CaptainJJack

A Windy Credit Market Overview

I used to own Boeing, but I sold it when Mulally left, and I still own GE, although I recently sold at $14.15, after getting in at over $20 last year.

I made a lot of money on Boeing, but I lost on GE (obviously).

I followed the WTC dispute, and I expected this result. You would have to be brain dead not to see what the Europeans were doing, and if it continues, it will eventually kill Boeing.

But, Boeing is not going to do much to pursue this further. Their whole business is selling to countries that have protectionist policies (including the US), and they are not going not start stirring up a trade war.

The whole bet on Boeing right now is the 787, and if it were not so far behind, I would be interested in the stock. The key is NOT whether they will get it done, but rather how much will it end up costing them.

I've heard numbers in the $20 billion area, and if that is even remotely accurate, Boeing's profit prospects are poor even if they sell a ton of these planes.

GE, as you point out, is a play on GECC, and with the stock at almost 1.5 times book, there is at much downside as upside even if GECC works out.

Don't get me wrong, GE, especially ex GECC and Universal, is a GREAT company, and a pretty good long, long term bet.

But, I cannot get enthusiastic about the stock at prices above $14, even though Goldman and Morgan Stanley both seem to feel there is strong short term upside.

While I cannot take issue with their seeing a short term rise to $18 (Goldman), I cannot see any reason why it isn't equally likely to fall to $10 if new problems emerge in GECC's commercial portfolio, as seems a better than even chance.

Is Buffett Backing Away from Stocks?

I have held BRK for years, now, and I will hold it as long as Buffet is there. I read the NY Times article, and as far as I could see, there is nothing new, here.

If there was ever a divergence, it was when Buffet bought the Conoco stock, last year. He almost never buys after a run up like that, and the only explanation I have is that he felt that oil prices were not going to fall much.

I also think the put he sold seems out of character, not so much because he sold a put, but that he sold a put on the general market performance. I think he did it because he got GREAT terms, and there has been no time in the last 100 years where he would have lost anything on his bet.

If there is anything that characterizes Buffet is his unwillingness to part with money. He sat on huge piles of cash a few years ago, and this while virtually all of Berkshire's businesses were generating huge amounts of cash. This was actually causing BRK to under perform as cash was yielding close to zero, after tax.

That he put money to work ,when everybody else was bailing out, is vintage Buffet, and I expect his bets to payoff significantly in the future. It is totally consistent with the concept of "margin of safety".

I also do not see him doing much as long as the market is fully valued. He is not a market timer, but he DOES make bets based on his perceived VALUE of the market (just like Ben Graham did).

That he ends up buying low and selling high makes it look like he is timing the market, when he is not, and he makes no prediction about what the market will do when he makes a decision to buy or sell.

Kids go back to school tomorrow, as parents breathe a collective sigh of relief. Here's what President Obama plans to tell them.

I could not agree more. You have to wonder what the town hall crazies are smoking


On Sep 07 05:55 PM DVW wrote:

> Looks ok to me. I dont understand the fuss.
>
> Better than "just say NO" and "a thousand points of light".

Top 10 Components of the Dow Jones U.S. Economic Stimulus Index

While it may be obvious, I do not think it meaningless.

All it says to me is that a portfolio of companies that has more exposure to the Stimulus may outperform a market neutral index like the SPY, and has done so, so far.

If you believe, as I do, that the consumer is retrenching, and that with capacity utilization at historic lows, private investment has tanked, then knowing which companies have the greatest exposure to the only significant buyer is good information.

I know nothing of how this index is composed and how the stock weights are determined, but I do not look at this as being anything more than a "portfolio strategist" estimate of which companies will do well in the near term.

Instead of it being Goldman or Morgan Stanley, you have some analyst hired by Dow doing the picking.


On Sep 06 06:46 PM whidbey wrote:

> What, if anything, does your post prove? That the stimulus has been
> more effective for the index as compared to the S&P? If that
> is your argument you deserve to be ignored. Pitiful and meaningless.

Why Invest in Oil Over Alternative Energy

I remember talking to a physicist a number of years ago about carbon and generating electricity.

He said to imagine that you were standing in front of a coal fired plant, and watch as a steady stream of coal cars dump their fuel. For a typical plant this amounts to thousands of cars dumping coal each year.

