Tuesday, May 18, 2010

Kraft-Buffet Reduces Stake/Hussman on Europe's PIIGS' Rescue Plan/Arnott Says to Reduce Risk/Michael Kahn Bearish Technical Opinions/Bought 50 UBCP

1. Kraft and Uncle Warren: Buffett reduced Berkshire's stake in Kraft by 23% in the 1st quarter, selling 31.54 million shares. It was noted in Barrons this week, and in this Reuters article, that Buffett was very critical of the Cadbury acquisition and the sell of the pizza business owned by KFT to Nestle. The sell of the pizza business created a large taxable gain of almost 1 billion dollars. Kraft's pizza business was one of its most profitable businesses,with a 2009 operating profit of 297 million and margins of 14.2%. Buffett called that sell dumb, and that is probably an understatement. But, it did cause Nestle to bow out of the Cadbury bidding. Buffett also views the use of Kraft stock to buy Cadbury as a mistake, because he viewed the stock as undervalued and KFT paid up for Cadbury. This is undoubtedly also a valid point. It is understandable that he would complain about using a depressed stock as currency to make a full priced acquisition. In the last analysis, the addition of the Cadbury higher margined products, and the greater focus it brings on growth in emerging markets, will outweigh over the long term the valid objections made by Uncle Warren.

The changes in Berkshire's major holdings are reported on form 13 F filed with the sec.gov.

It was mentioned in another Reuters article that Pershing Square (/www.sec.gov), run by William Ackman, reported owning 32.8 million shares of Kraft, while Paulson eliminated his firm's stake.

This is a link to the Soros Fund holdings as of 3/31/2010: /www.sec.gov.

2. John Hussman's Take on Europe's Shock and Awe: A very negative and interesting assessment of Europe's 750 billion Euro rescue plan is provided in John Hussman's Funds Weekly Market Comment. He views this plan as a debasement of the Euro currency, and nothing more than promising to buy bad government debt by selling good Euro government debt. As such the plan rewards those who have flaunted the fiscal policies and dilutes the wealth of those who hold the "existing stock of currency". This is an intelligent discussion but I believe he tends to be overly-dramatic on the downside risks. I also believe that he is wrong about how the European Central Bank is sterilizing the influx of EUROs which happens when it buys government debt (about 20 billion of purchases in the first week). It is not selling "good" government debt to buy "bad" debt. As I understand it, the Central Bank is drawing Euros out of the market by allowing banks to deposit funds with it and to earn interest.

3. Christine Benz Interview with Arnott: This is worth watching. Arnott says that there is a fifty per cent chance of a double dip, and the markets are priced as if that is not going to happen. Arnott believe that there could be a better opportunity to buy stocks in 6 to 12 months than now. He recommends that retirees look to add TIPs to their portfolio to protect against greater than anticipated inflation when TIPs have one of their "occasional corrections". Inflation is the "big risk" for retirees, and severe inflation could be crippling for many retirees. He does not believe that a 10% return is realistic in the years to come, and investors need to ratchet down their expectations. He further recommends that, to be tactical, an investor needs to take some risk off the table.

4. Depressing Article by Barrons technician: The latest missive by Barron's technical analyst, Michael Kahn, was a depressing read. Copper, which is not a market that I follow, apparently just broke down from a technical pattern called a bear flag. Oil has rapidly fallen below its trendline. The emerging market ETF, EEM, has fallen below its 200 day moving average.

{A double short for the emerging market index (EEV) is one of my short term hedges, slightly under water at the moment. I just figure, as part of the OG's simpleton thought process, that emerging markets run with U.S. stocks but with a higher beta. If U.S. stocks fall into the crapper, then emerging markets will end up falling more. instability & volatility in asset correlations Emerging Market Currencies and Bonds as Non-Correlated Asset Classes (see also: Seeking Alpha article on high beta positive correlation of emerging markets and U.S. stocks; and paper by William Corker on historical correlations: spwfe.fpanet.org:10005/.pdf) Since I am a long term bull on emerging markets, this is at best a short term hedge which will be taken off once I am more comfortable that the market has found its footing again.}

Kahn sees the recent spike in the VIX, gold and dollar running up together, the declines in copper, oil and EEM, to be signposts all pointing in the same direction. But, he is not one usually brimming with optimism either. Another way to look at these moves is simply as the latest manifestation of herd group think, which gelled on April 27th.

