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James Emerson, CFA

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  • Fannie / Freddie - What Does Treasury Know? [View article]
    These stocks should be trading at zero. While the govenment has removed the shut down condition, the coming dilution is going to be massive. As public policy these entities should be closed. Let the portfolios run off and there is also no need for the vastly overpaid executives. There is no reason for the government to subsidize mortgages by allowing these entities to borrow at extremely low cost. The diversion of capital to the housing market is crowding out productive investment. The government, both parties, is doing its best to prop up housing prices and will continue to do so as no politician wants to be the one to crush the dream of home ownership. The reality is that home prices are too high for the average income level. By perpetuating the Fannie and Freddie frauds, the politicians, and this is a bipartiasan effort, hope to keep prices up until incomes catch up. The problem is the incomes are not going to catch up any time soon. The only way for the housing market to adjust to equillibrium is to let prices fall dramatically. The new equillibrium may also be at a lower number of transactions.
    Dec 26 12:09 PM | 9 Likes Like |Link to Comment
  • An End to the Credit Rating Addiction [View article]
    "Realistically, of course, not all investors have the same ‘in house’ capacity for risk assessment. Smaller and less sophisticated institutions will have to continue to rely heavily on third-party ratings."

    No firm that relies heavily on third party inputs to its investment process should be in business. It is an acknowledgement that those institutions add no value to the investment process. Size has nothing to sophistication nor does size excuse a failure to devote the necessary resources to the investment decision making process. The regulatory framework should prohibit institutions that are incompetent at managing assets from aggregating assets through the sale of insurance and banking products.
    Oct 3 11:51 AM | 5 Likes Like |Link to Comment
  • The Leading Cause of Personal Bankruptcy [View article]
    Academic studies have shown that people misprice extremely unlikely high payoff and high loss events, overpaying for high payouts, e.g. lottery tickets, and underreserving or under insuring for high loss events like catastrophic weather and health events. In the healthcare debate, people ought to separate the questions of who is going to pay for routine care and who is going to pay for catastrophic care. Most healthy Americans would be better off paying for routine care out of pocket rather than relying on a third party payor. All insurance prices in the expected routine care of the pool with the effect of the premium payments of the young and/or healthly subsidizing the care of the unhealthy and/or the old. In a capitalist society, people should save for their expected lifeitme routine care needs and adjust their consumption accordingly. Under the current insurance system there is no incentive for the young and healthy to join the insurance pool since there is no savings mechanism. If health insurance operated more like whole life insurance where the policy builds value over time, young people would be incentivized to "save" for their future healthcare costs and be protected from catastrophic losses. A simplistic version would be the that the premium would be expected healthcare costs and a catastrophic component. If an insured's actual costs were below expectations, a portion of the excess payments would accumulate and be available to pay future period premiums. If an insured's actual claims where higher than expected their future risk premiums would be higher.

    The problem with the American system is that an individual is better off not preparing for future or potential healthcare costs. The worst that can happen is that in the unlikely event you suffer a catastrophic illness is that you go bankrupct. If you never have a catastrophic illness, you get to consume more (cars, televisions, homes) than the people who protect the downside by purcashing insurance. The maximum benefit of purchasing insurance is limited to the amount of unprotected assets in bankruptcy. Since most Americans couldn't earn and save enough to self fund the costs of a catastrophic illness anyway it makes no economic sense to purchase insurance.
    Jun 5 10:34 AM | 5 Likes Like |Link to Comment
  • Why Seeking Alpha Embraces Pseudonymity [View article]
    Management of companies has the coercive power to silence critics. The use of a pseudonym protects authors from vindictive managements that have company treasuries at their disposal to engage lawyers to file legal actions. Read David Einhorn's book Fooling Some of the People All of the Time. There would be little to no discourse about short candidates without the protection afforded by annonymity on SeekingAlpha.
    Mar 19 04:54 PM | 4 Likes Like |Link to Comment
  • BlackBerry Is Still A Great Buy In 2014 And What's Next For The Market [View article]
    Just some color... My assistant called T-Mobile to order a Q10. The rep. told her that Blackberry is going out of business and she shouldn't get this phone. I tried to get the Q10 in a T Mobile store in midtown Manhattan. not only is the device not available the salesperson told me that all carriers except AT&T were going to drop Blackberry.
    Feb 20 09:13 AM | 4 Likes Like |Link to Comment
  • A Side By Side Comparison Of Cove Energy And InterOil's Bidding Processes [View article]
    The bottom line is that one month is an extraordinarily long time to take to evaluate a limited number of bids. IOC is a notorious self promoter, yet the company has been radio silent. Neither portends good things.

    SInce the participation of a major internationally recognized company is a requirement, lets make the assumption that only major company's have bid. The investment bankers would have been wasting their time and effort soliciting bids from companies that don't meet the requirement of the government of New Guinea. Limiting the field of bidders to major companies simplifies the evaluation process. InterOil does not have to vet each partner or weigh each bid versus the likelihood of the company's performance, in the way that a homeowner might consider a lower all cash bid to be superior to a higher bid that is contigent on financing. By virtue of the government requirements, we can assume that all bids are the equivalent of all cash.

