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Eric Boughton, CFA

 
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  • Equity CEFs: The Rights Way To Play CEFs [View article]
    Regarding GRX, it is important for readers to understand that the "apparent discount" of 13.6% as of 6/30/14 is based on a stated NAV of $11.94. Unfortunately (and poorly phrased SEC regs play into this), Gabelli has not reduced that stated NAV for the dilution that will happen later this month from the newly issued shares. The NAV so adjusted is $11.205. So the 6/30 closing price is a 7.9% discount rather than a 13.6% discount. Full disclosure, my fund (MDCEX) may hold positions in some of the securities mentioned.
    Jul 1 03:18 PM | 1 Like Like |Link to Comment
  • How To Trade The 8% Yielding Alpine Total Fund Before It Splits And Raises Its Payout [View article]
    Please correct your "16% Yielding" headline to 8%. (Both pre-split and post-split, the annualized cash distribution yield is slated to be approximately 8%.)
    Jan 8 06:12 PM | 2 Likes Like |Link to Comment
  • Determining The Perfect Time To Buy Closed-End Income Funds [View article]
    First of all, I agree that discounted closed-end funds offer tremendous opportunity which can be systematically taken advantage of. In fact, I run a mutual fund designed to do just that.

    However, you state that "the average closed-end fund is cheap. It's selling at about an 8.5% discount, more than double the historical average, based on the Herzfeld Closed-End Average Index." Readers should note well that this average only measures the discounts of 15 US Equity CEFs selected by Herzfeld. It contains no bond CEFs, and is therefore not representative of the entire CEF universe. Your article seems to be about bond CEFs, and it is therefore somewhat misleading to cite the Herzfeld Average.

    In fact, the average bond (muni & Taxable) CEF is currently trading at a 2% premium to NAV. The CEFs you mention, with discounts, may be wise purchases, but they are not representative of bond CEFs out there. Readers should know that.

    Another quibble I have with your article is your statement that "unlike stocks, fixed-income investments have a predetermined value at maturity. So despite any wild market swings, if we hold on long enough, bond valuations will recover as maturity draws near." While this is true for individual bonds, it is manifestly not true for constantly traded portfolios of bonds. A bond CEF, for example, which owns long-term bonds and keeps its duration approximately stable by selling some bonds and buying others can lose money "indefinitely". Nearly all bond CEFs employ this approach.
    Feb 5 12:19 PM | 13 Likes Like |Link to Comment
  • Gold And U.S. Government Debt: Highly Correlated [View article]
    There is some direct connection to general price inflation, certainly. Gold has appreciated 6% per year over these 38 years, whereas general price inflation has been 4%. However, the correlation between the gold price and CPI has been only 65%... much lower than the 86% correlation (and the 98% over the past 15 years) noted above. The 65%-vs-86% difference suggests, as E.D. Hart notes, that "there is more going on than mere inflation".
    Jan 29 07:28 PM | Likes Like |Link to Comment
  • Gold And U.S. Government Debt: Highly Correlated [View article]
    It is true that if two series are both moving in the same general direction, there should be some positive correlation. However, 86% correlation is too high to be chalked up to this factor. For example, over the same time period, and using quarterly data, the S&P 500 (price-only) is only 49% correlated with the price of gold.
    Jan 27 02:44 AM | 1 Like Like |Link to Comment
  • Gold And U.S. Government Debt: Highly Correlated [View article]
    Thank you, everyone, for your constructive comments! I agree with the notion that the best way to look at the debt-to-gold relationship is by measuring total world debt (probably to include government & private debt), and comparing to the price of gold as measured in some kind of "blended" currency rather than USD. This would, however, be a "project". :-) I believe the general relationships will be similar (in terms of correlation), and that the gold price will be seen to have outpaced the growth in total world debt over the past 12 years or so, just as it does on the "US-only" chart.
    Jan 25 06:46 PM | 1 Like Like |Link to Comment
  • Opportunity in GigaMedia? [View article]
    Mr. "Swift", thanks again for your analysis. After GIGM declined below $2.50, I thought it could be due to market fears that the Mangas deal had fallen through. Now, with the 5/12/10 announcement that the deal had indeed closed, the stock barely budged. I believe it is a much better risk/reward setup today than it was a few months ago. Do you have an updated analysis in light of the 4Q financials just reported? When I take total cash + ST and LT marketable securities, subtract ST debt, and add $100 mln, I get $155 mln. Adding in the $67 mln supposed value of the remaining 40% stake in the unit, I get $222 mln. As against current market cap ($2.47 stock price) of $134 mln.
    May 13 07:50 PM | Likes Like |Link to Comment
  • Why Did Nortel File for Bankruptcy Protection? [View article]
    More interestingly, why didn't Nortel merely buy back its own bonds in the open market when they were trading at $.20 on the dollar in 2008? This would have saved the company (employees, customers, etc.) and allowed it to decide on a 'non-panic' basis which business lines to keep and how to restructure operations. Not only stockholders (goes without saying), but also bondholders, would have received higher value had they done this. (Except for the bondholders who sold at $.20 on the dollar, of course, but that's their problem...)
    Jan 4 08:33 PM | Likes Like |Link to Comment
  • Salesforce.com: Making Good Results Better [View article]
    Marc Benioff? Take his eye off the ball? You mean the Marc Benioff who talks like a teenager selling snake oil, pronounces 'huge' 'heeee-uge', and uses variants of the word 'exciting' on a conference call 15 times? Little chance of that! :-) What a clown.
    Nov 18 07:51 PM | Likes Like |Link to Comment
  • The 'Junk Stock' Rally [View article]
    Speaking of a 'junk rally', here's a fact: had you purchased the lowest-priced decile of all Russell 3000 stocks as of March 9th, equal-weighted, you would have had a 423% return through September 30! No joke. Had you simply pulled all 3000 (roughly) tickers, sorted by closing price on March 9th, and bought just $100 worth of each of the 300 lowest-priced stocks, your $30,000 investment in this diversified portfolio would have been worth $157,000 on September 30. Regret, anyone? Anyone think there might be some short candidates on that list?
    Oct 21 06:56 PM | 2 Likes Like |Link to Comment
  • Why Shorting Amazon Is a Bad Idea [View article]
    Richard, I am short Amazon, and I fully respect your decision not to short Amazon. However, I will take issue with one of your basic points: "Betting against richly valued stocks is very seductive, because they are so easy to find..."

