Stock Market Prognosticator

The Statistical Review of World Energy

2010-06-10T08:12:00.006-05:00

BP just released the BP Statistical Review of World Energy, which is published annually, and covers consumption, production and other statistics on oil, natural gas and other forms of energy for 2009.

I just wanted to point out the statistics on domestic United States production of oil and natural gas.

Natural gas production moved up as everyone expected due to the large scale development of unconventional resource basins. United States natural gas production increased by 3.5% in 2009, the fourth consecutive year that production has moved higher.

A bigger surprise was on the oil side, as production in the United States increased by 460,000 barrels per day, a 7% increase and the largest since the early 1970’s.

It would be premature to read too much into this number, as a one year increase in production coming after a generation of declining numbers, might be a statistical blip. Also, the deepwater moratorium on drilling will impact domestic oil production going forward.

It is something for investors to watch, however, since the 2009 numbers don’t reflect the shift in capital away from natural gas and towards oil development that has gained momentum recently.

Here is a link to the full report.

Fed Details AIG Aid

2010-06-09T13:21:00.001-05:00

The Federal Reserve Bank of New has added a new section to its web site detailing the assistance that the bank has extended to AIG during the financial crisis.

This aid was given, according to the bank, to "to preserve the stability of an already fragile U.S. economy and to protect the U.S. taxpayer from the potentially devastating consequences of the company’s disorderly failure."

This is all part of an effort by the Federal Reserve to be more transparent regarding its dealings with institutions.

The link is here

Berman Is Back

2010-02-25T04:36:00.014-06:00

Those investors that dabble in the Energy Sector are probably familiar with Arthur Berman, who runs a blog called the Petroleum Truth Report, and has staked his reputation on a bearish point of view on the shale gas resources that are believed by many to be the greatest thing since sliced bread.

Berman comes with impeccable credentials which lends an air of respectability to his writings. He is a Petroleum Geologist that worked for a major oil company for most of his career.

His latest piece was published on the Oil Drum, and I recommend that everyone read it, not because I necessarily agree with everything that he writes, but investors shouldn't fear an opposite opinion.

Here are some provocative excerpts from the post:

"The widespread belief that there is 100 years of natural gas supply in the U.S. because of shale plays is incorrect. Claims that shale gas has resulted in 100 years of supply are based on circular references without underlying documentation, and also do not take high decline rates or anticipated future demand growth into account."

"The current marginal cost of gas production is at least $8/Mcf, and prices will eventually rise to meet that cost."

"The Barnett Shale play is largely non-commercial because the controls on production are complex and difficult to predict."

Read the comments below the post as Berman makes substantial comments in response to readers questions.

Twitter Comment

2010-01-20T10:02:00.006-06:00

I came across an interesting comment from Dick Costolo, the Chief Operating Officer of Twitter, as reported on Bloomberg News:

"We have to catch up to our valuation," Costolo said. “We’ve raised all this money. We’ve created this global brand. It’s one of the fastest -- if not the fastest -- growing brands in the history of the world. Now we have to go build the business that lives up to that valuation."

This is a shocking admission that the company is overvalued in the private market, and not something that you hear everyday from an executive at a Technology company.

Lympho-Maniac Charity Event

2010-01-09T06:41:00.008-06:00

It's time once again for the annual Lympho-Maniac Charity Event held once a year in the spring in New Orleans. If you are not familiar with this event, it is organized by Chad Landry, an institutional equity salesman who works for Capital One Southcoast. He is also the proprietor of "Chateau Landry," but that's a story for another blog post.

The Lympho-Maniac event is a 70's retro dance party designed to increase cancer awareness with all donations and proceeds going to The American Cancer Society’s Patrick F. Taylor Hope Lodge in New Orleans. Chad is a cancer survivor and started this event up 10 years ago.

Chad is having a very special guest this year for the event, which is being held on Saturday, March 20, 2010. Donald Trump, Jr. and his wife are returning as judges of the dance contest. Click here for more details on the event.

Lympho-Maniac 2010 Promo from Scott Bellina on Vimeo.

If you can't make the event, consider making a donation through the Lympho-Maniac web site.

Exxon Mobil - XTO Energy - Part II

2009-12-17T09:32:00.003-06:00

Another part of the Outlook for Energy: A View to 2030, released by Exxon Mobil a week before the XTO Energy deal really bothers me.

"ExxonMobil technologies have unlocked vast new resources of natural gas that previously were trapped in dense rock formations, as well as other types of so-called “unconventional” natural gas. These technologies have resulted in a significant upswing in U.S. natural gas production, and may have similar applications in other parts of the world."

How about this instead:

"Exxon Mobil sat around and watched smaller companies enter these new plays and drill circles around us because we thought that they were too risky, and that North America was too mature an area to be bothered with."

or

"We had the technology to unlock these unconventional shale resources, but didn't have the balls to use it on a large scale, and sat around and bought back stock instead. Now we have to pay up for these resources."

Full Publication

Christopher H. Browne

2009-12-17T05:42:00.001-06:00

Christopher H. Browne of Tweedy, Browne & Co. died a few days ago and in memory of this value investor, here are excerpts from a speech he made to the Graham and Dodd Value Investing Center at Columbia University in November 2000.

"A whole body of academic work formed the foundation upon which generations of students at the country’s major business schools were taught about Modern Portfolio Theory, Efficient Market Theory and Beta. In our humble opinion, this was a classic example of garbage in/garbage out."

"Investment performance is generally measured against a benchmark, and claims to being long-term investors aside, the typical institutional client tracks performance on a monthly or quarterly basis versus the benchmark. Performance that deviates from the benchmark becomes suspect and can lead to termination of the money manager. Consistency of returns relative to the benchmark are more important than absolute performance especially in a world dominated by the hypothesis that asset allocation is more important than stock selection."

Columbia Speech

Exxon Mobil - XTO Energy

2009-12-15T10:05:00.009-06:00

Exxon Mobil released a publication entitled Outlook for Energy: A View to 2030, about a week before the XTO Energy purchase. There was one part that caught my attention and gave a little hint of what they were planning:

"Natural gas supply to expand, particularly in the U.S. where unconventional gas supplies are expected to meet more than 50 percent of gas demand by 2030."

and later on:

"There will be an expansion of natural gas supply, particularly in the United States where unconventional gas supplies are expected to satisfy more than 50 percent of gas demand by 2030."

Full Publication

How Bad Could It Have Been?

2009-12-04T08:41:00.003-06:00

A recent academic study called Financial Crises and Economic Activity, written by Stephen G Cecchetti, Marion Kohler and Christian Upper, has implications for the current strength and trend of the U.S. and Global economic recovery.

The paper examined 40 systemic banking crises since 1980 and evaluated the real output costs of these crises. The conclusion:

“First, the current financial crisis is unlike any others in terms of a wide range of economic factors. Second, the output losses of past banking crises were higher when they were accompanied by a currency crisis or when growth was low at the onset of the crisis. When accompanied by a sovereign debt default, a systemic banking crisis was less costly. And, third, there is a tendency for systemic banking crises to have lasting negative output effects.”

How bad could it have been for us this time? The mean peak to trough decline in GDP for the 40 crises was 18.4%, with a median decline of 9.2%. Also, in one crisis, it took seven years for GDP to get back to its pre crisis level.

Read the original study here.

FDIC Report

2009-12-01T10:40:00.001-06:00

The Federal Deposit Insurance Corporation (FDIC) recently released its third quarter of 2009 Quarterly Banking Profile detailing a host of statistics on the banks under its jurisdiction. This report has been well covered, but one part I wanted to highlight was the section on the number of employees at the FDIC.

The number of employees has moved up from 4,476 in September 2006 to 6,298 as of September 2009. While this might seem like a lot, the total number of employees peaked at 22,586 in September 1991, during our previous banking crisis.

The point is that either current employees are much more efficient than they used to be back in the early 1990's, or the FDIC may be one of the few agencies to be adding jobs to the economy over the next few years. Just something to think about.

How To Destroy Value

2009-11-11T15:22:00.008-06:00

It was reported today that Motorola (MOT) is shopping around its division that makes set top boxes and other equipment for cable and phone companies. The rumored asking price is around $4.5 billion.

That sounds great, but unfortunately for Motorola and its shareholders, the company paid $11 billion for it 10 years ago. Read how management gushed over it back then:

"This partnership will enable us to expand our portfolio for network access, delivering next-generation solutions along with 'home hubs' that will handle high-speed Internet access and video entertainment, as well as carrier-quality voice services," Motorola chief executive Christopher B. Galvin said. "People want access tailored their way and the ability to get online quickly and simply."

Some might say that Motorola didn't really pay $11 billion since it issued its own stock to complete the purchase. This is nonsense of course.

Deals like this might be a contributing reason to explain why Motorola stock has been a disappointment to many investors.

Interesting Article

2009-10-26T05:45:00.007-05:00

I ran across an academic article recently that I haven't had time to read yet, but thought I would share it with readers of this blog.

The Financial Crisis as a Symbol of the Failure of Academic Finance? and it's available here.

This excerpt from the abstract drew my attention:

"Theoretical constructs such as the efficient markets hypothesis, rational expectations, and market completeness were too often treated as intellectual dogmas instead of (parts of) falsifiable hypotheses...the failure of academics to communicate the limitations of their models and to warn against (potential) misuses of their research - and sins of commission - introducing (often implicitly) ideological or biased features in research programs."

Full Citation

Blommestein, Hans J., The Financial Crisis as a Symbol of the Failure of Academic Finance? (A Methodological Digression) (September 23, 2009).

"Short-Termism" In The Market

2009-09-17T09:22:00.001-05:00

I have blogged constantly about the value and importance of long term investing, and a recent report from the Aspen Institute came out with some practical proposals to fight what they call "short-termism" in the market.

Let's start with the problem as outlined by the institute:

"High rates of portfolio turnover harm ultimate investors’ returns, since the costs associated with frequent trading can significantly erode gains."

"Fund managers with a primary focus on short-term trading gains have little reason to care about long-term corporate performance or externalities, and so are unlikely to exercise a positive role in promoting corporate policies, including appropriate proxy voting and corporate governance policies, that are beneficial and sustainable in the long-term."

"The focus of some short-term investors on quarterly earnings and other short-term metrics can harm the interests of shareholders seeking long-term growth and sustainable earnings, if managers and boards pursue strategies simply to satisfy those short-term investors."

The report recommends market incentives to discourage such short term behavior. This would include revising the capital gains structure to impose a lower tax on stocks held for a longer time period, and an excise tax on short term trading.

These sound like sensible suggestions and should be taken seriously by the powers that be.

The full report is here.

Another Greenshoot

2009-09-15T06:56:00.003-05:00

Another green shoot in the economy hit the tape last week:

"FedEx Corporation (NYSE: FDX) today announced that it expects to report earnings of $0.58 per diluted share for the first quarter ended August 31, down 53% from $1.23 per diluted share a year ago. The company's guidance for the quarter was $0.30 to $0.45 per diluted share."

"FedEx expects earnings to be $0.65 to $0.95 per diluted share in the second quarter, which reflects the current outlook for fuel prices and a continued modest recovery in the global economy."

How many green shoots equal a recovery?

BJ Services Take Under

2009-08-31T20:10:00.010-05:00

Am I the only BJ Services (BJS) shareholder out there who thinks that this is a lousy deal? Is there any hope for a competing bid? BJ Services traded close to $40 back in 2006, and was as high as $33 last summer.

So we get .40 shares of Baker Hughes and $2.69 cash for a big total of $16.47. Wow, that's a big $0.63 premium over the previous close for BJS.

I know that the management of BJ Services has a reputation for being cheap, but that's not supposed to extend to when you sell your own company.

Article Shows That Sell Side Analysts Still Suck

2009-08-13T10:32:00.011-05:00

An article entitled "Behavioural Bias and Conflicts of Interest in Analyst Stock Recommendations" published in the Journal of Business Finance & Accounting examines these issues:

"Whether sell-side analysts are prone to behavioural errors when making stock recommendations as well as the impact of investment banking relationships on their judgments. In particular, we analyse their report narratives for evidence of cognitive bias."

The conclusions:

"New buy recommendations on average have no investment value."

I think everyone already knew that, although I would add that in the short term they can drive the price of a stock up.

"Whereas new sell recommendations do, and take time to be assimilated by the market."

Again, fairly logical since sell side sell recommendations are fairly rare, they are likely to be more noticed.

"We also show that new buy recommendations are distinguished from new sells both by the level of analyst optimism and representativeness bias as well as with increased conflicts of interest."

Just as a review, representativeness bias refers to "A cognitive strategy for quickly estimating the probability that a given instance is a member of a particular category. We use it to judge the likelihood that something or someone belongs to a specific category."

"Successful new buy recommendations are characterised by lower prior returns, value stock status, smaller firms and weaker investment banking relationships."

Small Cap Value stocks with little or no analyst coverage rule.

So what does this all prove? That sell side analysts are humans just like the rest of us and suffer from deviant investment behavior despite what is arguably a higher formal education.

Mokoaleli-Mokoteli, Thabang, Taffler, Richard J. and Agarwal, Vineet,Behavioural Bias and Conflicts of Interest in Analyst Stock Recommendations. Journal of Business Finance & Accounting, Vol. 36, Nos. 3-4, pp. 384-418, April/May 2009. Available at SSRN: http://ssrn.com/abstract=1400370 or DOI: 10.1111/j.1468-5957.2009.02125.x

Health Insurance Debate

2009-08-12T08:08:00.014-05:00

There has been a lot of media attention on the continuing debate over the Obama Health Care proposals that are tortuously making its way through the U.S. legislative process. Well here is another thing to consider - a new study by the folks at Stanford University, the Rand Corporation and the University College of London entitled:

Does Health Insurance Make You Fat?

The conclusion reached was that "We find stronger evidence that being insured increases body mass index and obesity."

Abstract

"The prevalence of obesity has been rising dramatically in the U.S., leading to poor health and rising health care expenditures. The role of policy in addressing rising rates of obesity, however, is controversial. Policy recommendations for interventions intended to influence body weight decisions often assume the obesity creates negative externalities for the non-obese."

"We build on earlier work demonstrating that this argument depends on two important assumptions: 1) that the obese do not pay for their higher medical expenditures through differential payments for health care and health insurance, and 2) that body weight decisions are responsive to the incidence of medical care costs associated with obesity. In this paper, we test the latter proposition – that body weight is influenced by insurance coverage - using two approaches.'

"First, we use data from the Rand Health Insurance Experiment, in which people were randomly assigned to varying levels of health insurance, to examine the effect of generosity of insurance coverage on body weight along the intensive coverage margin. Second, we use instrumental variables methods to estimate the effect of type of insurance coverage (private, public and none) on body weight along the extensive margin."

"We explicitly address the discrete nature of the endogenous indicator of health insurance coverage by estimating a nonlinear instrumental variables model. We find weak evidence that more generous insurance coverage increases body mass index. We find stronger evidence that being insured increases body mass index and obesity."

