Company Background

It’s Labor Day Weekend. What are you doing sitting at home? Go out and spend! There are endless numbers of sales going on at your favorite retailers. Forget that your credit card is maxed out, you are late on your utility payments and that you are trying to get the bank to reduce the face amount of your mortgage. If you don’t leave the house to buy things and eat fancy dinners, there is no way the US is going to recover from this recession. It is your duty as an American to help us spend our way out of the current economic malaise, irrespective of the additional debt you are forced to take on to achieve this universally desirable goal.

In the article, Buffett discussed his reasons for being bullish on the US for the long run. True to form, he claimed no prescience when it came to timing the markets, but clearly stated that despite near term uncertainly the index averages were destined to move high over time:

Specifically, I think we need to be careful to not put too much emphasis on the value of assets implied by these sales and agreements. This is because there are a number of factors that I believe could lead the discounts to be larger than they would be in an arm’s length transaction.

Throughout the housing crisis Mark has offered ground level data and analysis that is head and shoulders above just about anything else out there. For those of you who are wondering, he is still incredibly bearish on the housing market, mostly because of the continuing supply overhang and what he sees as a coming foreclosure tsunami as more interest rates are due to reset on a plethora of exotic mortgage products.

I am usually mildly outraged by excessive payouts but unfortunately less so than previously. After watching the banks dole out absurd bonuses and golden parachutes after receiving life-saving taxpayer assistance I have become somewhat desensitized to the subject.

Having said that, it is often instructive to take a look at the changes made during Q2 to get a sense of what themes managers are focusing on. Of course, we cannot see their short portfolios so for many of these managers you really only get half the story. But on the long side, having the data from Q4 2008, Q1 2009 and Q2 2009 all together, it is sometimes possible to re-engineer a certain manager’s strategy.

Bank of America Corp. (BAC) said its loans as of June 30 were worth $64.4 billion less than its balance sheet said… Wells Fargo & Co. (WFC) said the fair value of its loans was $34.3 billion less than their book value as of June 30. The bank’s Tier 1 common equity, by comparison, was $47.1 billion.

Obviously I had no idea exactly when during Q2 he had bought his gigantic share but based on his recent track record I was inclined to believe that it was somewhere at the beginning of the quarter (early April) when BAC was in the $7 range. Before I had looked through the 13F filing and when I saw the stock up 6.7% the day after Paulson’s announcement, the conspiracy theorist in me wanted to believe that he was using the knowledge that his disclosure would prompt others to buy (based on the number of copycats out there) to sell out of his position. But, now that I have taken a detailed look at the 13F, I am not so sure that he is still long the stock.

While I am a baseball fan, I don’t think the baseball comparison fits quite right. See, there is no halftime in baseball. Between innings and during the seventh inning stretch there is some time for players and fans to catch their collective breaths, but these are short breaks that don’t allow for substantial rest and reflection. This is why I think a football analogy works much better. So, in an attempt to provide some lighter commentary than usual, the following is my analysis of the first half, the half time speech by the coaches, and what the second half may have in store for the US economy.

Assuming BRK did actually experience a large recovery in book value and a significant positive reversal of the value of its derivative exposure, the question is should we be upset? With 9.5% (as of today, probably more tomorrow) of Americans unemployed and over 16% under-employed, should we begrudge companies and individuals that have seen their fortunes improve since the free fall the US economy experienced in Q4 2008 and Q1 2009? I actually don’t think either of those questions can be answered in generalities. Some people seem to relish criticizing the capitalist machine as a whole, but from my perspective that lumps too many companies in together without considering their roles in facilitating the near collapse of our financial system or the means in which they have been able to regain their thunder.

From Bloomberg:

Being a contrarian investor, whenever I hear that the “consensus” believes something I tend to shudder. In fact, I often take universal agreement as a contrary indicator, meaning that I tend to feel that whatever it is that the herd is predicting will either not play out or, even worse, the exact opposite will result. During earnings season investors are inundated with consensus forecasts for earnings and the market is unfortunately prone to celebrating companies who trump analysts’ estimates but to scorning those who fall short of expectations. Given that market participants often react very strongly to announcements of quarterly revenue, margin, and earnings per share figures, doesn’t it make sense to ask simple questions regarding the historical accuracy of analyst estimates? In other words, if the market as a whole puts so much emphasis on the prognostications of analysts, isn’t it important to know if the numbers that companies are being compared against are even meaningful? What good is using a benchmark to evaluate the quality of a company if that benchmark is completely skewed?

Of course any definitive answer to those questions would be nothing more than speculation. However, if is it the case that company specific fundamentals are more likely to drive share prices now that the volatility has subsided, investors would be smart to revisit a couple of biases that could lead to poor returns.

However, even as an analyst I have continued to follow the sector very closely. Not so much the REITs as the regional banks. If you think about it these banks are not much more than real estate companies. While their main business is not to own properties (at least not by choice), a large percentage of their loan books are tied to real estate. Aside from some business or what are known as C&I loans, the majority of the loans on the books of the banks I follow are tied to commercial real estate, residential real estate and construction.

In their fifth annual international housing affordability survey based on Q3 2008 data, researchers Wendell Cox of Demographia.com and Hugh Pavletich of Performance Urban Planning ranked 265 separate markets in Australia, New Zealand, Canada, Ireland, the UK and the US in terms of affordability.

A) Australia

No wait, even better. I have some senior subordinated debt from private school operator Instituto de Banca y Comercio, Inc. that I know you are going to love. How can you invest in these fabulous companies? Well, according to a recent 10-Q filing, if you buy shares of publicly traded Ares Capital (ARCC) you can become a part owner of these securities as well as a plethora of equally obscure ones.