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Saturday, August 27, 2011

(VIDEO) An important trait for an equity analyst

Short story from a Richard Dawkin's documentary about the ability to change your hypothesis when the facts change.


Thursday, August 25, 2011

Buffett said BAC deal is reminiscent of his youth? GEICO & American Express trades

http://www.cnbc.com/id/44207362

QUICK: JUST GOING ON REAL QUICKLY TO POINT OUT THAT THIS IS KIND OF LIKE SOME DEALS BUFFETT HAS DONE IN THE PAST SOME OF THE MAJOR DEALS HE'S IN HIS YOUTH. HE SAYS THIS IS LIKE GOING BACK TO HIS YOUTH WHERE NOT ONLY AMERICAN EXPRESS, WHERE HE GOT IN BACK IN THE 1960s, BUT THEN WITH GEICO BACK IN 1970. GEICO WAS IN TROUBLE, TOO. I BELIEVE BECAUSE OF SOME ACCOUNTING ISSUES. HE BOUGHT INTO THAT COMPANY, TOO AND BOUGHT A MAJOR STAKE AT THAT POINT, BUT IT'S THE IDEA OF BUYING INTO THE COMPANIES THAT LOOK LIKE THEY ARE IN TROUBLE, TAKING SOME MAJOR BETS AND BUYING BIG INTO THEM. THIS IS REMINISCENT OF SOME OF THE DEALS HE'S DONE IN THE PAST.
 If you are a Buffett nerd you know how profitable his old American Express and GEICO trades where.  I'm going to take a cold shower, and remind myself that Buffett also invested in Irish banks and lost his shirt and it's only my analysis that matters...not Buffett's.

I might be taking more than one cold shower. 

Issuing high credit ratings...Buffett's new profitable job. BAC's pound of flesh.

 At first, it was great seeing Buffett had made an investment in Bank of America. I felt a great deal of validation, but after a night thinking about this, I have developed very mixed feelings about his investment.

Basically, I feel Brian Moynihan had payed a very dear price for capital that's both expensive and disadvantageous for the common equity holder. For one, Buffett purchased preferreds not common, so if reps & warranties do go out of hand, Buffett's investment could still be safe. Also the capital from preferreds is not nearly as flexible as capital from an equity raising. In fact, with current low interest rates, Buffett's preferreds will help eat up BAC's NIM . Also the amount of capital Buffett has invested in preferreds is negligible to the overall company...only 5 billion dollars. The company can basically self generate this capital in two months.

Of course, it isn't just the preferreds Buffett bought, which tick me off, it was the 700 million dollars in warrants at a 7.14 dollar strike.....they have a TEN YEAR EXPIRATION.  Those warrants Bank of America gave out were instantly profitable. I'm not an expert on warrant pricing but, the 2019 BAC-A warrants with a 13.30 strike price and an Jan 2019 expiration sell for 4 dollars.  In all likely hood, Buffett could go around and sell 700 million warrants anywhere for 6-12 dollars (depending if the strike decrease with dividends. )  Now it would be very unBuffett of him to turn around and sell the warrants like that. To add insult to injury, Buffett isn't going to exercise those warrants until the very end (due to time value, and the ability to use his capital for other opportunities for the next 10 years without it being preoccupied)  and when he does, BAC surely won't have needed the additional capital.

Looking at the cost and I am a bit cynical about Buffett's investment. If Moynihan believes in the 12.60 net tangible equity per share number and no need for capital raising. Then Moynihan should have never taken Buffett's call. I mean first of all, if Buffett's calling you....you know you are going to get screwed on the price. Call it the Buffett Bite, and it's a big one.
 
So why the hell would Moynihan do such a deal? I'm guessing it's because Bank of America is willing to pay lots of money for a high credit rating. If you don't want people calling you up about your perceived counter party risk, you are tired of taking phone calls from analysts and you just want the talking heads on TV to say something good about your company....you can give Buffett millions if not billions of dollars for his seal of approval.

Granted, Buffett called Moynihan, it wasn't Moynihan who called Buffett, but I would have been much happier of Moynihan took the phone call, told Buffett Bank of America wasn't interested raising capital at those nose bleed levels, and then issue an (unscrupulous) press release stating Warren Buffett offered to invest money in Bank of America, but we turned him down because we don't need the capital.  That's a much cheaper seal of approval.

