Below please find Grant's Interest Rate Observer summer issue for 2011. For those of you not familiar with this publication I highly reccomend you read it. The summer issue is a collection of past articles, so as you'll not some are from a long time ago and some are more recent.
Enjoy.
Giro29_SUMMER11
Friday, August 26, 2011
Thursday, August 25, 2011
JANA Partners presentation to McGraw-Hill
Below please find JANA's presentation to McGraw-Hill. For those of you who haven't followed the situation - JANA is arguing that McGraw-Hill break apart the company into more logical operating divisions. The conglomerate structure actually constrains the value that the divisions could get independently.
Enjoy:
JANA-McGraw-Hill-Presentation-MHP
Enjoy:
JANA-McGraw-Hill-Presentation-MHP
Tuesday, August 23, 2011
Marc Faber on CNBC
Marc Faber was on CNBC this morning giving his opinion of the markets and the world in general. Interestingly he reccomends Asian REITS as well as the usuals (gold, commodities, etc). He does mention that he thinks gold is due for a near-term pull back given the recent parabolic upward move.
Enjoy.
Enjoy.
The devils in the details
As some of you may or may not know I am a big fan of special situations - specifically risk free profits. I make a point to search PRE-14C filings to identify opportunities (specifically reverse splits or tenders) where I may be able to pick up a few bucks here or there. One such opportunity came across my radar today.
Read the press release here.
Here is the release pasted in case you are reading this via a feed:
"KENT FINANCIAL SERVICES, INC. ("Kent") (NASDAQ: KENT - News) On August 22, 2011, Kent's majority owned subsidiary, Kent International Holdings, Inc. ("Kent International"), filed a Schedule 14C Preliminary Information Statement with the United States Securities and Exchange Commission (the "SEC") in connection with a proposed "going private" transaction. The proposed transaction involves an amendment to Kent International's Articles of Incorporation to effect a one-for-950,000 reverse stock split. If implemented, fractional shares will be redeemed by Kent International for cash consideration of $2.50 per pre-split share."
So people read this got all excited and went out and bought KENT. KENT previously closed at $1.12 and opened today at $1.99 - as "traders" sought to bridge the gap close to the $2.50 tender. So the stock was up nearly 70% as of this writing.
Here is the kicked - and a quick test - what was wrong with this situation?
For those of you with a sharp eye you will notice that Kent Financial KENT is the parent company that happens to own shares in its subsidiary Kent International. Which company is actually doing the reverse merger - Kent International (KNTH). Low and behold people bid up the wrong stock -KENT.
As the market slowly finds this out I wouldn't be surprised if KENT drops down near to where they traded before.
This just goes to show you the devil is in the details and it pays to read closely. I hope people who bought KENT on the hopes of the proceeds paid in the reverse split read this post and realize they bought the wrong security.
I looked at shorting KENT as I think it is a good opportunity to play the snap back as people realize there is no $2.50 coming their way. But at the end of the day I don't really know much about KENT's underlying business so I was a little reluctant. That being said I fully expect it to drop back to near where it was trading - so a 30% - 40% decline.
Read the press release here.
Here is the release pasted in case you are reading this via a feed:
"KENT FINANCIAL SERVICES, INC. ("Kent") (NASDAQ: KENT - News) On August 22, 2011, Kent's majority owned subsidiary, Kent International Holdings, Inc. ("Kent International"), filed a Schedule 14C Preliminary Information Statement with the United States Securities and Exchange Commission (the "SEC") in connection with a proposed "going private" transaction. The proposed transaction involves an amendment to Kent International's Articles of Incorporation to effect a one-for-950,000 reverse stock split. If implemented, fractional shares will be redeemed by Kent International for cash consideration of $2.50 per pre-split share."
So people read this got all excited and went out and bought KENT. KENT previously closed at $1.12 and opened today at $1.99 - as "traders" sought to bridge the gap close to the $2.50 tender. So the stock was up nearly 70% as of this writing.
Here is the kicked - and a quick test - what was wrong with this situation?