Bhattacharya, Jayanta, Bundorf, M. Kate Kate, Pace, Noemi and Sood, Neeraj,Does Health Insurance Make You Fat?(July 2009). NBER Working Paper No. w15163. Available at SSRN: http://ssrn.com/abstract=1435601

Value vs. Growth

2009-08-02T06:40:00.002-05:00

The ancient battle between Value and Growth investing continues, with Barron's weighing in with its take on the issue. It's starting to remind me of the Hundred Year's War between France and England or that Star Trek episode where two planets have been at war for five hundred years.

Value Investing has underperformed growth investing over a six month or three year horizon, but Value Investing outperformed in the second quarter of 2009.

The problem with this and all other like statistics is that it artificially categorizes all cheap stock as Value stocks. Barron's uses the Russell indexes to measure performance, and specifically mentions Bear Stearns, Citigroup (C), Freddie Mac (FRE), General Motors, Macy's(M) and JCPenney(JCP) as being particularly harmful to Value investors.

Just because a stock is cheap doesn't make it a Value stock. This is pretty basic and is one of the first things any investor learns after picking up a book written on Value investing.

The Real Vampire Squid On The Face Of Humanity

2009-07-27T10:55:00.012-05:00

Matt Taibbi’s article on Goldman Sachs has now achieved legendary status for the term he coined in this sentence:

“The world's most powerful investment bank is a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money.”

The entertaining article was a little short on facts, but who cares, after all, in an age where blogging dominates, no one cares about accuracy anymore. What really matters is shock value, and no one should be surprised that this article appeared in a mainstream media publication, as they are desperate to find a way out of its slow death.

I digress, though, as I am not writing this post to argue against the points that the author made. What I am writing about is to tell everyone that the real “vampire squid wrapped around the face of humanity” is not Goldman Sachs but in reality is the “momentum” investor.

When I worked on a trading desk at Morgan Stanley, we had a more colorful name for them. We called them “fast money scum,” and we meant it.

The ethos of the momentum investor is simple in concept. Buy what’s going up. If it keeps going up, buy more. When momentum breaks, get out. Everyone knows who these investors are. When a stock you own is down 20% after it misses earnings by a millionth of a cent – that’s them.

The momentum investor has enabled all three bubbles in the last ten years – Technology/Internet, Real Estate/Homebuilding and Commodities. They do this by pushing stocks up far above what they should be trading for on a fundamental basis.

It wouldn’t be so bad if these investors were honest about what they do, but they are not. They usually manufacture or hide behind some fundamental story about whatever sector is bubbling up, usually in league with sell side enablers, who are enamored of the trading commissions they generate.

Even worse, the financial media - CNBC and Bloomberg TV - orient programming toward this group, by amplifying short term trends, rather than discouraging it.

This infects the entire market as institutional investors, most of whom are trained as fundamental investors, are forced to jump on the bandwagon, lest they be left behind in the relative performance game.

Momentum investors have cost ordinary investors trillions in wealth over the last decade, as many small investors buy into these fundamental stories and then don’t realize when momentum breaks and the plug is pulled.

Any new regulatory initiatives out of the Obama Administration should be oriented toward controlling or destroying these investors.

Sovereign Wealth Funds

2009-07-21T06:06:00.007-05:00

Does anyone remember a year ago when everyone pundit and media outlet predicted that Sovereign Wealth Funds were going to take over the world? The assets they controlled were growing so quickly due mostly to the commodity boom that it was starting to create hysteria in the United States. It's amazing how quickly the conventional wisdom can change.

From the Financial Times:

"The financial clout of sovereign wealth funds has been savaged by the credit crisis as the value of their assets has plunged and forecasts for their growth have been dramatically scaled back."

Steve Forbes Video

2009-07-12T15:33:00.002-05:00

Steve Forbes drags Julius Caesar into the current financial crisis in a video from late June 2009. He compares Caesar's hubris to that of those who led our financial system into disaster.

Hubris is a Greek word which is officially defined as either overbearing pride or presumption or arrogance. The word is used, in the context of our financial crisis, to refer to a group of financial elite, or "masters of the universe" who felt that they could manufacture unlimited speculative profits using almost unlimited leverage, without any significant risk.

I agree with Steve Forbes on this, but his historical knowledge is severely lacking. He states in the video that Caesar conquered more land than any military leader in history, and specifically mentions Alexander the Great. This is clearly not true, as Alexander controlled a larger empire as measured by land mass, than Rome at its largest extent. Look at the links after the video.

This is a map of the Roman Empire at its peak in 117 A.D., which is 150 years after Caesar was killed. Since Alexander has a larger empire than Rome at its largest,then he certainly had a larger one than at the time of Caesar.

This is a map of the land that Alexander conquered.

Wikipedia also has a list of the largest empires in history as measured by land mass. Rome is way down on the list.

List of largest empires.

What Will The End of Newspapers Mean For Blogging?

2009-07-10T08:33:00.002-05:00

Here’s the real issue behind the fall of the Newspaper industry. What will all those bloggers do when there are no newspapers left and they can’t scrape content from a newspaper while hiding behind the “fair use” doctrine?

If you’re not familiar with scraping content, it works like this. Cut and paste the opening paragraph from the online version of an in print Newspaper article. You can put it in quotes, with a link to the original source if you are generous, or just reference it without a source. Charts and tables are also copied into the blog. You then frame the content with your thoughts on it afterward.

You’d be surprised how much web content is derived from this without any thought to how difficult it is to write these newspaper articles. No consideration is given to the hours spent researching stories or wading through dense government press releases, or the years spent cultivating sources, etc.

I just looked at the front page of a highly followed blogger who has been in the news a lot lately, and fully 50% of his stories are scraped from other publications. This blogger does give full credit to the source with a link. Just something to think about.

So Much For Chinese Demand

2009-06-29T08:25:00.001-05:00

"The International Energy Agency cut its oil demand estimates for every year through 2013 by about 3 million barrels a day, it said in its Medium- Term Oil Market Report today. Consumption will average 86.76 million barrels a day in 2012, the first year it will rise above 2008’s level of 85.76 million barrels a day, according to the Paris-based agency."

Well so much for demand for Energy from China. This demand growth has always been hyped by Energy bulls, but as I and many others have stated previously, what really matters is demand growth from the the U.S. and other industrialized nations.

Here is how the math works:

Oil demand in 2009 for the OECD countries is 45.2 million barrels per day, down 2.3 million barrels per day from 2008.

China oil demand is 7.9 million barrels per day. Let's assume that it grows at 5% a year, or about 400,000 barrels per day.

As you can see, the fall in demand from the OECD easily wipes out demand growth from China by a factor of at least five.

Two More Oil Bears

2009-06-17T08:38:00.007-05:00

James Mulva, the CEO of Conoco Phillips said that the doubling in the price of oil off of its bottom to $73 a barrel was "a little bit ahead of the actual supply and demand situation and inventory levels."

Nouriel Roubini, the economist, said that the rally in oil prices was "too high too soon." Here's a short video of Roubini covering his full views on the current economy.

When General Motors Ruled The World - Part III

2009-06-13T09:26:00.002-05:00

General Motors was formed in 1908 by William Durant, when he incorporated the Buick Motor Company. Later that year, Oldsmobile becomes the second company to join General Motors. In 1909, General Motors purchased a 50% interest in the Oakland Motor Car Company, which later became known as Pontiac. In 1909, General Motors bought Cadillac for $5.5 million. This is a photographic tribute to this iconic American institution.

In 1936 and 1937 the United Auto Workers (UAW)attempted to organize the labor force at General Motors. This strike later became known as the "Flint sit down strike," where workers occupied the large General Motors plant in Flint, Michigan.

The strike spread to other plants and in February 1937, General Motors capitulated and recognized the UAW as the exclusive bargaining representative of workers in the union.

The first three pictures below are of John L. Lewis, and other labor leaders discussing the strike in January 1937 in Washington, DC.

Did the union victory in 1937 plant the seeds of the eventual destruction of General Motors? These men had no way of knowing, obviously, and were just fighting for basic rights that we take for granted. It certainly is not fair to blame the union for all of the ills of General Motors, as management made its share of bad decisions.

The final picture is the management of General Motors, including Alfred Sloan, discussing the strike with the Governor of Michigan and the U.S. Secretary of Labor. The management of General Motors refused to even sit in the same room with the Union leaders and all negotiations had to be done through intermediaries.

When General Motors Ruled The World - Part II

2009-06-11T09:25:00.002-05:00

They Did Have Good Intentions

2009-06-10T08:56:00.002-05:00

Another video from a lecture series called "The Culture that Spawned the Crisis: A Closer Look" held at The National Constitution Center in May 2009. The speaker is Peter Wallison, who worked in government during the Reagan Administration.

He argues that a push under the Clinton and Bush administration's to increase the homeownership rate was a worthy goal, but it was done by distorting the credit market by pressuring banks and the two Government Sponsored Entities to make loans that they should not have made. This is not the first time that someone has made this point, but it does bear repeating.

A Pathological Mutation of Capitalism

2009-06-06T08:30:00.002-05:00

I wanted to share an interesting video from a lecture series at the National Constitution Center entitled "The Culture that Spawned the Crisis: A Closer Look." Several speakers argue that the changing culture of the United States led to the conditions that caused the financial crisis.

Some of these cultural changes include the concept of "thrift" which used to be an important part of American culture, but over a generation evolved into a culture of envy and personal gratification, where people expect something for nothing.

John Bogle, the founder of the Vanguard Group, speaks in this video. He uses the the term "pathological mutation" to describe the change in our capitalistic system, from a traditional owners capitalism where rewards went to the owner and providers of capital to a managers capitalism where the majority of rewards went to corporate managers and financial intermediaries.

When General Motors Ruled The World

2009-06-04T08:42:00.009-05:00

White Mountains Insurance Analyst Day 2009 - Part II

2009-06-01T08:26:00.003-05:00

Here are my notes from the White Mountains Insurance Analyst Day held on May 20, 2009. These are for the introductory section, the financial highlights and a review of bad news in 2008. When I went back to the events section of the White Mountains Insurance web page, the webcast link was missing, so I don't know if I'll be able to review the rest of the meeting. I have e-mailed the company asking for the link but haven't heard back. If anyone has the link to the webcast, please send it to me.

2008 – Bad News

WTM had $1 billion in excess undeployed capital last year because of a lack of investment opportunities – so the company bought back stock and did Berkshire transaction. Barrette admitted that with hindsight this was obviously, not a good idea. He doesn’t think it will destroy value but will not do what he thought it would do.

Equity Portfolio – Bad News

Equities as a percent of adjusted shareholder value has gone from 55% in December 2007 to 70% pro forma for the Berkshire transaction in June 2008, to just under 38% in the first quarter of 2009. He said that with hindsight the company should have sold down its equity portfolio, but instead paid Berkshire out of proceeds from its fixed income portfolio.

By December 2008, WTM altered its equity strategy to a goal of capital preservation. After first two weeks of October 2008, WTM found its capital falling to levels that came close to minimum capital levels necessary to keep credit ratings where they needed to be. Moved out of common stocks and de risked fixed income portfolio.

Barrette said the company likes what they own and would probably own some different things if they had more capital or flexibility. WTM owns things not because they have to but because they want to.

WTM Life Re – Bad News

This was a business that WTM got into that it didn’t fully understand what they were getting into. Alan Waters is in charge of fixing the business.

WTM has reinsured two blocks of Japanese variable annuity policies with same counter party that guarantees the return of initial deposit at death or maturity. These are ten year policies with average remaining life of 7 years. Outstanding guarantee is $2.5 billion for WTM, which is the difference between the account value and the guaranty value. Seventy percent is invested in fixed income index funds, and 30% in equity index finds.

Lost $188 million in this business in 2008, $181 million in last quarter of 2008. This loss comprised $93 million from assumption and model changes, which was the change in WTM assumptions on policyholders surrenders.

When a policyholder surrenders a policy the insurer does not pay full guarantee value of policy but only the account value so when account or asset values are low, high surrender are good. Unfortunately for WTM actual surrenders were well below what the company had estimated when they wrote the policy so they had to change the surrender assumption in the last quarter of 2008. WTM changed surrender assumption from 6.2% to 2.2% of all policies.

WTM lost $32 million in first quarter of 2009, but business is now marginally profitable now that the markets have calmed down.

WTM has reduced risk through increased hedging and improved method of hedging. WTM uses swaps instead of bond futures. Increased volatility coverage from 60% to 70%., and added local trading coverage in Europe and Asia.

WTM is still sensitive to surrender rates and if rate decreased to 1.1% then it would cost company $44 million.

Barrette says WTM ventured into a business it did not fully understand, and now he understands that they didn’t fully understand it, and he apologizes for it.

Barrette said it is a big loss but believes that they have it under control but there is still possible downside. The lesson is when something looks easy then look again. WTM usually laughs at those who get into its business who think it is easy and now they are on the other side of that.

White Mountains Insurance Analyst Day 2009 - Part I

2009-05-30T08:21:00.013-05:00

Here are my notes from the White Mountains Insurance Analyst Day held on May 20, 2009. These are for the introductory section, the financial highlights and a review of bad news in 2008. When I went back to the events section of the White Mountains Insurance web page, the webcast link was missing, so I don't know if I'll be able to review the rest of the meeting. I have e-mailed the company asking for the link but haven't heard back. If anyone has the link to the webcast, please send it to me.

Notes

Ray Barrette introduces the Board of Directors of White Mountains Insurance (WTM) and says that some are in the room and the rest are listening on the phone. He commented that the Board had a tough time with them due to the poor returns the last few years. Barrette says that he was not sure if Bruce Berkowitz would be there in person or listening on the web.

Barrette then introduced some of the WTM people who would be speaking:

David Foy, CFO
David Linker? (spelling), fixed income manager
Mike Miller, One Beacon
Alan Waters. White Mountains Re

Financial Highlights

Barrette said that 2008 was a tough tough year. Book value of WTM dropped 20% and book value of One Beacon dropped 22%. First quarter things have stabilized with WTM book value flat and OneBeacon up 3%.

One Beacon combined ratio at 94% for first quarter of 2009.

WTM Re has had a bit of an up and down combined ratio and has had reserve issues in the past but Barrette believes that those reserve issues are behind them. He knows that he has said that before and if people are skeptical he is not surprised.

Answer Financial (AFI) – controls $1.2 billion in premiums combined with Esurance. He believes that Esurance/AFI is third choice for consumers behind Geico and Progressive.

Esurance combined ratio is at 103% in first quarter of 2009, but WTM looks at loss ratio rather than combined ratio, but the combined ratio did come down 10 points. WTM cut marketing and advertising expenses but are ready to ramp them up when needed.

Investment Returns

Barrette said it was the first time in his very long career that underwriting is doing well, but investments are the problem. Investments were always value added to the company. Total investment results were down 9.5% in 2008, and while this might be good for some people, the company’s job is not to lose money, and the company was disappointed with that. Things stabilized in first quarter of 2009, and the company likes what it owns.

Surprise from last year was Life Reinsurance business, which they had barely talked about in past meetings and then there were significant losses with it. First quarter of 2009 was a problem and the company lost $32 million in the Life Reinsurance business, but things have stabilized.

Book Value Growth

Barrette said this a chart that he used to love to show at investor meetings, but it looks a whole lot less attractive now. Since IPO in 1985, 15% growth in book value – still ranks pretty high in industry. Stock value growth used to be above book value growth but now it is below.

