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Mike Holt

Mike Holt
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  • Is Molycorp Bottoming? [View article]
    Pay attention to the capital structure and then ask yourself what you own, or would own if owners of bonds and convertibles demand equity stakes as repayment. They are higher on the totem pole than existing equity owners. How much do you think your shares would be worth if all outstanding stock entitled existing shareholders to only a tiny stake in the company after a restructuring engineered by some of the most powerful "players" who have deep pockets and long track records of success in taking over troubled companies for the benefit of themselves and to the detriment of existing stockholders.
    Aug 26 08:13 AM | Likes Like |Link to Comment
  • Apollo's Leon Black Seeks Backdoor Takeover Of Molycorp [View article]
    Leon Black acquired nearly 98% of the equity in Sirius Satellite Radio using essentially the same technique. He owned the convertible shares and when the company needed capital to survive, existing shareholders found themselves holding an interest in about 2% of the company and Leon held the rest. This was a sobering experience for me. Others warned not to invest alongside Leon because to him everyone who thinks they're at the table with him are actually on the menu. Review the events surrounding the debut of Sirius when the CEO represented that Sirius would launch their product before XM would, i.e., as soon as 3rd party radio manufacturers finished developing radios with the chipset that Sirius had supposedly provided. Sirius also represented that they would have enough cash on hand to carry them until those subscription revenues came pouring in. But, it was then revealed that Sirius had never even provided the radio manufacturers with the chipset they would need, and the CEO was then awarded a $3 million severance payment, representing almost all of the remaining cash on hand. These were all questionable events, but then Leon Black then stepped in to save the company--for himself. Existing shareholders got Scr*wed even worse. So, be forewarned! (Who were the original owners when Molycorp was brought public again several years ago?)
    Aug 26 08:01 AM | 1 Like Like |Link to Comment
  • This Might Be A Stock Bubble, But Valuation Metrics Won't Help You Understand That [View article]
    Every time the market reaches new highs, it seems to draw warnings that we are now in the midst of a new bubble.

    I remain concerned about a number of fundamental factors that could potentially slow economic growth or even destabilize financial markets, and I think that global trade imbalances coupled with global money supply growth in excess of consumer demand have led to greater upward pressure on prices for capital assets relative to prices for many consumer goods. But, I have to admit that corporate earnings are now much higher than they were when the market previously approached its current levels.

    Yet, some still insist that the market is overvalued because EPS has been inflated by share buybacks, or that the earnings themselves are not real since top line revenue growth has not kept up with this earnings growth. Alternatively, if they acknowledge that the higher corporate earnings are real, they argue that they are not sustainable so should be replaced by an average of corporate earnings over the prior ten years.

    I think this latter argument is what deserves our attention. What has caused corporate profit margins to increase, what could cause them to contract, and what is the likelihood of such a contraction, i.e., are the factors that could contribute to a contraction of earnings more in the nature of potential risks or do they represent inevitable outcomes that can be supported by arguments beyond merely a reversion to the mean theory?
    Jul 24 01:25 PM | 1 Like Like |Link to Comment
  • This Might Be A Stock Bubble, But Valuation Metrics Won't Help You Understand That [View article]
    Thanks, I just saw reference to the book elsewhere (it was published at the same time as Shiller's book "Irrational Exuberance" so it didn't get as much attention.) A kindle version of the book is not available, but a subsequent book written by Andrew Smithers is -- "Wall Street Revalued: Imperfect Markets and Inept Central Bankers."

    My inclination is to search for a hard copy of the first and start with Chapter 30, since I do have a lot of respect for Russell Napier, also of CLSA, who has referenced Tobin's q in some of his presentations.

    I also intend to plot what is purported to be the equivalent of Tobin's q using data provided in the Fed's quarterly z1 Report.

    As for "an historical analysis" of earnings for the next thirty years, we'll all have to stay tuned for that.
    Jul 23 01:39 PM | 1 Like Like |Link to Comment
  • This Might Be A Stock Bubble, But Valuation Metrics Won't Help You Understand That [View article]
    The MarketWatch article by Brett Arends explains that Andrew Smithers bases his analysis on a combination of (1) Subsequent 30-year returns; and (2) a comparison of U.S. stock prices (since 1900) in relation to a key measure called Tobin's q, which looks at how much it would cost to replace corporations' assets from scratch.

    It may be possible to evaluate previous stock market valuations based upon subsequent 30-year returns, but use of this metric to gauge current stock market valuations reflects a high degree of speculation that doesn't leave me with a high degree of confidence in Smithers conclusions, even though they are purported to be "based on ...a deep study of history."