    Richly valued large-cap stocks are absolutely not easy to find. Let me run a question by you: How many $3 bln mkt cap US-domiciled companies have both a PE above 30 (not a really high bar) and a price-to-book multiple above 3? Answer: 29. How many $30 bln mkt cap companies have both of these characteristics? Answer: precisely 2, namely Apple and Amazon.

    Why does it matter that they are large-caps? For a short in richly-valued stocks to work, the law of large numbers must come into play before, in your words, the earnings have "time to grow into the stock price". Those, like me, who short ridiculously valued large-caps have the odds overwhelmingly stacked in our favor, because the odds of the company significantly increasing its earnings BEFORE the market assigns a fair DCF value to the stock are quite low.

    And a return to fair value just creates your garden variety successful short; the real 'juice' happens when the company stumbles, like so many well-regarded companies eventually do.
    Sep 18 01:13 PM | 3 Likes Like |Link to Comment
  • Plum Creek Timber Saws off Excess Supply, Grows Profits [View article]
    A "$900MM liquidity base ready for the tapping", eh? Where have I heard that before? Oh, yeah, from a bunch of over-leveraged financial firms. ("We have plenty of liquidity," Mozilo said. "We're in very good shape." -9/7/07)

    But, of course, since PCL is not a "financial" firm, we shouldn't worry that its $2.73 bln in long-term debt is 5.9 times its FY08 EBITDA, and 6.5 times its FY08 operating cash flow, right? Nor should we worry that PCL generates the vast majority of its "operating" earnings merely by selling land. For example, in the first quarter, PCL made $29 mln in operating profit on selling timber, LOST $13 mln in operating profit on their manufacturing businesses, and made $173 mln operating profit on selling land. That's 92% of operating profit from a completely non-recurring area! The "selling timber" profit didn't even come close to covering the quarter's $38 mln interest expense!

    Given these facts, we should probably not worry about whether PCL’s profits are sustainable over the long term, right? I mean, they can continually find land which is worth a lot more than they paid for it, right? Land markets are probably grossly inefficient, and PCL execs are the smartest operators in the world, right? The fact that the majority of PCL's land was purchased in the last 5 years doesn't matter, does it?

    For those thinking of PCL as a REIT, consider also that there is a major difference between the earnings reported by other REITs, and PCL. Other REITs depreciate their property (buildings), usually on 30-year schedules. Since buildings don't really depreciate that quickly (unless they are constructed poorly), and in fact can be expected to appreciate slowly as long as they are maintained, other REITs' reported EPS is arguably understated. Not so with PCL: it depreciates NONE of its land, and so its EPS is certainly not understated. This makes PCL's 29 multiple on 2010 earnings just as ridiculous as it sounds.

