Thursday, May 28, 2009

Leucadia Investment in Trouble?

The financial partner in The Market Common project in Myrtle Beach has defaulted on its loan agreements with a national bank and might consider filing for bankruptcy protection, according to a notice issued Tuesday.

Leucadia National Corp., a financing partner with developer McCaffery Interests Inc., is contesting the defaults but said it is "exploring all options and remedies available to it including, but not limited to, a bankruptcy filing."
Thus begins an article on the Market Common fiasco--which you can read in full at Myrtle Beach Online. The trouble, however, doesn't stop there.

...[M]ore than one-third of The Market Common's tenants have asked the project's developers to lower their monthly rent payments, according to Tuesday's notice.

Jewelry store Carlyle & Co. plans to close in August and at least two other stores - Victoria's Secret and Bath and Body Works - have said they may close.
The stakes are actually pretty big on this one--i.e., foreclosure on the property by the bank is a possibility, however slim:

The financial default involves $7.6 million worth of payments Leucadia owes as part of an interest rate swap agreement tied to a construction loan.

Failure to pay that amount triggers another default on the primary $92.7 million construction loan and would let JP Morgan Chase foreclose on the property.

Leucadia, in the notice, said it has not paid the $7.6 million "and has no intention of paying such amount to Chase."

In addition to a possible bankruptcy filing, Leucadia said it is trying to negotiate new loan terms with the bank.
As the primary construction loan to Leucadia is scheduled to mature on October 10th, there's an end date to this financial posturing by both sides. But the problems at The Market Common seem likely to continue for a good while after.

Tuesday, May 26, 2009

Munger likes Wisdom

Another title which pretty much states the obvious for us long-time fans.

This post will simply point to an article about the Oracle of Pasadena, Warren Buffett's right-hand man, Charlie Munger. The article talks about the Wesco meeting, and the man that many of the "cultists" go to hear speak.

A lifetime of practicing what he preaches has made Munger a billionaire: Good businesses are ethical businesses, he tells us. A business model that relies on trickery is doomed to fail.

Munger starts the session with "Socratic solitaire," in which he asks himself a series of questions.

"How serious is the present economic mess?" Munger asks. "Deadly serious. The worst mess since the Great Depression. You can't tell what happens when people get discouraged enough."


Today he's negative about the economy, but positive about stocks — a bullish sign. In the late 1990s, Munger complained that he didn't see much to buy. The market quickly proved him right. But, at current market prices, Munger sees many long-term investment opportunities.

"I am willing to buy common stocks with long-term money at these prices," Munger said. "Is Coca-Cola worth what it's selling for? Yes. Is Wells Fargo? Yes." He owns both.

"If you wait until the economy is working properly to buy stocks, it's almost certainly too late," he said. "I have no feeling that just because there's more agony ahead for the economy you should wait to invest."
Smart words from a very smart man. After reading the article, if you're wanting more Munger, get the book Damn Right! or Poor Charlie's Almanac.

Monday, May 25, 2009

Whitman Likes HK Real Estate

Marty Whitman likes Hong Kong real estate? That's probably not a secret to those of us who have been following him a long time.

But in Third Avenue's latest letter, Whitman presents some up-to-date information showing in numbers why he likes the great Hong Kong companies.

For example, the adjusted NAV for Cheung Kong Holdings is 100.38; for Henderson Land Development Company, it is 59.21; for Wheelock, it is 32.72.

Updating Whitman's data for the recent rise in share prices, but keeping the same adjusted NAV numbers, Cheung Kong is selling at a 15% discount, Henderson Land is 31% off, and Wheelock is still very cheap at a 41% discount.

"Most importantly," says Whitman, "all of the companies continue to have extremely strong financial positions and are very well poised to take advantage of opportunities presented by the current global recession and credit crunch."

This, he backs up by showing that the net debt to capital at Cheung Kong is 13.2%; at Henderson Land Development Company, 14.1%; and at Wheelock, a very low 1% (as it excludes debt at a major subsidiary which is non-recourse to the parent).