For those of you with a sharp eye you will notice that Kent Financial KENT is the parent company that happens to own shares in its subsidiary Kent International. Which company is actually doing the reverse merger - Kent International (KNTH). Low and behold people bid up the wrong stock -KENT.
As the market slowly finds this out I wouldn't be surprised if KENT drops down near to where they traded before.
This just goes to show you the devil is in the details and it pays to read closely. I hope people who bought KENT on the hopes of the proceeds paid in the reverse split read this post and realize they bought the wrong security.
I looked at shorting KENT as I think it is a good opportunity to play the snap back as people realize there is no $2.50 coming their way. But at the end of the day I don't really know much about KENT's underlying business so I was a little reluctant. That being said I fully expect it to drop back to near where it was trading - so a 30% - 40% decline.
Tuesday, August 16, 2011
Phil Falcone the Next Warren Buffett?
Christopher P. Mittleman, the chief investment officer at a small New York money management firm is out with a four page letter that compares Phil Faclone to Warren Buffett. He says that Harbinger Group (Phil's publicly traded shell company) can be the next Berkshire Hathaway. He likens it to Carl Icahn's vehicle that he listed.
Without agreeing or disagreeing with any of these statements, here is the letter for your enjoyment. I would welcome any comments on this topic as I have seen a number of people awarded the crown of "the next Buffett" but few have managed to keep this title (Eddie Lampert, Mohnish Pabrai, and most recently Sardar Biglari).
Christopher P. Mittleman's letter
Without agreeing or disagreeing with any of these statements, here is the letter for your enjoyment. I would welcome any comments on this topic as I have seen a number of people awarded the crown of "the next Buffett" but few have managed to keep this title (Eddie Lampert, Mohnish Pabrai, and most recently Sardar Biglari).
Christopher P. Mittleman's letter
Wednesday, August 10, 2011
GMO Capital - Jeremy Grantham Q2 Letter
Jeremy Grantham and GMO Capital are out with their Q2 letter. They come out swinging saying the S&P is worth no more than 950. Reccomend farmland, forrestry, and high quality large caps. The farmland and forrestry are a continuation of the same theme we have been seeing for some time now. They also are suprisingly fairly upbeat on Japan.
Enjoy:
Grantham August
Enjoy:
Grantham August
Monday, August 8, 2011
Jim Rogers on CNBC
Jim Rogers was on CNBC to discuss his opinion on the debt downgrade - i.e. the U.S. is bankrupt (read buy China, commodities, and emerging markets). The second video - which is frankly the more interesting of the two, Jim discusses where he is currently long (nothing too surprising but interesting to hear irrespective).
Part 1:
Part 2:
Part 1:
Part 2:
Jeff Gundlach on CNBC
Jeff Gundlach was on CNBC earlier today giving his views on the downgrade and the current economy. He interestingly says that the downgrade was rather silly and it is not a downgrade on the government's ability to repay its debt merely a downgrade on the dollar itself. This has been clearly relfected today with Gold's run. I think he is spot on with this.
He then goes on to discuss how the economy will weaken going forward. He essentially makes a bullish case for treasuries which is the exact oppostive position that Bill Gross of PIMCO is taking. Interesting when two heavy weights are on the opposite side of the fence.
Enjoy.
He then goes on to discuss how the economy will weaken going forward. He essentially makes a bullish case for treasuries which is the exact oppostive position that Bill Gross of PIMCO is taking. Interesting when two heavy weights are on the opposite side of the fence.
Enjoy.
Thursday, August 4, 2011
Phil Falcone of Harbinger Capital on CNBC
Earlier today Phil Falcone went onto CNBC to discuss his views on LightSquared and the market overall. The video is divided into two parts. In the first part he focuses primarily on LightSquared and discusses some of the issues they have had. In the second video he discusses some of his interactions with AT&T and other competitors and how they aren't competing fairly and briefly touches on some of the troubles his funds have been going through as of late.
Enjoy.
Part I:
Part II:
Enjoy.
