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Philip Mause

 
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  • Who Benefits The Most From Lower Oil Prices?
    Today, 2:06 AM F, GM, YUM 9 Comments

    Summary

    • There has been considerable discussion of the benefits to the U.S. economy due to lower oil prices.
    • A comparative analysis suggests that a number of other countries will achieve much greater benefits due to lower oil prices.
    • By comparing net oil imports and GDP, the amount of reduced oil expense can be calculated at a percent of GDP.
    • Using this measure, the benefit to the U.S. of a $50 per barrel drop in oil prices is roughly .6 percent of GDP.
    • Other countries will achieve much greater savings - Japan (1.7% of GDP), South Korea (3.4% of GDP) and India (2.8% of GDP).
  • Xerox: Solid Balance Sheet And Enormous Owner's Cash Flow
    Fri, Jan. 23 XRX 12 Comments

    Summary

    • Properly analyzed the Xerox balance sheet has zero net debt.
    • Xerox trades at 7.3 times owner's cash flow.
    • Xerox will benefit from earnings tailwinds in the form of share repurchases and lower interest payments.
    • Xerox is misunderstood because earnings are much less than cash flow and the balance sheet contains hidden assets.
    • Xerox should trade at 10 times owner's cash flow which would produce a price 39% higher than Wednesday's close.
  • Beaten Down BDCs: TICC Capital
    Tue, Jan. 20 TICC 5 Comments

    Summary

    • TICC is now trading at 20% below net asset value and has a dividend yield of 15.6%.
    • TICC has relatively high leverage and relatively high CLO exposure.
    • On the other hand, TICC has no oil and gas loans in its loan portfolio and has disclosed a relatively small percentage of those loans in its CLOs.
    • TICC has recently authorized a share repurchase plan of up to $50 million which may tend to put a floor under the stock.
  • The Dollar Dilemma And What It Means For Investors
    Sun, Jan. 18 ACAS, ARCC, HPT 61 Comments

    Summary

    • The dollar continues to rise against most leading currencies.
    • This tends to drive down commodity prices, make exports less attractive and create an increased danger of deflation.
    • It is also likely that, if the trend continues, the Fed will be cautious about raising rates.
    • A strong dollar is generally good if it is a sign of a strong U.S. economy but can be bad if it is a sign of international panic.
    • Investors should focus on companies that do business in the United States and provide stable cash flow; BDCs and REITs are attractive on this basis.
  • Beaten-Down BDCs: Prospect Capital
    Sat, Jan. 17 PSEC 48 Comments

    Summary

    • Prospect Capital saw its stock decline in December and is now trading at a large discount to net asset value.
    • PSEC is one of the largest BDCs and has an excellent management team, which has been purchasing the stock heavily of late.
    • PSEC's investments are diverse and will likely perform well under any reasonable scenario.
    • PSEC does have some energy investments that create the possibility of write downs but, even given a stress test, PSEC looks cheap here.
    • PSEC has plans for restructuring that could provide the catalyst leading to a higher valuation.
  • Beaten Down BDCs: American Capital
    Wed, Jan. 14 ACAS 24 Comments

    Summary

    • In the past several months, a number of business development companies have experienced declines and are now trading below net asset value.
    • The recent turmoil in the oil patch is the first situation in which business loans made since 2009 are perceived to be at risk of default on a large scale.
    • Thus, business development companies face the risk of significant losses on loans and the consequent reduction in dividends and decline in net asset value.
    • Concern about this danger and other factors have led stocks in the sector to decline to levels well below net asset value and have created some bargains.
    • I will first analyze American Capital which, I believe, is one of the biggest bargains in the sector.
  • 2015 Outlook And Picks
    Thu, Jan. 1 LXP, ACAS, GOOG 14 Comments