Since 1999, book value has grown at 10% a year and market value of stock at 8% a year. Barrette apologizes for the results.

The Mind of Wall Street - Part II

2009-05-29T08:04:00.003-05:00

I just started reading a book called “The Mind of Wall Street,” by Leon Levy. Levy died in 2003, but had a fifty year career on Wall Street and was one of the early partners at Oppenheimer and Company. Levy is a value and contrarian investor who incorporates the psychology of the market into his investment process.

An interesting bit of information is that according to Levy, the concept of the adjustable rate mortgage was conceived by Gene Fenton, an employee of Oppenheimer and Company. Fenton, in true Wall Street spirit, constructed it so that it could only adjust upwards. Of course, this concept did not catch on too well given the one sided nature of the product.

Some time later, Marion Sandler, another Oppenheimer and Company employee, came along and changed it so it would adjust either way. If you don't recognize this name, years later Marion and Herb Sandler went on to fame with Great West Financial, a leader in the mortgage market. The Sandlers sold out to Wachovia at the peak of the housing bubble.

FDIC Quarterly Banking Profile - Q1-2009

2009-05-28T05:48:00.001-05:00

The Federal Deposit Insurance Corporation (FDIC) just released its quarterly banking profile for the first quarter of 2009. Highlights include:

1) FDIC-insured institutions post an aggregate net profit of $7.6 billion in the first quarter of 2009. This was down 60.8% year over year, but up from the $36.9 billion net loss reported in the fourth quarter of 2008.

2) Banks set aside $60.9 billion in loan loss provisions.

3) Banks reported an average net interest margin of 3.39%.

4) First-quarter net charge-offs of $37.8 billion.

5) Noncurrent loans and leases increased by $59.2 billion, the largest increase in three years.

6) The percentage of loans and leases that were noncurrent in the quarter was 3.76%, the highest percent since 1991.

7) Total equity capital of insured institutions increased by $82.1 billion in the first quarter, concentrated mostly in large TARP recipients.

8) Twenty one banks failed in the quarter, the most since 1992.

Varsity Notes

2009-05-27T12:29:00.007-05:00

I recently stumbled across an interesting web site that contains hundreds of free lecture notes and other materials for various courses at different colleges and universities across the world.

The site is called Varsity Notes, and is great if you want to freshen up your knowledge in certain areas related to investing or elsewhere. The relevant categories for our purposes would be:

Finance

Business Administration

Economics

Accounting

Some of the more famous professors whose notes are available include Aswath Damodaran of New York University. Damodaran makes available on his web site a 58 page handout on Valuation.

The Mind of Wall Street

2009-05-25T08:07:00.004-05:00

I just started reading a book called “The Mind of Wall Street,” by Leon Levy. Leon Levy was one of the first partners at Oppenheimer and Company. Levy died in 2003, and was a value investor incorporating much behavioral psychology into his investment process.

When I saw the book at the store, I saw the title and the name Levy, and my eyes skipped over the first name and I assumed that Gus Levy was the author. Gus Levy was in charge of Goldman Sachs in the early 1970’s.

Oppenheimer and Company has an interesting history. The firm was founded in 1951 after Max Oppenheimer left the firm Hirsch and Co. Levy joined soon after that. Oppenheimer catered to many German refugees at the beginning, and in the first few years more German was spoken at Oppenheimer than English.

Another interesting tidbit recounted by Levy was his accounting of the ethnic divisions that used to exist on Wall Street. The major street firms were broken down as follows:

Merrill Lynch – Catholic.
Brown Brothers, Morgan Stanley – WASP
Goldman Sachs, Lehman Brothers - Jewish

This book should be an interesting read, and I will post on it over the next few weeks.

White Mountains Insurance Analyst Day

2009-05-15T10:34:00.001-05:00

White Mountains Insurance is holding its annual investor meeting on May 20, 2009. The meeting is in New York City, but is being webcast. White Mountains Insurance doesn't hold earnings conference calls or market very much to the investment community so this is a good chance to get a review of what going on in its business segments.

Some investors may feel that management has some explaining to do considering the stock was trading at close to $450 last year compared to $214 per share today.

Here are my notes from the meeting last year.

The Credit Crunch Peaks

2009-05-05T06:21:00.001-05:00

The April 2009 Senior Loan Officer Opinion Survey on Bank Lending was released yesterday and the results show that the "credit crunch," may have peaked. Here are highlights:

Forty percent of domestic respondents reported having tightened their credit standards on commercial and industrial (C&I) loans. This was down considerably from the 65% in the January survey.

Sixty five percent of domestic respondents reported having tightened their credit standards on commercial real estate loans (CRE). Once again, this was down from the 80% in the January survey.

The story was somewhat mixed for consumers, where a higher percent of banks tightened standards on Residential Mortgage Loans, both prime and non prime.

On credit card loans and other consumer loans the opposite was true, a smaller percentage of banks tightened standards on these loans.

Here is the full survey and some charts to look at.

Gulf South Bank Conference

2009-05-04T10:38:00.003-05:00

I’m heading down to the Gulf South Bank Conference later in the week. This is an industry-sponsored event that has about 20 or so banks presenting to investors. These aren’t the giant commercial banks that dominate the news, but are smaller community banks that don’t get a lot of publicity. I think the largest bank presenting has a market capitalization of approximately $2 billion. Here is a list of the banks attending:

BancorpSouth, Inc. (BXS)
MidSouth Bancorp, Inc. (MSL)
Bank of Florida Corporation (BOFL)
Peoples Financial Corporation (PFBX)
Bank of the Ozarks, Inc. (OZRK)
Porter Bancorp, Inc. (PBIB)
Capital City Bank Group, Inc. (CCBG)
Renasant Corporation (RNST)
CenterState Banks of Florida, Inc. (CSFL)
Simmons First National Corporation (SFNC)
Encore Bancshares, Inc (EBTX)
Southside Bancshares, Inc. (SBSI)
First Financial Bankshares, Inc (FFIN)
Superior Bancorp (SUPR)
First Security Group (FSGI)
Teche Holding Company (TSH)
Hancock Holding Company (HBHC)
TIB Financial Corporation (TIBB)
Home BancShares, Inc. (HOMB)
Trustmark Corporation (TRMK)
IBERIABANK Corporation (IBKC)

I just found out that Whitney Holding (WTNY) pulled out of the conference several weeks ago because it didn’t want to get any political flack from Congress about spending money on wining and dining investors. I will post my thoughts on the conference when I return.

TXCO Resources Gets Hit

2009-04-23T13:37:00.012-05:00

TXCO Resources (TXCO) looks like it may become the first casualty of the credit crunch in the exploration and production sector.

The company just received an acceleration notice from its lender demanding full repayment of the $150 million owed under the agreement, an amount the company does not have.

It's a shame since the company has some interesting properties in the Maverick Basin in Texas, and is also exposed to the Eagle Ford Shale.

I uploaded a few pictures of drink coasters I received from them at an investor meeting some time ago.

What is or What Was The Financial Crisis?

2009-04-14T09:26:00.003-05:00

Here’s the bitter truth about the “financial crisis.” Things were never as bad as people thought, and now things are not as good as people think. Over the last six months, there was too much pessimism around what was going on, and now we are moving toward too much optimism.

Why is this happening? One reason is that too many investors and commentators take cues from the stock market and use that as a fundamental barometer for whether things are “good” or “bad.” This is reflected in media commentary by these pundits who go on TV and say something like this:

“The market doesn’t believe it.”

“The market is saying this….”

“What the market is telling us.”

The market is a poor substitute for doing fundamental research on stocks, yet millions of people use it as the Oracle of Delphi instead of what it really is – the uncontrollable collective mass hysteria of terrified investors and short term traders.

Bank of America traded as low as $2.52 last month and peaked two years around $47. Which was correct? Neither. Bank of America was never worth the 2-3 times book value it traded at when it peaked, nor was it ever worth as little as the 15% of book value it traded at in March 2009.

Yet now everyone is breathing a huge sigh of relief, as the crisis is over, and as evidence of this, the stock market is cited as the determinant of that conclusion.

Here’s the bottom line. Don’t use the stock market to tell you the fundamentals of our financial system, as it is a terrible indicator of those fundamentals.

Festival of Stocks Number 136 - April 13, 2009

2009-04-13T05:44:00.003-05:00

I humbly present the 136th edition of the Festival of Stocks. This is the eighth time I have hosted, and if you want to sign up as a host then go to this web page.

Stock Ideas

Jae Jun presents Cheap Graham Stock Ideas posted at Old School Value.

Dividend Growth Investor presents Best High Yield Dividend Stocks for 2009-1Q Update posted at Dividend Growth Investor.

D4L presents Federal Realty Investment Trust (FRT) Stock Analysis posted at Dividends Value

Bootstrap presents Company Update: Miller Industries posted at Bootstrap Investing.

Zach Scheidt presents Netflix - High Flyer or Falling Star? posted at ZachStocks.

Andy presents Warren Buffet's Berkshire Downgraded as AAA Credit Rating Lost posted at Saving to Invest.

Ray presents S&P Dividend Aristocrats to be changed? posted at Financial Highway.

Steve Alexander presents 5 Points to Look For When Evaluating Management posted at MagicDiligence - The Best Magic Formula Stocks.

George presents Special Situations Real Money Portfolio March 2009 Update posted at Fat Pitch Financials.

Mutual Funds/ ETF's

Cody Butler presents How Do Mutual Funds work? posted at Investment-For-Beginners Blog.

Darwin presents Colombia ETF - A Return to Supercharged Frontier Market Returns? posted at Darwin's Finance.

Ripe Trade presents Ripe Trade: Leveraged and inverse ETF pitfalls posted at Ripe Trade.

Walter W. Fouse presents 7 Ways to Pick the Best Noload Mutual Funds and ETFs posted at Top No Load Mutual Funds.

Precious Metals

Shaun Connell presents The Case for Buying Gold posted at Learn Financial Planning.

Declan Fallon presents Gold and Silver under Pressure posted at Zignals blog.

Traders

Dr. Barry Burns presents How Day Trading Works According to Einstein posted at Top Dog Trading.

Stock Trading Terminology posted at Stock Tips.

etrades presents Day Trading Tips From The Pros - Time To Cash In! posted at eTrades.
Enjoy!

Mike Pastore presents Get the Right Type of Day Trading Software posted at Mikes Millions.com.

Sun presents Individual Country ETF First Quarter Performances posted at Earn More Invest Wisely at The Sun's Financial Diary.

Stock Trading Brokers presents SEC Considers Proposal for Uptick Rule posted at Stock Trading Brokers.

Other

Patrick @ Money Saving Deals presents TradeKing Offers up to $150 in Transfer Fees posted at Money Saving Deals.

Patrick @ Cash Money Life presents Leave Your Money in Your Retirement Accounts! posted at Cash Money Life.

RJ Weiss presents What is Inflation? posted at Our Financial Planner.

Michael Haltman presents Mark To Market Eased: Making A Silk Purse From A Sow's Ear? Example Included posted at The Political and Financial Markets Commentator.

James Fowlkes presents 5 Steps to Becoming a Better Investor posted at JamesFowlkes.com.

Frank B. presents Beginners Guide to Investing posted at Investment Basics.

The Smarter Wallet presents Investing In The Stock Market? Rules To Help You Sleep At Night posted at The Smarter Wallet.

Dorian Wales presents The Recent Rally in Stock Prices is Nearly Over posted at The Personal Financier.

Tushar Mathur presents Getting finances in order posted at Everything Finance.

Silicon Valley Blogger presents Best Online Stock Brokers For Cheap Stock Trades posted at The Digerati Life.

Lympho-Maniac Charity Event

2009-04-05T08:16:00.015-05:00

Chad Landry is an institutional equity salesman and works for Capital One Southcoast out of New Orleans. Once a year he organizes a charity event to raise funds for research into cancer. He is a survivor himself and lives life to the fullest because of that. Here's an interview that the local media did with him last month in connection with the event:

Chad is a good friend and has done everything he can to help me ever since I went off on my own two years ago and started my investment partnership. He lives up to his motto of "Reputation over Revenue."

Donations can be made at this web site:

Lympho-Maniac

Tom Gayner of Markel Insurance (MKL)

2009-04-02T13:23:00.014-05:00

Thomas S. Gayner, the Chief Investment Officer of Markel, will be interviewed on the blog - Manual of Ideas - on Monday, April 6th. Gayner manages the investment portfolio at Markel and has a strong long term track record of outperformance, and follows a value investing approach.

I wrote an article on Markel for Investopedia back in late 2008.

Here is an excerpt from the interview:

Question

You have stated that the businesses you seek should have

(1) a demonstrated record of profitability and good returns on total capital,
(2) high measures of talent and integrity in management,
(3) favorable reinvestment dynamics over time, and
(4) a purchase price that is fair or better.

Perfection, however, is rarely attainable in the stock market. Have you had to compromise on these criteria, and if so, could you illuminate for us how you decide on acceptable versus unacceptable trade-offs?

Answer

Tom Gayner: While you say that perfection is rarely obtainable in the stock market, I would go so far as to say that it is never obtainable in the stock market. Perfection doesn't exist in this world. All of my choices involve various degrees of compromise and trade offs. As an accountant, I can tell you that my wife and children are sick of hearing me use the phrase "opportunity cost".

Every decision is also another decision (at least) and every non-decision is also a series of other decisions.
The challenge is to get the balance roughly right between the choices that actually exist. All of the 4 points I lay out are north stars that guide me. I admit though, that I have never personally been to the North Pole.

The one area where I will not compromise is in the area of integrity. I may not make every judgment correctly when I'm trying to make sure I'm dealing with people of integrity but I will never knowingly entrust money to people when I am concerned about their integrity. Even if you get everything else right, the integrity factor can kill you. My father used to tell me that, "you can't do a good deal with a bad person." And he was right.

The other factors can be thought of as shades of gray and nuances. We look for as much of the good as we can find and weigh that against what we have to pay for it, our expectation of how durable the business will be, and what our other alternatives are. I don't have a formula or algorithm to get that precisely right, I just spend all my time thinking, reading, and adapting as best as I can.

Origins of Value Investing

2009-03-23T15:05:00.005-05:00

The origins of Value Investing has been pushed even further back than Henry Clews.

I am currently reading “Devil Take The Hindmost,” by Edward Chancellor. The book is an excellent review of the history of speculative activity in the financial markets. One quote that I wanted to share was from Richard Steele, an English writer who wrote a publication called the Spectator in the late 17th and early 18th centuries.

“Nothing could be more useful, than to be well instructed in his Hope and Fears; to be diffident when others exalt, and with a secret Joy buy when others think it is their interest to sell.”

Sounds just a little like Warren Buffett when he says:

"Try to be fearful when others are greedy and greedy when others are fearful."

A Letter From A TARP Recipient To The Government

2009-02-25T10:17:00.002-06:00

Banks have received billions of dollars from the government as part of the Capital Purchase Program (CPP) of the Troubled Asset Relief Plan (TARP) set up by the Bush Administration. Here is the letter they would love to send to Congress.

