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abcde_98
15 Comments
Manulife Financial: Enduring Value
1. How many years do you use in your DCF valuation?
2. Are growth rates, etc projected at the same rate through all years?
3. We will gain some insight of the recent "start" of the economic downturn on MFC's results today. Fair enough this factors in to cut 2009 EPS, but what about future years' EPS reduction? This is not going to be a "V" shaped recovery
4. Growth rate of 21.5%. This seems unlikely to continue in future. What are results if reduce it to, say
(a) 12.5% for each year where you assumed the 21.5%
(b) 10% for 2 years with 20% thereafter
(c) 0% for the next 2 years with 20% thereafter?
5. P/E assumption. Also, look at P/BV. Which of these ratios dominates? MFC's P/BV is very high relative to industry. Accounting conventions cause "noise" for these ratios and accounting rules have changed over time. Would be great to see historical trend without this accounting noise...it would likely be considerable work effort.... not requesting any change but something to consider.
6. Dilution of 10% with a capital raise. This I would say is reasonable for ongoing status quo company. However, if MFC desires to bid for AIG and/or other insurance portfolios/companies, financing is likely to be an issue...a large financing could cause MFC to raise substantial funds and perhaps greater dilution than 10%. Something to consider.
A Yahoo Takeover Trade as Google Partnership Crumbles
1. overall market levels have come down, and any recovery will not be "V" shaped but perhaps "L" shaped
2. pricing in the Search world will probably come down as companies realize they are not getting enough end value (aka click-through all the way to actual sale)
3. Yahoo was counting on revenues from deal with GOOG to help build out additional features/R&D. But now, financial pressures will cause YHOO to slow down such product enhancements (or cause YHOO to take on any deal to accelerate product enhancements)
4. MSFT has the negotiating power/control now, as GOOG is out of the way.
5. Perhaps Jerry Yang's arrogance has abeyed in this economic climate.
6. MSFT may (and should, imo) wait things out to observe the effects of things returning to 'normal' at Yahoo without the GOOG revenue and ultimate effect on Yahoo's market share and revenues (note market share could go up, but ad revenue received per market share unit could decline!). The idea here is to better understand the likely future trends as the economy and operating environments have changed substantially.
AIG: America's Insurance Giant
Consumers/common investors will hear about financial exposures (losses) that stock-public companies have because of SEC reporting requirements, but there are significant losses in pension funds, etc.
of course, the consumer/common investor does not hear/see about these enterprises. Oh, and of course, that's in the future, but in a greedy, aggressive, short-term focused society, it is probably only a small % that gives a damm (intentional spelling).
so, the pension funds will be under-funded , amd then they have the following choices:
1. walk away from the fund declaring it insolvent (that has happened in UK/England, but not sure if can do that in USA)
2. add more money to the fund, but where will the money come from?
(a) additional higher % contributions
(b) smaller benefits per month (in the base amount and/or less indexing to inflation or none at all!)
(c) delaying the benefits' payout (eg. working longer)
(d) capping the benefits at some age (instead of the whole remainder of life)
In #2, this is the same situation faced by the USA's Social Security pension benefits scheme ... and the politicians in USA are afraid to make the tough decisions... most likely becuase of politics and looking to be the bad guy making one of the tough calls
But then again, at least the USA nation has a social security system.... some nations in better fiscal shape (eg China) have no social security system as such, so its citizens suffer as well.
The winners? the bankers who are funding all these nations (with the governments of the nations being the face or "front" to the citizens).
AIG: America's Insurance Giant
I like that you have attempted to give examples that the "Main St" of "Any Town" can understand.
I disagree that financial guarantees should be illegal. Many sophisticated legal agreements exist, but they have not been "data-based" as most systems do not contain such flexibility. Companies do disclose the terms of such agreements, however, this is on a per transaction (capital raising, etc) basis.
Yes, sure, a company should provide a SUMMARY of such right, convenants, etc to which they are exposed...and i would like to see such company that has accurately recorded/maintained such exposure. And this would work for financings.... however....the very insurance products themselves that AIG sells provide rights/options/calls to policyholders and these and their value is not disclosed so readily (understandably) to investors.
