Baoxiaodao
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Direct link: http://www.americanbanker.com/issues/177_58/wells-fargo-caps-loan-value-ratio-third-party-lenders-1047789-1.html
A new report from Amherst Securities found that some megabanks are making 3.5 to 7 points of profit on HARP 2.0 loans, in part because they are charging higher than market rates for the loans.
On industry advisor close to the issue, and who spoke under the condition his name not be used, said on a $200,000 loan (for example) some lenders have the ability to earn $10,000 in profit per loan. "They can earn up to 10 points," he said, but that profit margin only applies to loans that are already in their servicing portfolio.
The advisor noted that Wells is not doing anything wrong – but simply sees a huge market opportunity to earn a ton of money.
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Howard Marks is one worth listening to. Thanks!
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Due to flooding in Australia, spiders have moved 'way' above ground.
Try walking the dog thru the pictures from National Geographic.
It reminds of how old timers in town make a mark on a building where the highest flood was and think that is it - until its not.
A nice investing reminder.
Cheers
JEast
Thanks J, that is a very good one.
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Fan, thanks very much for the reply, and you can be sure, your quality posts always get my attention. Congratulations on your Jumbo Interactive call by the way, has been pretty good for you this year ;-) Also closely monitored your Delticom investment, and even bought tires from them not so long ago ;-)
Indeed hard to predict the possible impact of the new CEO on SMT Scharf, but I indeed perfectly understand that the previous one might have gotten better offers, after what he already achieved at Scharf. Haven't bought in, and might well regret it in a few years, but mostly because I have a significant portion of my portfolio invested in EGD. The only way I can see this not being a homerun over the next few years is if the price of gold would drop like a rock, but always looking for counterarguments as I'm cautious to become too optimistic.
Did you buy any EGD in in the end?
I had to sell Jumbo due to account consolidation @.44. However, I am totally OK because I am pretty sure I will hold until today if I was not forced to sell. I also had to sell Delticom at 68, and it went up right after the sale. This year so far is a disaster. A managed account with almost totally different holdings has 26% YTD with negative leverage and no derivatives, on top of 20% gain last year. This account more or less represents the true performance.
I did buy some EGD in my RRSP account... but only a few hundred shares... Bart, I am extremely conservative with with any investments I make. In SMT Scharf's case, I can see where it will go and why it will go there. Coal price is a factor, but regardless of it, SMT Scharf should do well in the long run. In EGD's case, I am not so sure. I am not used to that kind of dilution and this story requires tremendous growth down the road the make the ROIC acceptable. Maybe I am just an old guy and too nervous about risks.
Well, on the other hand, I did buy into Russia, where people hate and distrust, through a Swedish equity called Vostok Nafta. It is so funny people are focusing on the short term politics and ignoring the change already in place. I would like to ask, 20 years ago, if so many people had went on street in Russia or China, what would happen? It is naive to believe democracy is always right and dictatorship is always wrong. I do not like Putin, but I think Putin will do a better job to grow the economy than the liberals from the West will. You know when China was run by engineers, its economy expanded 30 years almost nonstop; now that those freaking economists(I think they deserve this word) are trying to give out advice, I could not help but worrying about China's future.
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Hi Fan,
I was digging into your SMT Scharf investment, and it looks like your thesis is already starting to play out, with EBIT margins and profit increasing nicely.
Any thoughts on the fact that the CEO left the company? Do you think this will impact the growth story?
Hey Bart, it surprised me that someone actually paid attention to my writing :P
I was surprised that the CEO chose to leave at this moment, but the rational choice for him at this moment, is probably to move on to a better opportunity. Please note this is pure guessing. The CEO owns some shares which were sold to him at low price. However, he had no options and in the last few years, shares were distributed to all employees but him. So financially, with the current compensation structure, there is very limited upside if he stays on. This is an example where if options are used wisely, good people will be kept on board. As a shareholder, it is hard to say if this is a curse of blessing. At this moment, if he got a good offer with improved compensation, he will probably move on. Dr. Trautwein is still young and it would not surprise me he has the desire to pursue better life.
