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Jeremy Johnson

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  • National Bank of Greece Appears Undervalued [View article]
    It's not a technical impossibility. Greece would have two currencies: a euro with strict capital controls and an internal currency. Euro claims would be left outstanding and renegotiated over a series of years. The government would finance itself with the new currency and compel its citizens to convert. Cash euros would continue to be euros. In theory, the whole thing would be a negative for the euro since there would be an impairment to the asset side of the ECB's balance sheet while the same liabilities remained outstanding, but the return of confidence to the euro could counterbalance this to a degree. It would all be pretty messy, but a Greek default would be just as messy without taking care of the underlying problem of having a monetary policy inconsistent with the underlying Greek economy.
    Jun 28 08:47 PM | Likes Like |Link to Comment
  • Undervalued Cisco: An Economic Profit Valuation and Analysis [View article]
    Cisco has been overvalued for a decade. At $26.00 it was very overvalued, even under rosy scenarios. With the stock at $15.00, it has started to make some sense from a valuation perspective. At this point, the stock is even discounting things getting worse, far removed from the past where the market has continually given credit for things improving before they had. There are still large risks, but they are more balanced.
    Jun 28 08:34 PM | Likes Like |Link to Comment
  • Transocean: Deep Rigs at a Deep Discount [View article]
    The problem is that it's starting to look like the drillers will play out like the shippers. There are some 60 drillships + ultra deepwaters in construction. Returns on capital are very high right now, probably a little over 2x cost of capital. This is motivating the expansion. There is little barrier to entry, but somewhat better than shippers admittedly. In 2-3 years you could have a glut of ships and dayrates will come down substantially.
    Jun 27 12:56 PM | Likes Like |Link to Comment
  • National Bank of Greece Appears Undervalued [View article]
    I think the preferred is far more compelling, I owned it briefly a year ago and I'm glad it was only briefly because it's done terribly (I was short the stock at the same time).

    I think Greece will eventually be ejected from the Euro -- which will be better for Greece and the E-zone. I think the biggest obstacle to Greece leaving E-zone is not Greece itself, but Portugal -- the situation there needs to resolve itself further because at the moment Greece leaving the E-zone would just highlight the problems in Portugal. However, I think it would be much harder for Portugal to leave the E-zone because it's so integrated with Spain.
    Jun 25 07:18 PM | Likes Like |Link to Comment
  • National Bank of Greece Appears Undervalued [View article]
    They've been trying to sell the 20% stake for the last 6 months or so.
    Jun 24 04:43 PM | 1 Like Like |Link to Comment
  • The Economist argues again for a 3rd way in dealing with Greece: an orderly restructuring marking down the country's debt by 50%. This would bring Greece's debt/GDP level down to 80%, from where the country could hope to grow again. Yes, banks would have to take an immediate hit, but nothing their capital position can't handle.  [View news story]
    Title 11 of the U.S. Bankruptcy Code. You or your firm will be means tested.
    Jun 23 07:01 PM | 2 Likes Like |Link to Comment
  • The timing of the release of 60M barrels of oil is a puzzle: The war in Libya, the purported cause of the move, has been raging for months, and prices had already fallen ~10% since April. So why the release now? This isn't really about oil; it's the economy, stupid. Some see it as "a sign of desperation" with prices recovering after a few months.  [View news story]
    The only practical purpose the SPR serves is as a deterrent to an oil embargo -- it was in fact the reason it was created. It's also useful when there are temporary supply disruptions.

    It cannot even remotely handle a sustained decline in production, and it is not especially useful as a wartime reserve since the government would have first call on U.S. based production and would be loathe to dip into at that juncture irreplaceable reserves of very finite quantity.