    From a game theory perspective due to the government requirements, InterOil is in the position of either accepting a low bid or having the government yank the project. Neither is good for shareholders.

    So that leads me to the question of why is it taking so long to evaluate the bids and announce a winner? There are not that many potential permutations that InterOil has to evaluate in order to make an "apples to apples" comparison. The logical conclusion is that the bids were inadequate. Basically, either the valuation based on the bid doesn't support InterOil's market capitalization or the JV partner demanded such a large share of the economics that the value to InterOil is not commensurate with InterOil's market value. Look for the stock to trade significantly lower once the results are announced.

    Apr 3 09:48 AM | 4 Likes Like |Link to Comment
  • The Bullish Case For Tanzanian Royalty Exploration [View article]
    Clearly exploration is a speculative endeavour. From a shareholder's perspective, the key is to pay a fair price for the potential upside. I would argue that $3 million is a fair price for the project given that it was acquired in an auction and I don't think that Tanzanian Royalty Exploration was given any special consideration in terms of price. That price embodies some probability that more resources will be discovered and some probabilty that the some or all of the existing resources will be converted to reserves along with some probability that the project will fail. The current value to shareholders is about 3 cents per share, $3 million project value divided by about 100 million shares. With the share price at $4 per share, the Buckreef project would have to increase in value by a factor of over 100 just for an investor to break even. I don't think those are good odds for investors. If I am speculating on a long shot, I want to receive a big payoff if it comes in.
    Sep 27 10:52 AM | 4 Likes Like |Link to Comment
  • Tanzanian Royalty Exploration: Fool's Gold [View article]
    Providing a investors with information and analysis is hardly unethical. Most analysts who publish research do not have positions in companies they cover. Most people would consider it unethical to have a position in a company as that leads to inherent bias. Is every analyst who issues a negative report unethical? In fact the SEC thinks otherwise. After the tech bubble, sell side analyst were required to disclose their agregate buy, hold and sell recommendations in order to allow investors to determine which analysts were shameless shills.
    Jun 10 03:23 PM | 4 Likes Like |Link to Comment
  • Tanzanian Royalty Exploration: Fool's Gold [View article]
    I may quite well have similar credentials to Mr. Gibson. To me it is very suspicous that a fund that reported about $40 million of assets in 2009 would take a $65 million plus position in a speculative company. You might consider what I've written about the company exactly because I have no position in the company. I have no stake in the outcome other than I value my reputation and I like being right. I am not talking my book, just trying to provide interesting and actionable analysis. You can look at my comment stream and make your own judgment about my investment talent.

    I publish under a pseudonym mainly because I like to write about the short ideas. But here are my redacted credentials, Ivy League undergraduate degree in economics coupled with an MBA in Finance from a top 10 school. I am a CFA Charterholder which means that I am subject to the CFA Code of Ethics which I take seriously. I traded and analyzed merger arbitrage and capital structure arbitrage for two top performing hedge funds. Most recently, I was a trader and an analyst for a top performing equity long short fund ($100 million > AUM >$10 million average annual return +10% net of outrageous hedge fund fees from 2003 to 2008 including +25% net in 2008 with no down years in between all audited and verifiable). I currently manage an investment fund that does not invest in public markets.
    Jun 10 02:28 PM | 4 Likes Like |Link to Comment
  • GMX Resources Preferred Stock: Compellingly High Yield [View article]
    Investing is forward looking. The source of the losses was impairment charges for abandoned projects. These types of charges are unlikely to recurr in the near term. Further any future impairments are not a risk to the cash flow but rather to the common equity cushion beneath the preferred stock.

