andydee

The Labor Market Has Not Yet Signaled a Turning Point in the Markets

Are you aware of what the critics (not just skeptics) of that May Employment Report are claiming?

Chris Martenson is a critic, and his views were outlined in a June 5th blog..."May Employment Report Not Believable"
www.chrismartenson.com...

He outlines his reasons for concluding the report is bogus, based mainly on two points the positive surprises in the report occurred chiefly in categories that are "modeled", not counted - and he disputes the veracity of the model, and secondly, the hard-to-believe gov't employment numbers, a drop of only 7,000 during a period of severe contraction in States' employments and the ending of 60,000 census takers jobs.

Your "punchline" - " The graph below shows that not only did total hours worked decline in May, but the rate of decline (0.7%) was very much in line with the rate of contraction that workers have experienced since September." seems to support his thesis.

Perhaps we should be paying more attention to the (non-political) ADP report on employment than to the "official" (and political?) BLS reports henceforth.

2 Concerns with Michael Lewis's Review of Buffett Book 'The Snowball'

wobatus,

Thanks for the info on the Danny Devito movie. Goggled it and recalled that one of the best things about the movie was his co-star, Penelope Andrea Miller. She's sexy in OPM but her characterization of Brando's daughter in The Freshman, opposite Matthew Broderick was beyond delicious.

The guy that wrote this article is an obvious loser. The only reason people are reading it is because of the subject matter.

His two "concerns", imo, have been exposed as bogus - because he failed to read the Michael Lewis article in full, so he completely misunderstood Lewis' reference to "Betting against Buffett", and secondly, is obviously unaware of the context of Lewis' comment on "Buffett-the-student-w... purchase of 30 shares of GEICO in 1951. Of course Lewis should not have selected THAT purchase of GEICO as THE example of Buffett's break with Graham...there are other better examples, but even using GEICO, Buffett's 1976 purchase would have been a superior example.

There were other more obvious early "breaks", (I put that in quotations because I don't believe that Buffett actually "followed" Graham - he just learned from him and adapted Graham's philosophy into his own), Graham bought lots of cigar butts because he didn't know anything about the company except that the share price was less than working capital...so many of the cigar butts would eventually fail. Buffett, working in Graham's office, dutiful filled out the Graham-Newman "briefs" on these cigar butts but wanted to know more about the underlying business and the management. Graham didn't give a damn about the business or the management. I'd say Graham was closer to DeVito's character of "Larry the Liquidator", except that Larry the Liquidator knew more about his investments than Graham knew about his.


On May 20 07:28 AM wobatus wrote:

> Other People's Money was the DeVito movie. The buggywhip line is
> the best. Even the best damn buggywhipmaker went out of business
> and was better off selling off his stock then continuing as a going
> concern.

2 Concerns with Michael Lewis's Review of Buffett Book 'The Snowball'

Here's my guess...the author of this piece on Michael Lewis' review of Alice Schroeder's book read the review by Lewis BUT did not read the book by Schroeder!!

This quote ""felt confident of being able to predict what it would be worth in a few years. ... A less Graham-like analysis could hardly be imagined. Graham's 1920s bubble and Depression experiences had made him suspicious of earnings projections. But Warren was betting three-quarters of his patiently acquired money on the numbers he had calculated." is an excerpt from Ms Schroeder's book(pg 138).

That page starts with this sentence..."This was especially true because, at its current price, GEICO was an investment that Ben Graham would not have approved of, even thought Graham-Newman had only recently become its largest shareholder."

However, I am reading the book - and don't care for it by the way...(fortunately, like Warren, I'm cheap and I didn't pay for it - I've got it for 21 days from the public library...), and this IS NOT when Warren broke with his mentor...IF this was the time, (the incident in question concerned Warren dumping 3/4's of his then meager portfolio and buying 350 shares of GEICO - in 1951!!), he would not have continued to buy "cigar butts" for 20+ more years.

No, as the author points out his metamorphosis into the Warren we know came after he began his relationship with Charlie Munger.

Although Alice doesn't point this out in her book, I believe it was Charlie that got Warren interested in Phillip Fisher's book, "Common Stocks and Uncommon Profits", which I think was where Warren may have borrowed his notion that every serious investor ought to get a ticket with only 20 "chances" on it - representing the limit of his/her lifetime investments. If that was so, each choice would be thoroughly investigated...of course, that's not how Warren did it - or how Charlie did it.

BTW, I don't mean to imply that Charlie "taught" Warren how to invest, or that he changed Warren's mind about what he had learned at the "foot of Ben Graham". Clearly Warren was his own man - he has simply "boosted himself up onto the shoulders" of those investors he admired.