I tried to check out this new CEO on Google but had no idea about him. I am always suspicious about entrepreneur type with a big smile. He sold his company in 2008 and stayed on for a while. Then he moved to SMT Scharf. The only speculation at the moment is that he might do a deal when the price is right. Ludowici Limited in AU got competing offers in the last few weeks. Although its business is nothing compared to SMT Scharf's, you can have an idea what a right price will be if there is an offer.
I still think the growth prospect for SMT Scharf is good although I do keep an eye on coal price. This is a company offering right products at the right time and in the right places. When I stated I have a hurdle rate of 40% on this board, many of you guys think this is unrealistic. However, I think at today's price, with some luck, 40% annualized return for the next three years is still possible.
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I have decided to cancel the Economist after reading it for 15 years. They seem to have lost their editorial independence. I am looking for a replacement without any success so far. I have always admired the quality of the writing. I pick up the FT from time to time and there is always something of interest you might not see elsewhere.
I thought I was the only one finding this. I stopped reading the Economist a few months ago.
Could you guys elaborate with some specific examples? Are you sure that it's not your own positions that have changed over time?
Liberty, I think I might exaggerate it. It is probably only me who found most publications are not worthwhile reading. With publications I meant newspapers, magazine, etc.
I used to read Economist page by page, but nowadays it is getting harder to find something interesting. Maybe I read too much of it.
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I have decided to cancel the Economist after reading it for 15 years. They seem to have lost their editorial independence. I am looking for a replacement without any success so far. I have always admired the quality of the writing. I pick up the FT from time to time and there is always something of interest you might not see elsewhere.
I thought I was the only one finding this. I stopped reading the Economist a few months ago.
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An interesting side topic is the willingness of people to pay for good content. I picked up Financial Times every day last year from my school. And right after they cancelled the subscription, I missed it a lot. The subscription costs 350e or around 470 USD in Finland, but after thinking about it, I am going to subscribe. I paid 79/year for WSJ and got 20 Amazon gift card in rebate. However, even at this price, this is a totally or near totally waste of money. The newspaper, in my opinion, has failed in capturing what is happening around the world if you compare it to Financial Times.
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I am sure this topic has probably been discussed before, but what Newspapers or magazines is on everyone's must read list.
Currently, I get WSJ, Economist, and Businessweek.
I am thinking about subscribing to Investor's Business Daily, Harvard Business Review, and Barrons. I have not yet pulled the trigger on those subscriptions, but I figured I would poll members of the message board to see what everyone's "must read" publication(s) is/are before I sign up.
*For me the one that I glean the most wisdom from is the Economist. That is a subscription that I plan to carry for a long time.
If you just want to get educated, then all those things you mentioned above is OK in my opinion. But for successful investing, there is really no need to read any of them. Even today I regretted for paying 59/year for WSJ. One thing I recommend is the Financial Times. I can be easily absorbed into this paper for more than half an hour a day.
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House price increases have not been matched by underlying increases in fundamentals such as growth in disposable income, growth in GDP per capita, inflation, population growth, annual immigration growth or the rental indexes produced by CMHC. The ratio of house prices to rent (a ratio equivalent to price to earnings ratio used to identify valuation risks in stocks) is now higher in Canada than in any other developed country.
Moreover, average house prices are now 12 times personal disposable income, way above historical averages. This ratio reached 9.7 times in the last housing bubble in the late 1980s. As a result, household debt as a per cent of disposable income has risen to over 153 per cent in Canada, reaching record levels and coming close to the levels that the U.S. reached before the housing crash.
A few interesting comments on that article too.
Man, I have to admit Chinese has a habit buying real estate regardless of price. You may even call this an addiction. Still, one has to punt into perspective that this is really an arbitrage for 3rd world rich people like Chinese. Even at today' price, you can buy a far better quality home in Canada than in China. That being said, it is now the marginal purchasing power that is supporting the sky-high price.
This may go on for a while. Stay tuned.
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I am so curious about people here talking about China like they do know China. No offense, but the situation there is probably so complicated that any conclusions are not more than educated guesses. China is a place I feel thoroughly mystified as I grow older and acquire more knowledge. Yes, I myself is a Chinese.
