A Thank You

I began blogging in the Spring and 2007 and have found it rewarding, both professionally and personally. I have made contact with other investment bloggers and have been able to expound on my investment philosophy and ideas. I now have 60 subscribers - more than I thought I would have after eight months of blogging. Thank you for being interested enough to read my blog.

Some stats for the record. I managed to write 134 posts this year. My average weekly unique page views was 311 for 2007, with my best week back in June when I had 3,051 unique weekly page views after I posted Sell Side Cliches, and it got mentioned in the Kirk Report.

I hope that in 2008, I will continue to reward you with interesting and lively content.

Sallie Mae (SLM) - The Conference Call from Hell

It will go down in history as the conference call from Hell, displacing Jeff Skilling and the famous Enron Call from 2001. I am referring, of course, to the conference call conducted yesterday by Sallie Mae (SLM) and Albert Lord, its CEO.

First, he slams down the ancient sell side practice of asking a "multi part" question to conform to the single question requirement of most managements. The victim was Jason Miller.

"All right. This is the last question I answer that’s more than one part. We will look at the dividend in the second half of the year.."

And then Lord begins to display either his total contempt for the analyst community or his total ignorance of the company he is running.

Analyst

"And you didn’t mention how much equity you were going to need to get back up to the single A rating."

Albert L. Lord

"You’re talking to the wrong guy. I don’t know that answer."

Then an analyst begins to question him about access to the pass through market.

Analyst

"Okay, but clearly you’ve been talking to the arranging banks and they must be telling you something."

Albert L. Lord

"I’m not sure what you’re talking about. I’ve been talking to whom?"

Analyst

"We’re trying to make -- we’re trying to figure out what your stock is going to be worth and you’ve got to give us some guidance, you’ve got to give us some numbers. I don’t even seea margin number here for the stuff that you’ve done. Can you give us some handle on what your stock is worth?"

Albert L. Lord

"You should give Steve a call."

Analyst

"But you’re the CEO. You’re the guy who just took over the company."

Albert L. Lord

"Yeah, that’s exactly right. I’m the CEO. You should give Steve a call. Next question."

And then the grand finale, after no more questions from the analyst crowd:

Albert L. Lord

"How good is this? Steve, let’s go. There’s no -- no questions. Let’s get the fuck out of here."

The Problem with Auction Rate Securities.

The reclassification by Palm Inc. (PALM) of $75 million in short term investments to non current raises the issue of auction rate securities again. So what is the problem with them?

They are actually long term securities, not short term, with the rate reset on a short term schedule using a Dutch Auction methodology. If the auction fails, then the holder can't get access to its funds until the next auction.

Also, the issuer does not conduct the auction, it is done by Broker dealers.

A Threat to Value Strategy?

One of the bedrocks of Value Investing is margin of safety, which is sometimes manifested by owning a company with a large cash balance relative to its market capitalization. Most investors lump cash and short term investments into one figure, owing to the alleged safety of these investments. What if that cash wasn't really cash?

The latest hint of this problem comes from Palm Inc. (PALM) which stated during its conference call that $75 million of its cash balance has been reclassified to non current due to a "limited market" for these auction rate securities. The full quote from management, courtesy of Seeking Alpha:

"We also reclassified approximately 75 million of our investments to non-current. These are AAA and AA rated auction rate securities that currently have a limited market and are not needed to meet all liquidity needs for at least the next twelve months. As a result, they have been reclassified to non-current."

This looks to be classified on the PALM balance sheet as "other assets" which is now at $92.2 million. I am not sure what the other $17 million is.

There were no questions about this during the call.

PALM a Net Current Asset Value Play?

A number of bloggers have been pushing Palm, Inc. (PALM) as a "cash equals current market cap" play. This is not correct. PALM did report $622 million in cash and equivalents as of 8/31/07 compared to a current market cap of $573 million. However, they recently received a $375 million investment from Elevation Partners, and then promptly paid out a $900 million dividend to shareholders.

I don't usually bash fellow bloggers, mostly because one day I will make a mistake and don't want to be bashed myself, but this PALM investment theme was reported on Silicon Valley Insider, the blog authored by Henry Blodget, the former Wall Street super star analyst.

Here is an excerpt:

"Yes, we think Palm sucks. But it's worth observing that the company is trading for cash value.

At $5.50 a share, Palm has a market value of about $550 million, and at the end of August, it had about $550 million of cash. Thanks to its disastrous quarter, the company will undoubtedly take a restructuring charge, but it will still have a meaningful pile. And the 10% holiday headcount reduction should stem any cash burn for a while.

