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Southern and Eastern Europe the next shoe to drop?

Monday, 07 September 2009 18:35

Edward Hugh wrote a very interesting article in the A Fistful Of Euros blog titled There Is Another Shoe To Drop In The Global Economic and Financial Crisis - And The Focus Will Be On Europe’s Perifery.

He clearly spells out the mess Eastern Europe, Spain, Portugal and Greece is in economically, what they need to get out of it.

So far the European Central Bank has been very accommodative to these countries, but what happens if this is no longer the case.

I agree with his conclusion that the financial crisis is not over yet and investors will be reminded of that shortly.

Tim du Toit is the editor of Eurosharelab. Kindly note that this blog is published for information purposes and is not investment advice. Please refer to our disclaimer. To subscribe to our weekly newsletter, click here.

The Eurosharelab Blog is published by Serendipity Ventures (UG) haftungsbeschränkt a limited liability company incorporated in Germany. Our address is Von-Eicken-Str. 13A, 22529, Hamburg, Germany. Email: This e-mail address is being protected from spambots. You need JavaScript enabled to view it

Invest in over leveraged junk at your peril

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Thursday, 03 September 2009 09:58

John Dorfman in his Bloomberg article titled Debt Dogs of Summer Are July’s Hottest Stocks touches on something that I have also noticed.

This market rally has been led by junk companies!

That means growth stocks from the previous bull markets and over-leveraged companies such as re-listed leveraged buyouts.

Two examples John mentions: (emphasis mine)

Human Genome Sciences Inc. acts as if it’s on steroids. Shares in the Rockville, Maryland-based biotechnology company have risen more than 400 percent in July.

Human Genome has jumped to $14.64 from $2.87 at the start of July. Last week the company and its joint-venture partner GlaxoSmithKline Plc announced positive results from a phase three clinical trial of a lupus drug, Benlysta.

The company has lost money in 29 of the past 30 quarters. Its book value (corporate net worth) was negative to the tune of $241 million as of Dec. 31. And its total debt is more than $581 million.

As for the stock, it sells for more than eight times per- share revenue, a rich multiple. And the price-to-earnings ratio is incalculable because there are no earnings yet.

I’d say investors are paying full price today for success that might be achieved in the future. As a strategy, that works once in a while. Most of the time it’s a recipe for disaster.

The other example is

Oshkosh Corp. is another debt heavy hot stock. Based in Oshkosh, Wisconsin, the company makes military trucks, fire engines and cement mixers.

The stock is up 75 percent since June 30, when Oshkosh received a $1 billion U.S. Defence Department contract to supply more than 2,200 all-terrain vehicles for the armed forces. Most or all of them will be used in Afghanistan.

Oshkosh has debt equal to about 34 times its equity. That leaves me watching from the sidelines.

I am also not a fan of investing in companies with high debt levels. John mentions that his preferred measure of debt no higher than 50% of equity, mine is 35%.

Highly leveraged companies lack the financial flexibility when it really matters and that is why I avoid them.

Just think about how many companies piled on debt buying back shares at high prices to “optimise their capital structures” and now am fighting for survival when they could be making acquisition at really attractive prices.

With banks still under capitalised, writing off bad loans and the public debt capital markets only available to the largest companies I do not think the credit markets have freed as much as the rise in equity prices indicate.

Buy over leveraged junk companies at your peril.

German half year rail tonnage declines to a record low

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Wednesday, 02 September 2009 05:02

The German Federal Statistics Office reported that Germany rail cargo tonnage in the first half of 2009 dropped the most since records began in 1950.

The German railway system transported 147.3 million metric tons of goods in the first six months of 2009, down 22.4 percent from the year-earlier period.

Quantities of goods transported by combined traffic (containers, swap-bodies) – as part of the volumes mentioned above – amounted to 26.9 million tonnes (–21.2% compared with the first half of 2008). The quantity measured in Twenty Foot Container Equivalent Unit (TEU) reached 2.5 Million (–19.3%) and dropped down to nearly to the level of the first half of 2006 (2.3 million).

In terms of product categories iron and non-iron metals showed the strongest plunge (–44.1%) which caused nearly a third of the whole decrease for all products (42.5 million tons as mentioned above).

I did not compare the various six month period but compiled the following monthly comparisons to last year:

Source: German Federal Statistics Office

As can be seen the data series is quite volatile, as shown in the following graph.

Source: German Federal Statistics Office

The increases in the last 2 months are encouraging but lets see if the recovery continues.

The decline in iron and non-iron tonnages do not bode well for companies such as ThyssenKrupp and Salzgitter.

Wonderfully insightful interview with Tim McElvaine

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Written by swadmin

Monday, 31 August 2009 17:23

Thanks to John Bethel in his Controlled Greed blog for pointing me to this interview with Tim McElvaine (pdf).