    In a nutshell, each and every year, PCL is making less and less money (and losing money some quarters) from what I would consider its “core” businesses: a) cutting down trees and selling them to saw mills, and b) manufacturing high quality lumber products. Each year, it is desperately attempting to make up for this by selling off its best quality, highest value timberland to real estate developers. When doing so, it is cherry-picking the land it owns at the lowest cost, in order to maximize reported earnings! Eventually, there will be nothing left in this “bag of tricks": the value of PCL's forest land will be judged on its own ability to generate sustainable cash flows. Unless lumber prices once again rise to their bubble levels of early 2004 (or PCL gets lucky and finds "greater fools", like university endowment funds, to buy its land at silly prices), equity holders of PCL are likely to be unhappy with the value of their stock when that happens.
    Jun 11 07:40 PM | 4 Likes Like |Link to Comment
  • GDP Numbers Are Not Making Sense [View article]
    I hate to have to defend government statistics, but I must.

    Ed, you've made a simple, but understandable error in confusing "real" GDP with "nominal" GDP. Nominal GDP is the dollar value of final goods and services. Real GDP is this value, but adjusted for inflation (as measured, quite inaccurately, by the government).

    The numbers you cite for GDP are nominal: the exact nominal numbers, per bea.gov , are:

    12/31/07: $14.0312 trillion
    3/31/08: $14.1508 trillion
    6/30/08: $14.2945 trillion
    9/30/08: $14.4128 trillion
    12/31/08: $14.2003 trillion

    During 2008, therefore, nominal GDP had positive growth of 14.2003 / 14.0312 - 1, or 1.2%.

    However, when you factor in the idea that some portion (it turns out greater than 100%) of this apparent economic growth was simply due to the devaluation of our currency vs. "real goods and services" (aka inflation), then you come up with a different answer. This is real GDP.

    What inflation numbers are used? The answer lies in another government release called the "GDP price deflator", also released by bea.gov. This deflator had the following values:

    12/31/07: 120.7
    3/31/08: 121.5
    6/30/08: 121.9
    9/30/08: 123.1
    12/31/08: 123.2

    Total inflation, for GDP calculation purposes, during 2008 was therefore 123.2 / 120.7 - 1 = 2.1%.

    Taking 1.2% - 2.1% therefore will give you (very roughly) full year 2008 real GDP decline of 0.9%.

    As for how this all gets filtered through to the quarterly numbers reported by the BEA and most WIDELY cited (for example, the "-6.3%" in the fourth quarter), they are actually reporting quarterly, but ANNUALIZED changes in real GDP. This is pretty complex, but let me lay it out for you.

    First, let's get quarterly REAL GDP values by dividing each quarterly nominal GDP data point by the deflator listed above:

    12/31/07: $14.0312 tln / 1.20743 = $11.6207 tln
    3/31/08: $14.1508 tln / 1.21508 = $11.6460 tln
    6/30/08: $14.2945 tln / 1.21890 = $11.7274 tln
    9/30/08: $14.4128 tln / 1.23056 = $11.7124 tln
    12/31/08: $14.2003 tln / 1.23244 = $11.5221 tln

    OK so far? Next we take each sequential real GDP difference and derive a percentage change. This would be "raw quarterly change in real GDP". If positive, it would indicate the BEA believes there was more "real" economic activity in that quarter than in the immediately prior one.

    1Q08: $11.6460 tln / $11.6207 tln - 1 = +0.2177%
    2Q08: $11.7274 tln / $11.6460 tln - 1 = +0.6990%
    3Q08: $11.7124 tln / $11.7274 tln - 1 = -0.1279%
    4Q08: $11.5221 tln / $11.7124 tln - 1 = -1.6248%

    As sad as it is, we are not yet done with the math lesson. For their headline report, the BEA would like to make sure they annualize the quarterly number. "If the next four quarters are exactly as bad / good as this most recent quarter, then what would be the total growth / contraction in real GDP?" is the question they are trying to answer.

    Essentially this means multiplying the numbers by 4, BUT we must be more precise by adding 1, raising to the fourth power, then subtracting 1. (Compounding, you know...)

    So at the end of this tortuous road we have:

    1Q08: (1 + 0.2177%)^4 - 1 = +0.9% (all rounded)
    2Q08: (1 + 0.6990%)^4 - 1 = +2.8%
    3Q08: (1 - 0.1279%)^4 - 1 = -0.5%
    4Q08: (1 - 1.6248%)^4 - 1 = -6.3%

    And this is what gets reported. For the full year, the BEA believes real GDP declined by:

    (1.002177)*(1.00699)*(... - 1 =
    -0.8485%, even as nominal GDP increased by 1.2052%.

    I hope this has helped you understand published government numbers better. I agree with various posters: these numbers are:
    1) Subject to large revisions.
    2) Increasingly divorced from reality on the inflation side, as the government increasingly attempts to hedonically erase the inflation that is happening.
    3) Increasingly divorced from reality on the "value of goods and services" side, as "value" is counted quite generously... every serial bundling of a crappy mortgage into a new leveraged CDO, for example, adds to GDP!
    4) Increasingly unhelpful in determining "how we are doing" as a nation.