    Summary

    • The market is roughly 5% overvalued, but will grow into its price in 2015; the most likely result is the S&P 500 up 4.7%.
    • The high dollar and low inflation will deter the Fed from raising rates until the second half of the year; year-end Fed funds rate no higher than .75%.
    • Oil will stabilize between $65-$85 per barrel.
    • We will reach an agreement with Iran, the Venezuelan government will fall, and the ECB will engage in massive QE.
    • Picks are Lexington Realty Trust, Hospitality Properties Trust, American Capital, and Google.
  • The Feds May Sell Oil From The Strategic Petroleum Reserve
    Dec. 12, 2014 USO, BNO, CRUD 20 Comments

    Summary

    • The Government Accountability Office (GAO) has recently completed a report analyzing the Strategic Petroleum Reserve (SPR) and concluding that it may be advisable to reduce its size.
    • The SPR contains 691 million barrels of oil which is considerably in excess of the amount required by the International Energy Agency.
    • While a sale of oil from the SPR now would constitute bad public policy from a number of perspectives, it may make sense to reexamine the SPR and its role.
    • A buy-low, sell-high strategy would generate income for the federal government and would also tend to stabilize world oil markets.
    • This strategy would suggest buying oil at this time and possibly expanding the SPR's capacity.
  • Aemetis: Rewards Outweigh Risks
    Dec. 11, 2014 AMTX 15 Comments

    Summary

    • Aemetis operates an ethanol refinery in California and a biodiesel plant in India.
    • It has been generating solid cash flow this year but the third quarter saw a dip in earnings and cash flow.
    • AMTX's share price has declined precipitously due to the general pullback in the energy sector.
    • AMTX is certainly sensitive to ethanol price trends but these may not track petroleum price trends.
    • AMTX will also benefit from a number of other tailwinds which create the potential for a substantial increase in cash flow and valuation.
  • Methanex: Pullback Creates Attractive Entry Point
       • Dec. 9, 2014 MEOH 5 Comments

    Summary

    • MEOH is the world's largest methanol producer and dominates the methanol market.
    • Methanol is a liquid that can be produced from natural gas (and other inputs) which has a number of chemical applications and can be used as a transportation fuel.
    • MEOH is about to add additional capacity which should produce a substantial increase in cash flow.
    • MEOH's price is depressed due to the general pull back in the energy sector.
    • While the price of methanol has declined, MEOH can generate solid cash flow at a relatively low price and should generate enormous cash flow under normal conditions.
  • Book Review: The End Of Normal By James K. Galbraith
    Nov. 29, 2014 6 Comments

    Summary

    • This is an excellent book providing the reader with helpful insight into modern economic debates.
    • The author's position is that various factors have resulted in a situation in which "normal" levels of economic growth may not be achievable.
    • These factors are resource scarcity, financial fraud, the nature of technological development and the futility of military force.
    • The author does not really make a persuasive case that these factors suddenly became important in 2008 or that they effectively impede economic growth.
    • His policy prescriptions - more safety net, less military spending, taxes on economic rents - may have some merit, but they do not resolve the problem he identifies.
  • The Paradox Of Cheap Oil
    Nov. 25, 2014 ACAS, ARCC, COP 15 Comments

    Summary

    • The recent decline in oil prices has been welcomed as a stimulant to the economy.
    • However, because the United States has become a large oil producer, it is unclear whether lower prices will actually increase GDP.
    • On the other hand, lower oil prices will certainly restrain inflation and further postpone the need for an interest rate increase.
    • As oil prices decline, high-cost production tends to go off-line and balance the market.
    • The investment implications are positive for interest rate sensitive stocks like BDCs and REITs and arguably positive for select oil sector stocks.
  • American Capital: 50% Upside With Downside Protection
       • Oct. 14, 2014 ACAS 34 Comments

    Summary

    • American Capital (ACAS) is a BDC which is generating strong cash flow but not paying dividends due to a large tax loss carry forward.
    • Its current net asset value (NAV) is $20.12 so that it is trading at a discount of 31%.
    • ACAS is planning to implement a restructuring which should unlock its true value with the resulting equities trading at or above current NAV.
    • If, for some reason, the restructuring does not take place, ACAS will almost certainly resume share repurchases which will drive the price up to the $16-17 level.
    • NAV will tend to increase at roughly 10% per year while this scenario is playing out - providing further downside protection.
  • The Reliable Dividend Yield Metric Is Flashing A Faint Buy Signal
    Oct. 10, 2014 ACAS, JNJ, T 17 Comments

