maz

Why is the Market Ignoring American Express's Bad Report?

Rohan & Ramani,

How are your $24.50 short positions doing today :-)

Discover Financial: Quite Solid Results, All Things Considered

To make sense of the loan loss provisions when comparing to the 8.39% net charge-off rate you need to use the loan loss provisions on total managed loans as the charge-off rate is calculated on that basis

$381m is the loan loss provision for owned loans for the quarter. Including managed loans the figure is $924.4m for the quarter.

For the last twelve months owned loan provisions are around $2.6 to $2.7 billion so the lower figure for this month might indicate conservative reserving in prior quarters. Managed basis loan loss provisions are around $4.5 billion over the last 12 months

That figures to be about right. Managed loans are $51 billion and relatively unchanged throughout the period. $4.5b/$51b works out to around 8.82% - a tad higher than the 8.39% charge-off rate. Of course the two are not entirely comparable because of timing but it's a reasonable indicator that the company is adequately reserved if they are expecting charge-offs to rise to 8.5 to 9.0% in the next quarter.

The press release said the quarter's loan loss provisions were UP $873 from last year and down $154 million from the previous. Provisions for the quarter alone were $924 million and the balance sheet had

Cadbury Is Confident Beyond 2011

What a useless commentary after all the recent news article on Kraft's bid for Cadbury. I really expect much more from Zack's

Automatic Data Processing: Better Suited to Survive This Downturn than Its Competitors

Paychex is the better opportunity. You are correct on the dividend payout ratio but you pay dividends from cash not earnings - the cash payout ratio is still high but at 70% is better than the earnings payout ratio.

A big key for Paychex & ADP is the inflation/deflation debate. Right now they are both earning very little off customer float and their own cash because interest rates are so low & a deliberate policy to preserve capital & maintain liquidity. Paychex interest income is less than half long term average on $4 billion cash (float + own cash). If you believe we're in for Japan like deflation this will continue for many years. If you believe that at some time - may be 2, 3 or 4 years - inflation will really take hold then these guys will get a big boost

Bed Bath to Go Above and Beyond - Barron's

How can you back out $4 a share in cash to lower the P/E?

It doesn't make sense - cash is a balance sheet item and earnings - the 'E' in P/E - are an accrual item on the income statement.

What you are saying is that the $4 per share in cash and zero debt has no effect on the share price. Don't know about you but zero debt cash rich companies are worth a premium to me.

Why is the Market Ignoring American Express's Bad Report?

Looking at charge-off trends is somewhat misleading - it works reasonably well in a slowly increasing or decreasing managed loan portfolio but when the portfolio is rapidly increasing or decreasing the charge-off percentage is either under or over stated.

Right now Amex has a rapidly declining managed portfolio (owned + securitized loans) partly due to an intentional credit tightening by AXP and also due to a large reduction in spending - both of which are good in the short term imo as they will lead to first a stabilizing & then a reduction in charge-offs as underwriting is improved.

The reduction in total loans outstanding obviously affect the net interest income adversely but we also need to plug in the interest margin (which increased) and the charge-offs. Achieving a balance is important for the long term. But overall net interest income is usually no more than one-third of Amex business.

Of course transaction volume affects fee income but the discount % remains pretty steady. Fees for other banks issuing Amex cards are still increasing & of course here they don't take the credit risk.

The shares may not be worth what many thought they were last year but I would be far more concerned if the company's liquidity position were challenged than a few quarters of extremely high charge-offs. I don't think the liquidity position is in danger & in the current low short term interest environment both AXP & DFS are raking in low cost (to the companies) deposits which should further improve interest margins. Talk of paying back the government shows pretty much what AXP thinks of their liquidity position.

You certainly may be right that the share price could fall back -may be into the teens - and therefore you could make money shorting in the short term but this is no Citi or BAC and I think you are focusing too narrowly on the charge-off rates

Why Is Pepsico Buying Its Bottlers?

