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  • Aflac's False Currency Woes Create Undervaluation And Opportunity [View article]
    Lets take the simplest cast. Stock X is a US-traded stock where 100% of its revenue/earnings comes from Japan (or some foreign country). You pay $100 for it. Tomorrow, nothing changes except that JPY crashes. Will the stock stay at $100? If you are using fundamentals to value it, the value of its earnings and revenue in USD for US investors is obviously less.

    If you, US investor, have liabilities in USD, you need to look at returns and growth in USD terms. Thats why I used the Fixed Income analogy. You might earn a great yield on a Icelandic bond but if the FX is dropping even more, you, US investor are not going to realize that great return..

    Ray, AFL is not two companies. It doesnt say, lets take the US earnings and pay the US dividend. Furthermore, no one values AFL based purely on US earnings (as they are a small portion of the overall earnings). Would you pay upwards of 35 P/E for a insurance company (by valuing only the US earnings)? With AFL, a big portion of its equity valuation is Japanese growth and Japanese earnings.

    Dan, I dont think retail investors should be hedging anything. Institutions can hedge the cost-basis and perhaps earnings and if you are sophisticated enough maybe even Japan macro, but a JPY bet and Japan macro environment is an essential part of a AFL investment for a retail investor. That was my ENTIRE point. Would you buy GOOG (or some other tech darling) and pretend that tech sector growth has no impact on it because it is such a great company?

    AFL may be a great investment but its wrong for US investors to say: dont worry about that JPY exposure.
    May 2 01:53 PM | 1 Like Like |Link to Comment
  • Aflac's False Currency Woes Create Undervaluation And Opportunity [View article]
    Exchange rates only have an indirect impact on the growth forecasts of AFL's Japanese business (reflected in the answer given by company management).

    This indirect impact is because the same factors that drive FX rates also impact things like returns on AFL's investment portfolio, Japanese GDP rates, health care costs and employee savings rates in Japan etc etc. There can be big uncertainty around whether such macro factors will hurt or help AFL and certainly there will be no conclusions in a short time-frame (<12 months).

    It does not, however, mean that US investors should be indifferent to FX rates. If you are a US investor and not hedging your JPY exposure when buying AFL, you should absolutely be concerned about JPY exchange rates. If you are buying Japanese corporate bonds, would you just look at the interest rate and not worry about FX rate? Would you invest in a fast growing ZWE company in USD when the exchange rate is plummetting regardless of what fantastic earnings it has in Zimbabwean dollars?

    If you want to compare apples-to-apples as an investor, you do need that FX translation (more importantly when making forecasts than just translating what happened in the past quarter) to be able to compare attractiveness of say MetLife or other US companies in your opportunity set. If you state that you want to look at AFL in JPY terms only, my objection becomes moot.
    Apr 30 12:59 PM | Likes Like |Link to Comment
  • AFLAC: Cheap At Current Price [View article]
    AFLAC has "cleansed up" by moving those investments to JGBs.
    Realizing what the Japanese monetary policy means: AFLAC recently announced that they're starting to diversify now into corporates abroad.

    Here's the situation:
    AFLAC makes money (mostly) by selling policies to Japanese corporate employees and investing that float into higher-yielding assets.

    Now the right questions to ask are:
    How will Japanese demographics play in terms of AFLAC's growth potential? Will the Japanese buy more policies in the future or less? Is AFLAC situated for future mortality rates in Japan (if they change upwards from current predictions)? How are the policies structured - if Japan cuts its healthcare spending, how will payouts be affected?

    Now the monetary/fiscal policy impact - you are not paying the current market price for the US business, you are actually paying it for the Japanese business (80%+). So, the fact that its US business "covers" its dividend is irrelevant and is in fact the red herring. But the right questions are:

    If yen devalues, what is the impact on US earnings? If BOJ dumps yen onto the market, yet there are no wage increases, what is the impact on the ability of Japanese to buy more policies? (asset-inflation w/o the accompanying wage-inflation is my base-case scenario for money-printing impact. Havent been wrong in the US, but maybe Japan is a different beast) If JGB vol picks up (as it has in the last couple of days), what do AFL risk managers have to say?

    And the biggie: what happens to JGBs in the long-run? In the short-run, the BoJ competition for long-dated purchasing will boost AFL assets. But if the likes of Kyle Bass are right, watch out AFL balance sheet.

    I wouldnt presume to push my assumptions/conclusions on the intelligent crowd here. But these are questions worth answering for yourself before you jump into AFL.
    Apr 8 01:43 PM | Likes Like |Link to Comment
  • AFLAC: Cheap At Current Price [View article]
    AFLAC has "cleansed up" by moving those investments to JGBs.
    Realizing what the Japanese monetary policy means: AFLAC recently announced that they're starting to diversify now into corporates abroad.

    Here's the situation:
    AFLAC makes money (mostly) by selling policies to Japanese corporate employees and investing that float into higher-yielding assets.

    Now the right questions to ask are:
    How will Japanese demographics play in terms of AFLAC's growth potential? Will the Japanese buy more policies in the future or less? Is AFLAC situated for future mortality rates in Japan (if they change upwards from current predictions)? How are the policies structured - if Japan cuts its healthcare spending, how will payouts be affected?