Let's just wait and see.
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Denamrk has a huge housing bubble. No one really has focused on this besides Luxor capital. We lay out a short thesis here-http://www.valuewalk.com/2012/01/why-denmark-is-not-aaa/#.TxmV1W-CkhU.
Their biggest bank, Den Danske has 2x the assets of Denmark. It would be like JPM, C, BAC or whoever having $30T of assets. Banking assets to GDP is 90% in America vs 450% in Denmark.
Thanks! Have you looking into Finland? I would really like you to comment on this one!
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Ross,
A while back, I wrote about my foray into BAC warrants and the series L preferreds. It looks like you were doing the same:
From "BAC-WT - Bank of America Warrants" (Nov. 3, 2011)
"I have bought BAC wts (class A) with 13.30 strike at an average of 2.75. I have also bought BAC pfd (series L) at an average price of 750 (yield 9.67%). Per $1,000 par of pfd., I have bought 75 wts (1,000 / 13.3 = 75). This has created a reasonably low strike convertible pfd security. My total cost per $1,000 par is 956.25 which earns close to 7.6% yield. My assumption is that the pfd. will eventually trade at par and the business will eventually earn 1% on assets of about $150 - $200 per share (putting the common fair value at about $20, imo, given interest rates today).
The wts currently trade at about 45% premium to the stock. I expect that premium to decline approx. 6% per annum. Netting out the premium decay fromt the pfd dividend receivable gives a net 1.6% yield. Which gives a 1% yield advantage over the common. Should dividends increase on the commn, the wt strike will decline $1 for $1 (unlike WFC wts). This hedges, to some extent, the wt's premium decay.
If the pfd is money-good and eventually trades at par, this operation should result in profit, even if the wts expire worthless. If you leverage the pfd., with an attractive spread and it proves to be money-good and the common gets through the strike price by 2019, this should offer a superior operation to holding the common. And finally, because the series L pfd is already a perpetual convertible, should the common later rise well past $20, you might get some extra kick from the pfd rising through par. Example, given a $750 pfd cost, option breakeven on the common is $37.50 per share.
And, while not wanting to dwell on the negatives, it's no small thing to have even marginally better terms to the common in any prospective liquidation scenario."
I would add that the premium on the BAC class A warrants has gone down to about 36% over the last month or so. The premium decay over the remaining life of the warrant is significantly lower than when I initially posted, increasing the net yield on the combined security. I have been adding to the position recently.
I am totally in awe. I think I am gonna read this at least 5 times to understand it. Thanks for posting!!!
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Hi UCC, I looked at YLO-D and to be honest I have no clue how to analyze this investment? Could you please elaborate so that I can get started?
And just curious, why YOL-D instead of other series? I searched the board using yellow meida, but nothing turned up. That is why I ask here.
Thanks in advance!
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Hi baoxiaodao,
Common stock holdings in approximate size order:
ffh
ssw ~ 15%, will be tendering some early next week - credit jeast, Irwin Michael - 3+ yrs
others <10%
cfx:t. - had for 2.5 yrs. sell some when it reaches16-17, buy back below 12
ylo.pr.d - perpetual preferreds - face value 25- position will be covered by dividens within 1.5 years.
credit to ubuy2wron, ffhwatcher, and rstuzu.
rbs.pr.p - rbs perpetual prefs. dividend in suspension until April - no sign dividend will not be restarted - credit dcollon
mtl - maturing position assured dividend.
bac and wfc tarp warrants
wfc common
mfc common - stuck in RSPs - dont want to sell at a loss
bce - bought after merger blowout - double in 3 yrs with dividend
bby common - small pos.
A smattering of other tiny positions. There is nothing above the board has not discussed.
This years results were so bad due at least 50% to RIM. One of my major goals is to practice patience when buying. I am starting to learn that cheap stocks dont require immediate action and can often be had for cheaper after the knife has fallen. Virtually all of my major mistakes have been from acting too fast.
Nothing fancy except the leaps.
