Monday, March 29, 2010

Finney of Evermay still sees stocks on sale

We once again visited with Kizziah Finney of Evermay Securities, this time for a lengthy breakfast at Balthazar on Spring Street. His traditional English breakfast, although he prefers to call it Irish, and my raisin Danish vanished quickly and then we began to talk about today's market. He is again upbeat, more so than when the market was lower a few months ago.

"The U.S. equity market has an 'on sale' on it, as in like it's in foreclosure. My God man, the dollar is 12% stronger than a month ago, corporate earnings are still coming through fine, and you've got what, less than 4% on the ten year, around 2% on the two year in this impossibly positive yield curve for financing, what could not be right for discounting free cash flow back into stock prices for U.S. firms. The market is still so friggin' timid that it will only extend the discounting period for maybe three years and if a company really has its market share down, really down, then that's too short. A friend of mine is traveling around the world on some boat, God bless him, and no matter where he goes it's U.S. products advertised everywhere and just like in the old days, pre-Soviet collapse, U.S. products still have some cachet in the developing world. Go figure, I'm proud to have my Colgate toothpaste. You got it, that's the thing. The risk/reward on these stocks is still like betting on Secretariat, God bless that horse who I saw from the infield at the Kentucky Derby, a highlight of my Irish life."

We asked Finney about the current market, as in right now, given its substantial run-up. He was unflappable. "Of course you ninny, the market could correct anytime, that's what a market is, if it went straight up it would go straight down, so you want it to jiggle around a bit, who cares if you write this interview up and it goes down tomorrow. Let it go and just try to pick the right chance to buy again. Look up the street, one over, on Broadway and there's Uniglo, the Japanese H&M, and think of a sign out front that said, 'everything at the price it cost us to make this stuff in Mauritius or wherever in Asia', so that means its 80% off. That's almost the kind of discount we're seeing in the U.S. stock market for companies big and small with, importantly as in very importantly, decent balance sheets over a five year period. Any dead stock with a brand and a balance sheet is golden now."

Another round of coffee and for the ebulliant and apparantly gourmand, a crossiant with butter and jam please, Finney allowed a follow up question as to what he is talking about in what many call an overbought market. For example, we mentioned to Finney the quote in the NYT today from a market strategist saying "the market is as overvalued now as it was undervalued a year ago". Finney responded. "Yeah I saw that. It was the analyst from Gluskin Sheff. Who the f**k has ever heard of Gluskin whatever. The Yorker Times takes its quotes from any street corner bloke on Bowery if it fits their agenda, which is only to complain. The overall market will take two steps forward one step back, for the near term, but bargains galore remain below the surface. You like X-sports or whatever they're called, or surfing, or that whole idea that even I can wear on summer weekends, it's called Quiksilver as a stock, was selling as low as $2 in early January and now is at around $4.80 here in late March. Somebody made a huge gain, as in this is somebody here. This kind of stuff is everywhere if you can find it, hard to find but lucrative if you can because the big securities firms no longer hire enough people to even begin to cover the little stuff. Believe it or not some of the government required, post Spitzer destruction of the equity research function, research is outsourced to India and they are just guys and gals crunching numbers in front of computer screens with no idea about the soul of a company. Peter Lynch must be amazed, well in fact he is beyond commenting, this is not research."

This led to a search for forward looking stock tips but Finney would only say that he knew one when he saw it and if he saw it he moved immediately and that's that. He might be right or wrong, but in this market he obviously feels comfortable, now ordering a poached egg on toast with truffle butter. Fearing that he might eventually just have a heart attack at the table I hastened to end the interview despite his formidable insight. Asking the question "is there anything that you would like to add to this valuable interview?" he answered, "Stay slow, stay low, but keep buying, that's the formula for now, and how's the chipped beef?"

Saturday, March 27, 2010

Google and China

Reading today in the NYT about China barring a prominent scholar from leaving the country to lecture at Harvard this week and later participate in a conference on Asian Studies in Philadelphia, it reinforced the urgency and courage of Google's recent action. Google's decision to move their server to Hong Kong and risk(assure)the hostility of the Chinese government was one of principle, not earnings per share or competitive positioning.