I can't count the number of book I've read about Warren - though I find them interesting - they haven't been influential...unfortun... - but this is the first one I've come across that makes Warren seem a bit closer to Gordon Gecko and a character played by Danny DeVito in a movie whose name I've forgotten...including the tendency towards lecherous behavior - especially involving Katherine Graham...

It isn't a book you can sit down and read for long stretches...or at least I can't...BTW what's amusing to me, as skim through the pages describing Warren's support of liberals such as Eugene McCarthy!! and his strange relationship with his wife - I keep recalling the advice Jack Palance, as Curly, in "City Slickers" gives to Billy Crystal's character...when he holds up his index finger and says that's the secret to life..."Your index finger?" says Billy, "No", says Jack, "ONE". "Do one thing well, and everything else falls into place". That's advice Warren understood before he saw the movie. His success at making money has opened up vistas he never conceived of...

Now I make a great Gumbo Soup...but...

Why I'm Short Vanguard Natural Resources, Long Linn Energy

Freyda,

I guess we move in different circles.

I was suggesting that you listen to a recording of the LINE presentation so that you could get an answer to your question re: how long they expect to maintain their current distribution...You told me you looked at a chart of LINE prices(? - I guess...)

I don't "read charts". I'd like to know more about the companies I invest in than simply what price someone assigns to a share (or unit in LINE's case).

Since you haven't listened to the recording, and since I was trying to be helpful - I'll answer your question..."They expect to maintain the current distribution because they have hedged about 100% of their production through 2011." In other words they have, in effect, "presold" all of their output for the next three years at prices well in excess of today's price...somewhere between 2 and 3 times as much as today's NG spot price.

Why I'm Short Vanguard Natural Resources, Long Linn Energy

Freyda,

Do you follow LINE? Seems as though you don't.

There's a 14 minute presentation by Mark Ellis, the COO, and Kolya Rockov, the CFO, and co-founder of LINE on the web right now at... www.vcall.com/CustomEv...

Just go down to the "Day 1" 10:30AM time and click on LINE. In about 14 minutes you'll get an excellent briefing on the company, and you'd get an answer to your question...

"how long will it continue to maintain its present distribution in the face of a really tough 2010 environment?"

PS If you are interested in VNR turn to Day 2...I think their presentation is about 20 minutes long...

Deep Value in American Capital Strategies

"There is, however, a wrinkle or two.

"The first one is that while IRS rules require BDCs to pay dividends, there's a temporary waiver in place (because so many BDCs and REITs have become too insolvent to pay cash dividends), which allows them to pay 90% of the dividend in stock. Newly-issued stock, that is."

Actually, the waiver, I believe, permitted an additional 10% more than the existing maximum of 80% of the dividend in newly issued stock.

"I cannot for the life of me figure out why anyone thinks that receiving a dividend in stock does them any good at all, since each shareholder still owns the same proportional value of the company's equity; other than some minor tax adjustments, it's a purely symbolic gesture."

"Symbolism" AND "retention of liquidity". It is my opinion that, absent issues with liquidity and lenders reluctant to let even a bit of the "Current Assets" to go back to share owners, Malon and company would prefer to pay dividends in cash. If management had a choice, that's what they would do, imo. I don't think the holders of the unsecured debt will let them.

"The company has made no commitment as to the use of stock vs. cash. An announcement is due June 15th."

No later than June 15th. We could hear about it sooner than that, but, imo, after "favorable" Q1 results are announced - and after a favorable vote on the (now prel..) proxy, scheduled for June 11.

www.sec.gov/Archives/e...



"The next wrinkle is potentially even more dilutive.

"A BDC can only thrive if it can raise capital. ACAS cannot get new loans due to the covenant violations of previous loans. It could issue new equity, but its bylaws require new shares to be sold at no less than book value; not possible, with current shares trading so much lower."

I agree with your notion that capital will permit a BDC to "thrive". It can grow without new capital, in a welcoming environment - which we don't have now. BDCs can grow by using "realizations" - principal and interest payments by the existing portfolio companies as well as the occasional sale of a "mature investment", be that equity or debt.

However, I think you may have overlooked something important. Take a look at the last (successful) proxy. It gives ACAS an opportunity to sell 42 million shares below NAV. Those shares are not shrunk by the prel proxy being circulated now. Check out the current proxy and the one issued earlier this year. The 42 million shares mentioned in the Jan proxy was 20% of the outstanding shares as of Jan 6th, 2009, THE record date for that proxy.