Dear Congress,

Thank you very much for the capital last Fall, but there are some things that we need to explain to you.

Most of us didn't need the capital, but took it because you browbeat us into accepting it, or we were so scared that we felt we had no choice.

Please stop calling it a "bailout." It was not a bailout, because you received something of value in return for your investment. The security you received pays you a healthy dividend, and it came with warrants to purchase our stock. Although most of the warrants are out of the money because of the panic in the market, investing is a long term game, and it is possible that five years from now, you will find that in the aggregate you made a great investment in the financial system. Also, remember that every single one of us that took capital from you is current on dividend payments.

We understand you are angry because of the losses we are taking currently, but quite honestly, and with all respect, you have run up a $10.8 trillion dollar loss in the country's finances since the late 1700's, and maybe you should take care of that before you criticize us for our considerably smaller losses.

You are a stakeholder in our bank now, but nothing more, so stop telling us not to play golf with our clients, or to stop sending our most productive employees on weekend trips when they make money for our firm. Normally, we don't put up with this much abuse from our preferred shareholders, but we cut you some slack due to your inexperience with capital markets.

Please stop hauling us in front of various Congressional committees to generate sound bites to display to your constituents back home. I would think you have enough of these already, and we have lots of work to do to get through this credit cycle.

Thank you, and please contact investor relations like all other shareholders if you have any further questions.

Sincerely,

Anybank

The Cognitive Distortions Of Chicken Little

2009-02-24T10:00:00.003-06:00

I was listening to CNBC, and they just reported that the sky is falling. Oh my God!! Look out below.

The Financial Media is deepening and prolonging the recession by engaging in a series of what a professional would call cognitive distortions. The first of these is called Catastrophizing. This is defined as believing that a situation is much worse than it really is. Here's an example of Catastrophizing. A large bank reports a huge loss due to a unrealized loss in its securities portfolio, and deteriorating loan asset quality leading to higher charge offs and loan loss reserves. Then a talking head, or one of the anchors on CNBC says something like this:

"The entire Banking System is insolvent."

Well actually, no it's not. There are thousands of Banks in this country and just because Citigroup thought they could "ride the worm," if I may be allowed to quote from Dune, doesn't mean that every other banker did.

This Catastrophizing is closely related to Magnification, or the tendency to put a stronger emphasis on negative events and ignoring the the positive events.

So what are the causes of these cognitive distortions? There are many possibilities:

1) The media is so immersed in the flow of information and the negative effect of the markets that all they can see are the problems. This "wall of bad news" leads to the distortions listed above. The media was guilty of this in reverse when the markets were heading up. Can anyone remember an anchor actually challenging the Energy Bulls with tough questions two years ago, or were you as annoyed as I was that they were treated as God like investors incapable of error?

2) They are easily manipulated by large institutional investors who have their own agendas to advocate. Have you considered that the commentators who are pushing Nationalization are short the Banks, and their souls are not as pure as they seem?

Some Good News Lost In All The Doom And Gloom

2009-02-23T09:31:00.002-06:00

The sentiment is obviously terrible out there for the market and the economy, so it is important to highlight some data that didn't get that much play because most pundits are too busy predicting when the sky will fall and who it will fall on.

The Conference Board reported that its Index of Leading Economic Indicators rose 0.4% in January. This is the second month in a row that it increased. Five of the ten components in the index were up.

And no...I am not saying everything is great in the economy, but the world is not coming to an end like the blogosphere seems to be saying. This is not Imperial Rome, and there is not a Barbarian army camped outside our walls waiting to sack us.

Capitalism is cyclical. Get used to it.

The White House Fires Back Against Rick Santelli

2009-02-21T08:17:00.009-06:00

The Rick Santelli "Rant of the Year" is now legendary in the investment blog world so I won't waste any time discussing it. The clip is below:

What is less well known is the response from the Obama Administration by Robert Gibbs, the Press Secretary. The clip is below. The Gibbs part starts about 20 seconds in.

"I also think it’s extremely important for people who rant on cable television to be responsible and understand what they’re talking about," he said. "I feel assured that Mr. Santelli doesn’t understand what he’s talking about."

Beating A Dead Horse

2009-02-13T15:50:00.002-06:00

This won't come as news to anyone, but here is another depressing chart on the economy from the Dallas Federal Reserve:

"Over the three months ending in December, the Texas Leading Index experienced its sharpest decline since its inception in January 1981 (Chart 1). All eight of the indicators gave negative signals, with the steepest drops coming from the increase in the Texas export-weighted value of the dollar and declines in the stock index of Texas-based companies. In addition, the Texas Business-Cycle Index was revised downward, indicating Texas likely entered a recession sometime in the second half of 2008."

Full report is here.

What Is The Real Story With The Senior Loan Officer Opinion Survey

2009-02-03T10:10:00.001-06:00

The Senior Loan Officer Opinion Survey on Bank Lending Practices for January 2009 was just released by the Federal Reserve. The universal headline from most media outlets ran something like this - "Banks Continue To Restrict Lending."

While this is technically correct, there is some interesting data in the release. The survey asks 25 questions to domestic lenders, many of which are multi part, and then another series of questions to foreign banks with domestic locations.

1) The fraction of banks that are tightening lending standards overall actually declined from October 2008.

"Relative to the October survey, these net fractions generally edged down slightly or remained unchanged."

The level is still "elevated" however.

2) The fraction of banks that are tightening lending standards for Commercial Real Estate also declined from October 2008.

"80 percent of domestic banks reported that they had tightened their lending standards on commercial real estate (CRE) loans over the past three months, slightly less than the roughly 85 percent that reported doing so in the October survey."

Once again, still elevated.

3) The fraction of banks tightening standards on Home Equity Loans also fell from the last survey.

"About 60 percent of domestic respondents, down from 75 percent in the October survey, noted that they had tightened their lending standards for approving applications for revolving home equity lines of credit (HELOCs) over the past three months."

I'm not saying everything is going great out there. So what's the point of all this? Don't believe everything you read. It wasn't that long ago that we were being told that Oil prices were never going to go down, and that Fannie Mae and Freddie Mac were the greatest companies in the world.

Go to the original source and draw your own conclusions. The sky is not falling and the world is not coming to an end, although that seems to be the general consensus out there.

Is It Time To Buy The Insurance Sector?

2009-01-29T09:04:00.001-06:00

I just came across a survey from the Council of Insurance Agents and Brokers that gives confirming evidence that the soft market in insurance may be over.

The survey concludes that "Commercial property/casualty market premiums showed definite signs of leveling off in the fourth quarter of 2008 across small, medium and large accounts and for most major lines of commercial business."

Rates still declined in the fourth quarter of 2008, but at a slower rate than the last few quarters, according to the survey.

“We see evidence in the fourth quarter that premium rates eased as insurers tried to hold the line on pricing. It’s still a competitive market, but we think this may signal the bottom of the soft market, following six years of steady decline. We will see if this trend continues in the first quarter of 2009 as price increases in the reinsurance market begin to trickle down and as the full impact of the economy and market conditions comes home to roost on insurers’ bottom line,” Council President Ken A. Crerar said.

Most insurers are trading below book value due to investor concern about the investments they hold, so is it possible that a return of the hard market along with decade low valuations might be a buying opportunity for investors?

The survey is here.

More TARP Banks

2009-01-13T17:15:00.019-06:00

The Treasury released the list of banks getting money from the government as part of the Capital Purchase Plan. The total amount given out was $14.77 billion for 43 banks. Some are household names and others are rather obscure:

Nine Surprises For 2009

2009-01-12T14:18:00.005-06:00

In the spirit of Byron Wien, who every year releases a list of surprises to expect during the coming year, I submit my own surprises for 2009:

1. Investors stop listening to the talking heads on TV after realizing that they are on TV to shill for their own portfolio and not to help them out.

2. Jim Cramer is finally institutionalized after changing his mind ten times in one week about a stock.

3. Commodity bulls admit that oil futures are no different than any other financial instrument and that there are speculators in the oil futures market. The speculators are rounded up, taken to the basement of the Federal Reserve in New York, and hung by the neck with piano wire.

4. After blinding leading individual investors into commodities, the third great investment bubble in ten years, the Sell Side is prohibited from recommending any stock or other investment ever. The terms Buy, Sell and Accumulate are replaced with “the hell if I know.”

5. The term “smart money” is banned from being used in the financial media. A crowd of investors burns an effigy of “smart money” at the corner of Wall and Broad Street.

6. After hiding out for months during the Energy Bear market, Matt Simmons is finally located in Carthage, Illinois and beaten by a crowd of angry peak oil enthusiasts. He is quoted as being “flabbergasted” by his treatment by the mob.

7. Hedge Funds admit that Hedge Funds are not a separate asset class. “We just go long and short stocks, bonds and derivatives like everyone else.”

8. Shareholder activist investors admit that they don’t really care about the long-term health of the companies they are targeting. “We just want the stocks to go up in the short term, and then dump our position at a profit. We have to say we are long term investors so management will listen to us.”

9) Investors start investing rationally, they ignore rumors, they weigh stocks rather than vote for them.

Words of Wisdom - Part II

2009-01-09T10:38:00.001-06:00

More words of wisdom from Henry Clews to get us through the harrowing market that we find ourselves stuck in. Henry Clews lived from 1836-1923 and wrote several books on his views and experiences on Wall Street, including "The Wall Street Point Of View" and "Fifty Years in Wall Street."

"I cannot refrain from expressing the opinion that there are permitted to exist in this country conditions which needlessly aggravate the perils of financial upheavals, when they occur. In every panic much depends upon the prudence and self-control of the money-lenders. If they lose their heads, and indiscriminately refuse to lend, or lend only to the few unquestionably strong borrowers, the worst forms of panic ensue."

Just like back then, banks hold the keys to the recovery.

"If, on the contrary, they accommodate to the fullest extent of their ability the larger class of reasonably safe borrowers, then the latter may be relied upon to protect those whom the banks reject, and thus the mischief may be kept within some bounds. Everything depends upon anxiety being held in check by an assurance that deserving debtors will be protected. This is tantamount to saying that all depends on the calmness and wisdom of the banks. They may easily mitigate or aggravate the severity of the crisis according as they are prudently liberal or blindly selfish."

The Words of Wisdom of Henry Clews

2009-01-07T10:31:00.011-06:00

Henry Clews lived from 1836-1923 and wrote several books on his views and experiences on Wall Street, including "The Wall Street Point Of View" and "Fifty Years in Wall Street." Here's a quote that seems to sum up very succinctly and without emotion what we are going through now:

"The action of commerce, like the motion of the sea or of the atmosphere, follows an undulatory line. First comes an ascending wave of activity and rising prices; next, when prices have risen to a point that checks demand, comes a period of hesitation and caution; then contraction by lenders and discounters, and then a movement, in which holders simultaneously endeavor to realize, thereby accelerating a general fall in prices."

"Credit thereupon becomes more sensitive and is contracted; transactions are diminished; losses are incurred through the depreciation of property, and finally the ordeal becomes so severe to the debtor class that forcible liquidation has to be adopted, and insolvent firms and institutions must be wound up. This process is a periodical experience in every country, and the sharpness of the crisis that attends it depends chiefly on the steadiness and conservatism of the business methods in each community affected."

What we are going through now is no different than what other generations experienced. We are probably better off because we have more of a social safety net and an activist government to smooth the rough edges of this downturn.

So Who Should We Believe?

2009-01-05T12:54:00.008-06:00

The Securities and Exchange Commission (SEC) just released its voluminous report totaling more than 200 pages that investigated whether fair value accounting was to blame for any or all of the credit crisis and financial dislocations over the past year. The SEC concluded that fair value accounting "did not appear to play a meaningful role" in the 25 bank failures that have occurred this year or the tumult at collapsed investment banks."

The next day a group of insurers say just the opposite in its report.

"The application of fair value accounting measurements to an inactive, illiquid, and disorderly market for structured credit products helped fuel the worldwide credit crisis, an organization of major insurers and reinsurers told the U.S. Financial Accounting Standards Board (FASB)....that while the organization does not believe that fair value measurements caused the global credit crisis, "unreliable, and non-transparent fair value measurements served as a powerful accelerant."

Discover Crunches Credit Further

2008-12-24T14:28:00.004-06:00

Discover restricts credit further as seen in the e-mail below:

Discover Business Card Affiliates,

As a result of the current economic downturn, Discover Business Card has taken a look at credit risk and has made a decision to pause online acquisitions of its business products (Business Card, Business Miles and Business card with Cash Back Bonus) as of January 1st. At the turn of the year, the intention is to evaluate performance and the credit risk model so that the cards can once again be offered to online prospects in 2009.

Please note that this message relates only to Discover's Business Cards and not its Consumer or Student cards. You are free to continue to promote the latter and, in fact, we encourage you to do so in place of business cards.

An Update on the Energy Patch - Part II

2008-12-23T07:27:00.002-06:00

I just returned from an Energy conference in New Orleans and wrote a little on it in this post here.

It seems that investors are waiting for three events before deciding whether to invest in these stocks in 2009.

First, to state the obvious, most institutional investors are waiting for the price of the commodity to stabilize, fearful for how far it will fall before a bottom is reached.

They also appear to be waiting until after the final round of exploration and production companies set capital budgets for 2009. While a decline in spending is discounted in the shares of the services and drilling companies, there is concern about how much more will be cut.

Also, many exploration and production companies will be forced to value reserves at the end of 2008 using a lower price deck than expected. This will cause reserve writedowns at many of these companies. Since "proving" up reserves is the main business model for many, this will also be a painful adjustment.

An Update on the Energy Patch - Part I

2008-12-23T07:08:00.003-06:00

I just returned from an Energy conference in New Orleans, and what a difference a year makes. At this same conference last year, if the maid who cleaned my hotel room wanted to raise a billion dollars to start an oil company, she probably could have gotten the capital. Not so this year, as a resigned outlook on the current downturn colored everyone's attitudes.

One company attendee told me that currently there was no spot market for rigs. As soon as a contract ended, the rig was being sent back to the owner. There is not even a conversation about a lower rate. It's basically - here's your rig, we'll call you.

A Nineteenth Century View of Speculation that May Apply Today (Part II)

2008-12-22T07:23:00.002-06:00

This is a continuation of my post from yesterday on a book published in 1887 called "Twenty Eight Years In Wall Street," written by a gentlemen called Henry Clews. He wrote an interesting section on speculation that I wanted to share:

"Speculation for a fall in prices is based upon the presumption of an over-supply. If it succeeds, the production of the particular product is checked until prices recover, and in the meantime production is diverted to articles less abundant. Thus speculation proves a regulator both of values and production. Speculation for a rise in prices is based upon a presumption of scarcity or short supply, and its direct effect is to quicken production and restore the equilibrium of prices."

This one is a perfect explanation for the rise in Oil prices, and the forces that corrected it to where it is today. These same forces will also lead to a recovery sometime in the future.

"Speculation, moreover, makes a market for securities that otherwise would not exist. It enables railroads to be built through the ready sale of their bonds, thus adding materially to the wealth of the whole country, and opening a more profitable market to labor. In this it becomes the forerunner of enterprise and material prosperity in business."

Without the lure and illusion of easy wealth that investing in the Stock Market provides to people, how much capital could American businesses attract?