5. Meredith Whitney: I have noticed over the decades that anyone who publicly makes one good call can make a career out of it, even if subsequent prognostications turn out to be mostly wrong. Sort of like a country artist who has a song in the top ten and tours for fifty years singing it. Some of the individuals enjoying this kind of career boost include Meredith Whitney. In an interview yesterday on CNBC, Meredith said that she would not invest in European banks in a million years. She believes that the Senate version of the financial reform bill will almost single handedly cause a double dip recession due to what she characterizes as onerous credit card rules. For the past year or so, my recommendation to her has been to breathe into a paper bag at least ten times a day, and possibly this would reduce her hyper-ventilation some. Her last appearance on CNBC noted by me in a post was in November 2009: Item # 5 Sarah and Meredith There may have been some unconscious deep-seated reason why I joined Sarah and Meredith together in the heading of that post.

6. Wal-Mart: This retailer, more than any other, provides helpful information about American consumer spending. Around 100 million shoppers enter its stores each week. WMT reported this morning better than expected earnings and revenues. reported an adjusted E.P.S. of 88 cents, versus expectations of 84 cents and 77 cents in the year earlier period. Sales rose 6% to 99.1 billion versus the consensus expectation of 98.3 billion. The forecast for the next quarter was cautious however.

7. Richard Blumenthal (D): The publicity hound Attorney General of Connecticut, Richard Blumenthal, is running for the soon to be vacated Senate seat of of Chris Dodd who is retiring. The NYT has a front page expose this morning on Blumenthal's false claims of having served in Vietnam. Blumenthal did everything that he could possibly do to avoid service, obtaining at least five military deferments. Once it became apparent that he was running out of deferments, he enlisted in Marine Reserve and managed to secure a coveted spot in a reserve unit in Washington, who did nothing more than drills and local public affairs projects. One such project was fixing a campground, a place not likely to be infested with Viet Cong. On the campaign trail in Connecticut, Blumenthal has engaged in his own reality creation about his service in Vietnam which the NYT characterizes as "plainly untrue". When reading this article and viewing the video clip available on the NYT front page today, I almost expected him to start talking about how he was on Guadalcanal with Bob Leckie and John Basilone, in the mud and the muck, and wondering why he was not mentioned in Tom Hank's production of "The Pacific", which was recently aired on HBO.

8. Bought 50 UBCP at $8.49 (See Disclaimer): United Bancorp is a very small bank operating in Ohio:
"The Citizens Bank division conducts its business through its main office in Martins Ferry, Ohio and twelve branches in Bridgeport, Colerain, Dellroy, Dillonvale, Dover, Jewett, New Philadelphia, St. Clairsville East, Saint Clairsville West, Sherrodsville, Strasburg, and Tiltonsville, Ohio. The Community Bank division conducts its business through its main office in Lancaster, Ohio and seven offices in Amesville, Glouster, Lancaster, and Nelsonville, Ohio" (page 8: www.sec.gov)

The market capitalization is around 41 million at the current price. Like a large number of small community banks, UBCP remained comfortably profitable during the Near Depression period. United Bancorp reported earnings of 15 cents for the 1st quarter of 2010, down from 17 cents in the year ago quarter. The net interest margin was 4%. Nonperforming assets to total loans was 1.65%. Nonperforming loans to total loans was 2.3%. The bank is currently paying out 14 cents per share in quarterly dividends. At that rate, the dividend yield at a total cost of $8.49 is around 6.6%. The CEO said in the last earnings release that he expected the bank to earn as much or more in 2010 than in 2009. The bank earned 63 cents per share in 2009. As far as I can tell there are no analyst estimates for UBCP. At a 63 cents in annual earnings, the P/E would be about 13.5.

This is a low expectation buy. Looking at a long term chart, I may sell this one when and if it returns to a $13 to $15 price range, notwithstanding the guidelines for the regional bank basket strategy.

I looked at the recently filed 10-Q at page 28 to find the bank's current ratios as of 3/31/2010:

Total Risk Based Capital Ratio: 14.39%
Tier 1 Risk-Based Capital Ratio: 13.5%
Tier 1 Capital to average Assets: 8.6%

As a reminder, the ratios for a well capitalized bank are as follows:

Well Capitalized:
Total Capital to Risk weighted Assets: 10%
Tier 1 Capital to Risk Weighted Assets 6%
Tier 1 Capital to Average Assets 5%

No comments:

Post a Comment