Insider ownership is around 50% at each of the companies--a fact with both postive and negative implications.

Friday, May 22, 2009

Michael Lewis Likes Snowball. I Don't.

The title says it all: the author of Liar's Poker and a long, critical article about Warren Buffett, likes The Snowball. And he wrote a lot about why for The New Republic. The article ends with a look back at his critical piece, along with the main reason that Lewis enjoyed the book:

Even then I thought that his virtues far outweighed his vices, and felt a bit like the guy who, having grown weary of hearing others drone on about the physical perfection of some supermodel, went to the beach with a camera and snapped a photo of her cellulite.

Now Schroeder's brave book offers a close-up of the same cellulite, but more fairly, in the context of a genuinely delightful character.

Buffett might not like it, but this book has done him a very Buffett-like service. Twenty years from now, when the financial markets have forgotten our current trauma, and finance is once again fashionable, some young person will pick it up and discover that history's most legendary investor was not a cartoon but a real live human being. And still, somehow, deeply admirable.

Despite being a fan of some of the books Lewis has written, I'm glad his review ended when it did. Because I am no fan of The Snowball and was more than a bit eager for a rambling Lewis to get to the point as to why he was.

(As an aside, my view on the book is not that it is without merit. In fact, I transcribed some long excerpts that I think are particularly valuable in two of my favorite posts Buffett: The Sleuth Investor and Buffett Author Explains Derivatives.)

My main criticism of the book was stated previously like this: "Buffett achieved success because he was focused and frugal; this biography fails because it is unfocused and verbose." That was true, and still is, but I was being too nice.

This positive (and philosophically-revealing) review has actually motivated me to write more on why I don't like The Snowball. And why other books are better for the person who would like to learn how he accumulated a portfolio of wonderful businesses and friends. To be posted soon...

Thursday, May 21, 2009

Greenlight's Q1 2009 Letter

Greenlight's 2009 Q1 Letter detailed his holdings of Ford debt, as well as the common stock of Pfizer, Harman, and EMC. For example, Einhorn explains why Greenlight invested in Ford debt:

Ford is the third largest auto manufacturer in the world. We bought a large amount of secured bank debt (term loan and revolver), of which there is $14.7 billion outstanding, at an average price of 37% of par, starting in the fourth quarter of 2008.

The bank debt is secured by almost all of Ford’s assets including most of Ford’s manufacturing plants, inventory and accounts receivable, working capital, its investment in Ford Credit, most of Ford’s foreign subsidiaries including intercompany debt to Volvo, 66% to 100% of the stock of all major first tier foreign subsidiaries (including Volvo and Grupo Ford S. de R.L. de C.V., a Mexican subsidiary), and certain domestic intellectual property, including trademarks (i.e. the famous blue logo). In addition, Ford has over $20 billion of cash, which it had been burning at a good clip (we expect cash burn to fall). Even so, the collateral pool is worth many times the implied $5 billion valuation of the secured debt.

We observed that when the U.S. Government invested in General Motors, it put its money in junior to the secured bank debt. Even so, it does not appear that Ford will need a government loan any time soon, if ever.

Ford had the foresight to borrow money when the debt markets were accommodating. Ford reacted faster than its competitors to the slowdown by cutting production and other costs, improving manufacturing efficiency and vehicle quality. If auto sales stabilize at these low levels, Ford should reach cash flow breakeven in 2010 and generate $4 to $5 billion of automotive operating income in the next mid-cycle of automobile sales.

We also bought a smaller amount of various bond issues at Ford’s credit subsidiary at very large annualized yields to near-term maturities. The secured bank debt ended the quarter at 45% of par.
The letter, which ends with a quote by JFK--saying that "a nation that is afraid to let its people judge the truth or falsehood in an open market is a nation that is afraid of its people"--can be read in its entirety at Todd Sullivan's Value Plays.