"The company has proposed a way out of this dilemma: a reverse stock split, to bring the share price back in line with the book value."

No. A reverse split can only protect them from de-listing which may very well be a condition imposed by the lenders, or by NASDAQ.



"if the company needs capital, issuing new shares after a reverse split would help the balance sheet."

"Help" in the sense that it provides capital to take advantage of outstanding bargains in this environment.

"Other than the writedown of assets last year, the company continues to make money; only about 2% of their loans to portfolio companies are non-performing. "

As pointed out earlier, that's 2% at "Fair Value". Much higher if considered at cost...


"But even without cash dividends, the stock is attractively valued. And if the markets continue to improve in general, they will be able to profitably exit more portfolio positions, thus raising capital for new investments."

Agreed.

"If market forces continue to put pressure on the portfolio, however, I don't think it will make much difference whether the stock is reverse-split or not; having a respectable stock price doesn't make an attractive investment when your business sucks."

They are in a lot of different businesses, one of the many attractions BDCs have. But, certainly if the global economy does not get out of the "funk" it is in, and soon, by the end of 2010 for sure, things won't be very good for ACAS.

Are you an optimist? I think all "longs" must be.

Otherwise, play the other side.

Is Pennantpark the Best Business Development Company Around?

NMB

You wrote...

"> The NOI's for the first FY quarter of 2009 (Q4-08), NOI was only
~$0.20 after one time charges. I would think the average NOI before OTC's will be $0.45/shr .. and maybe figure more OTC's thru the 1st 3 quarters of '09. So, the FY2009 NOI's will probably be in area of $1.30-$1.40 .. and thus maybe $1.20-$1.30 payable as div's by Sept 2010."

We might disagree a bit on what ACAS NOI will be over the next 2 or 3 quarters, (it dropped from 75 cents in Q3 to 41 cents in Q4, before one-time charges - and I expect that Q1 and possibly Q2 won't show a flattening out of the NOI decline, especially given the hike in interest rates), However, I subscribe to your larger point:

ACAS will distribute as much or more in dividends over the next 18 months than the share price at today's market opening. And therefore it is a "BUY" at these levels.


On Mar 27 12:14 PM not_my_business wrote:

> NMB wrote:
>
> "So far, ACAS has accumulated ~$0.90/shr in NOI's so far in FY2009
> that must be distributed to shareholders by Sept 2010 .. along with
> 90% of whatever they make in the 1st 3 calendar quarters of 2009,
> which will likely be a total of about $1.50/shr."
>
> I made a mistake here .. sorry.
>
> The NOI's for the first FY quarter of 2009 (Q4-08), NOI was only
> ~$0.20 after one time charges. I would think the average NOI before
> OTC's will be $0.45/shr .. and maybe figure more OTC's thru the 1st
> 3 quarters of '09. So, the FY2009 NOI's will probably be in area
> of $1.30-$1.40 .. and thus maybe $1.20-$1.30 payable as div's by
> Sept 2010.
>
> NMB

Is Pennantpark the Best Business Development Company Around?

drtrader,

I'd like the penultimate word on FASB 159 to be that of Malon Wilkus, in response to a question from someone I believe is also a regular poster, (in addition to NMB), on the ACAS Yahoo Board .
***********
"Angelo Guarino – PRI

"Can you talk a little bit about the 159 election and the arguments that the regulators are giving you in the feedback of why the bifurcated balance sheet valuation approach makes sense? and, if you get a window to re-elect, would your lenders be obligated to accept that accounting change?

"Malon Wilkus

"Under 159 the requirement is that you had a one-time election to revalue existing liabilities and that for us was on January 1, 2008 and unfortunately, we, but – not only American Capital, but I think many BDCs were struggling - trying to understand the implications of FAS 157 in valuing the asset side of the balance sheet. And up through January and February of 2008, through January and through parts of February, it was entirely uncertain from our auditors as how the FAS 157 would be implemented with respect to our third tier assets. And as a result, neither American Capital, nor any (of the) other (large) BDCs that had the end of the year financials, elected to implement FAS 159. Now (we) can’t apply FAS 159 – and therefore by the time we did understand the impact of FAS 157, it was too late and you couldn't go back and implement it.

(As far as the second part of your question is concerned), "You could, under 159, apply at any time you enter into a new loan agreement, but that really doesn’t help the situation in (our) case.

"So, now the ... SFAS 159 was implemented by FASB and it is questionable to what extent a regulator could have an impact on that.