    In order to properly analyze a company, an investor should look at the earning power of the business in conjunction with the accounting statements. The accounting statements of GMXR reflect non-cash expenses that reduce earnings but not cash flow. However, some non-cash items really do reflect the true economic reality of the business. GMXR uses the Full Cost method of accounting for oil and gas properties. That means that the expense of exploration and development is capitalized. Those expenses don't flow through the income statement until production. Therefore the expense item depreciation, depletion and amortization reflects an allocation for money that has already been spent. In order to get a true sense of the business, I add back D,D & A to earnings and subtract the capitalized exploration costs. After I make those adjustments, the business is still profitable on an operating basis and produces cash flow well in excess of debt service and preferred dividend payments. A preferred stockholder has a claim on that cash flow.
    May 26 10:56 AM | 4 Likes Like |Link to Comment
  • Whitney Tilson: Why We're Short Netflix [View article]
    Cable is in trouble too. The paradigm shift in content delivery will force their prices down perhaps even forcing them to offer a la carte pricing to consumers. But the reason to be negative on NetFlix stock is that while the value proposition for consumers may be compelling, the ability of the company to produce earnings growth to support a 68X P/E ratio is suspect based on the competitive dynamics of the industry.
    Dec 17 06:40 PM | 4 Likes Like |Link to Comment
  • Whitney Tilson: Why We're Short Netflix [View article]
    So do you pay a premium multiple 68x to own a business with declining margins? Think about what that multiple implies for expected earnings growth. Right now the stock is a game of musical chairs, you do not want to be long when the music stops.
    Dec 17 06:31 PM | 4 Likes Like |Link to Comment
  • How Buying a Home Is Gambling [View article]
    In postulating that there is a non-trivial chance of foreclosure and you will end up financially devasted, the author confuses the potential outcomes of purchasing the asset with the potential outcomes of applying extreme amounts of leverage to finance the purchase. For an all cash buyer, the possibility of foreclosure is ZERO! In evaluating a home purchase as investment decision is separate for determining how much leverage to apply. The asset price volatility of single family homes has increased; therefore, the prospect of a short term trading profit in a 1 to 5 year holding period is less likely. In fact if possible one should finance a home with all debt to create the free call and leave the lender with all the risk (where is the Wachovia pick a payment loan when you need it?). I digress but that is the rational economic decision many Americans made during the housing bubble and while they may be foreclosed upon, in financial terms they only lost their 5% equity rather than the entire 20% to 40% decline in home prices. But the true determinant is not the mark to mark equity. A house is not like a margin account or a portfolio of mortgage loans. There are no margin calls, collateral calls or forced liquidations. As long as, the owner can pay the monthly payments they continue to control the asset. Homes are similar to only one asset I can think of, viatical settlements, in that the monthly cash flow from owing the asset is negative. Besides the imputted rent, the goal of purchasing a home is tax free capital gains. The main risk is not that the home price declines because that does not trigger anything but that a person's other assets and/or income decline to point where they cannot pay the debt service.
    Dec 12 12:31 PM | 4 Likes Like |Link to Comment
  • Banking Sector: Worst Is Yet to Come [View article]
    This analysis is dead on. One of the reasons bank failures persist is that the banks have been permitted to "play games with their loans". Troubled construction loans in 2008 and early 2009 were extended or the builders were allowed to complete the project with the construction financing still flowing. Look at Corus Bank. It was obvious that the projects financed by their loans were doomed in early 2008 yet they kept sending money out the door. From the bank perspective, their is no hope of recovering money on an incomplete project, better to continue funding the loan and have a completed project to sell in a potentially better economic enivornment when the project is finished. The loan stays current as there is an interest reserve built in so all the statistics the FDIC looks at to determine capitalization levels are not affected. Then once the loan comes due it immediately defaults with a very high loss severity since the economic recovery didn't materialize. Construction loans are very similar to negative amortization mortgages in that respect. Look how fast all those loans went bad and how severe the losses were.

    One reason Paulson's current strategy is successful is that the government has removed the risk that many banks will be forced to shut or be seized. First in the too big to fail tier, there is zero chance of failure so the banks are now given time to rebuild the capital base and will eventually earn extraordinary profits by virtue of artificially low cost of capital and by reduced competition. In a normal banking environment when by virtue of idiosincratic risk a bank that falls below the required level of capital it is shut, it is game over with no chance of a future therefore zero equity value. Correspondingly, the only losers should be the equity holders as the assets should be sufficient to pay depositors and creditors. While for smaller regional and local banks, the shut down condition has not been completely removed, it is certainly less likely. The FDIC seems taking out the worst banks first so a relatively better bank, which in normal times would be seized immediately, now has a long time during which it can potentially earn enough to recapitalize.

    When Warren Buffet was privately financing the banking system, the cost of capital was over 10% yet the Federal Reserve now provides it at 0.25%. That subsidy is a great stealth transfer of wealth from savers to the banks. The stockholders of the banks that survive are going to be richly rewarded.

    Disclosure: No positions. Formerly short FED, CORS, WFC, BOFL.
    Oct 4 10:50 AM | 4 Likes Like |Link to Comment
  • Things Not All That Bad at General Growth Properties [View article]
    GGP common stock is simply a call option on a game of chicken between the company and its lenders. The lenders don't want to take back the malls and the company doesn't have the NOI to support a refinancing. As long as the company is a going concern there will be some option value but if and when the lenders declare default the company will file Chap. 11 and the option (equity) value will disappear. The only way the equity has any value is if the current group of lenders agree to extend the current amounts due. If they don't extend, there is no way the lenders will let equity holders keep $167 million (the current market cap.) of value in bankruptcy proceedings. The misperception in one posting is that Chap. 11 means that the company fails and closes, it only means that the control of the company shifts from the current equity holders to the debtholders. No malls will close, no jobs are at risk, so the government has no compelling interest to save the equity holders. While the government may make capital available to banks to suport an extension of the loans, the banks may be loathe to grant credit to GGP at the current LTV ratio.
    Feb 25 11:56 AM | 4 Likes Like |Link to Comment