Jonathan Christopher

Second U.S. 'Bank-for-Businesses' Faces Bankruptcy

I'm afraid that the truth lies somewhere between the author's position of a bank nearing bankruptcy, and CGM's that they are paying their bills and can pay off their debts by selling assets.

To make things clear, I have a position in ACAS, and like it long term - if it survives. However they will need to replace some of their outstanding debe in about a year. At that time they could file for bankruptcy, not because they are not current on their bills, bu because a balloon payment id due. Selling entire companies at this point is difficult, and if everyone knows you are a forced seller, you will not get anywhere near the book value or real enterprise value.

So be cautious, Since Aug 20, 2008 I have purchased the stock at 21.02, sold it at 23.32, bought it at 14.20, sold it at 14.29, bought it a week later at 8.21, and started buying more at 2.71. Sold part of my position today, and am up 30% from the first buy, including those lovely past dividends. I will buy it again when I feel more confident.. Profits can be made, but it will be difficult and depend on luck and timing. This is not a buy and hold stock!!

I did not want to sell - but the short term dangers, at times, overwhelm my interest in holding.

Deep Value in American Capital Strategies

Some thoughts:
1. Buying debt at below face value will increase equity by the difference between face value of the debt and the amount paid. That is a good thing. However there are often strict limits on how much debt a company can buy back.
2. While a reverse stock split is only a paper exercise and does not change the equity situation, investment firms are often limited to buying stock with share prices above $5 or $10 dollars. the end result would be to increase the market available to buy the stock, which COULD result in increased interest, volume and a REAL increase in price.
3. The ACAS web site has not caught up with reality. An additional 10 to 15 million shares were issued as a result of the absorbtion of European Capital into ACAS. The 67.7% that ACAS had already owned was carried on the books as about $300 million, the market value of the European Capital shares. However since the total equity of the European operation can now be carried on the ACAS books, ACAS has picked up a net increase in equity of somewhere between $400 and $800 million shares. That will go a long way to cure the covenent violation.

I just purchased another 10,000 shares.

American Capital Q2 2008 Earnings Update

While this company looks very solid, it appears that many positions are illiquid. Unfortunately the housing economy will not be recovering until late in 2009, since there are two additional shocks to come: the repricing of the Option Arm Mortgages, and the failure of several major banking institutions in the US and Europe.

There will be general market movers and unfortunately the movement will be down. I am unable to tell if there is sufficient liquidity in the company to withstand an additional 10% drop in the market.

Remember that this long term bear market began in 2000, and the price, in constant real value (using Gold, or Silver, or Platinum, or Copper or Oil) has been down, even though the "dollar" value does not look that bad.

Net-net: The 20% dividend really helps reduce the risk, and this is a good business, just expect the rough ride to continue for at least another year. There are few places to hid, an this is one of them