On that item, i think your point might be more about disclosure vs if guarantees on financings are made illegal , then might as well make guarantees on insurance products illegal because those guarantees can cause significant financial hardship to insurers and investors sure don't know what exposures exist.
anyways, the USA government had and has been weakening the USA as a financial leader for quite some time ... actually the economic downturn was being helpful in some ways:
- lower oil prices
- reducing inflation
- strengthening a weak currency
- recently, other countries have begun to realize their economies were not so strong and not so independent of the USA system
- improving the relativeness of the markets, and reducing economic bubbles ... now if the EU would establish a more objective way of evaluating whether to reduce interest rates (yes, a lot of politics in the EU also, which result in a decision of "status quo") and then lower rates, that would be helpful
Crunching Numbers: Why I'd Buy AIG
everyone talks about the value of the assets, which is good, to a point. Remember though that if there is no market (ie, no one wants or no one is large enough to buy your assets), then what is the value of those assets?
2. Liabilities
The assets are there to provide for the Liabilities... so what happens when
(a) AIG need to pay out claims??? They use their cash, which in effect increases the % of total assets which are less liquid.
(b) policyholders start to cancel their contracts which have significant surrender (cash) values??
Two quick comments on the analysis:
1. we are in a new era going forward ... historical assumptions not so applicable (though government could intervene to attempt to change assumptions)
2. when calculating Present Value, the interest (discount) rate used should be the rate that you as a investor demand as a return on your investment. If you are happy with 4.5%, then ok, but other investors want something like 15%.... try inputing 15% and see those PVs decline rather significantly !!
Let Lehman Fail
The USA is a litigious society... well citizens, get off your arses and do something!
There have got to be some attorneys out there that can argue the actions of government are against the law, constitution, or otherwise the government has failed in its duty. Maybe no attorneys in America are willing to take up that fight ... maybe it takes outsiders (eg. a foreign nation) to bring forth action!
Similarily, the government should not bail out "insurers" like AIG, who actually manufactured products similar to the investment banks.
Bank of Montreal: Should You Be Tempted?
Citi: Break It Up! Break It Up!
i do not know Citi's business that well, but the concept seems reasonable. In fact, like the author, I have beeh harping for quite some time for AIG to split up -- problems with transparency would be reduced and investors would have the opportunity to invest in the parts of the business that they wanted.
but, i disgree with Tom Brown's (bankstocks.com) picks and harping to go long on:
- Montpelier Re (MRH) [i think they averaged down from upper 20's/low 30's so average cost was near $20/21]
- First Marblehead (FMD) [was recommended in high 40's low 50's]
4 Recommendations to Defend Against a Financial Armageddon
1. "The economy will recover in "12 months"". The ultra-wealthy will survive. The middle class? Some will make it, others will not. Standard of living has been chopped.
2. Consumers keep borrowing. You think you can live on someone else's finances all your life? AT some point the lenders smarten up.
3. USA vs other countries. "Oh, the economy will recover" Just wait until you go for that business trip or vacation abroad -- not just the higher cost, but some places "no want stinking dollar" (yes, a foreign vendor said those words!)
4. USA as powerhouse, world leader, etc. Too many nations (both eastern and western) do not agree with your policies. What is the USA going to do
...bomb them? first they will hide out and make you spend and spread your resources to come get them
...boycott their products? there are enough other nations that were savers vs debt holders that will buy from those nations. By the way, that family in a shack in central India has no debt, but some USA citizen living on debt for their life...is just that, in debt and has demonstrated they are no able to earn enough to pay off that debt (or just kept on spending)
... withhold goods? give some examples. clothes, cars, computers? you can buy those from a China
... withhold services? question is if they need the services.
... withhold commodities? what does the usa have? usa is an importer overall.
The standard of living in the usa is on the decline. (but let's talk about the economy, supported by a government that keeps borrowing, or when it feels the needs, prints its own money ... i guess the individual citizen would like to do that to maintain their prior standard of living).
4 Recommendations to Defend Against a Financial Armageddon
The US consumer is in for a reality shock to their standard of living and relativeness to consumers in other countries. I've said that back in 2006, but my point is: society and the US consumer wanting to have, have, have and so taking on debt, debt, debt.
US government is also not so fiscal minded. In layman's terms, the wars (Iraq, Afghan, and minor ones) have a cost, funded mostly by the USA. Who funds it? ultimately the US citizens, through taxes, reduced services, etc. The companies/citizens benfitting have been those in the defense sector...already the US was declining and one theory says wars create economic activity.
On the wars alone, the USA gov't has hurt its citizens for the next generation (starting say 2003, after not pulling out), through:
- worse standard of living
- paper ripped in half called the "dollar"
- protectionism and somewhat confinement/"jail... (how can you leave if your currency worth has been cut by 50%)
- social security system... it just keeps getting debated; no one in gov't wants to fess up and take the hit / pay up the money to fund the benefits that the US gov't promised
Having said that about the US gov't, China is getting lucky.