    However, the one good thing we can say about government statisticians: the math does work, and is self-consistent! You just have to take the time to figure out how everything relates.
    Apr 16 07:07 PM | 5 Likes Like |Link to Comment
  • Time to Buy the Homebuilders [View article]
    A few problems with your analysis, Herb. First, the U.S. Census Bureau estimates that U.S. population grew by only 2.8 mln people between 7/1/07 and 7/1/08. (www.census.gov/popest/...)
    Second, even this data is fraught with potential errors, with extremely limited data on net migration leading to reliance on extrapolative techniques.
    Third, the net movement of people from single-family houses into multi-family dwellings, which may be starting and may persist on a secular basis for quite some time, could offset any population growth.
    Fourth, the total number of families owning multiple houses is likely to decline for some time as well, offsetting new home construction.
    Fifth, when viewed over a long period of time, the average age of houses is lower than normal.
    Sixth, from about 1997-2006, the total number of new homes was far in EXCESS of the number demanded purely by population increases. So, why would we think population changes going forward over the next 10 years would be at all correlated with the number of new homes built?
    Seventh, specifically related to your bullish position on homebuilders, homebuilder stocks are, by and large, already pricing in the return of demand, and the ridiculously high margins achieved at the peak of the bubble. For example, consider TOL. During its best twelve months (5/1/05-4/30/06), TOL achieved $6.4 bln in sales, $1.4 bln in operating income, and $870 mln in net income (approx $5.15 per share with adjustments). This was a 22% operating margin, and a 14% net income margin. Consider, however, that from FY94-97 ("normal years"), TOL's operating margins averaged 14% and NI margins 7%. Which is more representative of TOL's business over the coming decade? You can have your opinion, but mine is that the 14% and 7% are much more likely, and in fact that 10% and 5% would be likelier still. The opulence of the past 20+ years is gone... for good!
    In any case, assume for a moment TOL generates a revenue run rate 25% HIGHER THAN its trailing twelve month sales (so from $2.7 bln all the way up to $3.4 bln). Keep in mind, that would EXCEED their average annual sales in 2003-2004! A generous assumption, to say the least! By comparison, analysts expect only $1.6 bln in sales in FY2011.
    Now, apply, say, 6%, net income margins to the $3.4 bln, and you get $204 mln of net income. That's a PE of 15.8, several points higher than the S&P 500! With a bunch of generous assumptions. Clearly, the market is already banking on quite a turnaround.
    I use TOL as an example simply because it is one of the least leveraged of the homebuilders. Clearly, with several other homebuilders where bondholders own more of the company than shareholders do (9 of the 17 homebuilders I follow have net debt in excess of market cap, and only 3 have investment-grade (BBB-) credit ratings.), the stock represents much more of a call option on survival. Good luck with those!
    Mar 26 01:33 PM | 1 Like Like |Link to Comment
  • Understanding the Complexities of General Growth Properties [View article]
    Todd, I appreciate your efforts in attempting to determine the value of GGP equity. However, the rationale behind your belief that assets exceed liabilities at GGP is highly flawed. Specifically, your argument rests on the extension of the price per square foot offered for a few higher-value properties to GGP's entire mall portfolio. It is unlikely that such an extension is in any sense reasonable.

    The question of "ultimate value" of GGP's assets is an open one, of course. However, it would take a fairly low discount rate applied to expected rental cash flows on GGP's mall properties over the next, say, 5 years, to come up with a present value answer exceeding $30 billion. Such a low discount rate is not likely to be applied by any investor with actual cash to invest. You implicitly admit as much by saying

    "The sudden supply of properties without bidders (loans still are very tough to get) would mean they would have to be placed on the market below "fire sale" prices"...

    Think about what you are saying. You are saying that a LOAN would be required in order to get a bidder. But, in fact, there are many investors with "actual cash" to invest. Why aren't they offering $30 billion plus for GGP assets right now? Almost certainly because the present value of those future cash flows is, in their mind, lower than $30 billion.

    Now, there may indeed be a rational investor who believes the present value of GGP property cash flows over the next TWENTY years exceeds $30 billion. Ackman may be one of them. But, consider that his ownership of GGP debt means that he can win (and win big) even in a Chapter 11 scenario which completely ELIMINATES the equity!

    Ultimately, I agree with throbulator: The debtholders will own GGP in (essentially) its entirety within a year. The size of the bone they throw to current equity holders does not have to be large, and could be zero depending on the opinions of the bankruptcy judge. Debtholders who bought the bonds at $.25-.30 on the dollar will therefore experience a positive return IF the value of GGP mall properties turns out to be greater than $10 billion. I think that is a (relatively) safe bet, which is why I have made it.
    Mar 18 03:05 PM | Likes Like |Link to Comment
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