Wednesday, May 20, 2009

Notes on the Notes from the Leucadia Meeting

For those who haven't read the complete notes from Leucadia's shareholder meeting, Inoculated Investor has posted seven pages worth. Here are my quick notes on the notes:

*The succession plan is basically to focus more on buying great (read: durable) companies, to develop capable managers, and to not die.

*Jeffries shouldn't compensate young know-nothings so highly--and if they use stock as compensation they should buy some back too (in order to cut down on diluting present shareholders).

*Americredit was bought too soon and is heading into a tough time as business shrinks, but it is a viable business, will survive, and at some point will prosper.

*Their top investments, including Fortescue, should outperform as the markets come back.

*Cresud has a great set of assets but the fundamentals in Argentina now are terrible and they're not optimistic.

*Commercial real estate? No thanks, say Steinberg and Cummins. And don't ask again, until they are full of durable companies.

*The company is positioned for inflation as they have borrowed in dollars and invested in hard assets.

*Sangart's Hemospan seems to be working fine but more tests are needed. Nobody has died yet, so that's cool. If it works, it will be a lot cooler.

*Third money managers? Never again, say both collectively. It was a huge mistake--especially the Pershing investment where they lost pretty much everything.

*The two couldn't care less about Moody's rating--and don't think you should either. (Hard to argue on this point.) "They have missed almost everything and been late at each turn."

*They don't have a crystal ball and don't know how long the downturn will last.

*Jeffries (JEF) is in retrospect even a better deal now than what they thought when they first made the deal. The deal was done with LUK stock--when it was trading around $54. (There's a message in that for all the JEF-deal-haters.)

*They buy when something is on sale and start to think about selling when the discount disappears.

*Long-term view on natual gas prices is six to seven dollars per Mcf.

*LUK has cash. Is looking to invest. Have been buying back their debt in the meantime.

Tuesday, May 19, 2009

Einhorn on the Economy

David Einhorn's comments on the market,from the GLRE conference call, are excerpted below:

...In the first quarter Greenlight Re’s investment portfolio had a better result than it did in the prior two quarters.

There are several factors that contributed to this. First, we enter 2009 with a very conservative posture, about 80% long and 40% short or about 40% net long. Although we are holding a good amount of cash, we became more concerned about the market as it sold off in January and became even more defensively positioned ending January at just 29% net long.

As things continue to dislocate through February, we used this as an opportunity to cover a number of short positions and entered the March slightly more a net long. We also added to our debt portfolio particularly in Ford Motor secured bank debt. At the beginning of the year our debt portfolio was about 12% of capital. We ended the quarter was about a 17% weighting in debt instruments.

Greenlight as always invested in debt instruments with that part of the corporate capital structures offered compelling unlevered returns. We started accumulating our debt portfolio in October of last year and have built our allocation in a patient fashion as markets begin further dislocated.


Our current debt portfolio is invested in US companies and we have been mindful of the liquidity in each of the issues of which we are invested.

In addition to moving up the corporate capital structure, we have also constructed a less concentrated portfolio and we have to start it. Although we have found many compelling investments that appear to be at bargain prices, this is temporary by the worst economy most of us have seen. It is very difficult to develop a high degree of confidence in corporate revenues in earnings even in well established profitable companies with conservative balance sheets.

So we have offset some of this idiosyncratic risk by holding a more diversified portfolio.


We continue to be cautious about the environment, especially in light of the market latest rally, and aren’t as convinces as some others to the government response to the prices to date will actually fix the problems in the economy. We think this take some time to play out as the normal forces of supply and demand exert themselves. We continue to be worried about monitory actions and the fiscal situation and continue holding some of our cash involved for the time being.

It's important to remember that Einhorn is speaking for GLRE and not for Greenlight Capital. (Though his thoughts in many cases will be the same, the nature of both investment vehicles can be expected at times to lead to different strategies.)

For the rest of the transcript, which Seeking Alpha provides free of charge, click here.

Monday, May 18, 2009

What Stock Would Buffett Put All His Wealth In?

What stock would Buffett put all his wealth in, if he had to choose just one? According to a recent Bloomberg report, which details his latest investment positions, it would Wells Fargo.