Tim McElvaine made a name for himself in value investing circles by being Peter Cundill's, a well known Canadian value investor's, top associate for a number of years.

Tim set up his own firm McElvaine Investment Management on the side in the 1990s and eventually left to run it full time.

His quarterly newsletters are also worth a read.

The interview is really insightful and explains value investing in an easy to understand way.

If you do only half of what Tim explains in the interview you will be a very successful investor.

Its hard to argue with a 20% annualized return (16 percent net to investors) for the ten years until December 31, 2007 while sometimes holding up to 59% cash. Similarly to most value investors 2008 was a disaster year for Tim with -48%.

Really the whole interview it is worth it.

The commercial mortgage crunch has started

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Saturday, 29 August 2009 05:53

The Financial Times reports in The Halabi CMBS crunch that the property magnate Simon Halabi hasdefaulted on a £1.15bn loan secured against one of the largest property portfolios in central London.

And who took the first hit?

Caisse de Depot et Placement du Quebec, Canada’s biggest pension-fund manager.

Caisse de Depot et Placement du Quebec, who holds the junior portion of a GBP 1.45 billion loan secured against Halabi’s nine office properties, said it may lose GBP 285 million ($462 million) on debt secured against Simon Halabi’s London properties.

As mentioned before the commercial mortgage loan market deteriorating is a slow motion accident that has already started but is not yet on the radar screens of most investors.

As can be seen above the pain will be spread far and wide across the world.

With commercial property values having declined 40% to 50% from their peak it is also much more than just the junior participants in commercial loans that are going to feel the pain.

I would not be surprised if some of the Landesbanken in Germany put up their hands soon as other loss recipients.

No wonder banks have been raising capital like crazy, pity the investors though.

The Investment Mistakes We Make

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Wednesday, 26 August 2009 18:02

Meir Statman wrote an excellent article published in the The Wall Street Journal on Aug 4 titled:

The Mistakes We Make-and Why We Make Them How investors think often gets in the way of their results. Meir Statman looks into our heads and tells us what we're doing wrong.

The article summarises the main behavioural finance mistakes investors make and offers valuable advice as to how these mistakes can be lessoned and or eliminated.

I have found a lot of the mistakes I have made in the article and I am sure you will as well

The article is worth a reading on a monthly basis because the advice is so valuable and because if we are not reminded about the principles often we are bound to make the mistakes again.

Here are a few of the gems from the article:

(emphasis mine)

"The trick, therefore, is to learn to increase our ratio of smart behavior to stupid. And since we cannot (thank goodness) turn ourselves into computer-like people, we need to find tools to help us act smart even when our thinking and feelings tempt us to be stupid."

"Let me give you one example. Investors tend to think about each stock we purchase in a vacuum, distinct from other stocks in our portfolio. We are happy to realize "paper" gains in each stock quickly, but procrastinate when it comes to realizing losses.

Why? Because while regret over a paper loss stings, we can console ourselves in the hope that, in time, the stock will roar back into a gain. By contrast, all hope would be extinguished if we sold the stock and realized our loss. We would feel the searing pain of regret. So we do pretty much anything to avoid that pain—including holding on to the stock long after we should have sold it. Indeed, I've recently encountered an investor who procrastinated in realizing his losses on WorldCom stock until a letter from his broker informed him that the stock was worthless."

"Successful professional traders are subject to the same emotions as the rest of us. But they counter it in two ways. First, they know their weakness, placing them on guard against it. Second, they establish "sell disciplines" that force them to realize losses even when they know that the pain of regret is sure to follow."

The whole article is worth a few minutes of your time.

Interview with great small, micro and nanocap investor.

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Sunday, 23 August 2009 10:08

The Summer 2009 edition of the Graham and Doddsville investment newsletter from the students of Columbia Business School includes a very insightful interview with Paul Sonkin is managing member of the Hummingbird Value Fund.

“We really specialize at the sub-$100 million, which is the smallest of the small. We are trafficking in the smallest 40 basis points of the U.S. Market where there are still 8,000 companies. So there is still tremendous opportunity.”

Here is an extract (emphasis mine):

GD: What is your take on the market right now? There seems to be some divergence of opinion among investors currently about where we are in the cycle.

PS: What’s going on now is that many of the people I am talking to – many smart, savvy investors –think that the second and third shoe is going to drop.

For that reason, I think there is atremendous amount of money sitting on the sidelines. And, because people expect it, I think it’s not going to happen.

An example that I was talking about the other day is 9/11. I think that there are a lot of commonalities between Lehman and 9/11. Basically, what happened is that Lehman set off a chain reaction – sort of a negative feedback loop.

I think it was a Thursday morning, October 11th when the Reserve Fund announced that they had a lot of exposure and they broke the buck. I remember that we were thinking, “Our cash may not be safe.” Wachovia had failed and you were having these huge bank failures and the world became a very, very scary place.