"I believe the men of most experience, not only in Wall Street, but in other departments of finance and commerce, will bear me out in the statement that a market where even values are considerably inflated by speculation, is more desirable than a period of depression. The result, in the long run, is the greatest good to the greatest number. I don't believe that the ghost of Jeremy Bentham himself could rise up and consistently condemn this statement."

We shall find out of this is true since according to the conventional wisdom we are entering a depression.

Here is a direct link to the book.

A Nineteenth Century View of Speculation that May Apply Today

2008-12-19T09:05:00.013-06:00

I recently came across a book published in 1887 called "Twenty Eight Years In Wall Street," written by a gentlemen called Henry Clews. He wrote an interesting section on speculation.

"Speculation is a method now adopted for adjusting differences of opinion as to future values, whether of products or securities."

I never quite thought of it that way but he does distill it down to a mathematical definition.

"This is more common now than in former years because the facilities for procuring information have increased with the greater intelligence and celerity with which all business is now conducted, and also from the greater rapidity with which such information can be transmitted by telegraph and cable."

Obviously, the "facilities for procuring information" was the nineteenth century equivalent of the Internet.

"Speculation brings into play the best intelligence as to the future of values. It has always two sides. The one that is based principally on the facts and conditions of the situation wins in the end, and the result of the conflict is the nearest possible approach to correct values. The consequences of speculation are thus financially beneficial to the country at large."

Is this where Warren Buffett got his famous line about the the voting machine and the weighing machine in regard to the Stock Market? What would Mr. Clews say about our recent spasm of speculative excess today? Is it beneficial to the country? If it is beneficial, then is our government doing the wrong thing in not letting it run its course?

Part II on Monday.

Haven Trust Bank Fails

2008-12-13T10:56:00.014-06:00

Haven Trust Bank of Duluth, Georgia, was the second bank to be seized by the Federal Deposit Insurance Corporation (FDIC) on Friday. My post on the first bank is here

Haven Trust bank had total assets of $572 million and total deposits of $515 million as of December 8, 2008. BB & T assumed the operations of the bank.

Haven Trust Bank was relatively new, and was formed in 2000, to ride the wave of real estate prosperity that engulfed the Southeast in the early part of this decade.

Its capital ratios were much lower than Sanderson State Bank, which was the other bank taken over by the FDIC on Friday:

Haven Trust Bank Capital Ratios (9/30/2008)

Equity capital to assets - 4.44%
Core capital (leverage) ratio - 4.42%
Tier 1 risk-based capital ratio - 4.90%
Total risk-based capital ratio - 6.16%

The bank had $437 million in real estate loans, with $260 million in Commercial Real Estate, and $133 million in the toxic construction and land development category.

Sanderson State Bank of Texas Goes Down

2008-12-13T10:37:00.012-06:00

We had a doubleheader by the Federal Deposit Insurance Corporation (FDIC) as they seized two banks on Friday evening. The first was the Sanderson State Bank of Texas.

This bank was taken over by the Pecos County Bank. Sanderson State Bank was a small bank and had total assets of $37 million and total deposits of $27.9 million at December 3, 2008.

Sanderson State Bank was first established in 1907, and had only one branch. It was able to survive the Panic of 1907, and the Great Depression in the 1930's, but not the most recent calamity to strike our economy.

The interesting thing to note was how quickly the situation deteriorated for Sanderson State Bank. At 9/30/2008, the bank had a Tier 1 risk-based capital ratio of 12.55%, and a Total risk-based capital ratio of 13.80%.

Ninety percent of its loans were real estate and maybe it was one concentrated loan that did them in. A sad end to a 100 year old bank.

More Credit Tightening

2008-12-05T10:45:00.005-06:00

I got this e-mail below from Discover today since I run an ad on my blog promoting its credit cards:

"Due to the recent economic downturn, Discover Business Card has made some changes to its lending criteria. After applying for a Discover Business Card, applicants may now be asked to provide additional information in order for Discover to make a credit decision. These changes will have an impact on the Discover Business Card approval rate and therefore you may likely see the overall conversion rate for the product decline. These changes were made in mid-November."

Just another brick in the wall I guess.

Is The Housing Market About To Turn?

2008-12-04T06:06:00.015-06:00

I know it is fashionable to be bearish on housing, but are things about to pivot and turn? Put these two items together:

1) The Housing Affordability Index reached 141.1 in the most recent release. This was the highest in at least six years. As one blogger noted, this will move even higher next month due to a drop in fixed mortgage rates to the current 5.75%.

2) The U.S. Treasury is considering a plan to drive mortgage rates down to as low as 4.5%. They would accomplish this by purchasing mortgage-backed securities from Fannie Mae and Freddie Mac.

Would low housing prices and a generational low in mortgage rates prove too tempting to home buyers and cause a mini boom in housing and begin to clear inventory?

Disclosure - I am long the XHB and ITB.

Travel Trends - September 2008

2008-11-25T08:21:00.008-06:00

Americans are still driving less, despite the fall in gas prices. The latest report through the end of September shows a 4.4% decline in miles driven, year over year. This equates to 10.7 billion less miles. This trend in driving less began last year and as can be seen in the chart below, is unprecedented in the last 25 years.

A Bloodbath Out There

2008-11-24T06:49:00.002-06:00

I did a screen in Finviz, a great site that you should check out if you don't know about it, and only 11 stocks out of the S & P 500 are up year to date through the close on November 21. They are:

Family Dollar Stores (FDO)- Up 34.21%
Rohm and Haas (ROH)- 34.18%
UST Inc (UST)- 29.8%
Barr Pharmaceuticals (BRL)- 21.62%
Amgen (AMGN)- 18.22%
General Mills (GIS)- 16.62%
Walmart (WMT)- 12.79%
Hudson City Bancorp (HCBK)- 12.01%
Campbell Soup (CPB)- 3.48%
Celgene (CLGN) - 2.79%
People's United Financial (PBCT) - 1.63%

Surprisingly, two banks are on the list. There are three biotech/pharm companies, and a few staples. Rohm and Haas is being bought by Dow Chemical, which explains its resilient performance. UST is also being purchased by Altria.

Hudson City Bancorp turned down the government investment via the Capital Purchase Plan, and People's United Financial just replaced Unisys two weeks ago.

Will This Be Citibank on Monday Morning?

2008-11-24T06:14:00.002-06:00

An engraving from the run on the Union Trust Company during the Panic of 1873.

Will This Be Citibank on Monday Morning? No, it won't but the market seems just as scared nonetheless.

FDIC Triple Header - The Community Bank of Loganville, Georgia

2008-11-22T07:22:00.004-06:00

The third bank closed by the FDIC yesterday. From the press release of the FDIC:

"The Community Bank, Loganville, Georgia, was closed today by the Georgia Department of Banking and Finance, and the Federal Deposit Insurance Corporation (FDIC) was named receiver. To protect the depositors, the FDIC entered into a purchase and assumption agreement with Bank of Essex, to assume all of the deposits of The Community Bank."

"The Community Bank's four branches will open on Monday, November 24, 2008 as Bank of Essex. Depositors of the failed bank will automatically become depositors of Bank of Essex. Deposits will continue to be insured by the FDIC, so there is no need for customers to change their banking relationship to retain their deposit insurance coverage."

"The Community Bank had total assets of $681.0 million and total deposits of $611.4 million. Bank of Essex purchased approximately $84.4 million of The Community Bank's assets, and did pay the FDIC a premium of $3.2 million for the right to assume the failed bank's deposits. The FDIC will retain the remaining assets for later disposition."

"The transaction is the least costly resolution option, and the FDIC estimates that the cost to its Deposit Insurance Fund will be between $200 million and $240 million. The Community Bank is the twentieth FDIC-insured institution to be closed nationwide, and the third in Georgia, this year."

FDIC Triple Header - Downey Savings and PFF Bank

2008-11-22T07:16:00.004-06:00

The FDIC did a triple header Friday night with three banks going down. From the FDIC press release:

"U.S. Bank, National Association, Minneapolis, MN, acquired the banking operations, including all the deposits, of Downey Savings and Loan Association, F.A., Newport Beach, CA, and PFF Bank & Trust, Pomona, CA, in a transaction facilitated by the Federal Deposit Insurance Corporation."

"The combined 213 branches of the two organizations will reopen as branches of U.S. Bank under their normal business hours, including those with Saturday hours. Depositors will automatically become depositors of U.S. Bank. Deposits will continue to be insured by the FDIC, so there is no need for customers to change their banking relationship to retain their deposit insurance coverage."

"Customers of both banks should continue to use their existing branches until U.S. Bank can fully integrate the deposit records of the organizations. Over the weekend, depositors can access their money by writing checks or using ATM or debit cards.
As of September 30, 2008, Downey Savings had total assets of $12.8 billion and total deposits of $9.7 billion. PFF Bank had total assets of $3.7 billion and total deposits of $2.4 billion. Besides assuming all the deposits from the two California banks, U.S. Bank will purchase virtually all their assets. The FDIC will retain any remaining assets for later disposition."

"The FDIC and U.S. Bank entered into a loss share transaction. U.S. Bank will assume the first $1.6 billion of losses on the asset pools covered under the loss share agreement, equal to the net asset position at close. The FDIC will then share in any further losses. Under the agreement, U.S. Bank will implement a loan modification program similar to the one the FDIC announced in August stemming from the failure of IndyMac Bank, F.S.B., Pasadena, CA."

Hedge Fund Kingpins Testify - Highlights

2008-11-13T21:23:00.010-06:00

Here are some of the highlights from the prepared statements today in front of the House Committee on Oversight and Government Reform by the five famed Hedge Fund managers.

Phillip Falcone of Harbinger Capital Partners

"I would like to take just a moment to tell you a bit about myself. I currently reside in New York City with my wife of 11 years and two children. By way of background, I was born in Chisholm, Minnesota, population 5,000, on the Iron Range in Northern Minnesota. I was the youngest of nine kids who grew up in a three-bedroom home in a working class neighborhood. My father was a utility superintendent and never made more than $14,000 per year, while my mother worked in the local shirt factory. I take great pride in my upbringing, and it is important for the Committee and the public to know that not everyone who runs a hedge fund was born on 5th Avenue - that is the beauty of America."

More later.

FDIC Seizes Security Pacific Bank

2008-11-09T16:25:00.011-06:00

Security Pacific Bank of Los Angeles, California was closed by the FDIC last Friday. The agency had a busy weekend as this was the second bank seized by the government on Friday. Pacific Western Bank assumed the deposits of the failed bank.

Final Stats (9/30/08):

Tier 1 leverage ratio - 3.14%
Tier 1 risk-based capital ratio - 3.71%
Total risk-based capital ratio - 5.00%

Noncurrent loans to loans - 19.94% at 6/30/2008.

News reports say that the bank was done in by loans to Homebuilders in the Inland Empire area of California.

Franklin Bank, S.S.B., Houston, Texas Closed By The FDIC

2008-11-09T16:05:00.016-06:00

Franklin Bank, S.S.B., Houston, Texas was closed by the FDIC on Friday.

Prosperity Bank of El Campo, Texas, assumed all of the deposits of Franklin Bank. Franklin Bank had total assets of $5.1 billion and total deposits of $3.7 billion. The bank was relatively new and was founded in 1987 as the Bowie State Bank.

It looks like Construction, land development, and other land loans did them in. The bank had $1.2 billion of these loans at 9/30/08, and $400 million were 30 days past due or in non accrual status.

Final stats on the failed bank:

Tier 1 leverage ratio - 2.11%
Tier 1 risk-based capital ratio - 3.37%
Total risk-based capital ratio - 5.11%

Noncurrent loans to loans - 11.06% (6/30/2008)

Capital ratios as of 9/30/2008.

Just to demonstrate how quickly capital can erode. The bank had a total risk-based capital ratio of 10.16% at 6/30/08.

The Empire Strikes Back

2008-11-04T11:00:00.012-06:00

On October 24, 2008, I posted on a paper from the Minneapolis Federal Reserve entitled "Facts and Myths about the Financial Crisis of 2008"

The paper listed what it called four myths that have arisen during the financial crisis:

1) Bank lending to non financial corporations and individuals has declined sharply.

2) Interbank lending is essentially nonexistent.

3) Commercial paper issuance by non financial corporations has declined sharply, and rates have risen to unprecedented levels.

4) Banks play a large role in channeling funds from savers to borrowers.

The Federal Reserve Bank of Boston has now counter punched with its working paper called "Looking Behind the Aggregates: A Reply to “Facts and Myths About the Financial crisis of 2008”

The conclusion:

"As Chari et al (2008) point out in a recent paper, aggregate trends are very hard to interpret. They examine four common claims about the impact of financial sector phenomena on the economy and conclude that all four claims are myths. We argue that to evaluate these popular claims, one needs to look at the underlying composition of financial aggregates. Our findings show that most of the commonly argued facts are indeed supported by disaggregated data."

Things We Wish We Had Done Two Years Ago

2008-11-03T07:49:00.002-06:00

From the press release of Corus Bankshares (CORS) last week:

“Corus did not originate any new loans in the third quarter of 2008. Given the uncertain condition of the commercial real estate market, and our desire to bolster our capital ratios, management has decided that this is not the right time to originate new loans. We hope that events will transpire over the coming quarters such that we will again feel comfortable originating loans.”

Corus is a major lender in South Florida for condos, where half its loans are non accrual or close to it.

Bank Death Watch - Freedom Bank of Bradenton, Florida

2008-11-01T17:38:00.019-05:00

The Freedom Bank of Bradenton, Florida failed last Friday. Its deposits were taken over by Fifth Third Bank. The bank was publicly traded on the OTC bulletin board under the symbol FBBF.

The bank started the year with $25 million in Equity capital, but by the end of the third quarter, capital was only $10 million. The capital ratios in the last call report (9/30/2008) were fairly gruesome:

Tier One Leverage - 2.0%.
Tier 1 risk-based capital ratio - 2.2%.
Total risk-based capital ratio - 3.45%.

The bank had $211 million in loans outstanding at 9/30/08, most of which were Real Estate loans.

Construction and Land Development - $176 million.
Commercial and Industrial - $32 million.

Noncurrent loans to loans - 15.49% (as of 6/30/2008)

In July, a private equity fund called Community Bank Investors of America LP, agreed to invest $5 million in the bank subject to it raising more capital elsewhere. I can't find any record of the fund completing the deal.

Alpha Bank & Trust - Another Bank Failure

2008-10-24T15:20:00.013-05:00

The Alpha Bank & Trust, of Alpharetta, GA was closed by the FDIC today. The deposits were assumed by Stearns Bank, of St. Cloud, Minnesota.

Press Release

Final Stats

Assets in nonaccrual status - 15.39%
Noncurrent loans to loans - 18.36%
Noncurrent assets plus other real estate owned to assets - 19.78%
Construction and land development loans - 61.02%
Core (Retail) deposits - 77.40%

Equity capital to assets - 5.20%
Core capital (leverage) ratio - 5.27%
Tier 1 risk-based capital ratio - 5.67%
Total risk-based capital ratio - 6.96%

(All data as of 6/30/08)

What Credit Crisis?