Banks that attract deposits at low rates were undervalued in the first quarter because investors wrongly believed that the entire industry was hobbled by risky bets and reckless lending, Buffett said at Berkshire’s annual meeting earlier this month. The KBW Bank Index fell 37 percent in the first quarter.

“All banks aren’t alike by a long shot, and in our view Wells Fargo, among the large banks, has some advantages the others do not.”

Before you get all excited, and rush to buy Wells Fargo at once, it has to be pointed out that he was speaking about buying the bank at a certain price--namely it's recent low of around nine dollars a share.

The Bloomberg article goes on to point out a few interesting things. For example, the amount Berkshire has invested in equities is the lowest it has been since 2005 (no doubt influenced, however, by the lower value of shares owned).

Also, Buffett took losses in ConocoPhilips, United Health and Carmax, adding to positions in Union Pacific, Nalco Holding, and (not surprisingly perhaps) Wells Fargo--the bank whose stock he said he would go all-in on at nine dollars.

Friday, May 15, 2009

Einhorn Doesn't Like Bugs

At least not of the Volkswagen variety. A recent article in the Wall Street Journal explains why:

Numbers normally speak for themselves with investment returns. It is a rare case when no figure can portray the full impact.

Hedge-fund manager David Einhorn (left), of New York’s Greenlight Capital, in a recent investor letter listed in a table the internal rate of return of 14 positions he closed in the first quarter. A bearish bet on jewelry retailer Zale generated a return of 92% and another on U.S. Bancorp returned 78%, Greenlight said in the May 1 letter. Then there were investments in companies such as Dr Pepper Snapple Group and Aldar Properties that generated losses of 46% and 91%, respectively, it continued.

But for the by now infamous Volkswagen trade, which dealt a punishing blow to hedge-fund managers around the world last year, Greenlight didn’t list a figure. It simply said, “bad.”

The only additional explanation it gave: “a relatively small position that caused a large loss.”
The article goes on to say that the position ending up costing Greenlight over one percent of its performance for the year.

Tuesday, May 12, 2009

Brokers Like Heebner

For those familiar with Ken Heebner's investment style--which includes big (and frequent) movements in and out of sectors--the title of this post may not come as too much of a surprise.

But just how much do brokers such as Citigroup and Merrilly Lynch like Heebner? That's impossible to tell. However, according to a recent report by Bloomberg, Heebner gave the brokers 71 million reasons to like him. And they could count all those reasons in dollars.

The huge commissions paid to brokers was, of course, partly due to his trading style and partly due to the need to meet redemptions (discussed here).

In any case, those are big numbers, and they definitely put a drag on performance. It's a good thing Heebner's brain travels at the speed of light.

Monday, May 11, 2009

Berkshire Loses $1.53 Billion

Berkshire lost 1.53 billion in the first quarter of 2009 compared to earnings of 940 million in the first quarter of 2008.

Is something lost, however, if you know right where it is?

That may be the question some are asking about the earnings--which were hurt by large write-offs of investments that many expect to work out well over time. (This is particularly the case with Buffett's big derivative bet on the markets.)

As the 10Q shows, the operating businesses struggled but both the utility and insurance operations put in a solid performance. Berkshire continues to show underwriting gains in its insurance business(es) and is using the (more valuable) float from them wisely.

Josh Funk, of the Associated Press, noted:

Berkshire officials say the company's operating earnings are a better measure of how the company is performing in any given period because those figures exclude derivatives and investment gains or losses. Berkshire reported $1.71 billion in operating earnings in this year's first quarter, which was down nearly 12 percent from $1.93 billion in operating earnings a year earlier.
This is an important point when trying to evaluate Berkshire today. The company's operating businesses are struggling, but still bringing in a lot of cash, and Buffett is able to invest that at what are most likely very low asset prices.

While those low prices have led to large write-downs, they also provide a big opportunity for Berkshire.

Thursday, May 7, 2009

Buffett Author Explains Derivatives

Snowball: Warren Buffett and the Business of Life is a book that I definitely do not recommend. Buffett achieved success because he was focused and frugal; this biography fails because it is unfocused and verbose.