Everybody pulled back. The country just shut down for a quarter, which is very similar to what happened after 9/11 - although, I think that was more psychologically driven. You had this huge exogenous event, which introduced a huge amount of uncertainty in both cases.

GD: I guess that’s a matter of how you define risk.

PS: Right, the risk of a permanent capital loss. So, in terms of risk, it’s the permanent capital loss versus volatility.

We think our permanent capital loss risk is low,but volatility risk is high.

Unfortunately, what we’ve had over the past 18 months is continually falling stock prices. But that creates the opportunity.

The issue is that investors who have just lost money just want the pain to go away. That’s why they sell at the bottom. And when things are going well, it’s like they just don’t want the juice taken away.

People just don’t want to sell when things are going up and that’s why investors tend to sell at the bottom and buy at the top. It’s just human nature.

Look at Fidelity Magellan, it has compounded at whatever rates it has, but if you look at the rates of what investors have made, it is half because people get in and out at the wrong times.

Read the whole interview if you have time it is really worth it

Nokia, more than just a one trick pony

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Thursday, 20 August 2009 18:43

In the excellent Fast Company article Nokia Rocks the World: The Phone King's Plan to Redefine Its Business Mark Borden explains the company's transition from a mobile phone company to world's biggest delivery system for services, applications and entertainment.

Nokia's 43-year-old executive vice president of entertainment and communities, Tero Ojanperä is quoted in the article as saying:

"We have since become the No. 1 cell-phone company in the world, with nearly 40% market share and 1.1 billion users.”

"The point here is, the world is a vibrant place. We are in India, China, Africa, Russia, the United States.

Think about a young boy in India who is getting his first phone: He can listen to music or take a picture or watch a movie or even make a movie. In many ways this" -- he holds up his slim E71 handset -- "is his first computer and it is connecting him to the rest of the world for the first time."

The article explains that while Apple, Research in Motion (Blackberry), and Palm offers products that target an elite, niche markets, Nokia builds devices to satisfy every budget and appetite for information.

Its 100-odd phone models run from $10 to $700, offering the barest of functions on the low end to rich media on the high end.

"By providing services and tailored content to even the low-end market, we become a lifeline," says Ojanperä.

For example in April Nokia launched a program in India called Life Tools. For a fee of $1.30 a month, users can receive daily information about agriculture, education, and/or entertainment. In addition to cricket scores and Bollywood gossip, rural farmers get weather updates and daily crop prices from three of the closest markets.

Apple and Blackberry may have large market shares in the developed world but Nokia, because of the large number of devices it manufacturers more than a million per day, it can make a huge difference in a short period of time.

Take a look at Nokia's website hub for the company's music, applications and gaming offerings.

www.ovi.com

Will the markets crash again in 2009?

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Sunday, 16 August 2009 10:00

Ambrose Evans-Pritchard, international business editor The Telegraph in his excellent article “RBS uber-bear issues fresh alert on global stock markets” highlighted the two market scenarios most on investors minds at the moment

On the one side

Bob Janjuah at Royal Bank of Scotland is advising clients to take profits in global equity and commodity markets and prepare for another storm as winter nears.

"I expect this risk rally to continue into – and maybe through – a large part of August. What happens after that? The next ugly leg of the bear market begins as we get into the July through September 'tipping zone', driven by the failure of the data to validate the V (shaped recovery) that is now fully priced into markets."

He expects global stock markets to test their March lows, and probably worse. The slide could last three months. "A move to new lows is highly likely," he said.

Mr Janjuah advises investors to seek safety in 10-year German bonds in late August or early September.

On the other side

Over at Morgan Stanley, equity guru Teun Draaisma thinks we are through the worst. "We were on course for a Great Depression in February, but Armageddon was avoided. Governments did not repeat the policy errors of the 1930s."

"We have seen the lows of this crisis. This is a genuine rebound rally, and it has been short by historical standards so far," he said.

Yet he too expects a nasty correction once this rally falters. The usual trigger at this stage of the cycle is when central bankers start to make hawkish noises, typically a couple of months before the first turn of the screw (normally a rate rise, but in this case an end to "quantitative easing". "As long as policy-makers are talking about how fragile the recovery is, equities are unlikely to go down much."

Mr Draaisma advises clients to stay in the stocks for now, but stick to telecom companies, utilities, and oil.

Where do I stand.

Well first of all I am biased as I missed the rally completely and an still 84% in cash and up around 4% for the year to date. I just did not have the courage to buy at or around the March lows.

I would like for the markets to go down so I can get in at lower prices as I find equities about fairly valued at the moment.

I do not know what is going to happen but am careful.

If I was invested at the moment I will look at hedging my portfolio and taking profits on the lowest quality companies in your portfolio.

Better safe than sorry.

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