ECRI Recession Call Remains Firmly Intact

[Ballinvarosig Investors]

https://variantperceptions.wordpress.com/2011/08/29/charting-banking-xxii-three-years-after-lehman/

 

http://variantperceptions.files.wordpress.com/2011/08/screen-shot-2011-08-27-at-9-53-45-am.png

 

http://variantperceptions.files.wordpress.com/2011/08/screen-shot-2011-08-27-at-9-54-18-am.png?w=463&h=247

 

http://variantperceptions.files.wordpress.com/2011/08/screen-shot-2011-08-27-at-9-54-01-am1.png?w=459&h=246

 

http://variantperceptions.files.wordpress.com/2011/08/screen-shot-2011-08-29-at-12-37-56-pm.png?w=457&h=242

 

http://variantperceptions.files.wordpress.com/2011/08/screen-shot-2011-08-27-at-9-54-38-am.png?w=466&h=254

 

In my opinion, there is a lot to be said for buying selected trashy financials that have just made it through this crisis.

[Guest misterstockwell]

From that blog on the improving banks:

 

It has not been a pretty process but all the headlines about robo-signing and wrong foreclosures are not the result of banks being slow. Even more, for most of them there is not even the incentive to delay when their capital ratios give them space for maneuver to accelerate issues and leave the crisis behind.

 

How does that square with this?

 

http://www.housingwire.com/2011/11/07/bofa-pays-1-3-billion-to-fannie-freddie-for-foreclosure-delays?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+housingwire%2FuOVI+%28HousingWire%29&utm_content=My+Yahoo

 

Well, obviously the banks don't want to be slow, but the fact is that, due to their "prior indiscretions", they are now forced to be slow.  In their own words:

 

But the correction continues. BofA claimed extended foreclosure timelines for it and other servicers would only exacerbate the problem — a notion also issued by Republican presidential nominee hopeful Mitt Romney.

 

"An increase in the time to complete foreclosure sales also may increase the number of severely delinquent loans in our mortgage servicing portfolio, result in increasing levels of consumer nonperforming loans and could have a dampening effect on net interest margin as nonperforming assets increase," the bank said.

 

And the bank is already searching for new capital. Also in the SEC filing, BofA disclosed it was exploring an issuance of commons stock to raise nearly $3 billion in cash.

 

So we see need for capital, an increase in late payments, and government interference that will directly increase delinquent loans and shrink NIM. The graphs may be pretty, but the reality is not. Look ahead a bit.

[frog03]

On one corner Buffett, on the other Watsa/Sprott...

 

Pick your corner!

[ERICOPOLY]

So we see need for capital

 

I've been wondering about that. 

 

My gut says they are trying to get approved for a dividend raise so they don't get left being the only one without a meaningful dividend after Citigroup gets theirs in 2012. 

 

Otherwise, what's the explanation?  I don't buy the official argument that it's about retiring securities at a discount when in order to do so they have to issue shares at a huge discount -- 3x 1% ROA.

[txlaw]

So we see need for capital

 

I've been wondering about that. 

 

My gut says they are trying to get approved for a dividend raise so they don't get left being the only one without a meaningful dividend after Citigroup gets theirs in 2012. 

 

Otherwise, what's the explanation?  I don't buy the official argument that it's about retiring securities at a discount when in order to do so they have to issue shares at a huge discount -- 3x 1% ROA.

 

I think you might be right on that. 

 

It sounds like they are probably trying to get into a capital position where the regulators will let them resume a real dividend at the same time as some of their big bank rivals.

[txlaw]

So we see need for capital

 

I've been wondering about that. 

 

My gut says they are trying to get approved for a dividend raise so they don't get left being the only one without a meaningful dividend after Citigroup gets theirs in 2012. 

 

Otherwise, what's the explanation?  I don't buy the official argument that it's about retiring securities at a discount when in order to do so they have to issue shares at a huge discount -- 3x 1% ROA.

 

I think you might be right on that. 

 

It sounds like they are probably trying to get into a capital position where the regulators will let them resume a real dividend at the same time as some of their big bank rivals.

 

Does anyone recall whether WEB's BAC warrants get adjusted downwards for dividend payouts? 

 

If not, then we could very well see WEB exercise his warrants upon a dividend resuming.  That would further increase BAC's capital ratios for Basel III.