I agree with much of what is said in the article but I also think that this is a defensive move because bottlers thin margins can easily be erased in a recession. Having them in house avoids public spats or embarassing cash infusions from Pepsico as the parent company is unlikely to reduce the cost of syrups & concentrates to bottlers. I predict that margins will decline & the bottlers will be a drain on free cash flow long term. Corporations always spin an acquisition to be a positive and gloss over the negatives which include paying a premium for the shares.

Still whether accretive (I think it will be marginally accretive but will not give a good ROI) or defensive it would appear to be a reasonable move by the company.

Credit Card Issuers and Processors - How They're Faring in the Crisis

DFS & AXP access to TARP funds has less to do with debts piling up - managed loans outstanding at both companies has been roughly static over the last year & you can expect them to come down over the next year or so imo - certainly not "pile-up". The bigger problem for both companies has been liquidity as the ABS market for credit card loans virtually shut-down or became prohibitively expensive. DFS is doing a good job financing maturing ABS out of increased customer deposits but that has a big negative to earnings - first the IO strip associated with the ABS has to get written down and reserves have to be increased as the loans are now on the balance sheet. Combined with rising defaults we can see earnings depressed (negative) for the next year.

If FAS 140 eventually (2010) makes credit card companies take ABS on the balance sheet that will be a big event - $20 billion for DFS and $29b for AXP - the write-downs and additional reserving required will make both companies look poor and challenge Tier 1 capital adequacy - that's why you see lot's of cash on the books as both companies are in defensive mode & quite rightly so. If it doesn't happen then both companies will look really good on a Tier 1 capital basis - currently 17.1% for DFS. If the ABS were on the balance sheet that figure would be around 8.5 to 9%

Michael Hall: Natural Gas Is a Victim of Its Own Success

Gas Rig counts are now 810 (27 March) so almost down 50% from the high and going lower. It will not be long till this affects supply as depletion rates on new wells are so high - certainly not longer than 6 months imo although there could be an increase in LNG imports that could stretch things out a bit. Cimarex was forecasting dropping from 35 to mid-single digits in rig count!

Meet the Top 10 Low Carbon Footprint Vehicles of 2009

Good points about Diesel cars - particularly in Europe - 59 mpg (imperial)?? - which I must say sounds fantastical for any BMW on the roads you mention unless you have a sewing machine engine! -

Also a big key here is the the split of highway/city driving. Many living in urban areas doing the morning/afternoon commute in traffic everyday can have up to 80% city driving & in those circumstances the hybrid will kill any gas/diesel car on mpg.

Nearly all of the taxis Vancouver, Canada are switching to Prius for precisely this reason.

The 15 Most Cash Rich Companies

mkreisel,

You make the classic mistake of assuming that all debt is equal but it isn't. Debt on GM's balance sheet is completely different from that at a utility company (like Berkshire's Mid-American which holds 90% of Berkshire's debt. All utilities are funded with debt because of the royalty like stream of their revenues. This makes complete sense as debt funding is a heckuva lot cheaper than equity & the revenue streams are preductable way into the future. Contrast that with tech companies that have to re-invent themselves every 5 years or so or lose their revenue streams - they have to be very careful about using debt & need cash to invest in new ideas or acquire new ideas.

Also it is important to know interest coverage & leverage ratios - net debt in isolation is a pretty useless measurement


On Mar 13 02:35 PM mkreisel wrote:

> If we include debt, things look very differently:
>
> Ticker, debt, net cash
> XOM, 9425, 22582
> CSCO, 6848, 22683
> AAPL, 0, 25647
> BRKA, 36882, -11343
> PFE, 17283, 7272
> TM, 118626, -95745
> MSFT, 0, 20298
> GOOG, 0, 15846
> RDSA, 23269, -8081
> WYE, 11739, 2806
> IBM, 99925, -21018
> JNJ, 11825, 957
> INTC, 1988, 9855
> HPQ, 20458, -9203
> ORCL, 10238, 408
>
> Now things look quite different!
>
> In addition, many companies are burdened with massive pension obligations,
> the stuff that did GM and Bethlehem Steel in. For example, IBM has
> 19452 million on its balance sheet; XOM 20729 million.
>
> BRKA also has a maximum of 67 billion derivatives exposure, including
> 37 billion in equity index puts, 19 billion in CDS, and 18 billion
> in muni bond insurance.
>
> PFE has just squandered its cash horde on that panic deal with WYE.
> When the deal closes for good, PFE will have a monstrous debt load
> and very little cash left.
>
> So if you really like company with lots of cash, AAPL, CSCO, MSFT,
> GOOG, INTC, and XOM are your best choices.

Q4 Holdings of Bruce Berkowitz, Robert Rodriguez and Mohnish Pabrai

Sorry he holds Sears but didn't add - my mistake

Q4 Holdings of Bruce Berkowitz, Robert Rodriguez and Mohnish Pabrai

How can you say that selling out of Berkshire does not indicate a stand on the stock? At the end of June Berkshire was 10.67% of Fairholme's portfolio & the largest holding and today it is virtually nothing - Berkowitz was very specific as to his reasons

"We made this move because we cannot see how the company can replicate its past stellar performance given its current size and the age of its key personnel."

In the meantime Pfizer has gone from 10.26% to 18.73% so you could say he was selling Berkshire to buy Pfizer and other healthcare companies.

He also added to Leucadia, Sears and Canadian Natural Resources - companies run by very able capital allocators. So may be he's switching to younger & smaller :-)

Canada vs. U.S. - Whose Banks Are Safer?

Some excellent points brought up re Canuck banks. One other point to consider is the amount of revenue each bank derives from its US operations

The pecentages are well down from their highs but still range 15 - 20% for most. BNS has least US exposure.

Overall the banks will contract further imo as the Canadian economy is inextricably linked to the US and government coffers have recently been filled by high commodity prices (one example gas tax for cars is a % not a fixed dollar/litre - many other royalties/taxes are % based). So just as the revenues drop the government has a massive increase in spending & will run deficits for several years. This will mean eventual inflation - may be two years off just when the economy starts to show life.

Canuck banks benefited hugely from the recent financial bubble. For example: From 1995 through 2005 Royal Bank's ROE averaged between 14.3% and 17.9% - respectable figures for any bank. Contrast this to 2006 & 2007 where ROE ballooned to an exceptional 22.4% and 23.3% - some 40% above the long run average. No surprise that the trailing twelve months is now 16.4% and as with almost all bubbles we can expect a substantially lower than average figure to follow.

DryShips: The Time to Buy Is Now

You can't be seriously recommending a management like Economou - he will look after #1 and suck what he can out of outside shareholders.

But besides dodgy management the risks here are huge and a few days of the BDI moving upward isn't going to help much - a it can easily go back down again but more importantly counter-parties to those long term charters are in a world of hurt right now. Watch for re-negotiated and cancelled charters. It makes more sense for some charteres to cancel & pay the cancellation fee than continue with rates from a supercharged bygone era.

The article is extremely well researched as are the author's replies (nothing like Dear Debra who wouldn't answer any post!) but it is pretty much like a scientific approach which rationalizes a complex situation by saying the "unthinkable" is unlikely to happen 99% of the time & then comes the black swan.

I don't think DRYS risk of bankruptcy is only 1% - it is very highly leveraged and this isn't the last capital raising that they'll need to get through the recession. They can't raise more debt so they'll either dilute shareholders further or try to sell assets at distressed prices - neither is appealing to me.

The biggest RED flag should be the related party dealings where DRYS gets the shaft compared to going market rates whether it be prices paid for ship management, prices paid for buying ships or the staggering break-up fees when DRYS doesn't have cash.

This company needs liquidity & the rights issue isn't going to be enough. Wait till those spot charters end and the first time charter gets cancelled

I have no position long or short nor do I intend to

Wish I had shorted wwhen I posted on the Debra Debacle :-)