Part I:
Part II:
Tuesday, August 2, 2011
Latest from Bill Gross & PIMCO
Below please find the latest from Bil Gross and PIMCO. He addresses the debt ceiling and also splashes in a dash of pessism for the overal economy.
Enjoy.
From PIMCO:
Kings of the Wild Frontier
Nothing in the Congressional compromise reached over the weekend makes a significant dent in our $1.5 trillion deficit.
In addition to an existing nearly $10 trillion of outstanding Treasury debt, the U.S. has a near unfathomable $66 trillion of future liabilities at “net present cost.”
Aside from outright default, there are numerous ways a government can reduce its future liabilities. They include balancing the budget, unexpected inflation, currency depreciation and financial repression.
“Over the years we’ve had some fun together – killin some ‘bars,’ drinkin moonshine – some even in these chambers. (Whiskey that is – the ‘bars’ I’ve seen once or twice, but only when I was plum drunk). But the time for funnin is over. They’ll be no jokes from David Crockett today.” Davy Crockett Speech to Congress, 1830
Figurative coonskin cap on head, I echo the sentiments of Davy Crockett – Indian fighter, Alamo defender and Tennessee Congressman – not necessarily in that chronological order. The debt ceiling may have been raised and the palpable sighs of relief heard across global financial markets, but the fun times are over. They’ll be no jokes from Bill Gross today, nor across this land for years to come I suspect. Even though the U.S. has managed to avert a debt crisis and perhaps a ratings downgrade, there remains a stain on our reputation, a scarlet “A” for budgetary “Abuse,” that will not disappear. The whole world was watching, and what they saw was a dysfunctional government taking its country to the financial precipice and backing off at the very last moment. “Shades of a Banana Republic,” as former Reagan budget director David Stockman opined somewhat harshly last week. We may not be Greece just yet, but Mr. Stockman is looking in the right direction.
Nothing in the Congressional compromise reached over the weekend makes a significant dent in our $1.5 trillion deficit. “Out year” fantasies, as opposed to “current year” realities, is an apt description of the spending cuts that characterize this compromise. The Office of Management and Budget (OMB) estimates that future deficits will be reduced at most by .5%, and if so, it would be welcomed, but that .5% comes with no new taxes and a continuation of the belief that we don’t have to pay for our trespasses. Like many a Banana Republic, we may one day be invoking the Lord’s Prayer, pleading – “Forgive us our debts, as we forgive our debtors,” yet at the same time looking towards the heavens á la Saint Augustine with a fervent “let me be chaste, but let it be tomorrow.”
Treasury Secretary Tim Geithner noted last week that it would be unthinkable that the U.S. would not meet its obligations on time. Now that the timeliness has temporarily been put aside, an investor must logically ask how we will meet our obligations, and how much they really are. In addition to an existing nearly $10 trillion of outstanding Treasury debt, the U.S. has a near-unfathomable $66 trillion of future liabilities at “net present cost.” As shown in the following table from a Mary Meeker “USA Inc.” study, and validated by the Department of Treasury and Congressional Budget Office (CBO) calculations, the combined present cost “payment due” from Medicaid, Medicare and Social Security is over six times our current obligations of Treasury debt. The press and most professional investors are accustomed to measuring “paper” debt as opposed to walking/living liabilities in the form of people. I call these liabilities “debt men walking” because as long as 330 million living Americans require promised entitlements – the $66 trillion that wear shoes are as much of a liability as the $10 trillion on paper.
Admittedly, as Meeker’s table (Figure 1) points out, we can address these liabilities by improving the efficiency of our healthcare system, reducing benefits, raising retirement ages, increasing tax rates or a combination of all of the above. We likely will. So reduce that $66 trillion if you care to, but the subjective remainder still hangs over financial markets like a Damocles sword. How will we meet these obligations as Secretary Geithner asked?
