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      « December 2005 | Main | February 2006 »

      January 31, 2006

      Forbes' Flint on GM: "Bankruptcy Shmankruptcy"

      Last week in a post I linked Bloomberg columnist and money manager John Dorfman's positive view of General Motors (GM/NYSE). Now comes Jerry Flint of Forbes giving his emphatic view of GM:

      Enough already on General Motors and Bankruptcy. I am tired of the B-word. GM isn't going bankrupt this year; GM isn't going bankrupt next year; 2008 is so far off that even Bill Gates could be bankrupt by then. It's dangerous to go three years out, but no, I wouldn't expect GM to go bankrupt in 2008, either.

      And why not? Here's Flint's answer:

      The company has $19 billion in the kitty and just about $100 billion in the pension fund. But there's more here than the balance sheet. When I was a boy, there was one reason companies went bankrupt: They couldn't pay their bills. GM can pay its bills, so that's not a problem.

      The new reason for bankruptcy is to break a union contract. That works with airlines because there are always some Navy top guns who owe on their Corvettes and will replace your striking pilots. And there are lots of women left to replace your striking stews.

      But replacing 150,000 United Auto Workers members is another story. A judge could tell them to work for 10 cents an hour, but it's still a free country; they can strike, and they would. Plus, they are stronger than the company. The workers own paid-up houses, cars and boats and have working wives (or husbands). GM would have to negotiate any change in the contract, so the bankruptcy ploy just doesn't work here.

      People can agree or disagree with Flint. But he's been covering the auto industry since 1958. So he's been around the block a time or two and well worth reading. And read this piece you should. And, lest you think he's being a cheerleader for the company, Flint suggests things could get interesting for Rick Wagoner later this year:

      If a turnaround at GM isn't evident by fall, look for a management change. But enough of the bankruptcy talk.

      Hey, I'm upfront about the fact I'm underwater with GM. The stock was recommend on this site last April 29 at $29.75 a share. It closed yesterday at $24.34. (I'm personally doing even worse. I first purchased GM at $37 before this blog was launched. My average cost is in the low $30s).

      That all said, I've maintained the GM holding in the portfolio. I didn't add to the position when the stock was trading in the teens because it's a already a large holding. If that changes, you'll read about it here.

      In the meantime I remain cautiously optimistic. I may be a fool, but time will tell.

      January 30, 2006

      Fairfax Financial's Prem Watsa Profiled in The Globe and Mail

      Courtesy of Shai Dardashti comes this piece on Prem Watsa, the founder and Chairman & CEO of Fairfax Financial Holdings (FFH/NYSE), in The Globe and Mail. John Daly writes of his rare interview with Watsa in a lengthy piece you may wish to print out and read. And re-read. It's a balanced profile of Watsa's life as well as Fairfax.

      The company was first recommended here on May 3 of last year at US$132.50. I've stated previously that Fairfax has been a holding long before this blog's launch and my average cost is US$125.00. The shares closed at $153.48 in New York on Friday (they also trade in Toronto).

      Witmer Making Waves Down Under

      The following was in Friday's column by Liam Dann in the New Zealand Herald:

      Goodman ramped

      Who the heck is Meryl Witmer? She sure knows how to move a stock price. Goodman shares shot up 24c in two days this week to hit a record of $2.50. The only obvious trigger was a tip by Witmer in US-based investment magazine Barron's. Turns out Witmer is a young(ish), glamorous-looking mega-star of the US stock-tipping industry.

      A partner with the exclusive US brokers Eagle Capital, her tips in the Barron's annual Roundtable column are hotly awaited by US investors.

      So when Witmer starting talking up an obscure food and beverage company on the other side of the world, Goodman Fielder was suddenly getting the kind of publicity money can't buy on stockmarket chat rooms and blogs all over America. Looks like Graeme Hart owes her a beer.

      The surge in US interest is making the pre-float cynicism of local fund managers look increasingly misplaced, says Macquarie Equities investment director Arthur Lim. It is also a reminder of just how globalised equity markets have become. "Increasingly, the key to these floats is that the destiny of the company is no longer in the hands of Australasian investors," he says.

      This is a timely reminder for us not to pile in when someone we admire makes a stock selection. And if you do, make darn sure you use a LIMIT order. (I always use limit orders, and remind readers to do the same to the point of annoyance, I'm sure.) It's better to see your order go unfilled than to get whipsawed.

      Belated Congratulations

      Hats off to Bill Cara, Trader Mike and the other stock market bloggers making Forbes Best of the Web last week. You guys have outstanding sites and you’re an inspiration to me in my humble attempt at blogging on stocks. I should have posted this earlier but things have been crazy in my neck of the woods and the week got away from me.

      Congratulations to all.

