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Tim Travis is CIO of and is CEO of T&T Investment Management L.L.C. Tim currently possesses the series 3, 7, 63, and 65 licenses, and he works actively in the field of investment management. Both Optimi Trading and T&T Investment Management L.L.C are investment... More
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  • Lecuadia (LUK) Naked Put Recommendation
    June 18th LUK Naked Put
    JUNE 21, 2010 BY


    1.)    Symbol: LUK


    2.)    Company Name: Leucadia

    3.)    Market Cap: 5.3 billion

    4.)    Enterprise Value:  7,402.2

    5.)    Book Value: 4567.9

    6.)    Tangible Book Value: 4,495.5

    7.)    TTM 2010 Net Income: 881.8

    8.)    2009 Net Income: 550.3

    9.)    2008 Net Income: (2,535.4)

    10.)  TTM 2010Free Cash Flow: (147.7)

    11.) Debt/Equity: .36

    12.) Shares Outstanding:250 Million

    13.) Target Price Range: $27.40 or 1.5 times current book value

    Investment Rationale:

    Leucadia is a holding company led by Ian Cumming and Joseph Steinberg who have compounded book value by double digit rates since 1979. They are known as some of the smartest value investors in the business and have proven themselves to be very able stewards of shareholder capital. Valuing Leucadia is a much different process than most investments because really it is an investment holding company. Currently Leucadia has quite a bit of exposure into iron and copper from their investment in the Cobre Las Cruces mine. They also are heavily weighted in the financial sector with extremely large investments in Jefferies (JEF) 28% of the outstanding shares, and Americredit (ACF) where they own 25% of the outstanding shares. Leucadia recently invested in a joint venture with Berkshire Hathaway to purchase CAPMARK out of bankruptcy which gives them a huge and potentially profitable footprint in the commercial loan servicing business. Leucadia has demonstrated a consistent track record of working in shareholders best interest including in 2008 when they sold shares of their own stock when it was trading at approximately 3 times book value, to raise capital for its major investments in ACF and JEF which have been the major contributors to the company’s success over the last couple of years. At this point in time most of Leucadia’s investments seems to be fairly valued in our estimation but if we have the opportunity to buy Leucadia at close to book value we feel there is very little risk because in addition to their investments they have a huge income tax credit stemming from a goodwill write-down that they are carrying over, and it is very unlikely that they would have to pay taxes on their profits over the next couple of years.

    Investment Strategy:

    Sell 1 January 2011$20 puts for $1.65 a piece.

    Target profit: $165

    Max Risk: $1,835

    Break Even: $18.35

    Target profit % on max risk: 9%

    Annualized target profit%: 15%

    Days till expiration: 219

    Margin Requirement: $261.60

    Target profit % on cash required: 63%

    Primary Risk Factors:

    A prolonged bear market would likely cause a decline in their existing investments but it would also provide them with the ability to take advantage of new opportunities. Both Ian Cumming and Joseph Steinberg are getting older and because a major premise in the investment in Leucadia is based on their investment prowess there is a risk that their successors will not have the same acumen. 

    Disclosure: Long LUK, Short LUK puts
    Tags: LUK
    Jul 02 12:38 PM | Link | Comment!
  • CNO Stock and Call Purchase
    6-30-2010 CNO Stock and Call Purchase
    JUNE 30, 2010 BY

    1)      Date:6-30-2010

    2)      Company: CNO Financial Group

    3)      Symbol: CNO

    4)      Price: $4.95

    5)      Shares Outstanding: 193 Million

    6)      Market Cap: $955.35

    7)      Book Value: $3.720 Billion

    8)      Tangible Book Value: $3.720

    9)      Earnings Per Share  2009:   $.49            TTM 2010: $.45

    10)   P/E:  11     

    11)   Forward P/E: 7.5 based on a .66 EPS estimate for 2011

    Investment Rationale:

    After emerging from bankruptcy in 2003, Conseco sold its finance business and focused on insurance. Main revenue sources include Medicare supplement, fixed annuities, and long-term care insurance, but the firm also offers life and specified disease insurance, such as cancer and heart/stroke policies, and equity-indexed annuities through a network of career agents, independent distributors, and direct marketing, targeting seniors and the middle-income market.

    CNO Financial Group or the old Conseco has a checkered past which culminated in a bankruptcy filing that they exited in 2003. Now they are differentiating themselves from their competitors in the health insurance industry by focusing on the senior market. Their business plan targets the baby boomer population and particularly those that need supplementary income in addition to their Medicare.