    Summary

    • I have written before about the dividend yield ratio of the S&P 500 and the fact that it has stayed in a range of 1.8 to 2.2 since October 2009.
    • In the past year, the dividend yield ratio has remained in a tight range of 1.91 to 1.97.
    • At Thursday's close the ratio rose to 2.00, creating a faint buy signal at the top of the range for the past year.
    • Although the dividend yield ratio will someday escape the range, it is unlikely to do so until interest rates increase.
    • There is more and more reason to believe that interest rate increases are far off in the future.
  • The Dollar, The Fed And The Market
    Editors' Pick • Oct. 10, 2014 ARCC, HPT, LXP 66 Comments

    Summary

    • The dollar has been rising lately against the currencies of many of our most important trading partners.
    • A rising dollar can occur because of robust domestic economic growth but it can also be caused by economic weakness abroad or global insecurity.
    • Regardless of the cause, a rising dollar tends to depress domestic economic activity and reduce inflation. Commodity prices tend to decline significantly.
    • These impacts - combined with negative impact on earnings of foreign subsidiaries - tend to produce a drag on corporate earnings and can be a negative for the market.
    • However, these impacts "should" lessen the pressure on the Federal Reserve to tighten; in our unusual context, the big question is whether this will be the case.
  • 3 Dirt-Cheap REITs
    Sep. 23, 2014 FSP, HPT, LXP 29 Comments

    Summary

    • Real Estate Investment Trusts (REITs) offer investors attractive yields plus potential appreciation.
    • The best metric for evaluating REITs is the ratio between price and funds from operations (P/FFO), which measures what an investor is paying for funds generated by properties.
    • FFO is measured by adding depreciation and amortization to earnings and excluding losses or gains and sales of property and impairment charges.
    • Three REITs have been identified with P/FFO ratios at or below 10; there do not appear to be any negative factors that justify such low valuations.
    • The REITS -- LXP, HPT, and FSP -- all pay generous dividends; at these prices, they are strong buys.
  • Book Review: The Dollar Trap By Eswar Prasad
    Sep. 20, 2014 UUP, UDN 10 Comments

    Summary

    • This book describes the workings of the dollar as the World's reserve currency in detail.
    • It points out many counterintuitive phenomena which have confounded investors - especially the dollar's tendency to rise in times of stress.
    • The author correctly concludes that the dollar is unlikely to be supplanted by any alternative in the foreseeable future.
    • This creates a complex problem for investors; the dollar's valuation is affected by factors unrelated to the trade balance and dollar denominated prices may not make economic sense.
    • In the immediate future, it appears that a rising dollar means less inflation, lower commodity prices and headwinds to economic growth. Interest rate sensitive equities should continue to do well.
  • The Real Reason For The Housing Bubble And The Financial Crisis - Investment Implications
    Sep. 2, 2014 ARCC, BAC, C 110 Comments

    Summary

    • The previous decade saw an unprecedented housing bubble and an ensuing financial debacle.
    • Federal Reserve Policy seemed out of sync, with the Fed feeding the flames of the housing bubble with low rates and then being slow to respond when the bubble popped.
    • The Fed has a dual mandate - full employment and stable prices - which it generally follows by measuring the unemployment rate and the rate of inflation.
    • Starting in 1983, the measure of inflation was revised so that house prices became irrelevant and "owner's equivalent rent" was used instead.
    • Had the old measure of housing inflation been continued, inflation would have appeared early in the decade and the Fed would have tightened earlier and popped the bubble.
  • The Private Market Value Strategy: Part 3 - Leveraged Companies
    Aug. 27, 2014 AMTX 3 Comments