[bmichaud]

http://interloping.com/2011/11/07/liesman-vs-achuthan-and-why-investors-should-be-terrified-of-certainty/

 

Couldn't say it better myself.

[Guest misterstockwell]

I am glad someone in the media is attempting to hold this guy accountable and exposing him for what he is. He offers the true investor nothing actionable.

 

That's a load of crap. I have used ECRI's info to make, and avoid losing, great quantities of money. It's another tool in the true investor's arsenal. The CNBC guys are idiots, and focused mostly on "what are your indicators?" Why the hell would he tell them when that is his business, his livelihood. Stupid. I have seen other people trade strictly off the WLI that ECRI puts out(with a week delay). The trades are few and far between, but extremely impressive numbers for a very simple system. This business allows for many methods to get to the same goal. I don't know why people have to bash an idea that is different than their own(and likely more successful). My friend is a partner in an HFT firm. I wish I could invest with him. I have money with an Asian quant fund. It's my best performer this year. I have money with a hedge fund investing solely in small banks. It's doing great. My merger arb accounts are doing great with none of this volatility. There are so many ways to win other than being a grumpy value investor. Expand your horizon!

[bmichaud]

I am glad someone in the media is attempting to hold this guy accountable and exposing him for what he is. He offers the true investor nothing actionable.

 

Burke, I'm hoping for the sake of your company (assuming you are in fact a CEO) that you're complete misunderstanding of the article I posted was due to perhaps the lack of a cup of joe or simply waking up on the wrong side of the bed.

 

Perhaps you were thrown by the following from paragraph #5:

....Achuthan, on the other hand, was beset by the bearish dilemma I outlined in "Sell Side Over-Optimism Explained", in that he credibly believes he knows what will happen next, but he can't give a date when it will become evident.

One lacking an eye for detail would skip the link in the article, and thus conclude the author is faulting Achuthan for not giving a date for when the recession will hit (IMO, a BRILLIANT move by Achuthan - very much akin to Buffett not EVER giving a date as to when the market will turn around, but rather simply stating that stocks are a good buy at current valuations, as demonstrated by Buffett's "Buy American. I am." op-ed).

 

So venturing down into paragraphs 6 & 7, we read:

 

This is a case where....the difference between trading and investing is not just a matter of semantics. Leisman was speaking this morning on behalf of traders (and by extension the investment industry) who need direction and somewhere to put their money today. Achuthan was providing advice for investors, who are looking to the right time to invest assets for the longer term, and who he more or less told to stay in cash for the time being.

 

Good traders can afford to fade Achuthan's comments confident, rightly or wrongly, that they will find the amrket turning point in their charts or other indicators. For the rest of us, without the time or inclination to sit in front of quote screens all day, we would have much preferred Achuthan be given considerably more time to speak without interruption....

So there you go Burke. Yet again, you are sitting at your computer firing off responses to each and every topic posted on this message board with zero credibility or logic to any of them.

 

Just admit, you are a trader NOT an investor. Otherwise, you would provide a much more logical response to my original post on this topic than simply stating you happened to catch UNP at $80 and since it rose to $100 there is no recession. Not once did you state why UNP was a good buy at $80. Why was it? What is your estimate of intrinsic value? What discount to intrinsic value do you like to buy at? What is your take on the FACT that D&A for railroads FAR outstrips maintenance capital expenditures due to the "old plant trap"? What are normalized earnings for UNP?

 

It's unbelievable to me that more value investors do not seriously take into account the ECRI's forecast - as value investors, shouldn't we be celebrating the possibility of going back into recession? Shouldn't we be excited about the possibility for good business selling far below intrinsic value? Shouldn't we be excited about the hamburgers we all crave become cheaper to buy?

 

I couldn't be more excited  8)

[ERICOPOLY]

The reason why I'm not excited for a recession is that companies generally do better when demand is not falling.  So I think I would make less money because of the recession.  I'm not holding cash to buy things cheaper.  I do have some portion hedged though with IWM $120 strike put.

 

[bmichaud]

The author didn't take him task. the cnbc economist tried to pin him down but he couldn't. he was too oily. How exactly does someone guessing that the economy might be down 1% next year supposed to help a value investor? is the economy being down 1% next year (even if he happens to guess right) some kind of guarantee that stocks will go down? he does not say what will happen to stocks. He did not tell investors what to do Now. And it's not just me. The best investors of all time pay absolutely ZERO attention to the forecasts of the "helpers". I am talking about Buffett, Templeton, and Lynch. I am in good company.