      January 27, 2006

      The Magic Sixes

      My recent posts mentioning Peter Cundill remind me of something Cundill has referred to in interviews over the years -- “The Magic Sixes.”

      “The Magic Sixes” are something Cundill got from a man named Norman Weinger of Oppenheimer in the 1970s. They are companies trading at less than .6 times book value (or less than 60% of book value), 6 times earnings or less, and with dividend yields of 6% or more. Cundill remembers that there were HUNDREDS of publicly traded companies in the US qualifying back in those days.

      How many are there in the US today?

      Well, I ran a screen on Barron’s Online last night and found a grand total of THREE companies meeting those three criteria: Impac Mortgage Holdings (IMH), Remec Inc. (REMC) and INEI Corp. (INEY). The last one didn't even appear on either Barron's Online or when I tried to find more company information. Glancing at the first two didn’t exactly leave me drooling, though anything could happen in the future.

      “The Magic Sixes” is NOT something you screen for and then only invest in the companies showing up in the results. Even Cundill says that. Instead, it gives you an idea of whether or not a stock market is dirt-cheap. If it is, you’ll have loads and loads of companies making the cut.

      And if not, as in the US, that means the market must be something other than dirt-cheap. That means it’s outrageously overvalued, slightly overvalued, fairly valued or slightly undervalued. My guess would be either of the latter two. We’re certainly not outrageously overvalued.

      Looking back on the polyester decade, Cundill has often used a basketball analogy, saying it was “layup time” in picking winning stocks then. I’ve also read him say that an investor would go hungry today trying to invest only in companies meeting “The Magic Sixes” criteria. The same is true for anyone trying to invest only in “net nets.”

      Will we ever see “layup” time in the US with a 1970s-like cheap market? Who knows? And what wrenching would the economy have to go through to reach those depths?

      Now I’m reminded of the saying (by Joe Louis, if memory serves) that goes something like, “everybody wants to go to heaven, but nobody wants to die.”

      January 26, 2006

      Hickey versus Hawkins

      No, this is not a court case from the past being cited as the US Senate debates the merits of putting Joseph Alito on the US Supreme Court.

      Instead, it relates something I posted here last November on Dell Computer and that occurred to me again when re-reading the latest installment of Barron’s Roundtable.

      Roundtable participant Fred Hickey, of the High-Tech Strategist newsletter, said he’s short Dell. It’s not one of his Roundtable picks; he just stressed his bearishness on the company during the proceedings. I’m not familiar enough with Hickey to know whether or not he considers himself a “value investor.” But he earned a stellar reputation for keeping his head during the tech bubble when most others covering the industry lost theirs. And he examines companies from a bottom-up perspective.

      Yet it’s interesting that Mason Hawkins and his Longleaf Partners Fund is long Dell. In fact, it's the 4th largest position in the fund (as of September 30). This Longleaf fund held 14.69 million shares and Southeastern Asset Management held 38.04 million at last report. Longleaf management wrote in their 3rd quarter report to shareholders that Dell is an entrenched brandname, has dominant market share, and produces generous free cash flow. They say that Dell's management owns a substantial stake in the company (thereby aligning their interests with shareholders) and is growing value by aggressively buying back shares at depressed prices.

      As stated in my post on Dell last fall, I don’t have a dog is this fight. But it will be worth watching to see who’s right on this one.

      Deep Value or Deep Doo-Doo

      Kirk Kerkorian apparently thinks it’s the former with General Motors (GM/NYSE). By now, you’ve heard the news breaking late yesterday afternoon that Kerkorian’s Tracinda Corp. has boosted its stake in GM to 9.9% of the company.


      Recall that Kerkorian reduced his previous 9.9% stake to 7.8% just before 2005 came to a close. Apparently for tax purposes, although more than one financial observer suspected it might just be the beginning of Kerkorian dumping his shares. Now we know that’s NOT the case. Now we know that Kerkorian is back into GM for the long haul.

      And to what end?

      Well, people can only speculate. Which they no doubt will. I said here that I wouldn’t be surprised if Kerkorian didn’t repurchase GM shares because his “reduced” holding was still 7.8% of the company, leaving him the 3rd largest shareholder -- and enough of a platform to work from.

      Loomis Sayles portfolio manager David Sowerby was quoted by Dow Jones Newswires as saying Kerkorian's move reflected his confidence in GM. "Incrementally, it's a positive, because you have the re-commitment from a deep-value investor," he said.

      Whether GM is a deep value play or leaves shareholders in deep doo-doo remains to be seen. Anyway, Tracinda made no mention of why it purchased more GM stock in yesterday’s filing. No reason to expect it to. Jerry York, Kerkorian’s advisor on GM matters, made Tracinda’s case for change at the recent auto show. That may the first and last time Kerkorian “goes public” on what he thinks the company needs to do. Or it could be the first of many.