2008-10-24T06:19:00.003-05:00

A new working paper from the Federal Reserve of Minneapolis says that four myths have been created during the financial crisis and perpetuated by the media and others.

"Here we examine four claims about the way the …financial crisis is affecting the economy as a whole and argue that all four claims are myths. Conventional analyses of the …financial crisis focus on interest rate spreads. We argue that such analyses may lead to mistaken inferences about the real costs of borrowing and argue that, during …financial crises, variations in the levels of nominal interest rates might lead to better inferences about variations in the real costs of borrowing."

The four myths:

1)Bank lending to nonfinancial corporations and individuals has declined sharply.

2)Interbank lending is essentially nonexistent.

3)Commercial paper issuance by nonfinancial corporations has declined sharply, and rates have risen to unprecedented levels.

4)Banks play a large role in channeling funds from savers to borrowers.

The authors present an impressive number of charts and statistics to support the conclusion. I would love to go through these one by one, but unfortunately the market seems to be crashing again. Here is the conclusion from the three authors:

"Our analysis has raised questions about the claims made for the mechanism whereby the financial crisis is affecting the overall economy. We emphasize that we do not dispute that the United States is undergoing a …financial crisis and that the United States economy may be in a recession or may experience one in the near future. Our analysis is based on publicly available data. Policymakers have access to other sources of data as well. Policymakers could well believe that bold action is necessary based on data that are different from that considered here. If so, responsible policymaking requires that they share both the data and the analysis that underlies the need for bold policy with the public."

Investing Carnival # 17

2008-10-14T05:22:00.003-05:00

Welcome to the October 14, 2008 edition of the Investing Carnival supported by the members of The Dividend and Value Investing Network - The Div-Net. This is the seventeenth edition of the Carnival.

Stock Analysis

D4L presents Stock Analysis: United Technologies Corp (UTX) A Buy At This Price posted at Dividends4Life.

The DIV-Net presents Chevron Corporation (CVX) Dividend Stock Analysis posted at Dividend Growth Investor.

Bill presents Lowes is Too Low posted at Learn The Stock Market And How to Trade.

The Rest

Paul Goodwin presents Back to the Basics … Again posted at The Iconoclast Investor.

Super Saver presents Municipal Bonds Funds Yielding Over 4% posted at My Wealth Builder.

John Lee presents WEEKLY TECHNICAL COMMENTARY: TODAY'S BREAKOUTS & BREAKDOWNS posted at WEEKLY TECHNICAL COMMENTARY.

KCLau presents How Fundsupermart will Revolutionize the Unit Trust Industry in Malaysia posted at KCLau's Money Tips.

FIRE Finance presents Tax FREE Money Market Mutual Funds posted at FIRE Finance.

The Financial Blogger presents Behind The Financial Crisis: Credit Default Swaps posted at The Financial Blogger.

MBB presents The Top 5 Online Savings Banks posted at Money Blue Book Finance Blog.

Tushar Mathur presents Looking For A College Fund Bailout posted at Everything Finance.

Qovax presents Valuing a Business - Seth Klarman’s 3 Methods posted at Value Investing and Entrepreneurship by Qovax, a Software Startup.

Sandy Naidu presents Warren Buffet?s Advice posted at Future Nest Egg.

praveen presents Taking out the DOG... posted at My Simple Trading System.

Ryan Suenaga presents It’s Okay to be Afraid, but it’s Important to be Brave posted at Uncommon Cents.

Lazy Man presents Jim Cramer: Sell Your Stocks posted at Lazy Man and Money.

Alexander presents It’s Time to Give Your Financial Planner a Call posted at Wealth Junkies.

Silicon Valley Blogger presents A Profitable Stock Sale: Sold The Bank Shares in my 401k Account posted at The Digerati Life.

Dorian Wales presents The Credit Crisis Presents a Rare Opportunity for Learning and Experience posted at The Personal Financier.

sherin presents How do you prepare for losing your job posted at Investment Internals.

Mr. ToughMoneyLove presents Investors Have Capitulated – Now What? posted at Tough Money Love: Hard Truth about Money and Personal Finance.

Kevin presents Why Jim Cramer Thinks You Shouldn?t Be in Stocks posted at No Debt Plan.

White Mountains Insurance (WTM) Analyst Day – Q and A - Part Two

2008-10-14T05:12:00.003-05:00

WTM Analyst Day – Q & A – June 17, 2008

This is part two of a rough transcription of the Question and Answer period from the White Mountains Analyst day held on June 17, 2008.

Here are the other posts I have written on the meeting:

WTM - Introductory Comments

WTM - The Reserve Issue

WTM - Review of One Beacon

WTM - Review of White Mountains Re

WTM - Review of Esurance

WTM - Investment Portfolio

WTM - Berkshire Transaction

WTM - Q and A - Part I

Has compensation been tied to long-term results?

LT comp has always been tied to results – using a formula to calculate. Short term can be a lot of discretion by CEO of units on short-term comp.

Since this happened on underwriting from six years ago – can more be tied to long term?

We have both ST and LT comp – whether the claims were there 6 year sago is irrelevant in deciding on comp – three years of adverse reserve development in a row - we are having a debate now in the company – a lot of these people were not here six years ago but they were here last year.

WTM Solutions – run off business – getting more activity?

Waxes and wanes with cycle as competitors get more stressed - yes, seeing more activity – pace is picking up – not enough pain felt just yet.

Person who used to run this retired last year but good team. They study 30 deals they get one. Neil Wasserman is in charge – part of team – confident in him. The expense base is $3 million a year so one deal basically pays for WTM Solutions.

Municipal Bond underwriting?

Looked at a lot of things – it is a good market – used to be in FSA – sold it in 2000 – kept some that was sold back last year. A good business – BRK is there – nothing yet that will benefit. Looked with partners starting 9 or 10 months ago.

We have done modeling on losses on sub prime guarantees done by insurers and come up with losses much higher – made a decision not to invest in existing insurer. Our hurdle is very high – high capital.

Globalization of Insurance business?

Look at it all the time – insurance is very local – would not go into Israel or Russia unless had someone who knew it well. Do not have the pretense that we can go into others markets and do better than them.

NOLS- Esurance - $300 million – is it currently being used?

Esurance is generating NOL’s - Gary sees a path to GAAP profitability reasonably soon so will soon use them pretty quickly. The AnswerFinancial NOL’s - we valued them knowing that we wouldn’t be used quickly - discounted them significantly – we hoping to do better than our own plans – we did not overpay.

BRK transaction?

Waiting for private letter ruling from IRS on taxability – have had conversations with them already.

Esurance conversion ratio of 8% - is that constant?

In 2000, conversion rate was 2% - up 1% compared to last year – improving the process – improving web site – always trying to improve. Not sure about competitors – believe that GEICO id higher – brand is important – so is pricing – on the phone conversion rate is 15%. AF conversion rate is 30% because they offer other carriers.

Are you OK with pricing vs. comp?

Not as competitive as a year ago – we took price increase in 18 states about up 9% because severity was going up – can see how comp they are by stet – CA very competitive – just raised rates in Florida so probably not that competitive there anymore. GEICO probably the most competitive on prices.

Symetra valuation last year was to be IPO’s at 1.4 times book. Is that current?

Can’t directly comment – that’s what it was last year and we were comfortable with it.

Are you shifting assets away from Energy in investing portfolio?

Have shifted from winners to laggards but overall weighting the same.

The Bad News On White Mountains Insurance Is Out

2008-10-13T10:40:00.011-05:00

White Mountains Insurance has fallen precipitously the last month with the rest of the insurance group, and all of us knew something was coming either in regard to the mortgage backed securities portfolio, or the Level III asset portfolio which consists mostly of long/short investment partnerships, according to management. The company issued a press release this morning with the details:

"In light of recent developments in financial markets, White Mountains Insurance Group, Ltd. (the "Company") announced today that it expects its adjusted book value per share at September 30, 2008 to be between $400 and $420, a reduction from $444 at June 30, 2008. These results have not been reviewed by the Company's independent auditors and are subject to change."

The stock is now up $43 to $338 so it sells at 80% of book value.

"The reduction is due mainly to a 5% drop in the value of invested assets during the quarter. The total return on fixed maturity investments, including mortgage-backed and asset-backed securities, was -2% to -3% for the quarter, compared to a return of -0.5% for the Lehman Aggregate Index. The total return on equity securities was between -13% and -15%, compared to -8.4% for the S&P 500."

Not bad, many did much worse.

"Our underwriting results for the quarter were impacted by after tax catastrophe losses of roughly $100 million. For the quarter, our segment GAAP combined ratios are estimated to be as follows: OneBeacon, about 100%; White Mountains Re, about 120%; and Esurance, about 102%. Mark-to-market losses on the White Mountains Life Re portfolio were about $15 million."

OK, the insurance business sucks as well, but we all knew that too.

"Finally, we expect to receive final approval from the IRS on the Berkshire exchange by the end of October and to close that transaction soon thereafter."

The company stands behind its word, and will pay Berkshire $485 a share. No private equity cop out here.

As previously disclosed, White Mountains does not invest in any collateralized loan obligations or collateralized debt obligations. The Company's high quality, short duration fixed maturity portfolio remains defensively positioned and had minimal exposure to the adverse credit events during the third quarter. As of June 30, 2008, the Company had $2.6 billion in mortgage-backed securities, which represented 57% of the Company's shareholders' equity. $1.5 billion of the Company's mortgage-backed securities owned at June 30, 2008 carry the full faith and credit guaranty of the U.S. government. As of September 30, 2008, the total mortgage-backed security portfolio was approximately $2.6 billion. Management remains comfortable with the credit outlook of this short duration, high quality portfolio."

Disclosure - I am long WTM.

White Mountains Insurance (WTM) Analyst Day – Q and A

2008-10-13T07:38:00.001-05:00

WTM Analyst Day – Q & A – June 18, 2008

This is a rough transcription of the Question and Answer period from the White Mountains Insurance Analyst day held on June 17, 2008.

My other posts on the meeting:

WTM - Introductory Comments

WTM - The Reserve Issue

WTM - Review of One Beacon

WTM - Review of White Mountains Re

WTM - Review of Esurance

WTM - Investment Portfolio

WTM - Berkshire Transaction

Advantages of having Answer Financial and Esurance together?

We get a lot of traffic to Esurance – 3.5 million quotes this year – people coming to the site - our conversion rate for online buyers is around 8% - the rest are going somewhere else - we are paying anywhere from $250-300 to get a policy – I am trying to monetize that traffic. We also get traffic from states where we don’t do business – only in 28 states – 30 by the end of the year right now we sell that traffic but would be better to keep it in house and give it to AF and use it build their volume.

Write most of our business online Seventy percent of our customers go through process without talking to anyone – 30% get someone on line at call center - people who buy online – their loss ratios are 15 points below people who buy on phone – the rest are better handled by AF. We also want AF to sell more of our business – right now only 10% and want to move it to 20%.

Have gas prices impacted miles driven which impacts claim frequency?

Frequency is really coming down – year over year through 1Q 08 - down 4% - thought it would be flat and in May it was down 8%. I think people are driving fewer miles and hopefully slower – flip side is that cars are smaller which may lead to higher severity of claims. Claim inflation may also be an issue going forward.

Monetizing Assets?

At this price we are a buyer of our stock – whether we can monetize any of our assets we look at this all the time. We talk to people who are interested. In current market odds are we are a better seller than buyer.

Who initiated BRK transaction?

When I (Barrette) got back a year ago the company had been working extensively on the deal…started somewhere in conversation between Jack and Warren – not sure who started it but it clearly got going – almost reached a deal a year ago but it didn’t – then I understood his parameters better - basically he needed to sell at market – did not want a below market price – when price hot my price and I knew he was a seller at that price that’s when the deal got done.

Is there a material change clause in BRK deal?

No clause…only if IRS doesn’t approve.

What could drive the $21 million reversal in Q2?

A GAAP market to market of our liabilities – when markets a very volatile and you have low interest rates in Japan we assume that they will maintain that for next 8 ½ years – what needs to reverse that it higher rates in Japan or lower volatility.

How much of WTM Re America (Folks) book is ceded?

WTM Re America is ceding 75% of property business and 50% of casualty business down to Bermuda – would increase them somewhat maybe to 80% each. That’s of the WTM Re America (Folks) book.

More color on limited partnerships that dominate Level 3 assets?

Three quarters are long short equity partnerships – in terms of transparency we get monthly reporting from them – audited annually – get a portfolio list – in touch with the managers – strategies do not have a lot of leverage. Can get losses from pilot error but won’t get compound damage from leverage – mostly Value managers - $2 billion from Prospector – reason why most are Level 3 is lag time on reporting.

$140 million reserve – what has company learned institutionally?

Now WTM will have a Chief Actuary – some form of dotted line reporting to corporate people – so the CFO of units don’t feel that CEO of unit can dictate to them. We will due diligence more regularly and more reserve meetings.

White Mountains Insurance (WTM) Analyst Day - Berkshire Transaction

2008-10-10T08:19:00.000-05:00

White Mountains Insurance (WTM) held its annual analyst meeting on June 17, and I finally got around to listening to the webcast. The URL is here if you want to listen yourself.

I have written six other posts on the meeting. They are:

WTM - Introductory Comments

WTM - The Reserve Issue

WTM - Review of One Beacon

WTM - Review of White Mountains Re

WTM - Review of Esurance

WTM - Investment Portfolio

Berkshire Transaction

WTM discussed the Berkshire transaction in a little more detail. In March 2008, WTM announced an agreement with Berkshire Hathaway to buy back 1,724,200 of WTM shares that they held. WTM would pay $751 million and transfer two insurance entities that are in run off. The two subsidiaries are Commercial Casualty Insurance Company and International American Group. The shares held by Berkshire Hathaway represent 16.3% of the company. The aggregate exchange value is $836 million, or $485 per share.

Management said “As our founding father Jack Byrne says, you shoot ducks not when the gun is loaded but when the ducks are flying….we had a lot of activity last year but the ducks weren’t flying. But when we got to this year, and we got some additional capital…and there was a duck that was quacking, and that duck was our own stock.”

“We had the opportunity to create this exchange with BRK, which valued WTM at $485 per share or 1.1 times book.”

“Ben Graham would say when you look at a company and if you can get that company in at a 20% discount to its intrinsic business value, that’s an attractive time to do something there is no company we know better than our own so being able to do a transaction where we value WTM at $485 and then had 2 run off businesses valued at 1.5 times book, we value that as a very attractive proposition.”

Management went out of its way to assure investors that the company would have the capacity to make acquisitions if needed despite the outflow of cash to buy its shares from Berkshire. Debt to total tangible capital would be 22% and total debt would be $1.3 billion on a pro forma basis.

WTM said that the deal had been under discussion for quite some time and that the two companies almost reached agreement a year ago. The sale is expected to close in the third quarter.

My Comments:

With WTM closing at $310 on 10/09/2008, this deal looks like a steal for Berkshire, although I haven't seen a press release announcing the close of the deal. Does WTM want to use its precious capital in this manner during this crisis?