 

as for my posts I find your analysis hilarious given you sold your CLWR calls (ouch) after a lengthy debate we had on the thread where you argued forcefully for the bullish case and I argues forcefully for the bearish case. You then post the very next day that you decided to sell your entire position. I found it quite strange that you passionately debated me and challenged me, then ended up 100% agreeing with me and dumping your position. one good thing about the internet is the public record it provides and I am quite happy to have my ideas looked at. I would point you to the entire RIMM thread for an example where I am proud to let my advice stand up to scrutiny.

 

You believe CLWR equity will receive nothing in BK, and I believe it will receive $2. I sold into strength and will buy back at 50-cents on what I deem to be a dollar of CLWR value. Last I checked I haven't seen ANY valuation math regarding CLWR or UNP from you. CLWR is an inherently fluid situation, and as any rational individual can tell from the thread, the valuation and circumstances are not nearly as set in stone as a typical investment. I didn't even need to disclose that I closed out my CLWR position. I just found out yesterday for the first time that bker_guy has been in and out of LVLT over the past decade (via his excellent long response over on the LVLT thread) - does that change my opinion of his analysis or thinking on the company? Of course not.

 

Regarding humor - I routinely find myself chuckling out loud at the authority with which you speak on practically every topic that comes across this message board.

[bmichaud]

Post #1 from you on this thread. You lead off discussing how UNP goes from $78 to $101.

 

the news of that call basically corresponded to the market low at the end of September. union pacific railroad correction low was $78. today it's $101. this neatly illustrates the insanity of trying to invest based on somebody's "recession call". Unless of course you use it for it's value as a Contrary Indicator.

 

Post #2...

 

so what you're saying is that when unp was $60 about 3 1/2 years ago that these charlatans made TWO recession calls since then (scaring the living daylights out of people) and unp is over $40 higher now. A holder of unp should have bought their jan 2008 call just as they should have bought their late sep 2011 call. they are contrary indicators whose sole purpose as far as I can tell is to create buying opportunities for those who can see beyond the fancy forecasts that in the end have absolutely no predictive power over investments. I was certainly buying heavily at the time of their recent recession call.

 

Your wording would lead one to believe you were buying UNP.....my bad if you were not.

 

.....

 

Do you understand that if clwr bonds are trading at 30c on the dollar that the equity is worthless? If you really think it's worth $2 in bk, why don't you buy the bonds at 30c and create an even cheaper entry? I think I know the reason.

 

You mean the market perceives it to be worthless....If one believes in the long-term value of CLWR's assets, but at the same time believes there is a possibility for a distressed situation, why not buy the equity, which could be worth $10 to $15 in the event of a sale down the road, at a good discount to a likely BK valuation? I'd rather take a 2% position in something that has 10 to 15 times upside, versus 3 times.

 

I don't for a second believe you did your own

 

Again, have seen nothing from you on valuation despite speaking with apparent authority on the topic.

 

And it's not just me. The best investors of all time pay absolutely ZERO attention to the forecasts of the "helpers". I am talking about Buffett, Templeton, and Lynch. I am in good company.

 

You think those guys don't embed economic analysis into their margin of safety calculations? How about Watsa and Friedberg? Buffett saying we are absolutely not going into a recession is an oft-cited quote on this board as to why we should ignore general market overvaluation and the economy - no different than me citing an economic authority (ECRI) in order to defend my rationale for being cognizant of the economic environment when assessing securities and demanding an appropriate margin of safety.

[bmichaud]

you finally get it. I used UNP as an example. As you finally realize, I never owned it. As for clwr, I am talking about an investment. you are talking about a speculation. You talk about the upside, but you don't talk about the downside. that's typical of someone who is guessing and speculating, which is what you would be doing betting on equity in a BK situation. If you go back to analysis of Glenview, which you referenced early on, you might discover that when they were buying, they were buying both debt and equity with the emphasis on debt. Their clwr equity was tiny in the scheme of things. It's a subtle point missed by those who pile on after their trades are announced.