Thanks, that is what I was looking for. I bought SSW for 9 accounts and tendered those 99 shares in each account. I would definitely look at others and ask anything I do not understand.
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Hi Baoxiaodao, I don't know Howard Marks methodology. I can only describe what I do. In straight dollar returns, non notional, it may not seem as risky. To provide context, I have a full time job, not in the investment industry. So, there is little correlation between career risk, and investment risk.
I have a certain amount of money in RRSPs, and a pension. The RRSPs are self directed and there are no options allowed in them.
As for the dollar value breakdown of common stock versus leaps it ranges around 15-20% in leaps versus common stock holdings. I haven't included the Tarp warrants in this calculation.
The leaps I have right now consist of GE, wfc, BAC, jpm, and bby. They are a mix of Jan. 2013s and Jan. 2014s. I only buy leaps when I have analyzed the underlying company and determined that it meets my definition of a value investment based on the common stock. If I am willing to buy the common stock as an investment, only then do I consider the leaps. I will only buy leaps that trade in dozens or hundreds of contracts per day. This excludes all small caps, and all leaps on Canadian exchanges. I have had bad experiences with illiquid leaps in the past.
In Sep/oct/nov I started to roll over my leap positions from 2013s to 2014s opportunistically. This year for the first time I took major losses on some of these positions. I was in rimm and bailed out completely - I didn't see it coming back until at least the end of next year. I have not advanced the GE leaps. The company is not at enough of a discount to make it worthwhile. The jpm and wfc, and about half the bby leaps are positions I initiated this fall as 2014s. The BAC is a mix. As soon as the 2013s BACs come back into the money I will start reducing the position.
That is sort of the general strategy. I don't write puts anymore, having been killed virtually very time. I have pretty much stopped buying puts for now. Markets are cheap, and puts lose value quickly unless markets tank. Part of the reason I Took so much of a haircut this year is the large amount I have in leaps. I normally wouldn't have anywhere near this amount. The only other time was in the spring of 2009. The stocks I have as leaps are by my analysis extremely cheap. Excepting bby they are also all financials. There is a bit of counter intuition going on. If BAC goes in the tank the beneficiaries will likely be jpm and wfc. If BAC succeeds there will be no effect on wfc and jpm. GE benefits every time someone needs capital or wants to sell a good asset at a crappy price which is happening alot in Euroland these days.
The leaps are assymetric investments. The downside is zero, which is the same as common stock. The upside is huge. I control for market risk these days by holding a 40% position in ffh. As stocks rebound I will convert some leaps to common to catch rising dividends, others I will sell, and I will not renew positions unless there is a sizable discount on the common.
I have about 7 years of experience with options and have refined the strategy to be quite successful. It is similar to Greenblatt or FFH itself. I only report my most recent 7 years because before that I was putting in money from the outside. I stopped that 7 years ago when it no longer moved the needle. Also, my earlier results were not as good. This is a long game, and I think about risk every single day.
Generally I think the 10000 hour rule applies. I have probably spent at least that amount of time over 15 years learning value investing, and I still make new mistakes every year. Unfortunately for me, I learn by actually doing, and trying things.
Well, that is a hell of information. Thanks! Can you please talk about your common stock holdings? Can you also talk more about your strategy trading options? I would really like to learn from you.
It took me 10 years to catch on with value investing, so I totally understand your feelings. Keep going!
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Ucc,
Congrats, that's a great 7 year return after tax. I am not surprised.
As a Canadian investor in US equities, I use the S&P 500 returns in $CND as a benchmark which, due to the rise of the $CND over the last decade, has done worse than the S&P 500 as normally measured in $US. So I figure your relative returns are even better than you suggest.
(My main account is a registered tax-free one where my 11 year returns are around 24 to 25% - but this is before f/x fees where I have gotten killed except in the last year or so as they have just introduced a $US settlement option.)
In any case, congratulations.
I looked at the way UCC invested and was wondering why such a result worth any congratulations without further understanding of the risks. Things could go either way. A few good bets can make a certain year's return shiny, but inherently, this is a levered and risky strategy. I did not mean to criticize, but certainly we should not encourage amateurs replicate UCC's strategy.