I'm off to see the doctor about this pound of flesh missing from my portfolio.

Wednesday, August 24, 2011

Fortune Article on Brian Moynihan

Fortune did an article on Brian Moynihan on July 7, 2011. I would suggest reading it if you have an interest in Bank of America.

Moynihan landed the CEO job during a secret interview at the Four Seasons hotel in New York City in November 2009 by promising the board's search committee that he would follow a rigid set of principles: Sell virtually every asset unrelated to bedrock banking. Forget all acquisitions, now and forever. Don't grow total loans, but do change the mix so BofA won't be overexposed to risky consumer credit in a bad cycle.



Saturday, August 13, 2011

Berkshire Hathaway looks cheap: operations have a 3.3X implied multiple

Originally, I wrote a post about Berkshire's valuation and made a very stupid mistake (double counted.) I would like to thank that reader for quickly pointing out my mistake, you know who you are.

I have decided to give the Berkshire valuation another shot. This time  with the help of Augustin Chieh of Chieh Capital. Augustin probably has the most extensive Berkshire valuation of anyone I know and I was lucky to have his help. Augustin definitely did help me on this, yet any mistakes in this analysis are all my own.

Berkshire Hathaway's Value: = Investments + Operations
  • Investments = 153.18B¹
  • Operations  [insurance underwriting operations] + [non-insurance operations] = [1.4B*12] + [5.93B * 15] = 105.75B² 
  • Equivalent class A shares outstanding: 1,651,284, as of July 28, 2011
  • Currently, the Berkshire A's go for 107,600 - the Berkshire B's go for 71.52
153.18B + 105.75B = 258.93 Intrinsic Value.  That's 156,805 per A share or 104.53 per B share
Market’s current implied multiple on the operating business when backing out investments is 3.3X.
            
([market cap] – [investments]) / [operations earnings] = ([178B] – [153.18B]) / [7.33] = 3.3  =   current implied multiple for Berkshire’s Operating Businesses          

Conclusion: Berkshire is currently selling at a reasonable value. There are a few possible catalysts. First, Berkshire Insurance subsidiaries have excess capital in order to generate new float which if written conservatively can translate to an instant increase of Berkshire's value. The second, Berkshire's investment portfolio is filled with blue chip companies which are selling at historical lows; if blue chip stocks start to rise, Berkshire’s portfolio will rise with it. Thirdly, about a billion dollars in housing earnings has disappeared since 2006 – which will eventually come back.
----
[Notes]
 ¹ I am assuming the major investments Berkshire holds will not be sold, leaving no capital gains tax This is of course, very debatable. I am also assuming 1 dollar of no cost float equates to 1 dollar of equity.  

² The 15 multiple for Berkshire’s non-insurance operations since Berkshire’s operating subsidiaries are handpicked by Buffett himself and a multiple close to the long term average S&P 500 multiple seems reasonable.. The 12 multiple is for the insurance underwriting operations. Although Buffett’s insurance operations have continued to grow float intelligently and at low costs, most insurance business don’t have a competitive advantage and are highly susceptible to market forces.  Operation numbers come from the annual report page 67, results from operations. The underwriting profit is the normalized underwriting profit from 02’-08’to include a full insurance pricing cycle. The underwriting profit also excludes 9/11 since policies now exclude 9/11 type costs, unless customers explicitly pay for them.  

Friday, August 12, 2011

BAC & Berkowitz: Webcast + Transcript

The live blogging for the BAC/Berkowitz conference call was very spotty. I suggest reading the transcripts at Morningstar and/or listening to the webcasts.

Tuesday, August 9, 2011

(VIDEO) Recent Daily Show segments on the market and Bank of America & update

I'm a big fan of The Daily Show. Especially liked their 2008-2009 segments called "Clusterf#@k to the Poor House"  Last Monday they did two great financial segments. Enjoy financial nerds.








update: I've been thinking about a few more posts. There is another Chinese company I find interesting. I also want to do a post on Berkshire Hathaway: congratulations for anyone who stole the B shares for 67 dollars yesterday.  I have also increased my position in the Back of America - A warrants, but I was asleep when they were selling for ~2.6.