China is the biggest market opportunity in the world of business. Google did make some compromises that were uncharacteristic of the company four years ago when it entered the Chinese market to gain access to such opportunity. They were pushed to the breaking point by Chinese censureship, government meddling in their business, and apparently government orchestrated hacker attacks on its infrastructure. When it comes to competitive business practices Google is not necessarily any saint as it works to be first to any market niche and corner(monopolize) it before any one else can through its systems and savvy. In this case, however, Google took the high road and stood up to the Communist party apparatus that controls the intellectual, political, and religious life of the country. Their other businesses in China will suffer as well but the long range impact on Chinese government behavior may be greater than anything that the timid complaints of the U.S. government and others can accomplish.

Friday, March 26, 2010

Republican glee may be premature

Many Republicans seem to view the onset of the "tea party movement" as a validation of their obstructionist and hostile approach to the Obama administration. They have recently just seemed giddy when delivering their booming voice opinions, exaggerations, half-truths, and lies about any national policy that needs to be addressed, or at least discussed. They could remind one of a basketball team that celebrates a lead in the first ten minutes or even the first half with such exuberance that it approaches naivete. In this communication age, the six months until the November elections is a very very long time.

One could wonder whether they will wake up in a few months and realize that they, the Republicans, have further narrowed their appeal such that only the segment of the U.S. population that follows Limbaugh, Beck, and company has become their constituency, that a "tea party movement" that started as a mixed group of those with genuine policy concerns, those that felt left out, and those with legacy resentments has been co-opted by a grab bag of activist extremists, becoming in essence an American version of a nascent National Socialist Party that alientates independents as well those Republicans outside the beltway who actually believe in Bush era "family values" and don't want to be led by radio personalities who call their opponents bastards and worse over the air waves and in public forums, much less those "leaders" who sully the halls of Congress with shouts of "you lie" and "baby killer" rather than engage in civil discourse.

In whatever way this difficult period evolves one could only hope that the current ugliness is temporary. We'll see but, in any event, November is a long way off.

Thursday, March 25, 2010

Vikram Pandit's CEO letter

Citicorp's non-glossy marketing-free annual report, a penance that is required for sinners in these times, begins with a particularly strong CEO letter from Vikram Pandit. As a starter, absent from the letter is any long winded or pedantic economic commentary, also absent is any talk about some special "values" program in the institution and , finally, there is no hyperbole about some magic management processes that are "first in class". What seems to be considered a requirement by many CEO's is not missed.

As it should the letter focuses on Citicorp itself, its strategy, its businesses, its strengths, accomplishments, and challenges. It acknowledges that to reach its goals that "what we now need is a turn in the economy, with a new cycle of job and credit creation". That sounds obvious, but it is refreshingly straightforward. The strategic alignment of the businesses gives investors the framework for what lies ahead and they can take it or leave it. It is made clear that the key to Citi's success near term is the pace and price of liquidation of assets in Citi Holdings.

Pandit lays out the many accomplishments over the last two years and asserts that a new foundation is now in place. He stresses the unique global franchise and the competitive advantage that gives Citi in a continually globalizing world, and he did not use those overused words "competitive advantage" to his credit, I just did. One could question the assertions that he makes about all that has been accomplished and how well positioned and well functioning the organization now is, but what's a leader to say. If he doesn't believe it, who would, and his style in this letter is not over the top.

Citi has a global presence that cannot be replicated. This line in the letter is compelling-"in our Institutional Clients Group today, 99% of our employees outside of the United States are local or regional hires". At this point the question is not whether Citi's franchise is unique but whether it can be managed. At least the letter does not quash that possibility.

It's a good shareholder communication.