I am very curious as to how UCC yourself thinking about the strategy. How do you think of your return on a risk-adjusted(again I borrow from Howard marks) basis? How do you manage your risk? Many of your positions can go to zero. How do you handle the volatility mentally?
Thanks in advance for the answers!
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Up over 40% overall, thanks to our huge overweight in LRE, including long term, nonrecourse, total return derrivatives. The remainder of the portfolio is down about 7%. :( Outperformance eventually regresses, often with great force. :(
This is most likely to be true. Things could go either way. Staying humble is key to better investment return.
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Article in today's Globe & Mail on Sears and Lampert. Cheers!
I wonder how a good newspaper like G&M can make such a bold statement...... But in the media business you need to grab the eyeballs......
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Retailing is a tough business. I once watched a video of a guy telling how the great fortune was made in retailing, like A&P and Walmart. But the question is, how much destruction those winners had brought?
Eddie is a financier. It is still not too late to admit his mistake and quit this game.
Gary Hoover video, right?
Retailing is certainly a tough business. That's why the smart thing to do is to optimize and maintain the Sears appliance/tools retail business, optimize the customer traffic for the Kmart locations as best as can be done for Kmart and then sell to others who can really utilize that traffic, more widely distribute the brands that SHLD has, and utilize the value in the real estate (owned and leased).
I agree that Lampert needs to bring in real operators to counterbalance his financial wizardry. But he most certainly should not "quit this game," whatever that means.
Txlaw, I realized I made the judgement too early. You never know what the ending is until the ending is there. I apologize. Even though I am a million miles behind Howard Marks, I am very proud that I am in the same 'I dunno" school as he is. Face the reality. Investing is all about resource allocation. Let's say Eddie sold Sears plus Kmart at the peak, he would have done much much better with his stock-picking skills. I think even you cannot deny it. He was kind of bound by this investment.
I never put a dime in business like retailers(delti excluded) and juniors. I learned from Kuppy that 98% of Junior are suckers. I also learned that retailing is a very hard business from the presentation and the audio book about A&P. So I stayed away from them. I do believe to become rich you need to avoid trouble. In fact, I even do not want to hear it. This has served me well after my failure at FMD and Delta Financial(I almost lost my shirt on them).
I think now it is not about fixing the business. Sears will have a confidence problem. It really does not matter how much cash it has. Retailing is a marginal business and the operating leverage is huge. Eddie was very successful for many years and he tried to use the same financial method to solve Sear's problem. To a man with a hammer, everything looks like a nail. How could you turn around a retailer by buying back stocks? This is the simple question. However, when things were going well. No one bothered to ask.
In the end, I admit that I have no idea about Sears' financials. I wrote this after reading the WSJ article.
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Retailing is a tough business. I once watched a video of a guy telling how the great fortune was made in retailing, like A&P and Walmart. But the question is, how much destruction those winners had brought?
Eddie is a financier. It is still not too late to admit his mistake and quit this game.
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I like ARGO, but have no means to trade in UK. My friend was not so comfortable with this for some reasons, so I chose to pass. Anyway, it can work out brilliantly.
And in my opinion, EU is not cheap. I've looked at some companies. Considering the risks, valuations are not very good. I still think there is better value in AU.
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Racemize, there is no mystery about small caps. It depends on how hard you look. It also helps when you find some original ideas. I apply Joel Greenblatt's concept to small/micro cap investing. The result is very satisfactory. I bought a few issues last year at 2-3x normalized earnings with high ROIC. And they returned triple digit.
can you give me detail in the process you look for them ? And how you value them?
Hi King, I have been thinking about giving an example. Here it is.
I own a company in AU called Jumbo Interactive. I bought it @ 30 cents. The annual report laid out everything very clearly. It is trading at 2.5x P/E before cash. JIN's business is to sell lotteries on the Internet, which is highly scalable. In the last five years, the business has grown just like other online businesses. In normal condition, this kind of business should garner 20x P/E. This is an outstanding business trading at ridiculous price. You see, magic formula wants good business trading at cheap prices. That is simply not enough for me.