Aside from the unthinkable outright default, there are numerous ways that a government – especially a AAA rated one – can employ to reduce its future liabilities. Highlighted below are the prominent tools that can significantly affect investor pocketbooks:
1. Balance the budget and/or grow out of it
2. Unexpected inflation
3. Currency depreciation
4. Financial repression via low/negative real interest rates
Let me address each of them in brief:
1. Balance the budget/growth – The current Congressional compromise is but one small step for fiscal solvency. There is no giant leap for mankind anywhere on the horizon. Trillions of further spending cuts, and yes trillions of tax hikes, are necessary to stabilize our “official” debt/GDP ratio of 90% or so. One important detail to keep in mind: projected deficits in 2012 and 2013 of 7-8% of GDP rely on OMB growth estimates of 3%+ in the next few years. Recent trends give pause to these estimates as does PIMCO’s New Normal, which believes 2% not 3% is closer to reality. If so, deficits move right back up to near-double-digit percentages of GDP. Likewise, should interest rates ever rise from current 2% average levels, a 100 basis point increase raises the deficit by 1% and erases any hoped for gains. Sisyphus would be familiar with this seemingly unsolvable dilemma.
2.Unexpected inflation – While markets are global these days, figures sometimes lie and policymakers often figure. Focusing investors’ attention on statistics emphasizing “core” or “chain-linked” methodologies can entice investors to stay home, or in the case of foreign nations, to “invest American.” Central bankers, not just in the U.S., but the U.K., have long been arguing for a reversion of headline 3% CPI numbers to the 2% or lower “core” standard expectation. “Patience,” they argue, but “prudence” might be the better watchword. If so, then the expected “unexpected” inflation would mimic the old Roman custom of coin shaving or its substitution with base metals instead of silver or gold. Inflation is the result no matter how you coin it, which puts more money in government coffers to pay their bills and less money in your pocket to pay yours.
3. Currency depreciation – High deficits, both fiscal and trade, combined with low interest rates for extended periods of time produce declining currency valuations against more prosperous, and more policy conservative competitor nations. Few Americans are aware that the dollar’s recent 12-month depreciation of over 15% is an explicit tax on their standard of living. Uncle Sam, the government overseer, benefits enormously: one rather clever way for the U.S. to pay its bills to foreign creditors is to pay them in depreciated dollars. The Chinese and other offshore holders wind up getting not only .05% interest on their Treasury Bills, but 12 months later – voila! – their Bills are worth only 85 cents on the dollar in global purchasing power. The Chinese should be reading Shakespeare, not Confucius – especially the second half of “neither a borrower nor a lender be,” when it comes to U.S. dollars.
4. Financial Repression via low/negative real interest rates – I have commented on this Carmen Reinhart, commonsensical technique in prior Outlooks. If the Treasury is borrowing money from you or PIMCO at .05% for the next six months and CPI inflation is averaging 3%, then lenders/savers are being shortchanged beyond even rather egregious historical examples. The burden of “sixteen tons” of debt á la Tennessee Ernie Ford is considerably reduced at 5 basis points of annual interest. “Loading” coal or debt in this case at near 0% yields doesn’t make the borrower another day older, nor deeper in debt. Actually it’s a shot of Botox for the borrower, but a shot of lead for the lender. Duck!
By using these four life rafts available to U.S. and other AAA sovereign borrowers, one can almost imagine a half century from now, that they remain solvent – although chastened perhaps with a lower credit rating. Based on historical example at Moody’s and Standard & Poors, it just might take 50 years for them to downgrade U.S. credit, but be that as it may, you and PIMCO as savers and savings intermediaries can take precautionary or even retaliatory measures to preserve purchasing power. Favor countries with cleaner “dirty shirts” and higher real interest rates: Canada, Mexico, Brazil and Germany come to mind. Shade equity and fixed income investments away from dollar based indexes towards those of developing nations with stronger growth prospects. Purchase commodity based real assets before reserve surplus nations do. And above all, don’t be lulled to sleep by Congressional law makers that promise a change in Washington. The last change I believed in was on Election Day 2008, and that turned out to be more fiction than reality. Davy Crockett, where are you? You may have been drinkin’ whiskey in those Congressional Chambers and those “bars” may have been half fiction, but you were a coonskin hero of a forgotten age, a hero the likes of which we have yet to see in 21st century Washington. We’re stuck with the new Kings and Queens of a wilder frontier.