Now, imagine standing in front of another power plant of the same size where natural gas cars were streaming in. There would only be one fourth the number of cars, in terms of carbon delivered.

Now think about a nuclear plant. He said it would take only a few carloads (I think he said two) for an entire year, and these would have only minimal carbon.

Nuclear power plants are very safe, but nuclear power is not. The problem is that bad guys will eventually make a bomb.

It may take a while, but with a half life of thousands of years, the opportunity will arise. Even with probabilities less than 1 in 10,000, there will be plenty of time.

But, the genie is already out of the bottle. The bomb materials will not likely come from the US, they will come from North Korea, Pakistan, Iran, or Russia.

I say that Nuclear should be on the table. I understand the risks, but they have to be weighed against losing the snow pack in the rockies and the corresponding loss of water in the Colorado and the Ogallala aquifer, as well as the loss of snow pack in the Cascades and Sierras and the impact on our fruit and vegetable crops.

Distinction Between Positive and Normative Economics Misses the Point

I look at this differently. I see economics as more about efficiency than about value judgments or prediction.

IF you assume that people behave according to the assumptions of rationality and optimization, then you can form solutions that get you the better result for the same input, or the same result with less input.

To me, the first part of microeconomics is about showing why demand curves should have negative slopes and why supply curves should have positive slopes. This is key to ultimately establishing that markets are efficient.

And establishing this is CRITICAL because if markets are efficient, then you can argue that rules and regulations can do more harm than good: they force an equilibrium that is less than efficient, and as a regulator (either lawmaker or bureaucrat), you better have a damn good reason for messing with something that already works well.

BUT, this all depends on having demand curves slope down and supply curves slope up; i.e. that there actually IS an equilibrium and it is relatively stable.

Since virtually ALL of the efficient markets hypothesis is based on Welfare Economics, whether an equilibrium exists becomes one of the most important questions economists could address.

So, I think a better question would be one that occurs just after going through the assumptions driving downward sloping demand curves, and that is, "Is it true?".

If you think people behave rationally, how do you explain momentum investing, where as the price RISES, demand...RISES? And as the price rises, people tend to hoard (e.g. oil, gold,etc), and supply may actually...FALL?

Not only that, what happens when you introduce risk where the pain of loss FAR exceeds the rewards of winning?

If markets do not have stable equilibria, then the need for laws, regulations and governance becomes very clear.

Exhibit A is Ben Bernanke and Alan Greenspan. Up until last fall, their prevailing view is that markets will tend to operate efficiently on their own. Smart people acting in their own best interests were to provide better policing than any set of rules or regulators.

It now seems that they subscribe to the view that any competitive "game" needs boundaries and rules, including the security markets.

Buffett's Lessons: More Appropriate than Ever

While I've read a lot on Warren Buffet, my all time favorite book on the subject of investing is The Intelligent Investor by Benjamin Graham who, as most people know, was Buffet's teacher, and endorsed this book as "By far the best book on investing ever written".

I cannot tell you how important that book was to me during the crisis of last fall and this spring.

Graham developed the concept of intrinsic value, and he was also the first to point out how difficult it was to obtain. He said that its only real usefulness occurs when there is such a separtion between the market value and the intrinsic value that even allowing for enormous error in your estimate of intrinsic value, you still conclude that the market price is wrong.

He called this the margin of safety.

While I also like and use concepts like ROE and ROIC, I recognize that the market capitalization may be so much higher than the book value, they may have no meaning -- which is just another way of saying that even good companies, with good managements may be poor investments if the price is too high.

Rational Market Theory and Black Swans in Healthcare Reform

Michael Porter (with a co-author, Elizabeth Teisberg) has written an entire book on this subject: Redefining Health Care. I think the author would find it worthwhile.

There is no such thing as competition in Health Care. There is rationing, but no competition.

Insurers compete on their ability to negotiate discounts for their insureds (at the expense of the uninsured who pay MUCH higher prices to offset the discount) and on their ability to select out poor risks, as well as ration care to those they insure (ask any doctor if they've ever had a hassle with an insurer over a necessary test or procedure -- it was so bad for Porter and Teisberg, it compelled them to study the problem and write the book).

The problem they found is that there is no measure for quality of service over the life of the illness or condition.