    CNO got into trouble by mispricing their long term care policies which hurt their capital situation and reduced returns. They were able to spin off this business and they sold some of their annuity business off as well, but unfortunately for CNO the financial crisis hit, and the investment portfolio took some big hits. This forced the company to raise capital and to renegotiate debt covenants which was key to its survival, but the overhang of these issues has continued to stay with the company.

    Due to experiencing losses during the financial crisis in 2007 and 2008 CNO has NOL carry forwards could be a big benefit as the company should be profitable over the next few years barring a double dip recession. CNO has a negative history of reserving appropriately for insurance losses so there is certainly uncertainty in this investment which is why we demand a large margin of safety.

     CNO Financial Group’s primary businesses are Bankers Life, Colonial Penn, and Conseco Insurance Group. Back in November of 2009 the famous Hedge Fund Paulson & Co acquired 16,400,000 shares of common stock and warrants to purchase 5,000,000 shares at an exercise price of $6.50 per share. The capital raise of 2009 really reduced the risk in the company substantially so we see no reason why in the next two years the stock should not trade near its book value which is over 300% above the current stock price.

    Total premium collections

        2009     2008     2007  
    Supplemental health:                  
    Bankers Life                                          $ 1,711.7     $ 1,887.0     $ 1,546.1  
    Colonial Penn                                            7.5       8.9       10.4  
    Conseco Insurance Group     600.4       621.8       633.4  
    Total supplemental health     2,319.6       2,517.7       2,189.9  
    Bankers Life                                            1,060.4       1,224.1       885.5  
    Conseco Insurance Group     78.4       129.8       368.6  
    Total annuities                                        1,138.8       1,353.9       1,254.1  
    Bankers Life                                            228.8       209.4       200.0  
    Colonial Penn                                            187.3       174.1       113.7  
    Conseco Insurance Group     240.3       269.8        287.3  
    Total life                                        656.4       653.3       601.0  
    Total premium collections                                              $ 4,114.8     $ 4,524.9     $ 4,045.0  


        Years ended December 31,  
        2009     2008(a)     2007(a)     2006(a)     2005(a)  
    (Amounts in millions, except per share data)                              
    STATEMENT OF OPERATIONS DATA (b)                              
    Insurance policy income   $ 3,093.6     $ 3,253.6     $ 2,895.7     $ 2,696.4     $ 2,620.9  
    Net investment income     1,292.7       1,178.8       1,369.8       1,350.8       1,222.8  
    Net realized investment gains (losses)     (60.5 )     (262.4 )     (158.0 )     (46.6 )     (3.3 )
    Total revenues     4,341.4       4,189.7       4,131.3       4,019.8       3,865.1  
    Interest expense     117.9       106.5       125.3       81.0       61.0  
    Total benefits and expenses     4,167.8       4,186.0       4,149.3       3,860.6       3,462.1  
    Income (loss) before income taxes and discontinued operations     173.6       3.7       (18.0 )     159.2       403.0  
    Income tax expense     87.9       413.3       61.1       58.3       143.1  
    Income (loss) before discontinued operations     85.7       (409.6 )     (79.1 )     100.9       259.9  
    Discontinued operations, net of income taxes     -       (722.7 )     (105.9 )     .3       51.1  
    Net income (loss)     85.7       (1,132.3 )     (185.0 )     101.2       311.0  
    Preferred stock dividends     -       -       14.1       38.0       38.0  
    Net income (loss) applicable to common stock     85.7       (1,132.3 )     (199.1 )     63.2       273.0  
    PER SHARE DATA  (b)                                        
    Income (loss) before discontinued operations, basic   $ .45     $ (2.22 )   $ (.54 )   $ .42     $ 1.47  
    Income (loss) before discontinued operations, diluted     .45       (2.22 )     (.54 )     .41       1.40  
    Net income, basic     .45       (6.13 )     (1.15 )     .42       1.81  
    Net income, diluted     .45       (6.13 )     (1.15 )     .41       1.68  
    Book value per common share outstanding     14.09       8.82       23.03       26.64       25.45  
    Weighted average shares outstanding for basic earnings     188.4       184.7       173.4       151.7       151.2  
    Weighted average shares outstanding for diluted earnings     193.3       184.7       173.4       152.5       185.0  
    Shares outstanding at period-end     250.8       184.8       184.7       152.2       151.5  
    BALANCE SHEET DATA – AT PERIOD END (b)                                        
    Total investments   $ 21,530.2     $ 18,647.5     $ 21,324.5     $ 23,768.8     $ 23,424.6  
    Total assets     30,343.8       28,763.3       33,961.5       33,580.2       32,871.0  
    Corporate notes payable     1,037.4       1,311.5       1,167.6       966.4       809.4  
    Total liabilities     26,811.4       27,133.3       29,709.2       28,858.6       28,347.4  
    Shareholders’ equity     3,532.4       1,630.0       4,252.3       4,721.6       4,523.6  
    STATUTORY DATA – AT PERIOD END (c)                                        
    Statutory capital and surplus   $ 1,410.7     $ 1,311.5     $ 1,336.2     $ 1,554.5     $ 1,603.8  
    Asset valuation reserve (“AVR”)     28.2       55.0       161.3       179.1       142.7  
    Total statutory capital and surplus and AVR     1,438.9       1,366.5       1,497.5       1,733.6       1,746.5  