Wednesday, March 24, 2010

Are the state's right

After the seemingly endless and tedious process of passing the health care bill, it was an immediate annoyance to see the attorney general's of 14 states join together to file suit against the constitutionality of aspects of the new legislation. More, yet more, politics it seemed. It is unlikely that these states have any real chance of success but, beyond pure politics, they have a substantive grievance.

Medicaid is paid for jointly by the national and state governments. Medicaid is already a significant part of the budgets of many states. Many states have great big budget problems today as a result of the recession, mismanagement, and voter short-sightedness. State budgets are actually supposed to balance unlike the federal budget.

So you see the issue. With the Medicaid expansion included in the package of solutions to expand health care coverage, quite a few states look at this and see something that, from today's perspective, they can't possibly handle. It's not just political attention seeking attorney general's of states like Virginia and Texas joining the suit but states like California and Pennsylvania with broader constituencies as well.

It's not just a medium term budget issue but also could be seen to be a further centralization of power in Washington down the road.

Annual report and tax time

It's now the season for two yearly financial experiences that are diametrically opposed from this point of view.

Annual reports are flowing through the front door mail slot daily. I love seeing them but not for the financials which can be found on a ton of websites with a few clicks. It's the CEO's letter that is always worth a skim, and worth more if it actually seems like it was written by the CEO(not that common) and not his staff or a consulting firm, and worth even more if the CEO is really smart. Most just pass the three to five minute skim test and that's it but there's information in that as well. Then my favorite aspect is the design of the report and the photographs. As one under the illusion that much can be intuited from this in a few cases, I can recall the Wachovia annual report two or three years ago that had only one photograph and that was a full page studio head shot of Kennedy Thompson, the CEO. Sold that stock and he was gone before the year was out and the company didn't last much longer. This annual report reviewing is not too time consuming in most cases and it can be entertaining believe it or not.

Tax time is something that I never enjoy. There are some people who actually like the experience of putting the numbers together, making the puzzle work, and arriving at a sure solution. My father was one of them and, of course, he was an accountant, a gene that did not pass down. The tedium of pulling all of the paperwork together and staying organized is bad enough but what really gets me is that many aspects of the instructions make no sense. I like to think, but following tax return instructions just requires blind faith. A simpler tax return is one of those issues that so obviously should be on some legislative agenda but that is not in the government's or the politician's interests. Do I do this rant annually or just every other year.

Probably annually.

Sunday, March 14, 2010

John Boehner's missing years

Conservative suburban scratch golfer John Boehner has a demeanor of smug confidence in his obstructionist approach to anything Obama. If asked anything personally negative about Obama he declines comment, is that courteous or subtly confirming. Obama is of course always under intense scrutiny. What about Boehner?

Boehner graduated from high school in Cincinnati in 1968 in the middle of the Vietnam War. He served eight weeks in the Navy before an honorable discharge? What's that all about. He graduated from Xavier University in 1977 with a degree in business, nine years after he got out of high school? What's that all about. Then he got a sales job in a company and became the President in a few years. What? John Boehner is one of the most powerful people in our country and yet Wikipedia and other sources have no information on major parts of this man's life. Anyone that I know in the same age group who received his undergraduate degree nine years after high school had some serious stuff going on, especially with no job history. Was it someone finally coming through, yanking the kid off the no Blacks no Jews golf course, and buying a degree for him at the local same faith university. Perhaps he's a self made man, washing dishes or changing oil and hitting the hardtack nine holes during that time. Who knows? I don't know, just guessing.

We should know.

If Obama had a resume like this, if I were to go so low as to take a right wing radio show polemicists adjectivinal license, a country club elitist pantywaist lemon sucker like Boehner would be all over it. Did I just write that. Boehner's credentials may all be fine but why does the press or the administration not get into this and find out who their leading foe really is. (Check out the latest Wikipedia photo of Boehner in an all white outfit, white shorts, hitting a shot on the golf course in perfect form with his ample middle so obvious --- an obvious populist for you tea party folks)

Postscript: Anyone who has ever spent serious time in Cincinnati knows that it is a conservative or exclusionary place that makes Richmond look liberal, Louisville look far left, and Charlotte look commie. I covered the city as a banker for two years in the eighties and know it well. That place and Columbus, Ohio were the two places that required the golf clubs to be packed if there was any chance of getting new business at all. I could keep it around 90 at the time. That's for everyone but the Cincinnati Carl Lindner folks for whom money was the only quality in life.

