Never Mind the B*ll*cks, Here's the No Brainers

[tropical]

Is Mr Market Having a classic "bad hair day" at present, or is he being realistic?

Aside from the endless monotony of the public US recession / no US recession debate in every newspaper and on all TV channels, the question about “No Brainer” investments continues to tickle my fancy.
Several threads touch on this, while discussing valuation methods, but most commentators are a little reticent about outing themselves..

Here’s a very condensed version of my musings on the subject:

1. The current situation is similar to the “Junk Bond” crisis around 1990. See “The Essays of Warren Buffet” page 112.

2. The current situation differs in that the “Junk” is, at least notionally, backed by property assets.

3. Packets of (sub-prime)“Junk” have indeed already changed hands since the out-break of sub-prime fever on Wall Street:-
“Citadel, the Chicago-based hedge-fund … will ….pay about …. 27 cents on the dollar, for asset-backed securities (E+Trade) with a face value of $3 billion” (according to Blomberg.com)
So Junk does, indeed, have a market Value.

4. Real Estate under the hammer after bankruptcy (here in Germany at least) seems to go for not more than a 25% discount.

5. Bearing 4. In mind, the valuation of 27 cents on the dollar for such Assets is probably very pessimistic (even with a recession grtting under way).

6. Berkshire Hathaway has entered the Market as a Bond Insurer (albeit for municipal bonds) – maybe debt does have a future?

Conclusion: Most of the Stocks that have been mutilated by the Sub-Prime Stigma (esp. Financial) are undervalued in a “no brainer” sense of the term.


Does anyone have any thoughts and/or research to add to my ramblings ?

Tropical

[npg]

I am sifting through the rubble as we speak... Just ensure you go for quality otherwise the risk of getting burned is quite high.

[tropical]

Hallo npg,
Pleased to hear that your surveying the wreckage as well. I take your point about quality.

I was thinking about the kind of story that is told about Buffet investing in American Express while the company was badly hit by an "off balance sheet" melt down. Apparently his analysis consisted of going out for a steak and observing weather or not people were still paying with their cards - I´m sure you know the story.

I´ve taken a "pocket money" position in First Marblehead. After reading their reports I realized that I wasn`t going to see through the financials in any meaning full way. However I reasoned that:

1.credit will have to roll again mid term or the entire economy will melt down.
2. Student loans are possibly much less toxic than the run of the mill “sub prime” products.
3.Goldman Sachs probably aren't deliberately flushing over a billion down the toilet.

Time will tell if it’s a “no brainer” or if, indeed, I have no brain……

I would like to add a couple of Berkshires recent aquisitions to my own portfolio and one of the options I considered was a “Buffet Bank” on winter sale. I was tending to think WFC but now notice that BAC is offering $1 for 50c to owners of CFC could this be a no brainer ?. Why isn’t CFC suddenly up to 12?- I don’t understand the Procedure. Do you have an explanation/ take on this.

tropical

[npg]

A lot of these lenders go belly up because their business is loan securization and in the current climate nobody wants to do this with anybody. Delta Financial Corp is the lates to bite the dust and Monish Pabrai had to book an incredible loss on his investment.

I am not sure FMD has a moat here. Its a good business but does it have some durable competitive advantages? How good is the quality here? You don't need to know every detail necessarily, but you should be able to have enough of a grasp on the business so that you can smell the fire. Can you do that with FMD?

Only you can answer that...

There are great banks that are affected by this crisis and a possible recession and are severely discounted right now. They are also far more diversified than a simple loans company. Thats the rubble I am looking at...

Check the earlier post on comparing banks....

[tropical]

Thanks for your comments npg.
I`ve always enjoyed your posts and you are, as usual, rigorously analytical and thorough in your line of thinking!

As I said, I am fully aware that I won`t really grasp the detail of the FMD business. In actual fact the management make a point of drawing attention to the risks that the business faces as well as many ways in which competitors could potentially attack the “Brand”. Their report has no fancy graphics and no Gung-ho management speak. I liked their frankness. I also reason that if Goldman Sachs managed to come up smelling of roses to the tune of 4 billion from the sub prime dung heap of 2007 they are probably better equiped to value the FMD business than I am.

Thanks for your tip about other Bank threads and I fully grasp your comments about the diversified nature of their businesses. Ill take a look – I remember you mentioning Irish Banks in an earlier thread and seem to remember “petekoch” has pushed the frontiers of examining banks somewhere (plenty to heat up the gray cells!).


Perhaps I haven`t grasped the real nature of the “sub-prime situation”. My train of thought is that there must still be some value behind the mess in the shape of (albeit currently undervalued) real estate. The first task must be to form a general opinion as to weather the current markdowns in share prices are of realistic dimensions or (as seems to have been the case, historically, during such Wall Street wobbles) over done and indescriminate (MOS). The second task must be to look for companies that have a good chance of remaining solvent until the crisis abates.
If, as it seems, most of the lending sin has been committed off balance sheet, there doesn’t seem too much point in looking beyond the survival question (guess?), whilst watching the share price and trying to make a judgement as to when the crash dive looks to be slowing up (yes I know, and no I don’t own a crystal ball!).
I guess the same must apply to house builders, who might be easier to make a judgement about - I'll check other threads.
tropical