This means that places like Mayo Clinic and Cleveland Clinic are routinely considered out-of -network because they often have higher expenses even though they often see sicker patients and they end up costing less because they are better at getting it right the first time.

These clinic models are unlikely to be replicated in many areas because their doctors are on salary and have no financial interest in things like their MRI centers or surgery centers.

Porter suggests, and I agree, that if providers were measured correctly, competition would favor the better overall results, and clinics like Mayo would thrive.

But this means that your local cardiologist or orthopedic surgeon and his/her MRI business and surgery center, might be forced out of business (I find it laughable that one measure the opponents of reform use to show how better the US system is over Canada and the UK is how many MRI centers they have compared to the US -- it is like measuring quality of life by how many Starbucks they have).

You can imagine how well this would go over when the fee for service doctors figured this out, never mind the Medicare rip-off deals of the drug and equipment providers.

Porter suggests that the long term measure of the degree that competition in a market actually works is simple: quality and innovation is constantly increasing and cost and relative price is constantly decreasing.

Armageddon Part Two: Securitization Is Too Big to Fail

Good Article!

The market I am watching is the money market funds. Since many funds either broke the buck or would have had the FDIC and the FED not stepped in, I wonder if they will cease to exist without the guarantees.

It seems to me that it all starts with the A1/P1 short term paper market. If you cannot get that to go right without government support, the other markets will have even bigger problems.

On the other hand, it seems to me that requiring most CDS contracts to be traded on exchanges would eliminate a lot of what brought down AIG and the credit markets last fall.

Buffett's Recent Portfolio Changes: What's the Message?

As a long time holder of BRK, I have followed Buffet for many years, and he makes a clear distinction between the 20 or so once in lifetime stocks to own, and everything else.

As a necessary condition, he looks for integrity and a focus on the long term shareholder. If a company falters this condition in any way, at any time, it's a goner.

After that, he focuses on the businesses. He likes businesses with strong cash flow, and he LOVES businesses with a history of strong cash flow and relatively low (compared to revenue) ongoing fixed investments. Look at his Coca Cola, American Express, Sees Candies, Wells Fargo, and Proctor and Gamble.

Historically, he has shied away from businesses that require a high fixed investment, especially in intellectual capital such as technology (as far as I know he has never owned a share of Microsoft even though I believe Gates is on his Board and is a good friend) and drug stocks. He claims that he just doesn't understand well enough what makes these businesses run.

This makes his new investments in drug stocks somewhat puzzling, although, at least with J&J, you could make the argument that it is a P&G look alike in the health care space.

BNI was also puzzling until I figured out how railroads were regulated, and I expect that Buffet will keep this stock as long as they are virtually exempt from antitrust laws even though as a business with high capital costs, they look more like airline stocks than anything Buffet would own.

As for COP, I am guessing he got into this using the standard developed by Graham that suggests for high capital intensive stocks in a rising market, you always want to own the second tier, less efficient companies. When the price of commodities fell, and not expected to rise soon, Buffet had no reason to own Conoco.

As for Buffet's political leanings, I have found him to be pretty middle of the road. He supported Obama this time after seeing eight disastrous years where, in the end, we tripled our debt, created a massive financial crisis, did not add a single job (actually, we will end up losing an enormous number of jobs), saw tax cuts lead to people buying Chinese goods at Walmart , caused a war that cost trillions, saw no increase in the real income in this country in almost a decade, and did nothing to address the long term Medicare crisis except, by adding a dramatically underfunded prescription benefit that made things even worse.

Buffet is no wild eyed Democrat, but it was Obama compared to what? That he still feels this way is more a result of where the Republican party, which has become the party of Rush Limbaugh, is as much as any feelings towards Obama.

Enough with the Buffett Critics

I own BRK, and while I do not idolize Buffet, I find the criticism of Buffet laughable. He is doing today what he has done for the last 30 years.

It was no accident that Goldman sought him out last fall, and they gave BRK a great deal..or...should I say, Buffet demanded a great deal.

Yes he had a lot of cash, but ask yourself why. Ask why Buffet has always been in a great position.

Once you answer to that, you will understand BRK, and once you understand that, you will understand why the critics will always end up wrong.