So the question is this: Can Palm be salvaged? Can it blow out its incompetent management team and recruit a better one? Can it be taken over by Research in Motion, Nokia, Motorola, or another gadget maker desperate to have a chance to compete with Apple?

If you think the answer is "yes," now is the time to look at the stock. Now, when everyone else is filled with feelings of love and admiration for Research in Motion and Apple and disgust and loathing for pathetic Palm."

Bill Miller on Risk

I read a post this morning on Crossing Wall Street that quoted Bill Miller talking about the investor misperception regarding risk in the markets. I like the last paragraph, and I highlighted it in bold. Here is the full quote:

"You also know that rising stock prices mean lower future rates of return and falling stock prices mean higher rates of return. So I was much happier in the summer of '02 when you buy everything on sale than I was in the Spring of 2000 when a lot of things were super-expensive.

My view is that the evidence is overwhelming that most people are too risk averse. And that therefore they should be taking a lot more risk than they feel like is right.

The problem is that real risk and perceived risk are two different things. And that's where people get into trouble, because they perceive risk to be high when prices are low, and they perceive risk to be low when prices are high. That's the psychological problem that most people have."

Robert Toll on the Sub Prime Bailout

A few excerpts from the Toll Brothers fourth quarter conference call held last week courtesy of Seeking Alpha

Robert Toll had some interesting comments on the new plan announced by the Federal Government.

Comments on Sub Prime Loan Plan

"With respect to what do I think about the most recent announcements, to be a wise guy, not much. There is no such thing as a sub-prime loan. There’s a sub-prime borrower; that is a borrower who hasn’t got the credit, the respect for his credit in the marketplace that’s equal to what you would consider to be necessary, which we call now prime. A little misnomer in the use of the words."

"What I understand has been offered to the congress to consider and pass is a break for sub-prime. So if you’ve got -- sub-prime borrowers, so that if you are not credit worthy, we’ll give you five years at your present rate but the next door neighbor, who decided he liked the teaser mortgage and went for four for the first six months and six for the next six months and then according to an index with a differential, he would be pushed to eight and then to 10, he’s stuck because he had prime rating."

"I think what would have made more sense, if I were running the zoo, is I would have said we are going to stop teasers, not just sub-prime but for everyone at a rate and pick a number. If we think a -- we’ve done it in the past. The rates used to be regulated in this country up to the elimination of Regulation Q. I think that was in the ‘70s when disintermediation took place."

"I think it wouldn’t be a great feat for us to say that for the next two years, we are going to cap the rates for teaser mortgages at 8%, or 8.5%, which has been approximately the 40-year average rate that we’ve lived with."

Toll Brothers Conference Call

A few excerpts from the Toll Brothers fourth quarter conference call held yesterday courtesy of Seeking Alpha

Interesting that he said that 1974 was a rougher downturn than the current one.

Comments on Current Conditions

"By many measures, fiscal 2007 was the most challenging of the 40 years that Toll Brothers has been in business. 1974 was perhaps rougher, but the difficult times only lasted one year."

"Since going public in 1986, we’ve just reported our first quarterly loss this fourth quarter after 85 consecutive profitable quarters. The loss was driven by $315 million of non-cash pretax inventory related impairments and related write-downs."

"The creation of projections is difficult at any time. In the current climate, it’s particularly difficult to provide guidance for fiscal 2008, given the numerous uncertainties related to items such as sales paces, sales prices, mortgage markets, cancellations, market direction, and the potential for and size of future impairments. As a result, we will not provide earning guidance at this time."

Are We There Yet For Homebuilders - An Update?

In September we blogged about the dangers of using stated book value as a buy signal when evaluating Homebuilders for purchase. The original post is here at this link:

Are We There Yet for Homebuilders - Part II?

My advice was not to believe the book values being used in quarterly balance sheets.

"do not use price to book yet as a buy signal. Book value is in flux and will continue to go down quarter after quarter. The safest thing to do is take the latest quarters book value and write off 30% and then slap a .75 multiple on it and then buy them there."

Well, it seems that a 30% haircut is not enough. Lennar Corp filed an 8-K disclosing that it sold some of its lot and land inventory at a haircut of 55% off the book value that Lennar thought it was worth just eight weeks ago.

The full filing can be read here at the SEC site.

The relevant quote is:

"As of September 30, 2007, the acquired properties had a net book value of approximately $1.3 billion and the sales price was $525 million."