    As for the second metric, namely Tobin's q, I question the validity of evaluating whether a company's valuation is reasonable by comparing it to the value of its assets when most companies don't reflect the value of their human capital on their balance sheets. This is especially important given that that the US economy has progressed from an agrarian/industrial base in 1900 to a service/knowledge based economy at present. Companies in service or knowledge-based industries might be worth very little if they lost all of their key employees, but just because the value of their employees is not carried on their balance sheets doesn't mean investors should ignore their value, including their contributions to the corporate earnings with which investors are typically most concerned--even if there is no way of knowing with certainty what those earnings might be thirty years from now.
    Jul 23 12:27 PM | 1 Like Like |Link to Comment
  • The International Monetary Fund And China's Pending Economic Collapse [View article]
    Michael, I wasn't sure where your article was going at times, but it contains a lot of interesting information so overall I enjoyed it.

    I was curious about the recent announcement that the BRIC countries were going to create and fund entities that would be similar to the IMF and the World Bank but over which they would be able to exercise greater control, so your comments in this regard were particularly helpful.

    It's too bad that the problems associated with China's soaring debt-fueled Fixed Asset Investment spending have been masked for so long, and that some people are still in denial regarding this issue. Maybe this is because Gordon Chang, and to a lesser extent, Jim Chanos were too early in their warnings about the potential consequences of various flaws that may have paved the way toward the current mess that China now faces. But, in light of developments over the past few years that I better understand after reading "The Great Rebalancing" and "Avoiding the Fall" by Michael Pettis, and "China Airborne" by James Fallows, it seems clear to me that the Chinese economy and banking system are now on very shaky ground.

    Still, your comment that "the effect will easily have disastrous consequences on the Dow Jones, SPY, NASDAQ, QQQ, FXI, EEM, VTI, IWM, VXX, HEDJ, etc." seems too strong. Have you considered arguments that financial contagion risks could be mitigated by actions taken by the CCP to insulate the Chinese banking system from bad loans by parking them on the books of Asset Management Companies formed for this purpose?
    Jul 22 03:03 PM | Likes Like |Link to Comment
  • The International Monetary Fund And China's Pending Economic Collapse [View article]
    Pompano Frog, can you elaborate on the historical spreadsheets on global markets that you prepare? I'm intrigued.
    Jul 22 01:43 PM | Likes Like |Link to Comment
  • Ucore Rare Metals: Clear Path To Production And Definitive Financing Source Make This A 'Strong Buy' [View article]
    PEMINC, we seem to be in agreement that a 27% to 30% Ke would be appropriate at this juncture, but I'm not sure how you arrived at this figure, i.e., how does "backing-out" from a 12% WACC translate into a 27% to 30% Ke?

    As an equity investor in an early stage junior mining company, I'm less concerned about the rate at which the company may be able to issue debt than I am with a return OF my capital. That's why projected earnings and cash flows are typically discounted at rates much higher than debt financing rates at this juncture. Potential access to government subsidies and debt at favorable terms may reduce this concern somewhat, but risks to equity investors are still very high.
    Jul 22 11:42 AM | Likes Like |Link to Comment
  • The Return Of FireEye (FEYE) [View article]
    The closing comment in the Businesweek cover story I referenced above sums up the opportunity that exists for cybersecurity stocks in general as a result of governments engaging in engaging in economic warfare in lieu of military conflict, and using cyberspace as the battlefield:

    "The problem is that whatever we [the US gov't] do, the response to it won’t come back at the government, it’ll come back at the 85 percent of networks in America that are in the private sector. And they are already having a difficult time keeping up."

    So, there may be sufficient opportunities for FEYE to succeed on its own. Existing internet security companies, or new entrants such as Google, can be viewed as both sources of competition and potential acquirers. Goldman Sachs issued a buy rating on FEYE last week based largely, it seemed, on its attractiveness as a potential acquisition candidate. This is a glass half full / half empty argument. In bull markets, small cap stocks such as FEYE tend to trade at prices emphasizing their potential for growth, but small caps in general have been reversing course recently. So, FEYE's valuation could be subject to downward pressure in a risk off environment, but if the risk off trading is driven in part by concerns about deteriorating relationships among countries, this could have the opposite effect on FEYE's valuation. Maybe some increased volatility lies ahead?
    Jul 22 08:54 AM | Likes Like |Link to Comment
  • The Return Of FireEye (FEYE) [View article]
    Agreed. Government involvement or sponsorship of cyber theft and cyber espionage is not an issue with which only governments in other countries need to be concerned. In fact, commercial entities are often the targets, although many don't reveal this because they are afraid that doing so may tarnish their reputations.