    Now the monetary/fiscal policy impact - you are not paying the current market price for the US business, you are actually paying it for the Japanese business (80%+). So, the fact that its US business "covers" its dividend is irrelevant and is in fact the red herring. But the right questions are:

    If yen devalues, what is the impact on US earnings? If BOJ dumps yen onto the market, yet there are no wage increases, what is the impact on the ability of Japanese to buy more policies? (asset-inflation w/o the accompanying wage-inflation is my base-case scenario for money-printing impact. Havent been wrong in the US, but maybe Japan is a different beast) If JGB vol picks up (as it has in the last couple of days), what do AFL risk managers have to say?

    And the biggie: what happens to JGBs in the long-run? In the short-run, the BoJ competition for long-dated purchasing will boost AFL assets. But if the likes of Kyle Bass are right, watch out AFL balance sheet.

    I wouldnt presume to push my assumptions/conclusions on the intelligent crowd here. But these are questions worth answering for yourself before you jump into AFL.
    Apr 8 01:43 PM | 3 Likes Like |Link to Comment
  • Playing Cyprus: The Stupid Burn [View article]
    Of course. It goes on until you can no longer pretend. Then, you look for scapegoats to blame for the whole mess. Germans are pointing at Russian money-laundering, Cyprus can point at Greece, Greece can point to HFs. Lots of people to spread the blame around. (Deja vu to the US credit crisis, which one can also point to as one of the causes)

    But regardless of whether there is money laundering or not, Cyprus banking will no longer be the same if/when the banks open. What happens when a sector 7x your GDP shrinks dramatically?

    Even if Russians bail them out (which is no guarantee - and I forget, has Turkey come to terms with Cyprus giving away exploration rights to these gas fields?) , what next?

    (I guess you dont worry about treating morbid obesity when the patient is in the middle of a heart attack, but at some point you should think of a better tool than repeated defibrillation, esp. if you're the one writing an long-term insurance policy).
    Mar 20 02:26 PM | 1 Like Like |Link to Comment
  • Playing Cyprus: The Stupid Burn [View article]
    Why is no one digging into why the bailout is so necessary right now?

    The ECB just told the Cypriots that the credit line is closed. The illiquid assets on the books of the Cyprus banks are worth much less than the depositor base + equity. We can be generous and assume that this hole is somewhat smaller than the $17B claimed to be needed (in reality, its probably bigger and much much bigger if you try to value assets during a firesale). And once the ECB does not allow the bank to use the ELA to swap these "assets" for liquid cash to support the daily operations, the bank is essentially insolvent. Now, if Cyprus cant make the deposits whole on one insolvent bank, the insurance guarantee is worthless. Depositor is every Cypriot and perhaps weak Euro bank will start asking questions about just what is backing the "short-term loan" he or she has made to the bank at low interest rate and whether its worth getting the risk. As deposits fall, the hole gets bigger, the sovereign is increasingly unable to make good on its promise and the classic vicious cycle of a bank run starts.

    That is why depositor guarantees are there in the first place in a fractional banking system. To ensure that people believe the risk is minimal and allow the bank to arbitrage liquidity of money by selling long-term money (loans) at higher rates and buying short-term money (deposits) at lower rates and "managing" the duration mismatch. If you strip away the guarantee, the short-term loan looks a lot riskier, liquidations of long-term assets in fire-sales is painful and creates a self-fulfilling prophesy. That is why even the hint that the guarantee is not "good as gold" is a terrible terribly policy decision to take. If and when some of these banks reopen, will its depositor base still be at $68B or whatever it was before this crisis? And if it isnt, what is the size of the gap between true value of assets and deposits? Is it still going to be that $17B figure? Much bigger, I would venture.

    The ECB can continue to support the banks and provide liquidity pretending that the assets are worth book. But then, that is just German taxpayers paying. And that may still happen, but as seen in every recent election, the propensity of voters to suffer meekly and support politicians who want to continue the charade is getting weaker and weaker.

    It is only a matter of time before the raw mathematics of the problem catches up to all the spin the bureaucrats can throw at it.
    Mar 18 03:27 PM | 2 Likes Like |Link to Comment
  • Smoke And Mirrors In The Herbalife Saga [View article]
    The point wasnt to give armchair opinions on which side to bet on. It was to clarify the confusion about the issues that several prominent blogs are creating. Everyone should draw their own conclusions about the stock, but if there has to be a sound-bite about what I mean, it is this: Retail investors should figure out which of the 3 questions are driving their investment and whether those questions matter.

    My answer is: 1. Very few people are really qualified to make high-quality calls on FTC decisions. 2. Technical flows will drive this stock, fundamentals will not matter much in the near-term. 3. And questions about "social responsibility" are just distractions

    Retail investors who ignore this and become dogmatic about being long or short HLF will end up getting hurt.
    Jan 18 04:24 PM | Likes Like |Link to Comment
  • Herbalife - A Case History In Bad Due Diligence [View article]
    "He has, to the best of my knowledge, no financial interest in the outcome of the Herbalife battle"

    Actually Tom, Hempton discloses a long position in the blog.
    Jan 17 04:46 AM | Likes Like |Link to Comment
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