- Instead of psychologically warped teenage mids in the USA taking a gun to their school or local shopping mall, in China it is the gov't who takes guns on its people (this is not a religious point - rather sit down, talk it out, and be reasonable).
- China, being a communistic country takes care of its people, correct?? WRONG! Where is the healthcare for all? Where is the social security system? Come on China, you have a large surplus, why not provide for your people? By the way, many are at or near retirement age, oh why not keep the money in the country's coffers.
As for the Fed, and for companies who were greedy/lax, let the market decide. Should we all take our savings (or get that last minute loan) and buy shares in any XYZ company; and expect the Fed to bail us out? No.
The US peoples' standard of living has been pulled from underneath them. Carroll Quigley wrote "The Tradegy and the Hope" about the rise and fall of civilizations (money,power,etc) over time. The stock market may or mat not reflect it always, but when you have less than your previous generation, and want to take that trip to Europe or Asia and see that vendors don;t even want your currency anymore, those are telling signs. Hey, but you had it good when you living on someone else's money whilst borrowing..eventualy someone comes knocking to collect.
Chinese Job Market Demographics: 3 Implications
Hey China, spend some of your trae surplue to provee benefits you your population
Why It's Not Too Late to Short China
5% Revaluation of China's RMB? Are you Crazy?
The worldwide "central bank" concept, influenced by the USA and thus US dollar is in question. Carroll Quigley, a Georgetown University, Washington DC, professor, wrote a 1,300 page book entitled "The Tragedy and the Hope" about the rise and fall o civilizations. The USA is in a decline in the world, doesn't anybody understand that.
There is already outsourcing using persons from Michigan.
US persons have and are in for a major, severe, unprecedented, tsunami, of adjustment of lifestyle. Sovereign funds own a piece of some important US companies, and one day the consumer of China or India will be telling the USA, improve your service or we will go elsewhere.
It's Time to Break Up AIG
On the Yahoo message board, it was an eye opener to read of another aspect of the mortgage industry -- the appraisals themselves and how companies like an AIG (and others), can play hard ball / bully the appraisors and their firms. As the mortgage industry is scrutinized further perhaps issues like this will become more apparent and the "bully" advantage will decline.
Years ago there was talk in the industry of some insurers making money by not paying claims (or significantly delaying). Some other companies made money through "float" (accepting money as an intermediary and then holding it for a little while before paying it over to the party it should go to). How much additional income is still generated by the insurance industry through such practices?
Where was the ERM? Derivatives? that are illiquid? There is always a winner and loser with derivatives. Sure, just keep taking one side of a derivative trade, oh and be sure not to protect against losses through purchase of a security at, say, a 10% loss level. Oh, we never thought about it? Oh, there is no one offering that type of derivative of the magnitude of our portfolio? Oh, PwC said we had a material weakness because we did not record the credit quality of the business underlying the derivatives - who needs to know that? Oh, forget Kevin Costner, we are the Untouchables.
The competitive advantages that this company once had have been and continue to erode, just like the US dollar.
Thoughts on Ambac Bailout, MBIA, Berkshire's Muni Bond Backing
But, I'd have to say there was/is an element of manipulation with a hint of a deal and a lot of weasel room / ambiguity that it would be somewhat difficult to dispute its plausibility.
The strange thing is: why should almost the whole market go up with a potential (or actual) capital solution to one existing, financially troubled, insurer? There are new market entrants such as Buffett and likely others, which can fill the void of coverage needed. Is finding a solution to this one company: (a) the panacea for the whole market? (b) putting more into the hands of the consumer to drive the economy?
Hardly think so, so go figure when technology companies and other seemingly less correlated industries suddenly rebound.
The credit market meltdown can be attributed to lack of risk exposure tracking/management and possibly some common sense. Spreads/premiums were decreasing to rather low levels. Many derivatives were/are involved. In contrast to an underlying security with derivatives, there is a winner and a loser. Too many persons on one side of the market. Oh, and of course, the underlying underwriters/insurers of the credit risk letting their underwriting discipline disappear. And how about that AIG which forgot to consider (and/or record) the credit risk quality of the underlying companies (vs just the quality of the securitized vehicle)? The "pump" is certainly on at AIG with the WSJ publishing multiple articles to defend the stock.
Is the credit situation an acute (very hard hitting, one time) event or is it a chronic (ongoing, still hard hitting though we may think it is a shock at the magnitude of the first round, future rounds are quite bad also) event?
More problems in the credit market in my opinion. It's also amazing how overseas markets rocket when there is a hint of a recovery in the US economy -- ya think it's fixed overnight? for every sector?