(As I said in a previous post, Buffett: Making of an American Capitalist is the best biography on the great investor.)

That said, The Snowball is not entirely without value. Here is Schroeder at her best, explaining derivative contracts (on pages 544 and 545):

Derivative contracts work like this: In the Rockwood Chocolate deal, the value of hte futures contract was "derived from" the price of cocoa beans on a certain date. If the beans turned out to be worth less than the price agreed to by the contract, the person who had bought the futures contract as insurance "won." Her losses were covered. If the beans were worth more, the person who had sold the futures contract as insurance "won." The contract entitled him to buy below the then-current market price.

Suppose that in the weight deal Buffett had made with Howie for the rent on his farm, he didn't want to risk Howie's actually losing weight, which would drop the rent. Since this was under Howie's control, Warren might want to buy insurance from someone else.

He could say to Susie, "Lookit, I'll pay you a hundred bucks today. If Howie loses twenty pounds and keeps it off for the next six months, you'll pay me the two thousand dollars of rent that I'll lose. If he doesn't keep it off for the whole six months, you don't have to pay me the rent and you get to keep the hundred bucks."

The index that determined the gain or loss was "derived" from Howie's weight, and whether or not Buffett would make such a deal was based on a handicap of the odds that Howie would be able to lose the weight and keep it off.

Anather example: Suppose that Warren made a deal with Astrid to give up eating potato chips for a year. If he ate a potato chip he had to pay her a thousand bucks. This would not be a derivative contract. Warren and Astrid were simply making a deal. Whether Warren ate a potato chip was not "derived from" anything. It was under his control.

However, if Astrid and Warren made that agreement and then Astrid paid Warren's sister Bertie a hundred bucks as insurance, in exchange for a thousand dollars if Astrid lost the bet, the deal with Bertie would be a derivative contract. It would be "derived from" whether Warren ate the potato chips, which was not under either Bertie's or Astrid's control. Astrid stood to lose the hundred bucks to Bertie if Warren didn't eat the chips, and Bertie would lose a thousand bucks if he did.

Wednesday, May 6, 2009

Einhorn Likes Bagles

Does that come as a surprise to anybody? Probably not. But did you know that David Einhorn owns almost seventy percent of BAGL--the common stock of the Einstein Noah Restaurant Group?

Below is an excerpt from a recent news article about four new franchises of the company opening up in Georgia:

Steele and her partners, Stuart and Marian Gertman and Roger Weiss, recently purchased the rights to open four franchises in an eight-county area of the CSRA. The first one, on Washington Road in front of the Kroger shopping center, broke ground on Feb. 4 and they started training staff on March 23.

“Corporate was incredibly helpful,” Weiss says. “They sent six people here from other locations to help us. We have all worked 12 hours a day, six days a week to get open.”

Einstein Brothers is known for their bagels, which contain no preservatives and are baked fresh daily. They offer regular coffee, flavored and specialty coffees, hot and cold teas, hot chocolate, sodas, and frozen drinks from coffee, ice cream or fat-free fruit base.

“Our brand is all about taking bagels to work and targeting the night-shift people just getting off work,” says general manager Seddrick Brown. “Our hours are early morning to early evening. We are ‘fast casual.’ Convenient, but definitely not fast food.”
For the full article, click here.

Tuesday, May 5, 2009

Buffett's Sidekick Munger

The Wall Street Journal recently published a decent article on Buffett's long-time business partner, Charlie Munger.

It talks about the differences between the two (e.g., one is laconic while the other is loquacious), some of the deals that Buffett made because of Munger (including the latest one), and what they expect for the economy going forward. Here's an excerpt:

The men share a view that the U.S. financial system will change, and criticize past excesses. "People were horribly overpaid for just pouring on leverage," Mr. Munger said. The two investors have repeatedly warned about the systemic risks posed by the abuse of leverage and derivatives.