      What we do know is that Kerkorian and York have talked with Rick Wagoner and GM’s management in the past and are certainly continuing to do so. Behind the scenes talks are still going on with the UAW. It may all seem mysterious to journalists and market watchers. I certainly have no idea what the inner workings are in the boardroom of GM or Tracinda.

      Then again, I don’t expect all the parties to negotiate in public. Except when it is to their advantage or when they feel public posturing is called for.

      Yet it seems obvious what GM’s destination is: to operate as a much smaller company inside North America (remember the International operations are in good shape). How much smaller? Small enough to make its North American car and truck business profitable.

      The only question is how much you-know-what must hit the fan to reach that point.

      January 25, 2006

      Private Equity Rides Privitization Wave in Europe

      As stated in the rationale for owning 3i Group PLC (III/LN), the firm's competitive advantage is in doing small-to-medium sized deals in the UK and Continental Europe.

      So this Dow Jones Newswires story by Nicole Lee in London caught my eye yesterday:

      European governments are increasingly turning to buyout houses to finance and manage companies that are providing essential public services, from mail delivery to waste incineration. Behind the move to privatize assets and outsource more services previously provided by the state is the growing budgetary pressure European governments are facing, particularly as populations age and the social security burden increases.

      Over the years, private equity has built a strong track record owning and managing European companies and, in the end, "so long as regulation is in place to ensure an asset is not exploited, there's no reason why financial buyers would be viewed negatively relative to a trade buyer," said Neil King, a partner with U.K.-based global private equity firm 3i PLC's infrastructure team.

      Among the state-owned assets likely to be put up for sale in 2006 are several transport businesses whose steady cash flows are expected to attract private equity investors.

      Just this week, the Dutch Finance Ministry said it sees no obstacles to privatizing national bus operator Connexxion. London-based 3i is one of several likely bidders for Connexxion, people familiar with the matter said earlier.

      3i Group was first recommended on 5/17/05 at $12.73 (adjusted for a 16-for-17 reverse stock split). It closed yesterday at $15.55. That's a gain of 22% not including dividends.

      In addition to doing deals across Europe, the company is also searching for deals in Asia -- especially mainland China and India. Regular readers of this site know that 3i has opened new offices in Shanghai and Mumbai in the last year (its had an office in Hong Kong for a while).

      All this, and the company has been repurchasing its stock aggressively. Always a good sign.

      P.S. 3i Group trades in British pence. I keep track of performance in US dollars because I reside in America. Remember your results could be better or worse depending on your currency.

      AmcorpGroup Reader Comment Question #2: How to Buy Stocks Listed on Foreign Exchanges

      The second of two questions asked in the comment section of the AmcorpGroup post was from George of Fat Pitch Financials. Here's his question:

      "I'd also like to know which broker you were going to use for the transaction. I've been interested in international investing lately, but my current online broker doesn't have an international trading desk. How much would commissions have cost for this Malaysian stock if you had bought it?"

      This is a question I've heard several times. My answer is one I categorize as "good" but not "great."

      I use the global trading desk of Charles Schwab. The positives are the Schwab people deliver excellent customer service and can answer just about any question. They do a great job telling you what the stock price in its currency translates to in American dollars. And you can place limit orders -- which I STRONGLY recommend doing.

      The negatives? You have to place the order by phone during weekday business hours (which are 8:30 a.m. to 5:30 p.m. Eastern Time if memory serves). You can't execute orders over the internet with the exception of Canadian stocks (last I checked).

      Regarding commissions, yeah, they're higher for these trades. I don't know the commission I'd have paid when buying AmcorpGroup. The global trading desk broker would have told me before the trade (the Schwab folks are excellent at doing that).

      But I don't want to dodge your question here. It would NOT be anything like $7 or $12.95 or the prices quoted in ads on CNBC. The commission would be multiple times higher.

      Lastly, "The Electronic Investor" in Barron's discussed this topic several months ago. It might be worth hunting down.

      Thanks for your question, George. Please let me know if I haven't answered it completely.

      January 24, 2006

      Cautionary Note Regarding Deckers

      Anyone considering buying stock in Deckers Outdoor Corporation (DECK/NASDAQ) should keep in mind that the company only has just over 12 million shares outstanding.

      So use limit orders when trying to get in. You could get badly whipsawed otherwise.

      I should have pointed this out in yesterday's post on Meryl Witmer picking Deckers in the Barron's Roundtable. (Then again, the links provided to my earlier posts on the company stressed this.)

      Deckers stock popped nearly 4% in trading yesterday. Not surprising with the very small float combined with the favorable mention in Barron's.


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