Another Unthinkable Event

2008-10-09T15:14:00.002-05:00

Is the unthinkable going to happen? What do I mean? How about the government closing the stock exchange to try to induce calm in the market. I am not talking about a circuit breaking close for a half an hour. I am referring to a multi day or week long halt. It's not as farfetched as it sounds, Roosevelt closed the banks in 1933.

Here are some major historical closing for the NYSE:

July 31 - Nov. 27, 1914 - Outbreak of World War I.

March 6 - 14, 1933 - Banking holiday.

September 11-14, 2001 - Terrorist Attacks.

I'm not saying that closing the exchange will work, as it may have the opposite effect, and many of these stocks trade off the exchange or overseas.

The full list of closings.

This Is Insane

2008-10-09T14:57:00.005-05:00

Wesco Financial (WSC) is down $58 or 17%. This is the insurance company run by Charlie Munger, who sits next to Warren Buffett at every annual meeting of Berkshire. Does the market really feel that Wesco is going to take a loss because it owns CDO's or some other toxic paper?

Is Oil Demand Falling Off A Cliff?

2008-10-09T08:52:00.002-05:00

Is demand for oil falling off a cliff with the stock market?

The Department of Energy reports that the U.S. Petroleum Products Product Supplied was only 18.66 million barrels per day for the four weeks ending October 3.

This is the lowest level since June 1999.

The FDIC Rips Into Bloomberg

2008-09-25T14:36:00.005-05:00

It seems that Bloomberg has angered the powers that be at the Federal Deposit Insurance Corporation (FDIC) with its recent article suggesting that the FDIC may need more money to bail out banks than is currently in its fund. Here is the Bloomberg article and the FDIC response is printed below:

Bloomberg reporter David Evans' piece ("FDIC May Need $150 Billion Bailout as Local Bank Failures Mount," Sept. 25) does a serious disservice to your organization and your readers by painting a skewed picture of the FDIC insurance fund. Let me be clear: The insurance fund is in a strong financial position to weather a significant upsurge in bank failures.

The FDIC has all the tools and resources necessary to meet our commitment to insured depositors, which we view as sacred. I do not foresee – as Mr. Evans suggests – that taxpayers may have to foot the bill for a "bailout."

Let's look at the real facts about the FDIC insurance fund. The fund's current balance is $45 billion – but that figure is not static. The fund will continue to incur the cost of protecting insured depositors as more banks may fail, but we continually bring in more premium income.

We will propose raising bank premiums in the coming weeks to ensure that the fund remains strong. And, at the same time, we will propose higher premiums on higher risk activity to create economic incentives for poorly managed banks to change their risk profiles. The fund is 100 percent industry-backed. Our ability to raise premiums essentially means that the capital of the entire banking industry – that's $1.3 trillion – is available for support.

Moreover, if needed, the FDIC has longstanding lines of credit with the Treasury Department. Congress, understanding the need to ensure that working capital is available to the FDIC to provide bridge funding between the time a bank fails and when its assets are sold, provided broad authority for us to borrow from Treasury's Federal Financing Bank. If necessary, we can potentially raise very large sums of working capital, which would be paid back as the FDIC liquidates assets of failed banks. As per our authorizing statute, any money we might borrow from the Treasury must be paid back from industry assessments. Only once in the FDIC's history have we had to borrow from the Treasury – in the early 1990s – and that money was paid back with interest in less than two years.

Finally, Mr. Evans' suggestion that the "government" could ever be "on the hook for uninsured deposits" demonstrates a misunderstanding of FDIC insurance. To protect taxpayers, we are required to follow the "least cost" resolution, which means that uninsured depositors are paid in full only if this is the least costly option for the FDIC. This usually occurs when a bidder for the failed bank is willing to pay a higher price for the entire deposit franchise. We are authorized to deviate from the "least cost" resolution only where a so-called "systemic risk" exception is made. This is an extraordinary procedure which we have never invoked. And again, any money we borrow from the Treasury Department must be repaid through industry assessments.

I am confident in the strength of the FDIC's resources to make good on our sacred pledge to insured depositors. And, remember, no depositor has ever lost a penny of insured deposits, and never will.

Andrew Gray
Director
Office of Public Affairs
Federal Deposit Insurance Corporation

New Federal Reserve Rules

2008-09-22T10:29:00.009-05:00

The Federal Reserve Board just issued two new rules. The first temporarily exempts bank holding companies from leverage and risk-based capital rules.

"The first interim final rule would provide a temporary limited exception from the Board's leverage and risk-based capital rules for bank holding companies and state member banks."

The second rule allows bank holding companies to do transactions they weren't allowed to do on Friday.

"The second would provide a temporary limited exception from sections 23A and 23B of the Federal Reserve Act, which establish certain restrictions on and requirements for transactions between a bank and its affiliates."

Festival of Stocks # 107

2008-09-22T06:30:00.002-05:00

I am the proud host of the Festival of Stocks. This is actually the seventh time I have hosted the festival. I received many entries this week on the current financial crisis which is obviously on the minds of many investors.

Stock Analysis

Dividends4Life presents Stock Analysis: McGraw-Hill Companies Inc (MHP) posted at Dividends4Life.

Saj Karsan presents World Wrestling Pays! posted at Barel Karsan.

George presents Buying More Sotheby's posted at Fat Pitch Financials.

Roy Ward presents Problems with Garmin posted at The Iconoclast Investor.

Steve Alexander presents Magic Formula Stock Review: Bare Escentuals (BARE) posted at MagicDiligence - Optimizing Joel Greenblatts Value Stock Strategy.

Martin Roth presents Six new stocks for NASDAQ Clean Edge Index - Green Technology Investor: helping you profit from the world's best green-tech stocks posted at Green Technology Investor.

Jim presents I Just Day-Traded AIG, It’s Dangerous & Addicting posted at Blueprint for Financial Prosperity.

Andy presents Another Inevitable Government (AIG) Billion Dollar Bailout posted at $aving to Invest.

The Financial Crisis

Joseph Osodi presents COLLAPSE OF GLOBAL STOCK MARKET « Josephekwu’s Weblog posted at Josephekwu's Weblog.

Michael Cintolo presents 10 Observations About This Financial Storm posted at The Iconoclast Investor.

Babak presents Reviewing The Carnage On Wall Street posted at Trader's Narrative.

Alexander presents Watching A Scary Stock Market posted at Wealth Junkies.

LAL presents What a week and it’s not done yet… posted at LivingAlmostLarge.

praveen presents Lehman, Merril Lynch, and AIG Lead to The "Unbubble" posted at My Simple Trading System.

Silicon Valley Blogger presents Best Places For Your Money When The Stock Market Tanks posted at The Digerati Life.

The Smarter Wallet presents How to Protect Yourself Against the Economic Crisis posted at The Smarter Wallet.

Ironman presents Hey Look - Brownian Motion! posted at Political Calculations.

Ryan Suenaga presents Why Ginnie Mae isn’t in the Same Boat as Fannie Mae and Freddie Mac posted at Uncommon Cents.

The Bailout Plan

2008-09-21T08:26:00.015-05:00

Here are some excerpts from the plan announced by the Treasury last week to spend up to $700 billion to buy assets from financial institutions.

"Treasury will have authority to issue up to $700 billion of Treasury securities to finance the purchase of troubled assets."

What are the two reasons for doing this?

"to promote market stability, and help protect American families and the US economy."

What can the Treasury buy?

"Residential and commercial mortgage-related assets, which may include mortgage-backed securities and whole loans."

But, we can basically buy whatever we want:

"The Secretary will have the discretion, in consultation with the Chairman of the Federal Reserve, to purchase other assets, as deemed necessary to effectively stabilize financial markets."

We are only bailing out domestic financial institutions:

"Participating financial institutions must have significant operations in the U.S."

But, if we want to bail out foreigners, we will:

"...unless the Secretary makes a determination, in consultation with the Chairman of the Federal Reserve, that broader eligibility is necessary to effectively stabilize financial markets."

We will tell you what we are doing:

"Within three months of the first asset purchases under the program, and semi-annually thereafter, Treasury will provide the appropriate Congressional committees with regular updates on the program."

Because we know you won't understand it anyway.

Bunning Tries to Shut Down the Federal Reserve

2008-09-20T07:18:00.002-05:00

Senator Jim Bunning, a Republican from Kentucky, tries to shut down the Federal Reserve with the following bill that will no doubt go absolutely nowhere:

S.3510 : A bill to prohibit the Board of Governors of the Federal Reserve System from making funds available at a discount rate to private individuals, partnerships, and corporations.

Latest Major Action: 9/17/2008 - Referred to Senate committee.

Status: Read twice and referred to the Committee on Banking, Housing, and Urban Affairs.

A Strange Coincidence

2008-09-19T15:49:00.003-05:00

Is it just a coincidence that on the day the Securities and Exchange Commission (SEC) bans short selling in 799 Financial stocks, the sign below mysteriously appears nailed to a fence in Suburban Birmingham, Alabama.

Stock Loan, of course, is the official name of the departments at Wall Street firms which handle the borrowing of stock for clients who want to sell short. Someone getting out of the business perhaps?

Financial Stocks Not On The Banned List

2008-09-19T08:36:00.007-05:00

I found a few Bank stocks not on the list of 799 stocks that can't be sold short per the Securities and Exchange Commission (SEC) order this morning. They are all Bulletin Board or Pink Sheet stocks so I am not sure if they can be borrowed anyway, but here are some of them:

Wake Forest Bancshares (WAKE)
Oxford Bank Corp (OXBC)
Baylake Corp (BYLK)
Benton Financial (BTOF)
Florida Community Banks (FLCM)
Greater Sacramento Bancorp (GSCB)
Stonegate Bank (SGBK)
Bank of Santa Clarita (BSCA)

Please understand I am not saying you should short these names. I know very little about most of them.

SEC Bans Short Selling

2008-09-19T06:06:00.007-05:00

The Securities and Exchange Commission (SEC) bans short selling in 799 financial stocks through October 2, 2008. The SEC has this authority under Section 12(k)(2) of the Securities Exchange Act of 1934.

Just to demonstrate how quickly the order was prepared, they included National Atlantic Holdings Corp (NAHC), a company that was bought out several months ago.

Some excerpts from the SEC order.

"Recent market conditions have made us concerned that short selling in the securities of a wider range of financial institutions may be causing sudden and excessive fluctuations of the prices of such securities in such a manner so as to threaten fair and orderly markets."

"This emergency action should prevent short selling from being used to drive down the share prices of issuers even where there is no fundamental basis for a price decline other than general market conditions."

"The following entities are excepted from the requirements of the Order: registered market makers, block positioners, or other market makers obligated to quote in the over-the-counter market."

The order covers SIC codes 6000, 6011, 6020-22, 6025, 6030, 6035-36, 6111, 6140, 6144, 6200, 6210-11, 6231, 6282, 6305, 6310-11, 6320-21, 6324, 6330-31, 6350-51, 6360-61, 6712, and 6719.

The Full List

AAME ATLANTIC AMERICAN CORP
AANB ABIGAIL ADAMS NATL BANCORP INC
ABBC ABINGTON BANCORP INC PA
ABCB AMERIS BANCORP
ABCW ANCHOR BANCORP WISCONSIN INC
ABK AMBAC FINANCIAL GROUP INC
ABNJ AMERICAN BANCORP OF NJ INC
ABVA ALLIANCE BANKSHARES CORP
ACAP AMERICAN PHYSICIANS CAPITAL INC
ACBA AMERICAN COMMUNITY BNCSHRS INC
ACE ACE LTD
ACFC ATLANTIC COAST FED CORP
ACGL ARCH CAPITAL GROUP LTD NEW
ADVNA ADVANTA CORP
ADVNB ADVANTA CORP
AEG AEGON N V
AEL AMERICAN EQUITY INVT LIFE HLDG C
AET AETNA INC NEW
AF ASTORIA FINANCIAL CORP
AFFM AFFIRMATIVE INSURANCE HLDGS INC
AFG AMERICAN FINANCIAL GROUP INC NEW
AFL A F L A C INC
AGII ARGO GROUP INTL HLDGS LTD
AGO ASSURED GUARANTY LTD
AGP AMERIGROUP CORP
AGX ARGAN INC
AHD ATLAS PIPELINE HOLDINGS L P
AHL ASPEN INSURANCE HOLDINGS LTD
AIB ALLIED IRISH BANKS PLC
AIG AMERICAN INTERNATIONAL GROUP
AINV APOLLO INVESTMENT CORP
AIZ ASSURANT INC
ALL ALLSTATE CORP
ALLB ALLIANCE BANCORP INC PA
ALNC ALLIANCE FINANCIAL CORP NY
AMCP AMCOMP INC NEW
AMFI AMCORE FINANCIAL INC
AMG AFFILIATED MANAGERS GROUP INC
AMIC AMERICAN INDEPENDENCE CORP
AMNB AMERICAN NATIONAL BANKSHARES INC
AMP AMERIPRISE FINANCIAL INC
AMPH AMERICAN PHYSICIANS SVC GROUP
AMRB AMERICAN RIVER BANKSHARES
AMSF AMERISAFE INC
AMTD T D AMERITRADE HOLDING CORP
ANAT AMERICAN NATIONAL INS CO
ANNB ANNAPOLIS BANCORP INC
AOC AON CORP
APAB APPALACHIAN BANCSHARES INC
AROW ARROW FINANCIAL CORP
ASBI AMERIANA BANCORP
ASFI ASTA FUNDING INC
ASFN ATLANTIC SOUTHERN FINL GROUP INC
ASRV AMERISERV FINANCIAL INC
ATBC ATLANTIC BANCGROUP INC
ATLO AMES NATL CORP
AUBN AUBURN NATIONAL BANCORP
AWBC AMERICAN WEST BANCORPORATION
AWH ALLIED WORLD ASSUR CO HLDGS LTD
AXA A X A UAP
AXG ATLAS ACQUISITION HOLDINGS CORP
AXS AXIS CAPITAL HOLDINGS LTD
BAC BANK OF AMERICA CORP
BANF BANCFIRST CORP
BANR BANNER CORP
BARI BANCORP RHODE ISLAND INC
BAYN BAY NATIONAL CORP
BBNK BRIDGE CAPITAL HOLDINGS
BBT B B & T CORP
BBX BANKATLANTIC BANCORP INC

