bond investor

Piotroski Formula Yields 14 Promising Investments

Since this was written, PPD (PrePaid Legal) has become subject of an SEC inquiry into its membership statistical information, marketing practices, and stock repurchase program. I thought the 9 Piotroski test screened *out* potential accounting oddities! I guess no screen is perfect, and one example doesn't invalidate the Piotroski method.

Prime Bomb: Former Golden Child Hudson City Bancorp Sees Prime Delinquencies Skyrocket

You should be long HCBK, not short. Its franchise is significantly undervalued. I think you make three four errors; it may be that you've thought of these things but just didn't include them in the article.

1. A loan portfolio has a "cure rate," in which *what's left* in the loan portfolio *after* certain loans are provisioned for and charged off is *healthier* than before. Hence projecting chargeoffs and provisioning to head upward indefinitely is not appropriate. In fact, many analysts looking at 3Q bank earnings thus far have concluded that the declines in loss reserves is a *positive*, not a negative, as it shows "what's left" in banks' loan portfolios has not needed as much provisioning as in prior quarters.

2. Your charts on delinquencies need more data series to do apples-to-apples comparisons. You compare HCBK's prime jumbo book to the FNM book of non-jumbo loans. I would be encouraged, not discouraged, that a portfolio of loans with a high original loan size was performing so well versus a portfolio of loans with average-to-low original loan size. While LTV is most important, we should be clear on the second-order effects, too, and you're not.

3. HCBK can easily earn its way through its loan losses. Its efficiency ratio is in the mid-20s, meaning that for every $1.00 in deposits, only about 25c goes to expenses. Contrast this to the bank sector average efficiency ratio in the low 60s. HCBK can keep offering better deposit rates and growing spread income. But you only focus on the loan book. More comprehensive analysis looks at the *future*, not just the present and past.

4. All stocks should be valued on both a relative and absolute basis. I agree that on an absolute basis, HCBK is facing some headwinds, but as 1-3 above explain, I think you are overplaying them. On a *relative* basis, HCBK is cheaper on a Price/Book basis to banks like WFC, with it Wachovia/Golden West option-ARM timebomb ticking inside its balance sheet. But perhaps you are also short WFC. If so, then we agree on something!

Disclosure: long HCBK, can't short specific stock like WFC 'cause all my money's in my IRA.

Some True Safe Havens Are Still (Surprisingly) Undervalued

Mark/JJ: most recent theories suggest black holes *do* emit energy:
en.wikipedia.org/wiki/...

LHC generates only a fraction of the energy of cosmic rays hitting Earth all the time. If it was going to create a singularity from same rays, don't you think odds are higher one would have naturally hit Earth some time in the past zillion years?

Also, read your own article link: LHC helium was caused by good old-fashioned equipment failure.

I admire the level of detail in your analysis, and your candor in admitting that you've been short-term wrong on SWC and PAL.

Agree that hoarding instincts may drive the stocks higher. However, there is no similar inflationary force like 1980, but a debt-destruction-fuele... deflationary one.

Will have to check your GM sales data vs retail auto sales data. Initial reaction is that the platinum is still a closed-loop, and whether it sits on dealers' lots or in customers' garages, it's the actual auto production minus guzzlers' Pt reclaimed that matters.

Wish I knew if older cars used more or less Pt than new ones...

TIPS: Nominal Yield, Risky Real After-Tax Return

It isn't just the tax rate for TIPS, it's the timing of the tax payments and the liquidity and transaction costs of meeting them with internal cash flows. Just Google "TIPS phantom income." Taxable investors get principal added to their investment, to be paid at maturity, but the IRS taxes it in each tax year. Funding that tax payment from cash flows would require selling a sliver of your TIPS investment. That reduces the number of "uninformed" retail investors, and it also creates distortions in the big TIPS mutual funds, which are also trying to smooth their yields across months.

It's October - Should We Be Buying?

Alan, very cogent analysis, as I'd expect from a fellow CFA charterholder. You lay out your reasons for bond bullishness, but don't cover the scenario in which commodities would do well. Since you like bonds if the Fed doesn't cut "too much," I'm guessing that you'd prefer commodities if they cut "too much" and take us down a stagflationary road instead of a recessionary/slow-grow... inflation or even deflation road.

Rather than looking at the Fed, I would look at the Asian and Middle Eastern central banks and sovereign wealth funds, since they own and buy far more debt than the Fed. They'll tolerate currency declines in their U.S. holdings only for so long.... perhaps until just after the Beijing Olympics. At that point, look for weak U.S. demand to be exported to the rest of the world.

The 'Credit Crisis' is Really a Risk Crisis

Yes, but as Stichnoth no doubt knows, investment is all about the marginal change. Are corporate spreads wider or tighter than they were in early 2007? Answer: wider. So credit is more costly. Is it "costly enough"? There certainly seem to be plenty of investment banks getting stuck with junk bonds and bank loans on their balance sheets.

Saying it's a "risk crisis" instead of a "credit crisis" is just semantics. "Credit" is just another form of risk, like interest rate risk, reinvestment risk, inflation risk, etc.

Small-Cap Growth: Analyst Coverage Discount?

Alan, the analyst optimism in WHQ would appear to be misplaced, at least in the short term, after the pre-announcement and lower guidance for the company. Your screen might be improved if a sell discipline was built. Maybe there's a "critical mass" of analysts at which excessive optimism is sure to result in underperformance. Given there's a finite number of sell-side firms with any real power over sentiment, there might be a trigger to sell when all the bulge-bracket firms cover a stock. (Note that I'm *not* suggesting that smaller-firm sell-side or independent analysts can't be more "right" than the big boys, just that they by definition they reach fewer people who actually follow their advice (blindly or not).