trying to refinance their homes. There will be a tidal wave of people trying to de-ARM themselves with better, cheaper fixed-rates.

The banks will make a butt-load (a new economic term) of money on the re-fis.

Another likely phenomenon of this will be that the banks will end up refinancing a chunk of the crappy sub-prime debt into more manageable instruments in the fixed-rate world, actually taking some of their current write-downs and putting them back on the books as profitable.

So you want to look at banks which both pay a very high dividend that is less likely to be hacked badly, and who have the wherewithal to ride through this.

Of them, I like HSBC (HBC), Bank of America (BAC), Wells Fargo, and, to a lesser extent, Citi (C)

HSBC with 1.1 Trillion in assets and depth in 83 countries is paying out about 5.86% on its dividend at current pricing. BAC took its big hit, is eating Countrywide (knowing full well that the hit was coming), and is now positioned to be a much bigger player. Fargo is well run and pays out well. Citi is not well run but they will get there. Their stock is attractive at these prices, though in small doses, buying on any panic selling to make the yield all that plumper when the underlying fundamentals don't support the panic perspective.

Doom and gloomers, note: Nothing... NO THING in the jobs report, or in the huge buybacks that you are facilitating for lucky companies gobbling up their own stock at 20-25% of its real value, indicates that anything other than very slow growth and some regional contraction is happening.

HSBC is also the safest way to play China. The expansion in China is not lost on HSBC, which has 1/5th of its financial power there. A lot of companies that import and export do business with that bank. Their prosperity ripples through HSBC's bottom line as the best managed bank in that part of Asia.