BCA CORPBANCA
BCAR BANK OF THE CAROLINAS CORP
BCBP B C B BANCORP INC
BCP BROOKE CAPITAL CORP
BCS BARCLAYS PLC
BCSB B C S B BANCORP INC
BDGE BRIDGE BANCORP INC
BEN FRANKLIN RESOURCES INC
BERK BERKSHIRE BANCORP INC DEL
BFF B F C FINANCIAL CORP
BFIN BANKFINACIAL CORP
BFNB BEACH FIRST NATL BANCSHARES INC
BHB BAR HARBOR BANKSHARES
BHBC BEVERLY HILLS BANCORP INC
BHLB BERKSHIRE HILLS BANCORP INC
BK BANK OF NEW YORK MELLON CORP
BKBK BRITTON & KOONTZ CAPITAL CORP
BKMU BANK MUTUAL CORP NEW
BKOR OAK RIDGE FINANCIAL SERVICES INC
BKSC BANK SOUTH CAROLINA CORP
BKUNA BANKUNITED FINANCIAL CORP
BLX BANCO LATINOAMERICANO DE EXP SA
BMRC BANK OF MARIN BANCORP
BMTC BRYN MAWR BANK CORP
BNCL BENEFICIAL MUTUAL BANCORP INC
BNCN B N C BANCORP
BNS BANK OF NOVA SCOTIA
BNV BEVERLY NATIONAL CORP
BOCH BANK OF COMMERCE HOLDINGS
BOFI B OF I HOLDING INC
BOFL BANK OF FLORIDA CORP NAPLES
BOH BANK OF HAWAII CORP
BOKF B O K FINANCIAL CORP
BOMK BANK MCKENNEY VA
BOVA BANK OF VIRGINIA
BPFH BOSTON PRIVATE FINL HLDS INC
BPSG BROADPOINT SECURITIES GROUP INC
BRK BERKSHIRE HATHAWAY INC DEL
BRK BERKSHIRE HATHAWAY INC DEL
BRKL BROOKLINE BANCORP INC
BSRR SIERRA BANCORP
BTFG BANCTRUST FINANCIAL GROUP INC

BUSE FIRST BUSEY CORP
BWINA BALDWIN AND LYONS INC
BWINB BALDWIN AND LYONS INC
BX BLACKSTONE GROUP L P
BXS BANCORPSOUTH INC
BYFC BROADWAY FINANCIAL CORP DEL
C CITIGROUP INC
CAC CAMDEN NATIONAL CORP
CACB CASCADE BANCORP
CADE CADENCE FINANCIAL CORP
CAFI CAMCO FINANCIAL CORP
CAPB CAPITALSOUTH BANCORP
CAPE CAPE FEAR BANK CORP
CART CAROLINA TRUST BANK
CARV CARVER BANCORP INC
CASB CASCADE FINANCIAL CORP
CASH META FINANCIAL GROUP INC
CATY CATHAY GENERAL BANCORP
CB CHUBB CORP
CBAN COLONY BANKCORP INC
CBBO COLUMBIA BANCORP ORE
CBC CAPITOL BANCORP LTD
CBIN COMMUNITY BANK SHRS INDIANA INC
CBKN CAPITAL BANK CORP NEW
CBNK CHICOPEE BANCORP INC
CBON COMMUNITY BANCORP
CBU COMMUNITY BANK SYSTEM INC
CCBD COMMUNITY CENTRAL BANK CORP
CCBG CAPITAL CITY BANK GROUP
CCBP COMM BANCORP INC
CCFH C C F HOLDING COMPANY
CCNE C N B FINANCIAL CORP PA
CCOW CAPITAL CORP OF THE WEST
CEBK CENTRAL BANCORP INC
CFBK CENTRAL FEDERAL CORP
CFFC COMMUNITY FINANCIAL CORP
CFFI C AND F FINANCIAL CORP
CFFN CAPITOL FEDERAL FINANCIAL
CFNL CARDINAL FINANCIAL CORP
CFR CULLEN FROST BANKERS INC
CHCO CITY HOLDING CO
CHEV CHEVIOT FINANCIAL CORP
CHFC CHEMICAL FINANCIAL CORP
CI C I G N A CORP
CIA CITIZENS INC

CINF CINCINNATI FINANCIAL CORP
CITZ C F S BANCORP INC
CIZN CITIZENS HOLDING CO
CJBK CENTRAL JERSEY BANCORP
CLBH CAROLINA BANK HOLDINGS INC
CLFC CENTER FINANCIAL CORP
CLMS CALAMOS ASSET MANAGEMENT INC
CMA COMERICA INC
CME C M E GROUP INC
CMFB COMMERCEFIRST BANCORP INC
CMGI C M G I INC
CMSB C M S BANCORP INC
CNA C N A FINANCIAL CORP
CNAF COMMERCIAL NATIONAL FINL CORP
CNB COLONIAL BANCGROUP INC
CNBC CENTER BANCORP INC
CNBKA CENTURY BANCORP INC
CNC CENTENE CORP DEL
CNLA COMMUNITY NATL BANK LAKEWAY AREA
CNO CONSECO INC
CNS COHEN & STEERS INC
COBH PENNSYLVANIA COMMERCE BANCORP IN
COBZ COBIZ FINANCIAL INC
COLB COLUMBIA BANKING SYSTEM INC
COOP COOPERATIVE BANCSHARES INC
CORS CORUS BANKSHARES INC
COWN COWEN GROUP INC
CPBC COMMUNITY PARTNERS BANCORP
CPBK COMMUNITY CAPITAL CORP
CPF CENTRAL PACIFIC FINANCIAL CORP
CPHL CASTLEPOINT HOLDINGS LTD
CRBC CITIZENS REPUBLIC BANCORP INC
CRFN CRESCENT FINANCIAL CORP
CRMH C R M HOLDINGS LTD
CRRB CARROLLTON BANCORP
CRVL CORVEL CORP
CSBC CITIZENS SOUTH BANKING CORP DEL
CSBK CLIFTON SAVINGS BANCORP INC
CSFL CENTERSTATE BANKS OF FLORIDA INC
CSHB COMMUNITY SHORES BANK CORP
CSNT CRESCENT BANKING CO

CTBC CONNECTICUT BANK & TRUST CO
CTBI COMMUNITY TRUST BANCORP INC
CTBK CITYBANK LYNNWOOD WASHINGTON
CTZN CITIZENS FIRST BANCORP INC
CVBF C V B FINANCIAL CORP
CVBK CENTRAL VIRGINIA BANKSHARES INC
CVCY CENTRAL VALLEY COMM BANCORP
CVH COVENTRY HEALTH CARE INC
CVLL COMMUNITY VALLEY BANCORP
CVLY CODORUS VALLEY BANCORP INC
CWBC COMMUNITY WEST BANCSHARES
CWBS COMMONWEALTH BANKSHARES INC
CWLZ COWLITZ BANCORPORATION
CZFC CITIZENS FIRST CORP
CZWI CITIZENS CMNTY BANCORP INC MD
DB DEUTSCHE BANK AG
DCOM DIME COMMUNITY BANCSHARES
DEAR DEARBORN BANCORP INC
DFG DELPHI FINANCIAL GROUP INC
DGICA DONEGAL GROUP INC
DGICB DONEGAL GROUP INC
DHIL DIAMOND HILL INVESTMENT GRP INC
DLLR DOLLAR FINANCIAL CORP
DR DARWIN PROFESSIONAL UNDERWRITERS
DSL DOWNEY FINANCIAL CORP
DUF DUFF AND PHELPS CORP NEW
EBSB MERIDIAN INTERSTATE BANCORP INC
EBTX ENCORE BANCSHRES INC
ECBE E C B BANCORP INC
EGBN EAGLE BANCORP INC
EIHI EASTERN INSURANCE HOLDINGS INC
EII ENERGY INFRASTRUCTURE ACQUI CORP
EMCI E M C INSURANCE GROUP INC
EMITF ELBIT IMAGING LTD
ENH ENDURANCE SPECIALTY HOLDINGS LTD
ESBF E S B FINANCIAL CORP
ESBK ELMIRA SAVINGS BANK FSB NY

ESGR ENSTAR GROUP LTD
ETFC E TRADE FINANCIAL CORP
EV EATON VANCE CORP
EVBN EVANS BANCORP INC
EVBS EASTERN VIRGINIA BANKSHARES INC
EVR EVERCORE PARTNERS INC
EWBC EAST WEST BANCORP INC
FABK FIRST ADVANTAGE BANCORP
FAC FIRST ACCEPTANCE CORP
FAF FIRST AMERICAN CORP CALIF
FBC FLAGSTAR BANCORP INC
FBCM F B R CAPITAL MARKETS CORP
FBIZ FIRST BUSINESS FINL SVCS INC
FBMI FIRSTBANK CORP
FBMS FIRST BANCSHARES INC MS
FBNC FIRST BANCORP NC
FBP FIRST BANCORP P R
FBSI FIRST BANCSHARES INC MO
FBSS FAUQUIER BANKSHARES INC
FBTC FIRST BANCTRUST
FCAL FIRST CALIFORNIA FINL GROUP INC
FCAP FIRST CAPITAL INC
FCBC FIRST COMMUNITY BANCSHARES INC
FCCO FIRST COMMUNITY CORP SC
FCCY 1ST CONSTITUTION BANCORP
FCFL FIRST COMMUNITY BANK CORP AMER
FCNCA FIRST CITIZENS BANCSHARES INC NC
FCVA FIRST CAPITAL BANCORP INC VA
FCZA FIRST CITIZENS BANC CORP
FDEF FIRST DEFIANCE FINANCIAL CORP
FDT FEDERAL TRUST CORP
FED FIRSTFED FINANCIAL CORP
FFBC FIRST FINANCIAL BANCORP OHIO
FFBH FIRST FEDERAL BANCSHARES ARK INC
FFCH FIRST FINANCIAL HOLDINGS INC
FFCO FEDFIRST FINANCIAL CORP
FFDF F F D FINANCIAL CORP
FFFD NORTH CENTRAL BANCSHARES INC
FFG F B L FINANCIAL GROUP INC
FFH FAIRFAX FINL HOLDINGS LTD
FFHS FIRST FRANKLIN CORP

FFIC FLUSHING FINANCIAL CORP
FFIN FIRST FINANCIAL BANKSHARES INC
FFKT FARMERS CAPITAL BANK CORP
FFKY FIRST FINANCIAL SERVICE CORP
FFNM FIRST FED NORTHN MI BANCORP INC
FFNW FIRST FINANCIAL NORTHWEST INC
FFSX FIRST FEDERAL BANKSHARES INC DEL
FHN FIRST HORIZON NATIONAL CORP
FIFG 1ST INDEPENDENCE FNL GROUP INC
FIG FORTRESS INVESTMENT GROUP L L C
FII FEDERATED INVESTORS INC PA
FISI FINANCIAL INSTITUTIONS INC
FKFS FIRST KEYSTONE FINANCIAL INC
FLIC FIRST LONG ISLAND CORP
FMAR FIRST MARINER BANCORP
FMBI FIRST MIDWEST BANCORP DE
FMER FIRSTMERIT CORP
FMFC FIRST M AND F CORP
FNB F N B CORP PA
FNBN F N B UNITED CORP
FNFG FIRST NIAGARA FINL GROUP INC NEW
FNLC FIRST BANCORP INC ME
FNM FEDERAL NATIONAL MORTGAGE ASSN
FNSC FIRST NATIONAL BANCSHARES INC SC
FPBI F P B BANCORP INC
FPBN 1ST PACIFIC BANCORP CA
FPFC FIRST PLACE FINANCIAL CORP NM
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Could The Unthinkable Happen?

2008-09-18T08:49:00.017-05:00

What am I referring to when I say the Unthinkable? What I mean is a direct intervention into the stock market by the Federal Government. I am not talking about more bailouts of Financial Companies who overleveraged and forgot how to properly assess risk. I mean our government actually buying stocks to support the market.

Granted it would take a lot more pain and the market would have to shed a few thousand points more to get anyone even close to advocating this, but is it that much more of a philosophical leap to go from bailing out AIG, FNM and FRE and becoming the owner of those companies, to supporting the stock market?

Other governments do this routinely, and Russia yesterday announced it was putting $44 billion USD into its market through three state owned banks.

How could this be accomplished in the U.S? By allowing the Social Security Trust Fund to invest a small percentage of its assets in the domestic stock markets. This might require a statutory change by Congress, but anything is possible in this environment.

I am not sure this would solve our current crisis since it is related more to credit than the stock market, but certainly the 25% fall in the market indexes are a contributing factor that impact confidence and wealth.

Now please don't jump all over me for writing this - I am not supporting the government doing this. I am just wondering out loud what the future might hold as Paulson and Company reach into its bag of tricks and finds that it is running out of magic.

NYSE Circuit Breakers

2008-09-18T06:19:00.004-05:00

I'm not sure what today will bring in the market; futures are up slightly as I am writing this, but here are the circuit breakers rules in force for the New York Stock Exchange for the third quarter of 2008. Good luck out there today.

In the event of a 1200 point decline in the DJIA (10 percent)

Before 2 p.m. a one hour trading halt.
From 2-2:30 p.m. a 30 minute trading halt.
After 2:30 p.m. - No trading halt.

In the event of a 2400 point decline in the DJIA (20 percent)

Before 1 p.m. a two hour trading halt.
From 1-2:00 p.m. a one hour trading halt.
After 2:00 p.m. - Market Closes.

In the event of a 3600 point decline in the DJIA (30 percent), regardless of the time, the NYSE closes trading for the day.

Big Oil Meets

2008-09-15T07:00:00.001-05:00

The few remaining Oil Bulls left in the market meet in an underground bunker 100 feet below ground, under the headquarters of Big Oil in Irving, TX. Angry crowds of investors are closing in, advancing relentlessly. Artillery shell explosions can be heard distantly in the background.

Bank Death Watch

2008-09-12T15:57:00.007-05:00

It's Friday afternoon which means it's time for the Federal Deposit Insurance Corporation (FDIC) to take over another bank. I keep refreshing the page at the FDIC site. I admit it's a little morbid, but what the heck.

FDIC Home Page

Inspector General Report

2008-09-11T08:56:00.012-05:00

The Office of the Inspector General (OIG) released a couple of reports yesterday on the ethical lapses by employees in the royalty in kind program at the Minerals Management Service (MMS). This report made the front page of the Wall Street Journal, but has been ignored by many due to all the hoopla over what is going on with Lehman.

The report found that employees of the office "frequently consumed alcohol at industry functions, had used cocaine and marijuana, and had sexual relations with oil and gas company representatives."

I have to say I am a little insulted. I have been to many oil industry events in my life and never been offered sex at any of them.

Here are some of the findings from the report:

"Between 2002 and 2006, nearly 1/3 of the entire RIK staff socialized with, and received a wide array of gifts and gratuities from, oil and gas companies with whom RIK was conducting official business. While the dollar amount of gifts and gratuities was not enormous, these employees accepted gifts with prodigious frequency. In particular, two RIK marketers received combined gifts and gratuities on at least 135 occasions from four major oil and gas companies with whom they were doing business."

"Several staff admitted to illegal drug use as well as illicit sexual encounters. Alcohol abuse appears to have been a problem when RIK staff socialized with industry. For example, two RIK staff accepted lodging from industry after industry events because they were too intoxicated to drive home or to their hotel. These same RIK marketers also engaged in brief sexual relationships with industry contacts. Sexual relationships with prohibited sources cannot, by definition, be arms-length."

The full reports are on this page.

Silver State Bank - Postmortem

2008-09-06T08:44:00.014-05:00

Here are some final stats on the bank seized Friday by the Federal Deposit Insurance Corporation (FDIC) as of 6/30/08.

Equity capital to assets - 6.87%
Core capital (leverage) ratio - 6.56%
Tier 1 risk-based capital ratio - 7.57%
Total risk-based capital ratio - 8.86%

Noncurrent loans to loans - 15.38% (Total noncurrent loans and leases, Loans and leases 90 days or more past due plus loans in nonaccrual status, as a percent of gross loans and leases.

Time deposits of $100,000 or more - 21.23%