But the situation is not normal here. JIN's online business hangs on a contract with Tatts, which is expiring at the end of 2014, although the contract will be renegotiated a year earlier. Tatts is a monopoly in the lottery industry which owns the only nation-wide license given by the government. Recently, Tatts launched its own website to compete with JIN. Therefore, the probability that JIN will renew the contract seems low.
I believe each of us has different opinion about risk/reward and you can make your own guess. Here is mine. Let's say JIN simply operates until the end of 2014 and then liquidate, the cash will cover more than the current market cap. This is third grade math so I would not give the details here. This is is the bottom line. I personally believe, after some thinking, that there is around 30% chance that the contract will be renewed as it is now. If it is renewed, I will hit a home run; if it is not, I would not lose much. There are also other complications, but I will keep things simple here.
This is basically how I make my investment decisions. Hope this helps.
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I tend to favor small caps, I'll really look at anything from the Magic Formula stuff, to net-net's. I like small caps because they're often a lot simpler so it's quicker to analyze. As an example I was looking at Renault recently and to get a good grasp on their operations I'd have to dig through about 150pgs of reports and filings. I also looked at a small pink sheet company, the annual report was 15 pages long.
To me the goal is to turn over as many rocks as possible, the more rocks overturned the better the chance of finding the fat pitch. I would rather sit on cash and look than invest in marginal investments. Small caps make it easier because I can read the annual reports of 10 companies in the time it takes me to read about one mid/large cap.
I don't limit myself to any size though, I'll invest in anything. I own shares of Intel ($127b) and shares of Titon Holdings ($6m) and anything in between.
That makes sense--do you generally try to diversify on these small cap stocks (or said another way, not take large positions)? I've been keeping my portfolio at less than 10 stocks (I'm actually more like 4 at this point), but it seems like these smaller caps are much more prone to going under than the big ones and/or it would be harder to get as much details about them. I know Greenblatt talks about having 20 or so, but he doesn't bother to analyze, so that's probably not as relevant.
As a side question, does anyone know if Greenblatt's system actually works? The numbers he puts in the book are pretty high and the backtesting data from other sources I read could not reproduce them--it seemed like he cherry picked the best back test for his returns.
I know a lot of investors on this board really love concentrated investing, knowing everything about a company and then dividing investments into 10 or 20 holdings. I know Buffett and Munger have talked about this, some discussion recently about Pabari as well. The idea is that the 25th idea isn't as good as the 1st idea. This sounds good, and I'm sure there's some merit in it for the full time guys. The problem is as an external investor you are always at a disadvantage, no matter how much you know you're still an outsider. I know this is true for companies that I've worked in, I've read some of the most detailed industry analysis and research reports yet the information is lacking compared to what I knew working in the company, and lacking in a large way. Having that intimate knowledge is critical, I think this is what Wall Street misses the most. Obviously you can handicap that a lot and that's what most people do, but I just can't get comfortable myself with this approach.
I take a bit of a different approach, I diversity because this isn't my full time job and I can't spend hours each day keeping pace with each investment. All I care about is that a business is cheap enough, and has a large enough margin of safety, if it meets these requirements I'll usually add it to the portfolio. Sometimes I'll add a small position and increase it over time as I learn more or as I'm looking and realize that the idea is a lot better than others out there. Sometimes the position will stay small because I find better ones.
The advantage of the concentrated approach is that with five stocks if you get a five-bagger your portfolio rockets to the moon. I prefer to look for $.50 dollars. A lot of these can be chumpy companies and I've had a few go under, but I've also had a lot do really well, enough to more than compensate for the disasters. I recognize that holding a bunch of stocks (20 currently, not evenly distributed) could limit my gains, but I'm fine with that. I'm more concerned about my downside, if I have a large margin of safety the gains will take care of themselves. In addition if I can't check a company for a few weeks because of other obligations I'm not concerned that some development will wipe me out.
Hope this helps!
The besting investing method is the one you are the most comfortable with. Well said, Oddball.
Dear Chrm: Boardroom Battles and the Rise of Shareholder Activism - Jeff Gramm
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