    Summary

    • The private market strategy seeks to capture the value that a private investor (including a corporation making an acquisition) would attribute to an entire company.
    • Leveraged companies can contain hidden value which would be attractive to a private investor.
    • Leveraged companies have to be analyzed carefully to isolate cash flow, debt terms, and valuation and to determine actual private market value.
    • In a sluggish economy, leveraged companies offer one of the rare opportunities to generate earnings growth as debt is retired and interest expense declines.
    • The two companies which I have written about using this strategy have both been acquired by larger companies; the third - Aemetis (AMTX) is one of my highest conviction holdings.
  • Aemetis Still Looks Like A Winner
    Aug. 13, 2014 AMTX 20 Comments

    Summary

    • A recent article suggests serious problems for Aemetis; the article suggests excessive leverage and an impending downward spiral.
    • The article overstates the amount of debt owed by AMTX and exaggerates the degree of difficulty AMTX will have in repaying the debt.
    • AMTX is generating strong cash flow and should be able to pay off roughly $35 million a year of the outstanding debt.
    • With EBITDA of some $45 million and debt of roughly $42 million in July 2015, AMTX will have many alternatives for dealing with the remaining debt.
    • With debt fully paid down in less than 2 years, AMTX can generate $2 a share in earnings and support a share price in the $20 - 30 range.
  • Current Economic Data Does Not Suggest A Rate Increase Anytime Soon
    Aug. 6, 2014 3 Comments

    Summary

    • There has been some recent speculation that the 4% GDP growth in the second quarter may suggest an imminent rate increase.
    • In fact, the second quarter followed a disastrous first quarter and GDP growth for the last six months is less than .5% or 1% per year.
    • Other data - especially labor force participation numbers - suggests a great deal of "slack" in the economy which militates against a rate increase.
    • Other central banks are still expansive which means that a US rate increase would push the dollar upward, increase the trade deficit and create deflation.
    • I will stick with my earlier prediction that there will not be a two handle on the Fed Funds rate until 2017, most likely the second half of 2017.
  • The Market Is Overpriced But The Correction Will Likely Be Shallow
    Jul. 29, 2014 SPY, IVV, DIA 16 Comments

    Summary

    • The dividend yield methodology for valuing the market has been reliable for the five years since the Crash.
    • Under this methodology, the S&P 500 trades between a 2.2% dividend yield and a 1.8% dividend yield with a midpoint at a 2.0% dividend yield.
    • At Monday's closing price, the S&P yields 1.89% in dividends making it overpriced in comparison with the midpoint of the range.
    • A pullback to 2.0% would imply a correction of roughly 5% in the Index; a less likely result would be a pullback to 2.2% or a 14% correction.
    • The methodology should continue working until there is a major disruption in dividend flow or a major increase in interest rates.
  • What Happened To 'Peak Oil'?
    Editors' Pick • Jul. 7, 2014 AMTX, CLNE, MEOH 275 Comments

    Summary

    • M. King Hubbert's prediction of a peak in US oil production proved eerily accurate in 1970.
    • Peak oil enthusiasts predicted a peak in world oil production between 2004 and 2008.
    • In fact, depending upon how it is measured, US oil production is now approaching the 1970 peak and world oil production has been increasing since 2009.
    • The reason is that more expensive sources such as shale fracking, tar sands, and tertiary recovery have emerged and are increasing rapidly.
    • A new oil market is emerging with higher marginal costs of production and more stable (but high) prices; there are very important investment implications.
  • Book Review: Stress Test By Timothy Geithner
    Jul. 7, 2014 SPY, DIA, QQQ Comment!

    Summary

    • Geithner was in the center of the 2008-09 Panic and this book provides a useful perspective from an excellent vantage point.
    • There are some "holes" in the analysis - why didn't authorities jump to action in 2007 when the subprime mess had been revealed and why wasn't it detected even earlier.
    • The book reveals that Dodd Frank may have actually made our financial system more dangerous.
    • I agree with Geithner on most points but I think he papers over some very tough and important issues.
    • The book supports an important thesis of mine - intelligent investors absolutely have to assess public policy responses and incorporate that assessment in their investment decisions.
  • Dividend Investors Should Consider Private Equity Managers
    Jun. 23, 2014 APO, ARES, BX 42 Comments