    Investment Strategy:

    Buy 100 CNO shares at $4.95

    Buy 1 January 2012 $7.5 CNO call for $1.00

    Target Profit: $255 on the stock and $250 on the options for a total of $505

    Maximum Risk: $595 total

    Days Remaining: 569

    Target Net on Cash: 85%

    Annualized target net on cash: 54%

    Break Even Price: $5.95

    Target Price: $7.50 or 10 times our .75 cent earnings estimate for 2011.



    Primary Risk Factors:

    A double dip recession would hurt their investment portfolio and could promulgate ratings downgrades.

    The company has a bad history of reserving properly so if they haven’t fixed their ways that is a problem. 

    Disclosure: Long CNO Stock, Short CNO puts
    Tags: CNO
    Jul 02 12:34 PM | Link | Comment!
  • AIG Bond Investment Recommendation
      Buy the (NYSE:AIG) 6% Due 12-1-16 

    From: ;

    Yield to Maturity: 12.68%

     Investment Rationale: AIG has been in the news the last 3 years for all of the wrong reasons. Clearly the company lost reality with proper risk management and rightly or wrongly was coerced into a government takeover which virtually wiped out the majority of the equity holders in the stock. Unlike some of the other government brokered deals AIG was unilaterally penalized with onerous terms with high interest rates. Fortunately for AIG the government backing has really resolved any issue of counterparty risk that dominated the short term focus of market participants during the financial crisis. AIG has been profitable three of the last four quarters and revenues are starting to recover as market participants are gaining confidence in AIG’s financial strength. AIG is also in the process of divesting some of their larger businesses in Asia to Metlife and they did a great job securing a fair price. Another deal with the British insurer Prudential fell through, but it is safe to say that they aren’t done divesting businesses, and the primary place where that cash will be going to is paying off the company’s debts to the government. Currently the US government owns about 80% of AIG. The next biggest shareholder is the Fairholme Fund which is managed by the famed value investor Bruce Berkowitz. The Fairholme Fund has posted a cumulative 10 year return of 237.17% versus a negative 7.86% return through the period of (6/1/00-5/31/10).

    The beauty of buying the debt in AIG is that due to bankruptcy laws AIG’s debt is senior to the equity in the capital structure. Typically the equity would have to be wiped out for the bondholders to lose a single penny and we think that this is very unlikely given the government’s significant stake. Companies go bankrupt for a variety of reasons. Financial companies like AIG typically either have a liquidity crunch where they lose their access to capital like a Lehman Brothers, or due to the heavy regulation in the industry some type of government action occurs. AIG had both due to their Financial Products division which was forced to keep providing collateral as securities insured by the division kept getting downgraded to the point where they no longer could access the capital they needed to stay in business. The government got involved due to the systemic risk in a manner similar to Freddie Mac and Fannie Mae where the equity was virtually wiped out. Now AIG has the implicit backing of the Federal Government so it seems highly unlikely that there will be any liquidity risk whatsoever, and I can’t imagine the government wiping its own equity stake out.

    Even in a worst case scenario which would be some type of government forced bankruptcy the AIG debentures would likely be converted to equity in a better capitalize and reorganized insurer with a drastically reduced debt load. We believe the bonds have a 90% probability of remaining performing bonds, and it is difficult for us to envisage a scenario in which an investor at these prices could lose as these bonds come to maturity. Short term mark to market losses are very possible so we only recommend this for long term bond buyers.

    Investment Strategy: Buy the bonds below 82. This gives us an equity-like return, with a yield to maturity upwards of 12% with significantly less risk.

    Primary Risk Factors: Extensive government interference and a double dip recession could stress this investment. There is likely to be a lot of headline risk over the next couple of years which could affect mark to market pricing.

    Disclosure: Long AIG Bonds
    Tags: AIG
    Jul 02 12:32 PM | Link | Comment!
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