    But, while there may be growing demand for cyber security software and services, this may also invite competition from both new entrants and from larger, more established companies.
    Jul 21 05:38 PM | Likes Like |Link to Comment
  • The Return Of FireEye (FEYE) [View article]
    Fire Eye (NASDAQ:FEYE) is a great story stock. Whether it represents an attractive investment at current prices requires a more indepth analysis of its fundamentals, which for some is not quite as exciting as keeping up with global macro trends.

    For example, the current issue of Bloomberg Businessweek features a cover story on how Russian government backed hackers were able to penetrate the NASDAQ computer network. Although the motives weren't clear, this is an issue that should be of concern to all investors, especially as relations between Russia and the rest of the world deteriorate. In this era, military conflict has been largely replaced by economic warfare and more and more of the battle is being fought in cyberspace. So, how will the US respond to actions taken by Russia, where Edward Snowden seems to have found a new home? And, how could this impact cybersecurity companies such as Fire Eye?

    The biggest threat as far as the US is concerned is China, and relations with Russia could play an important role in efforts to contain that threat. And, European countries that still rely upon Russia for oil and natural gas are also important allies. So, the US may be reluctant to escalate actions against Russia that could completely eliminate the possibility of a future alliance with Russia which historically has also felt threatened by China. But, this should not prevent the US from beefing up its cyber security especially as tensions on all sides mount.

    Meanwhile, despite the pivot in US defense concerns from the Middle East to Asia, tensions there have been mounting as well, and Iran is also one of the more established participants in cyber warfare. US budget cuts have forced the military to cut back on its spending without reducing its effectiveness and this has translated into greater reliance on technology in lieu of labor which is extremely expensive. These technological solutions will also be vulnerable to cyber threats, so here too cyber security companies should, like it or not, benefit from these trends.

    So, the stories are there, but what it means for companies such as Fire Eye (FEYE) Palo Alto Networks (NYSE:PANW) and defense technology companies such as Elbit Systems (EBIT) remains unclear.
    Jul 21 09:11 AM | 1 Like Like |Link to Comment
  • Ucore Rare Metals: Clear Path To Production And Definitive Financing Source Make This A 'Strong Buy' [View article]
    "In other words, if Ucore doesn't blow up, what's it worth now?"

    Ucore may not "blow up" per se, but it is still faced with many risks and uncertainties. That's why discount rates well above 8% to 12% are typically applied until projects such as this are de-risked through the achievement of various milestones that Ucore has not yet achieved.

    So, what's Ucore worth now? It depends upon the discount rate. You're free to use whatever rate makes sense to you, even if it is substantially lower than the discount rates most investors apply to these types of investments at this stage of development. That's what makes a market. Just beware that the valuation will ultimately be determined by the market.

    What's a share of Ucore worth now? That introduces additional risks and uncertainties. To address this, you can project future financing needs and the available means of financing and their terms, and/or you can adjust your discount rate to reflect this uncertainty.
    Jul 3 12:10 PM | Likes Like |Link to Comment
  • Ucore Rare Metals: Clear Path To Production And Definitive Financing Source Make This A 'Strong Buy' [View article]
    Ben, it seems premature to be using a discount rate as low as 12%, much less 8%. Valuations for mining projects such as this are typically based upon much higher discount rates until certain milestones are reached. Upon the achievement of each milestone, the project is de-risked and it may then become appropriate to use a lower discount rate to calculate the present value of future projected cash flows that could materialize if the project ever comes to fruition.

    At this stage, I think a discount rate of 30% would be more reasonable.

    After calculating the discounted present value of projected future cash flows, this value must be divided by the projected number of shares outstanding to arrive at a projected share price. Future capital requirements could result in the issuance of new shares, and attracting talented employees could also require the issuance of stock options. Both developments could dilute the per share value of the company. Its not clear whether or not this will be the case--that's one of the reasons for use of higher discount rates until production is imminent.
    Jul 2 11:03 PM | Likes Like |Link to Comment
  • An Interview With Ucore Rare Metals' CEO Jim McKenzie [View article]
    Thanks for this "rare find." The comments below this linked Business Week article by Heath Herndon are just as interesting.
    Jul 2 07:59 AM | Likes Like |Link to Comment
  • An Interview With Ucore Rare Metals' CEO Jim McKenzie [View article]
    Wow, the real dirt to be uncovered could be just as significant as what they're mining for underground. What a soap opera--like Petticoat Junction with a twist. Maybe Bokan Mountain would be better described as Yellowcake Junction.
    Jul 2 07:58 AM | 1 Like Like |Link to Comment