ConocoPhillips Financial Gauge Analysis for June 2009 Quarter

The analysis is distorted by the write-offs.

These write-offs were primarily Conoco's Venezuela's operations and a substantial write-off of Conoco's Lukoil investment. While they took the loss, I expect that the likely end result will be that the write-offs will prove to be conservative.

I hold Conoco, and I view it as a long term natural gas play (most of my holding in Conoco came from the conversion of my Burlington Resources shares). I also own CVX and XOM, as well as drillers DO and RIG.

I bought in 2005 and watched values skyrocket, then fall through the earth into Neverland recovering to where I am still down around 5%.

But, I think oil and natural gas will always be valuable, and I think that even though we have new technologies in natural gas exploration, we will end up using more than we can produce, and that new finds will be far, far more expensive to develop.

In short, I believe in peak oil and the ability of the Chinese and Indians to absorb as much oil as the world can produce.

And, while Solar and Wind are all the rage, now, I believe the real story of the US energy future will be new ways to use natural gas, especially in conversion to transportation fuels.

So, I will hold on to Conoco, and see what happens. I can afford to be patient, and while I am not smart enough to predict when to sell, I anticipate that there is a lot of upside at today's price.

Popular Mechanics Gets It Wrong on Buick Hybrid

This was article was helpful, although I have to admit that I start with a bias that favors the conclusion that the GM VOLT is all about marketing hype.

GM always seems to want to come out with software engineers might call "killer app vaporware". It starts with being far behind in some new technology or trend because it wasn't thought up at GM.

Then there is the prototype stage where all the off the wall, exotic technologies are promoted suggesting that GM is really making a bold leap.

Finally, there is the reality, which is so disappointing and usually a total failure.

For example, consider GM's fore ray into small cars. First, they scoffed at Toyota and Honda suggesting that small cars were a toy and that the American consumer would always want big and beautiful boats.

Then after the oil crisis hit, we saw all kinds of futuristic designs at car shows, suggesting even electric cars might be on the drawing boards (later we saw the EV in testing).

Finally, we get the Vega, followed by the front wheel drives of the 1980s and 1990s (Remember Roger Smith telling Fortune that GM's front wheel manufacturing will be so far ahead of the competition, with its massive robotics, that nobody will be able to touch their production efficiency?).

In the end, a business professor at Dartmouth figured that GM has spent far, far more than the US spent getting a man to the moon trying to develop a small car, even though unlike the moon shot, GM could go out and buy a Toyota Corolla and use it as a working prototype.

GM finally gave up and started the Nummi plant in a joint venture with Toyota. As I remember it, Toyota became GM's partner in large part to offset the backlash developing against buying Japanese cars.

Was the AIG Bailout a Goldman Bailout by Proxy?

I had also heard that some very big beneficiaries were European Banks, and I wonder if International Central Bank relations did not have a very important influence.

All I remember was that after Freddie and Fannie collapsed, things started to come apart very, very fast. In the banks, the standing orders were to collect from all the other banks before paying out any money. In other words, make sure you got paid, first, before releasing any money.

Obviously, this led to things seizing up, and LIBOR spreads blew out.

From what I remember, the Bear Stearns came apart, then the GSEs, then the AIG bailout, and the final straw was Lehman, where they simply ran out of money and/or viable buyers.

That is when TARP was born, and although the initial rational, buying toxic assets, was poorly reasoned and driven by ideology more than anything else, the driving force was that they needed more funding.

I love these 20/20 hindsight criticisms of this and TARP. With the benefit of 20/20 hindsight, I could have been a billionaire.

From where I sit, Ben Bernanke and Hank Paulson should get the Freedom Medal for saving the world from a financial collapse.

High Frequency Trading: We Fear What We Do Not Understand

I appreciate this article, but there is one area that bothers me.

The underlying assumption is that markets are rational and that there is an equilibrium price, even in the short run. I you believe this, then all that program trading does is get you to the price you would have gotten to anyway, just faster.

But I do not believe this is true in the short run. The market "votes" in the short run and "weighs" in the long run.

In the short run, the stock may not stabilize around an equilibrium and I think it is possible to pound a stock, especially a financial stock that essentially trades on the amount of trust people have in the institution, into oblivion.

The issue is not so much front running as stock price manipulation by piling on