"But it does seem pretty odd for us, because if we were able to retroactively implement 159, we would have $1.2 billion of additional book value."
**************

The last word will be mine. With $1.2B of additional book value ACAS share price would not be wallowing in the single digits...it would mean access to additional credit and phenomenal buying opportunities - the kind of opportunities, for example buying back their own debt -- sort of like what Michael Arougheti described ARCC did earlier this year...(from the last CC)

" As disclosed in the release this morning, we recently executed and are closing on multiple opportunistic debt repurchases of our on balance sheet CLO notes totaling $27 million at a total cost of $6.6 million. These 2009 transactions reduced our debt by a net $20.4 million and also created a distributed realized gain of $20.4 million or $0.21 per share.

"Importantly, these transactions increase the cushion under our asset coverage ratio by $40.8 million bringing the total cushion on a pro forma basis to $276 million for an adjusted net debt to equity ratio of .75 times using our 12/31/08 balance sheet. This calculation nets out to $48.6 million in cash not restricted for our dividend paid on January 2nd. "

So I guess I gave Mike A. the last word...


______________________...
On Mar 27 10:52 AM drtrader wrote:

> One more comment on the FASB 159 change. A lot, if not most, of
> their mez loans are variable. Libor + x. When they mark these to
> market, the reduction in the Libor component is reflected in their
> NAV. Marking their credit facility down to reflect the decrease
> in libor isn't terribly dishonest because quarter over quarter, it
> keeps their credit spread the same.
>
> Clearly it has that one-off effect of showing a big gain to NAV,
> but quarter over quarter its a better reflection of true NAV.

Is Pennantpark the Best Business Development Company Around?

My goodness, where to start?

Jan has a habit of designing criteria for evaluating BDCs that justifies his own investments. That's not the first time I have written that...Last year we had a sparring match on the ARCC Yahoo Board.

I'm not suggesting that PNNT is a "Bad Choice", merely that there are other BDCs that may have more to offer. One for example is ARCC, the site of Jan's post.

ARCC will pay share owners 42 cents in a few days - that's the quarterly dividend for Q4 '08. This for a comp[any with a share price hovering around $4.75 as I write this. Michael Arougetti (sp?), the CEO of ARCC, although loathe to pre-announce dividends, has indicated that he believes they will be able to sustain the dividend for at least one more quarter (check the Q4 transcript Q&As). Even if that is not true and ARCC has to drop back to a dividend that is based on NOI alone, share owners might reasonably expect dividends in the order of 30 cents a quarter going forward.

Now here is an interesting notion. ARCC has been able to navigate it way through the recent morass that has been our capital markets without resorting to any acts of prestidigitation.

PNNT on the other hand adopted SFAS 159 on October 1, 2008, giving them the right to "mark down the value of their outstanding loans "to market". Entirely legal and permissible, but it did add almost $2 to NAV, and perhaps avoided an issue with the banks that hold their credit facility - (haven't checked to determine is that is so, so pls don't take that as a fact). But here's a quote from their earnings release..."On December 31, 2008, the Company had $157.4 million in borrowings outstanding with a fair market value under GAAP of $109.9 million." So they owe $157M but can put it on their books at about $110M.

There are other points I could make, as well as other BDC choices. I own three at the moment, because I believe they have the greatest potential upside. ACAS, ARCC, and AINV.

I believe all of the BDCs will get relief from the rewrite of FASB 157, and so all will prosper...

I do want to make one comment on the preamble to your discussion of the BDCs. I believe you are incorrect about your assessment of whether WWII pulled us out of the Depression. Spending was important, but so was employment. Men were taken out of the factories and put into the services, women then took their place in the factories. It wasn't enough to build the planes and dump them into the oceans -

BTW BDCs are a product of the recession that occurred in the late 30's...check out the background to the Investment Act of 1940, the act which created the possibility for the BDCs...

Ares Capital Corporation Q4 2008 Earnings Call Transcript

This transcript, as of today's date, Mar 4th, is incorrectly labeled.

It purports to be Fiscal 2008 and Q4 but is actually Q3 08. This is from the 3rd paragraph of Mike Aroughetti's opening remarks...

"Before we get into the financial details of the third quarter, I want to take a few minutes to comment on current market events, how our long standing strategy plays into the current market, highlight our results and then explain how we continue to manage our business through this challenging period."

I've written to Seeking Alpha to get this fixed. You can also - go to SA Home Page and send them mail

Unconventional Energy Still Attractive - UBS

With LNG in Europe at $12 to $16 and prices in Asia even higher what makes anyone believe the approx. 2 to 1 imbalance btw world and US NG prices will continue indefinitely? Spot prices do not define the LT price... Nor do prices over the next two or three months. The fact that NG is at $7.30 now (HH) says nothing about prices in 2009, 10 and beyond.