    Taking that as a given, it may be a reminder to OPEC that the developed world does have tools available to make their lives uncomfortable in the short-term and it certainly helps that there is a real supply disruption in the case of Libya, the cumulative effect of which grows larger every day.
    Jun 23 06:58 PM | 4 Likes Like |Link to Comment
  • Greece: It's Not Lehman [View article]
    Upon further inspection at year-end 2009 general fund debt was about $84 billion on a budget of about $90b. It's probably several billion higher now but on a cash basis the budget has been balanced the last two years, so probably not too much higher. The budget problems have to do with escalators and planned tax roll-offs, not a current cash deficit.
    Jun 22 09:55 PM | Likes Like |Link to Comment
  • Greece: It's Not Lehman [View article]
    Has about $100 billion last time I checked. Budget of about $90 billion, interest payments of some $4-5 billion. Economy of $1.8-$1.9 trillion, which obviously has many calls on it beyond the State.

    I don't think municipals have much reliance on the State. The State channels some property taxes to other municipals for schools, but that's about it.
    Jun 22 09:35 PM | Likes Like |Link to Comment
  • Undervalued Cisco: An Economic Profit Valuation and Analysis [View article]
    Returns on R&D are clearly fading, but the question is how much and can Cisco trim some R&D (and marketing) and remain competitive. That was the purpose on the scenario analyses around R&D which showed in fact that if current R&D spending does not create extra profits soon or if R&D can't be cut back, the Cisco is nearly sitting at fair value.
    Jun 22 08:40 PM | 1 Like Like |Link to Comment
  • Undervalued Cisco: An Economic Profit Valuation and Analysis [View article]
    The IRR of the firm and the cost of funds create a ratio. That ratio should equal firm value over net invested capital (and it very often does in practice). It's also possible to model out 30-40 years of excess returns discounted back to today and add the net invested capital to get a similar answer. You're right, I was pressed for space and intend to make some changes to improve things for future memos.
    Jun 22 08:38 PM | Likes Like |Link to Comment
  • National Bank of Greece: Not Worth the Risk [View article]
    The good thing about a merger is that the combined entity should generate more internal capital then each bank alone due to cost reductions. Internal capital generation is huge deal for a stressed bank. After the Latin crisis most U.S. money center banks were nearly insolvent and they earned there way out through their ability to generate capital internally.

    Another aspect is credit quality at Alpha, if it's better or worse than NBG, depending on terms of the merger then you might be better or worse off. I don't know much about Alpha, so I can't comment there.
    Jun 22 04:38 PM | Likes Like |Link to Comment
  • Greece: It's Not Lehman [View article]
    Lehman creditors should recover about 20% when claims start being repaid in 2012 according the Alvarez. The bonds trade about 23-25 cents on the dollar.
    Jun 22 02:34 PM | Likes Like |Link to Comment
  • Undervalued Cisco: An Economic Profit Valuation and Analysis [View article]
    I typically only model seasonality when it is statistically significant and material. I test for seasonality using a variety of statistical tests which give me forecast seasonality and also use visual checks using 10 years of quarterly operating earnings data. Visually, an argument can be made that 1Q is slightly weak and 2Q slightly strong but the impact appears small. Also in recent years the very small amount of regular seasonality seems to have dissipated. In addition, the quarter I annualized seems to split the difference between 1Q and 2Q. Cisco's results are somewhat volatile, but boiling this down to an identifiable seasonality effect wasn't possible for me.
    Jun 22 02:01 PM | 2 Likes Like |Link to Comment
  • National Bank of Greece: Not Worth the Risk [View article]
    €18 billion of debt to the Government of Greece
    €4.5 billion market value of equity
    €7 billion of tangible equity
    €4 billion of allowances for loan losses

    €5.4 billion is a 30% haircut to debt from the Government of Greece
    A small portion could be taken against allowances

    Assuming a €5 billion hit, most of your tangible book equity value is gone.

    This might be interesting if it were trading at a small multiple of tangible book value, but in fact it's only trading at a slight discount.

    Finansbank (Turkish sub) generates a return on assets of about 2.5% which is very good for a bank. It trades at a $6.5 billion market cap. NBG owns about 80% implying a 5.2 billion value. Some of this is captured in NBGs tangible book value already, how much was difficult to ascertain, but I would guess at least $1-2 billion. Therefore, all else equal, NBG probably has a kick of $3-4 billion to it's value based on Finansbank.
    Jun 22 12:18 PM | 1 Like Like |Link to Comment