Friday, March 12, 2010

"The Surrendered"

Chang-Rae Lee's just published fourth novel is not as expected. Long awaited here since his third, "Aloft", was published in 2004, "The Surrendered" is alternatively beautifully written and insightful, grim and humorless, a story that relentlessly deals with death, human frailty, and individual determination.

If not already such an admirer of Lee's work, it would have been unlikely that I could have perservered through the first half of the book. The earlier novels were, like this one, multi-layered tales with plenty of characters and multiple story lines put together and ultimately concluded in a way that wasn't forced or trite, very satisfying and meaningful reading events. The huge difference in this latest work is in the observations and insights that are part of a quality work of literature. Those first three books had plenty of "aha" moments in which a subtle phrase, sentence, or paragraph captured some aspect of existence that seemed familiar but in words that were new. Many of those gems would force a smile, a sense of familiarity, or even a silent chuckle, as in that's just right. In "The Surrendered" there are many observations but the harsh subjects are immune from reader self satisfaction as the story spirals from one unpredictable chapter to another full of both forseeable and random tragedies, eventually building into a cohesive whole. "She could not look back. She loved them all but she knew if she looked back she was done. She would come to a stop. And she did not want to stop, not just yet. Not now. To crave anything, alas is to crave time. She was simply hungry for time."

The themes here are similar in ways to Lee's previous work but so much more direct. The writing at times extends itself in a way that is almost meadering and repetitive but in the end a reader indoctrination was underway, transferring characters' experiences. That this book was unquestionably worth the effort and that the effort was required may just be a reflection of our times, sadly, especially our American times.

There is a wonderful comment from a character that within the 460 pages I can no longer find but roughly it is this, "There is no limit of human goodness in the world, but so much of it is misspent".

In the wider world "The Surrendered" is either a blockbuster or a bust, a signature literary event or a melodramatic soul searcher. Here it was worthwhile reading.

Wednesday, March 10, 2010

Virginia's 5th district in "The New Yorker"

In this week's New Yorker magazine George Packer's article, "Obama's Lost Year", uses Virginia's 5th congressional district as the example of some of the important issues and challenges that the economy faces. Freshman congressman Tom Perriello is featured prominently and the towns of Martinsville and to a lesser extent hometown Danville get attention. Packer is a good writer and the piece is well done, with a few minor errors that only a local would pick up.

The article is much bigger than the 5th district and much of it is a discussion of Obama's style of communication and whether he missed an opportunity to follow up on his election momentum, a balanced discussion that is worth reading.

And hey, that bridge in Danville that was mentioned here in a March 1 post on the stimulus spending is covered briefly, observation here confirmed.

Saturday, March 06, 2010

The credit default swap issue is now being given a serious look

With soveriegn debt on the line, the concept of and regulation of credit default swaps is now finally being focused on. The EU is more or less saying that they will not provide cash for unregulated predators, and that has become the primary barrier to dealing with the Greek financial mayhem.

Wednesday, March 03, 2010

Germany balks on Greece

As suggested here earlier, German willingness to backstop Greece is non-existent. Merkel can't do it. This is an obvious problem for the EU, but for the German electorate the thought of bailing out a bankrupt and profligate Greece is untenable. They may eventually be part of a significant backstop for Greek debt but it will not be popular. The bigger problem here is that we are dealing with countries, countries with long histories.