While I'm no supporter of the "analysts" in the industry, Aubrey of CHK and Bob Simpson of XTO may not agree on Haynesville, but they do agree that U.S. NG prices will be in the range that UBS asserts, $9 to $12. I suggest that those two gentlemen know a good deal more about energy than the poster AEB...

$30K per acre sounds high now, but wasn't it only a few years ago that gasoline at $2/gal at the pump was unthinkable? The Haynesville wells, as most of the unconventional wells do, yield about 80% of the EUR in the first 18 months or so...so a driller will get his investment back quickly...thereafter these wells have lifetimes ranging from 10 years to 40 years.... Oil wells in Calif, abandoned, or sold it for chump change when oil sold at $10 barrel - just a few years ago, are now making good returns when oil is at $100 barrel, even when just dribbling oil. Who can predict what the price of NG will be in 2020? except that it will be much higher than it is now...

A good example for Mr B to contemplate...DNR and others, including ECA are returning to old Oil fields and making money using tertiary recovery...(Liquid CO2 pumped into old reservoirs). Garth, at DNR estimates 1Billion barrels of oil, net to DNR out of played-out fields along the Gulf Coast. All-in cost of a barrel of oil to DNR will be about $30 per barrel...definitely economic to the producer at current prices and even at $75/barrel. DNR does no hedging...

Why bring up DNR and tertiary recovery? Gas in place in Haynesville, Barnett, etc. is a lot higher than EURs...someone sometime will figure out how to make that rock give up more of the gas trapped in it...

Chesapeake Energy Called the Market's Bluff

The industry has just valued two of CHK's holdings, Haynesville and Fayettesville at $24B...look at PXP and BP purchases of a percentage of those assets - PXP $3.3B for 20% of Haynesville, BP $1.9B for 25% of Fayettesville...

That leaves the Barnett and Marcellus and various other holdings at around $4B...No way!

Market has undervalued CHK. They are selling dollar bills at 60 cents.

Buy while you still can get it at these prices...don't have to wait - it might not get to $40...

After all, in March A.M. promised 5 non-conventional oil plays in 4 states that will yield a minimum of 1B barrels of oil to CHK...and that';s not in anyone's calculation of CHK value so far...

What You Can - And Can't - Learn from Warren Buffett

Rick,

Well written, fair review.

My question: I have a couple of Buffett books, (Lowenstein's, "The W.B. Way", "Buffetology", "Of Permanent Value") and "Security Analysis" - but would like to round out my collection with a couple on Charlie Munger, and more of your favorite Buffet books - do you have any recommendations?

The Realities of Natural Gas

"Probably the most important observation on the ambitions of natural gas deregulators was rendered by Professor David Teece of the University of California (1990). According to him, market liberalization in the U.S. has already “jeopardized long-term supply security and created certain inefficiencies.” He also notes
that “While more flexible, a series of end-to-end, short-term contracts are not a substitute for vertical integration, since the incentives of the parties are different and contract terms can be renegotiated at the time of contract renewable. There is no guarantee that contracting parties will be dealing with each
other over the long term, and that specialized irreversible investments can be efficiently and competitively utilized.”

For this reason I never miss an opportunity to remind my students that as far as I am concerned, large and complex gas systems operating in a climate of uncertainty are most efficiently run on an integrated basis that emphasises long-term contracting. This kind of arrangement promotes optimally dimensioned installations, and although it may not be mentioned in your economics textbook, if pipeline-compressor-pr... systems which fully exploit increasing returns to scale in order to obtain minimum costs are to be readily financed and expediently constructed, then – as I interpret the evidence – the kind of uncertainties associated with short to medium term arrangements should be kept to a minimum. Failing to do so could cause a reduction in physical investment, and in the long run lead to higher rather than lower prices."

Garbage dressed up in unintelligible English.

Let me try to summarize.

In the first paragraph he cites a "scholar" that believes de-regulation energy was a bad idea, and is citing one reason for his belief. I worked for two regulated entities - one in energy and one in telecommunications. Regulation simply doesn't work - regulated industries are inefficient and are focused on perpetuating themselves. "Creative Destruction" is a foreign concept to a regulated entity - and necessary if we are to deal with a changing environment.

In the second paragraph our good professor eschews regulation, (good for him!), in favor of long-term commitments. I also believe in long-term commitments. My wife and I have been married almost 50 years. Good for the kids, and good for each of us. I wish our author had taken a course in expository writing while he was a freshman. It could have helped.