William H. Gross
Managing Director
Enjoy.
From PIMCO:
Kings of the Wild Frontier
Nothing in the Congressional compromise reached over the weekend makes a significant dent in our $1.5 trillion deficit.
In addition to an existing nearly $10 trillion of outstanding Treasury debt, the U.S. has a near unfathomable $66 trillion of future liabilities at “net present cost.”
Aside from outright default, there are numerous ways a government can reduce its future liabilities. They include balancing the budget, unexpected inflation, currency depreciation and financial repression.
“Over the years we’ve had some fun together – killin some ‘bars,’ drinkin moonshine – some even in these chambers. (Whiskey that is – the ‘bars’ I’ve seen once or twice, but only when I was plum drunk). But the time for funnin is over. They’ll be no jokes from David Crockett today.” Davy Crockett Speech to Congress, 1830
Figurative coonskin cap on head, I echo the sentiments of Davy Crockett – Indian fighter, Alamo defender and Tennessee Congressman – not necessarily in that chronological order. The debt ceiling may have been raised and the palpable sighs of relief heard across global financial markets, but the fun times are over. They’ll be no jokes from Bill Gross today, nor across this land for years to come I suspect. Even though the U.S. has managed to avert a debt crisis and perhaps a ratings downgrade, there remains a stain on our reputation, a scarlet “A” for budgetary “Abuse,” that will not disappear. The whole world was watching, and what they saw was a dysfunctional government taking its country to the financial precipice and backing off at the very last moment. “Shades of a Banana Republic,” as former Reagan budget director David Stockman opined somewhat harshly last week. We may not be Greece just yet, but Mr. Stockman is looking in the right direction.
Nothing in the Congressional compromise reached over the weekend makes a significant dent in our $1.5 trillion deficit. “Out year” fantasies, as opposed to “current year” realities, is an apt description of the spending cuts that characterize this compromise. The Office of Management and Budget (OMB) estimates that future deficits will be reduced at most by .5%, and if so, it would be welcomed, but that .5% comes with no new taxes and a continuation of the belief that we don’t have to pay for our trespasses. Like many a Banana Republic, we may one day be invoking the Lord’s Prayer, pleading – “Forgive us our debts, as we forgive our debtors,” yet at the same time looking towards the heavens á la Saint Augustine with a fervent “let me be chaste, but let it be tomorrow.”
Treasury Secretary Tim Geithner noted last week that it would be unthinkable that the U.S. would not meet its obligations on time. Now that the timeliness has temporarily been put aside, an investor must logically ask how we will meet our obligations, and how much they really are. In addition to an existing nearly $10 trillion of outstanding Treasury debt, the U.S. has a near-unfathomable $66 trillion of future liabilities at “net present cost.” As shown in the following table from a Mary Meeker “USA Inc.” study, and validated by the Department of Treasury and Congressional Budget Office (CBO) calculations, the combined present cost “payment due” from Medicaid, Medicare and Social Security is over six times our current obligations of Treasury debt. The press and most professional investors are accustomed to measuring “paper” debt as opposed to walking/living liabilities in the form of people. I call these liabilities “debt men walking” because as long as 330 million living Americans require promised entitlements – the $66 trillion that wear shoes are as much of a liability as the $10 trillion on paper.
Admittedly, as Meeker’s table (Figure 1) points out, we can address these liabilities by improving the efficiency of our healthcare system, reducing benefits, raising retirement ages, increasing tax rates or a combination of all of the above. We likely will. So reduce that $66 trillion if you care to, but the subjective remainder still hangs over financial markets like a Damocles sword. How will we meet these obligations as Secretary Geithner asked?