 

For the love of God how am I not concerned with the downside? Why would I be trying to buy at a 50% discount to a BK valuation if I wasn't concerned about downside? Obviously the valuation can be debated, but obviously we can't debate unless you bring something valuationwise to the table. I've done my own analysis on CLWR using a myriad of sources, and citing those sources. Again, you have brought nothing to the table. Glenview did not emphasize one over the other, so I'm assuming that is your emphasis. Glenview doubled down in the equity back in August and now owns over 5% of the equity - they currently DO NOT SHOW UP on CLWR's list of debt holders. Hmmmmmmm. They must be speculating though.

 

As to why you may want to buy the bonds at 30c on the dollar with only 3 x upside? Because you are more certain to get a return on Your money as well as a return OF your money. And 3 times upside in a far more certain situation is way better than speculating on a 10 bagger that rarely ever happens with BK equity. But you go ahead and play around in the clwr equity if it announces. Because by then, Glenview will have moved on to the debt and established a big position in the senior securities, and thus, will have established a big position in the equity of a new clearwire entity when it emerges.

 

Again, a 2% position is by its nature speculative - thus you approach from a probability weighted standpoint. So if there is a 25% chance for a 10x return and a 75% chance of a $0, then the expected return is 2.5X versus just over 3X for the debt with a 100% probability. Everyone uses different probabilities. I would give the position a coin flip, i.e. a 50-50 chance of $0 or $10, so the expected return is 5 times.

 

And you know that Glenview would move on to the debt though, right? You know that? Kind of like you know that Buffett did not intentionally allocate his portfolio between Generals and Workouts according to the general level of the market?  I love the authority to which you speak - you talk to the board as if we were your children. It's quite nice.

[bmichaud]

Buffett allocated based on how many values he saw, not the "general level of the markets". He advises people to look at company fundamentals and to ignore economic and market forecasts.

 

clwr is a $32m position of a $6.6B equity portfolio at Genview, which is less than a .5% position, and even less when you consider glenview total AUM. glenview owns over 6% of the A shares. There are over 2 times as many B shares, however, which means the Glenview economic interest in the equity is less than  2%. And they don't seem to be increasing it as it goes down.

 

 

They were buying when it fell below $3 back in August (http://sec.gov/Archives/edgar/data/1138995/000090514811001451/efc11-461_fmsc13g.htm). What's ur point? You argue in circles.

[bmichaud]

Buffett allocated based on how many values he saw, not the "general level of the markets". He advises people to look at company fundamentals and to ignore economic and market forecasts.

 

clwr is a $32m position of a $6.6B equity portfolio at Genview, which is less than a .5% position, and even less when you consider glenview total AUM. glenview owns over 6% of the A shares. There are over 2 times as many B shares, however, which means the Glenview economic interest in the equity is less than  2%. And they don't seem to be increasing it as it goes down.

 

 

They were buying when it fell below $3 back in August (http://sec.gov/Archives/edgar/data/1138995/000090514811001451/efc11-461_fmsc13g.htm). What's ur point? You argue in circles.

 

arguing with you is going around in a circle. they haven't bought since August. it crashed right? they haven't bought any more. Like I said it's Tiny. It's minuscule for them.

 

That point has nothing to do with your assertion that I am not considering the downside in the investment despite the fact that I said I would buy it at 50% of what I deem a conservative distressed valuation. I stated how I looked at it from a probability-weighted standpoint and you came back with, "the position is immaterial for Glenview". I'm not following.

 

And as I'm sure everyone else is, i'm done wtih the conversation.

[PlanMaestro]

From that blog on the improving banks:

 

It has not been a pretty process but all the headlines about robo-signing and wrong foreclosures are not the result of banks being slow. Even more, for most of them there is not even the incentive to delay when their capital ratios give them space for maneuver to accelerate issues and leave the crisis behind.

 

How does that square with this?

 

http://www.housingwire.com/2011/11/07/bofa-pays-1-3-billion-to-fannie-freddie-for-foreclosure-delays?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+housingwire%2FuOVI+%28HousingWire%29&utm_content=My+Yahoo

 

Well, obviously the banks don't want to be slow, but the fact is that, due to their "prior indiscretions", they are now forced to be slow.

 

It squares exactly as you say ... they were FORCED to slow down. And that is an important caveat, because when people talk about extend and pretend they are implying that the banks  do not have the capital. They have the capital, they WANT to foreclose.

 

It is not just the charts that are pretty, those key credit metrics are pretty too.