U.S. equity market alternatives

The U.S. equity market is looking attractive for many reasons. It is not a panacea for global economic decline, with that it will sink as well. It is all of a sudden a haven from so much that is going on in the world. Here's the opinion from this perspective---Europe's quasi-socialist cushion seems to have just delayed the blow from the '08-'09 financial debacle, and now the real effects are coming through---There are huge political issues confronting China as it faces a historic commercial real estate collapse--- India's dream story can't keep up with a ridiculously undermanned infrastructure--- Russia remains an ugly corrupt place--- and Brazil has portions of the country, and cities, that are beyond government control. Most of this is not new. It is all current, and added together this forces diversified global investors back to the U.S, dysfunctional government and all.

The U.S. equity markets are still down for the year. With the dollar gaining strength just because other countries troubles become clear and with the ECU in complete disarray, where would global investors turn. You can find some stocks that are overpriced in the U.S., pleased to own and be selling a few here, but for the most part it is still a modestly priced market, in fact cheap if anyone cares to discount free cash flow beyond three or four years. Diversification requires equities and the balance will tilt toward the U.S. in the next year. That tilt will be limited if the Obama administration follows through on hostile shareholder actions and it would be radically accelerated if the government indicated a business friendly environment.

This is not just stock price talk, but business environment, jobs, and investment talk, and one could wonder whether President Obama has any notion whatsoever of the link between the two.

Monday, March 01, 2010

Tea leaves from a master

As usual the Berkshire Hathaway annual report's chairman's letter is reviewed and analyzed by many for its humor and its market insights. For anyone, neophyte or expert, it's a well written insight into the capital markets and whether you have interest or not, it may be a good thing to read, if not for you then for your son in Alabama, your niece in Paris, your nephew in Kentucky, your daughter in Massachusetts, your son in Richmond, your daughter in New Mexico, your son in Cary, your international leaning daughter in D.C., your son in Louisville, or those other young adults out in the Northwest or in Atlanta or wherever to read. Of course having an interest in this stuff would be helpful and that is not a necessary requirement for a full and happy life, but the real point here is that, if they choose, anyone can learn from reading Warren Buffett's CEO letter that is accessible at

Many in the press are giving the big coverage.

Covered here is only this comment related to GEICO in the early part of the letter:
"An old Wall Street joke gets closer to our experience:
Customer: Thanks for putting me into XYZ stock at 5. I hear it's up to 18.
Broker: Yes, and that's just the beginning. The company is doing so well now that it's an even better buy now than it was when you made your purchase.
Customer: Damn, I knew I should have waited."

So is that, coming so early in the comments, Buffett's overall thesis for the year, and if so what does it mean.

Stimulus on track, but what was that shovel ready talk

The American Recovery and Reinvestment Act of 2009, aka the Stimulus, was signed into law in early February 2009 and in hometown Danville, Virginia the new congressman Tom Perriello announced in April 2009 that $29 million in funding had been granted to rebuild the deteriorating Robertson Bridge. This bridge is one of three that crosses the Dan River and connects the two major sides of this town of approximately 42,000. The repair and rebuilding project was overdue and the funded work will also develop the undercarriage of the bridge as a conduit of significant power and communications cables plus water and natural gas lines to a large new industrial site(for attracting needed industry) on the north side of town. That all sounds good, needed infrastructure spending in a rural city that needs a shot in the arm both in terms of near term construction jobs and long term development.

Since that time there was no evidence of any work of consequence whatsoever. Today, March 1, 2010, the Danville Register and Bee reports preliminary work needed to be done before construction can begin is well under way. Bids for the bridge project are due March 24 and an award of the contract is expected to be made within 60 days of the submission. Initial work on the project will begin 30 days after that and the completion date for the project is set for August 31, 2012. That means that the project will begin 14 months after it was announced. It then will be completed three and a half years after the announcement. This bridge is not much more than 300yards long if that.

The lastest stats on how much of the stimulus money has been spent versus how much has been allocated have not been seen here but up until a few months ago the difference between the two was astonishingly large. The above is an on the ground example. This lagging stimulus may be good news for the economy over the next year or two, but what does it say about our efficiency. In a rare moment, this post will just be left as reporting with the opinion making being the reader's responsibility.