Aside from the unthinkable outright default, there are numerous ways that a government – especially a AAA rated one – can employ to reduce its future liabilities. Highlighted below are the prominent tools that can significantly affect investor pocketbooks:
1. Balance the budget and/or grow out of it
2. Unexpected inflation
3. Currency depreciation
4. Financial repression via low/negative real interest rates
Let me address each of them in brief:
1. Balance the budget/growth – The current Congressional compromise is but one small step for fiscal solvency. There is no giant leap for mankind anywhere on the horizon. Trillions of further spending cuts, and yes trillions of tax hikes, are necessary to stabilize our “official” debt/GDP ratio of 90% or so. One important detail to keep in mind: projected deficits in 2012 and 2013 of 7-8% of GDP rely on OMB growth estimates of 3%+ in the next few years. Recent trends give pause to these estimates as does PIMCO’s New Normal, which believes 2% not 3% is closer to reality. If so, deficits move right back up to near-double-digit percentages of GDP. Likewise, should interest rates ever rise from current 2% average levels, a 100 basis point increase raises the deficit by 1% and erases any hoped for gains. Sisyphus would be familiar with this seemingly unsolvable dilemma.
2.Unexpected inflation – While markets are global these days, figures sometimes lie and policymakers often figure. Focusing investors’ attention on statistics emphasizing “core” or “chain-linked” methodologies can entice investors to stay home, or in the case of foreign nations, to “invest American.” Central bankers, not just in the U.S., but the U.K., have long been arguing for a reversion of headline 3% CPI numbers to the 2% or lower “core” standard expectation. “Patience,” they argue, but “prudence” might be the better watchword. If so, then the expected “unexpected” inflation would mimic the old Roman custom of coin shaving or its substitution with base metals instead of silver or gold. Inflation is the result no matter how you coin it, which puts more money in government coffers to pay their bills and less money in your pocket to pay yours.
3. Currency depreciation – High deficits, both fiscal and trade, combined with low interest rates for extended periods of time produce declining currency valuations against more prosperous, and more policy conservative competitor nations. Few Americans are aware that the dollar’s recent 12-month depreciation of over 15% is an explicit tax on their standard of living. Uncle Sam, the government overseer, benefits enormously: one rather clever way for the U.S. to pay its bills to foreign creditors is to pay them in depreciated dollars. The Chinese and other offshore holders wind up getting not only .05% interest on their Treasury Bills, but 12 months later – voila! – their Bills are worth only 85 cents on the dollar in global purchasing power. The Chinese should be reading Shakespeare, not Confucius – especially the second half of “neither a borrower nor a lender be,” when it comes to U.S. dollars.
4. Financial Repression via low/negative real interest rates – I have commented on this Carmen Reinhart, commonsensical technique in prior Outlooks. If the Treasury is borrowing money from you or PIMCO at .05% for the next six months and CPI inflation is averaging 3%, then lenders/savers are being shortchanged beyond even rather egregious historical examples. The burden of “sixteen tons” of debt á la Tennessee Ernie Ford is considerably reduced at 5 basis points of annual interest. “Loading” coal or debt in this case at near 0% yields doesn’t make the borrower another day older, nor deeper in debt. Actually it’s a shot of Botox for the borrower, but a shot of lead for the lender. Duck!
By using these four life rafts available to U.S. and other AAA sovereign borrowers, one can almost imagine a half century from now, that they remain solvent – although chastened perhaps with a lower credit rating. Based on historical example at Moody’s and Standard & Poors, it just might take 50 years for them to downgrade U.S. credit, but be that as it may, you and PIMCO as savers and savings intermediaries can take precautionary or even retaliatory measures to preserve purchasing power. Favor countries with cleaner “dirty shirts” and higher real interest rates: Canada, Mexico, Brazil and Germany come to mind. Shade equity and fixed income investments away from dollar based indexes towards those of developing nations with stronger growth prospects. Purchase commodity based real assets before reserve surplus nations do. And above all, don’t be lulled to sleep by Congressional law makers that promise a change in Washington. The last change I believed in was on Election Day 2008, and that turned out to be more fiction than reality. Davy Crockett, where are you? You may have been drinkin’ whiskey in those Congressional Chambers and those “bars” may have been half fiction, but you were a coonskin hero of a forgotten age, a hero the likes of which we have yet to see in 21st century Washington. We’re stuck with the new Kings and Queens of a wilder frontier.
William H. Gross
Managing Director
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