    Summary

    • Private equity managers, including Blackstone and Kohlberg, Kravis, Roberts, are now publicly traded and pay attractive dividends.
    • These stocks offer retail investors exposure (with liquidity) to the private equity market which has traditionally been a high performer.
    • There are eight stocks in the sector and recent performance has been solid.
    • Downsides include K-1 tax forms, transparency risk, and sensitivity to economic cycles.
    • On balance, an exposure to these stocks will produce both yield and appreciation for dividend investors with some appetite for risk.
  • Aemetis Is A Potential Four- Or Five-Bagger
    Jun. 15, 2014 AMTX 38 Comments

    Summary

    • Aemetis has converted first generation ethanol and biodiesel plants into advanced refineries and has recently obtained NASDAQ listing.
    • At its current price and projecting from first quarter results, AMTX now trades at an enterprise price of less than 5 times enterprise owner cash flow.
    • A number of factors should increase cash flow going forward.
    • Key factors which will increase earnings are: 1. operations at its plant in India, 2. replacement of expensive debt with cheap debt, and 3. the reduction of outstanding debt.
    • Making conservative assumptions, AMTX could earn well north of $2 a share and trade north of $30 within the next 2 years.
  • Why Piketty Is Wrong: Part 3 - Policy Recommendations
    Jun. 9, 2014 60 Comments

    Summary

    • Further review reveals the importance of housing values for Piketty's thesis and suggests some counterintuitive results reached in his work.
    • Piketty's recommendation for very high marginal income tax rates would lead to a preoccupation with tax avoidance and his tax on capital idea is unworkable.
    • A better solution for the United States would be much lower income taxes, a value added tax and other policy revisions targeted at our real problems.
  • American Capital Is Attractive Below $15: Here's Why
       • May. 28, 2014 ACAS 13 Comments

    Summary

    • American Capital (ACAS) current price of $14.73 offers the investor a discount of 26% to the true value of $19.81.
    • ACAS management has been shareholder oriented and is currently exploring restructuring alternatives that may unlock substantial latent value.
    • ACAS has a subsidiary, American Capital Asset Management, which may be the focus of the restructuring and which could generate substantial value for investors.
  • Why Piketty Is Wrong: Part 2 - The Spirit Of An Age
    May. 26, 2014 47 Comments

    Summary

    • Further review has revealed some dubious aspects of Piketty's calculations.
    • Piketty assumes we are headed back to the world of Jane Austen and Balzac, a stultifying world dominated by inherited wealth.
    • In reality, a world of "too much capital" will be more like the Wild West with opportunities (and unfortunately pitfalls) galore.
  • Why Piketty Is Wrong: Part 1 - The Math
    May. 4, 2014 65 Comments

    Summary

    • Thomas Piketty's "Capital in the Twenty-First Century" raises important issues.
    • It argues that returns on capital will eat up ever larger shares of national income.
    • Piketty's argument is flawed because of assumptions about the return on capital.
    • He also makes unwarranted assumptions about the elasticity of substitution between capital and labor.
    • Piketty neglects the fact that under reasonable scenarios, implausibly large levels of savings would be necessary for his projections to materialize.
  • The Perils Of Pauline And The Power Of Monetary Policy
    Apr. 18, 2014 48 Comments

    Summary

    • We have had a series of economic potholes since the Panic of 2008.
    • These have included the Horizon oil spill, the Flash Crash, the Greek default scare, the US debt ceiling crisis, the MF Global Bankruptcy, and the Fukushima nuclear disaster.
    • Despite these setbacks, aggressive monetary policy has enabled us to avoid a relapse into deflation.
    • The old mantra "Don't Fight the Fed!" has a lot of truth to it; monetary policy is still a very powerful tool indeed.
  • S&P 500 Is Below Fair Value With A Strong Support Level Of 1668
    Apr. 13, 2014 SPY 27 Comments

    Summary

    • The dividend yield model of the S&P 500 has worked very well for more than 4 years.
    • The model suggests a fair value based on a 2% yield - this suggests a price of $1835 for the index.
    • The yield level of 2.2% has not been breached since the Fall of 2009 - that price level is now $1688.