Mr. Munger thinks regulators may significantly curb the amount of leverage, or borrowed money, that banks can use. That will drive down pay at Wall Street firms, since traders won't be able to make as many big, leveraged bets. This could benefit Berkshire, with its cash hoard of $24.3 billion at the end of 2008. "There's going to be new rules in the game," he said. "For someone like us, that's going to be very interesting."

Monday, May 4, 2009

Near Transcipt of Berkshire Meeting

Read a near-transcipt of the most recent Berkshire Hathaway meeting at

Here, for your enjoyment, are two excerpts on BYD, the Chinese auto company we mentioned Warren Buffett investing in earlier:

BYD Chinese company is not early stage venture capital company, Munger says. It is a big maker of batteries, for example. Then finally, not satisfied with a couple of miracles it is now in automobile business. With zero start point and very little capital he built best selling model in China. That was against joint ventures in China. Munger says it is a damned miracle, not a speculative activity.

Munger says engineering graduates are being hired at BYD who were at top of their classes. He says it is a remarkable compilation of talent. Munger says lithium batteries are needed in every utility company in America and using power of the sun will need batteries.

Berkshire has invested in BYD and Munger says it is not a crazy venture. Munger says that car to be seen in the Qwest Center Omaha, the company makes almost every part in that car.

Munger says it is a privilege to have Berkshire associated with a company that is trying to do so much. Munger says it is a small company but its ambitions are big. Munger says he will be amazed if great things don't happen.


Berkshire is asked about Chinese companies. Buffett says he didn't know he'd be invested in BYD some years back, nor did he know he would have invested in Petro China.

Buffett says in some ways Berkshire will be restricted by ownership limitations, such as in insurance. But Buffett says it is hard to imagine not doing more in China in coming years because it is a huge market.

Buffett says a Chinese officially recently was upset with the Treasury bonds they hold because the value is dropping. Buffett says he believes the Chinese official is right. Buffett says it is a problem, though not the biggest problem in the world.

Munger says he would exactly what China is doing. Munger says China has one of the best financial managing systems in the world. He says China will be very hard to compete with all over the world, and that is exactly the right policy for China. Munger says that is exactly the right policy and he greatly admires the Chinese.
Asking yourself where you can buy some BYD? You're not the only one. Since news of Buffett's investment, the H shares--which are sold on the Hong Kong Stock Exchange--have gone from around 8 per share to around 20.

The stock symbol for BYD on the exchange is 1211. Here is a quote from Google Finance.

Friday, May 1, 2009

Simoleon Sense Review

Not too long ago, I gave a one thumbs up, one thumbs down review of Guru Focus--a site that you might find useful when doing research, despite its ever-increasing lack of focus.

Simoleon Sense, a site that presents "business issues through an interdisciplinary lens," is almost without fault. In any case, it's close enough to perfect (at what it tries to do) to earn a two thumbs up from me.

The site focuses on a number of areas, providing a plethora of valuable links that show how the brain works, how to make better decisions, what talented businessmen and professors are saying (about their craft or current events), and so on.

Miguel Barbosa, Simoleon Sense's owner, names the areas of research (rather than the benefits) when describing the site. For example, it presents data on value investing, neuroeconomics, behavioral finance, psychology, economics and private equity.

One of the things I like about the site is its simple layout. It is not crowded with information, or ads, so your main attention goes directly to the most important information in the middle. While ads exist, as do links to previous posts (on the side of the screen), they don't compete for your attention like at many other sites.

Another simple feauture is the link to "related posts" at the end of each one. This is not remarkable in and of itself--given that it's a free add-on that many bloggers use--but for Simoleon Sense readers it is remarkable, simply because of the quality of posts linked to (and the fact that, surprise, they really are relevant).

An improvement the site recently made, to keep its focus on business "through an interdisciplinary lens" was to move the nightly investment links to its own site. This site too is a good resource, and I plan to review it at some later point.

Until then, if this review interested you, head to the resource and judge for yourself. I think you'll find that it exceeds your expectations--and that the material provided is useful not just for business but for your life in general.